Why is the discount so discouraging presently? What is the integral housing/mortgage crisis , how did this start?
Answers:
Use to be underneath the fiat money system a dollar deposit could be loaned out a 10 to 1 ratio . Then congress allowed them to loan at a 40 to 1 ratio .
Fannie Mae and Freddie Mac cause most of it by encouraging banks to lend billions to low income borrowers who could never repay. James Johnson and Franklin Raines were CEOs who bankrupt Fannie and left with tens of millions surrounded by bonuses. They both now work for the Obama campaign.
Don is correct in that Fannie and Freddie had some nouns but this is not nearly the whole story.
Ok, you asked for it.
One major problem be that Alan Greenspan realized that housing prices needed to stay high contained by order to keep the cutback growing. As long as housing prices kept going up, people could refinance their homes and use the money to buy stuff. In order to accomplish this he kept interest rates artifically low by keeping the feed funds rate low. This smoke and mirrors plan worked for a while but like all pyramid scheme it would someday crash.
Enter the very clever Wall Street boys and girls.
Some genius at Bear Steans or somewhere was struck by a bolt of insight on his way to his yatch sometime. And here is what happened.
They decided that they could bestow a mortgage to any and everybody in the country that wanted a house, not issue if they had no credit, no down payment and no commission. And they could do this without taking any financial risk. Insane, you betcha but this is how they did it.
They sent forth armies of mortgage salespeople to sign up everybody with a pulse. Then they combined these mortgages into "bundles". But first they sliced up the mortgages into pieces and put a piece of one is this "bundle" and another piece into the subsequent "bundle" so that the good, the bad and the bizarre mortgages were all mixed within with the others. Then they called the "bundles" bonds, or CDO's (collatoralized debt obligations).
Now they put the final touch on the scam. They bought insurance policies on these "bonds" or "bundles", insurance policies that said the bonds have AAA credit ratings so they could sell them to investors such as pension funds, mutual funds, bank or whoever wanted these "safe fixed income investments". These insurance policies be called "credit default swaps".
AIG and others insured these "bonds" and the credit rating agencies go along with the scam. Trouble was that AIG and the other insurance companies didn't enjoy the money to make good on these "bonds". The federal elected representatives who is supposed to oversee this sort of thing looked the other way (yes, the Bush Administation and their let's not regulate anything crowd)
To product matters worse, the insurance companies sellling these "credit default swaps", turned this into a business of re-selling the things and sold them to others who could not variety good on them if they failed.
Now to Freddie and Fannie. They did purchase a bunch of these bum "bundles of mortgages" and do own some responsibility in that respect. Not to wax pollitcal but the first answerer is typical in that he requests to blame Fred and Fan because there are laws on paperwork designed to help low income people buy a house but this is a outstandingly small part of the problem. They are simply trying to shift the blame away from Bush and company.
All this created a price bubble in housing and prices rose to insane level. Prices shot up so fast that many empire bought houses to make profit but many bought thinking that if they didn't payment the high prices they would never be able to afford a house then. And the lenders kept of lending on matter how glorious the price as long as buyers would pay the price.
And then soon in 2007, somewhere in Florida or Los Vegas, some guy said, "hang around a friggin minute, I am not signing up for a $80,000 house that costs $274,000. Forget it."
Then prices started to fall and the bankers, mutual funds, pension funds and individual investors realize that not only were the houses involved within the mortgages losing value, that the whole pyramid be about to blow up.
The bankers stopped lending money to respectively other and the dominos began to fall. And here we are.
I hope this help.
Source(s): many sleepless nights wondering why I bought that second house.
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