Mortgage Crisis Following Up  

Posted by LibertyCast in ,


Well where should I get started?

How about that our economy is still doing bad and that banks are also doing bad, and it is questionable if and when they are going to get better. Now in a fiat based economy there are always ups and downs and it feeds on both, and in the process the market will change and businesses and laws both may also change.

So how did the market crisis get started?

Back in 1986 Congress passed law that barred interests deductions buying for individuals and families on anything other than home mortgage interest. This is code USC 26 Section 265. Now, this would be fine if they stopped with 265(a). However, they continued with 265(b) which is where they created the exception. This over time has been the beginning of bad mortgage buying habits as it became the tax preferred method for borrowing money. There is more to it than that as many options with first-time home buyer loans have encouraged the buying of loans that one could afford over time and getting loans for bigger homes that one could afford comfortably.

Now for the current problems in the banking industry. Credit Default Swaps. CDS's are essentially insurance, but through legal wording an arbitrary and unstable situation has been created. To give loans there needs to be protections, a backup in case an investment goes bad. This is where insurance has always kicked-in in the past, but to have insurance there has to be liquidated assets to cover it, as required, by law. This was seen as particularly advantageous to banks and other institutions as they did not have to have a liquid pool of money just lying around with this and could do elsewise with the money.

Here's the real kicker. Bad mortgage buying habits + no money to cover bad investments = companies pulling straight from assets to stay afloat and thus falling out from under themselves.

So this is where it has lead us. Granted Credit Default Swaps have extended beyond mortgages as it lies in almost all loan investments now, but this is a broader topic for another day. Now the question begs where do we go from here? Well they gave 800 billion to this already and economists are divided whether it will work or not. The reasoning is that if we give them money they can invest it and restimulate the economy. The problem is that confidence in the economy has been lost and the money may remain reserved in fear rather than being invested out of principle. It also doesn't help that these same companies such as Wells Fargo who have taken 25 billion of that and prepare for an elaborate trip to Vegas for its top loan officers (who could have likely been the ones issuing these bad loans). Since the public outrage Wells Fargo has withdrawn from these reservations and have called the trip off; I'm sure that we will still see more of this in our future.

So to fix the issue, USC 26 Section 265 must be ratified. It has encouraged BAD buying behavior and this needs to be corrected. Rating agencies have also been a problem here as they have been giving out better ratings than the property warrants. One solution (even though unappealing) is to allow these rating firms to be able to be sued by the issuer for negligence. These rating agencies have been too comfortable and too easily seduced due to legal protections and so something must also be done here. Granted law suits are not a great answer, however short term this will lead to either them going out of business really fast or pulling out of complex securities and simply not investing in them. This short term will at least "patch" this situation in the current crisis we are under. It is not a wise long term solution, but one of the better short term "patches" until proper mending can be devised and enacted.

Unlike many will claim and want you to believe. Deregulation has not been the problem here. It has been a combination of both government regulation and government oversight. Government oversight can be bad behavior as we have seen recently, but it has nothing to do with the deregulation of policies. Not watching and reducing control are two separate matters. What we could use as I've already talked about is the deregulation of the fore mentioned policy.

And to the prospective home buyer. Do your research and collect second opinions. Don't jump into a loan without educating yourself first and being sure you are making a wise decision. Check other agencies, look at your budget with an accountant, or even take your proposals to a real estate lawyer for review. Don't jump into any decision as dedicated as this without making a well rounded assessment of your situation and loan proposals at hand. In this current economy it is much better safe then sorry; even if you have to save and pay for a few other services to check things out beforehand.

Here is a statement made recently by Ron Paul which I find truthful:

This entry was posted on Friday, February 13, 2009 at Friday, February 13, 2009 and is filed under , . You can follow any responses to this entry through the comments feed .

1 comments

I like your claim that "Not watching and reducing control are two separate matters" it's certainly something to consider as even I've failed at time to see the distinction. Good post. Peace. Jason.

February 19, 2009 at 10:53 AM

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