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Frank Boettcher

On Sun, 12 Oct 2008 10:47:14 -0700 (PDT), wrote:

Frank Boettcher wrote:
*And it didn't help that the lowest yielding, most secure tranches
were often rated AAA by the rating agencies, so investors thought they
were getting a sound investment. *It turns out that many of those so
called triple A's became riddled with defaults.

True enough... part of the problem is that these were a new type of
instrument that nobody knew how to assess the risk of; but it's also
true that there was little accountability and due diligence as these
intruments were marketed thru-out the finance world.

The default rate, as a percent, has only gone up a small amount. A
bigger problem is the crisis of confidence... when it turns out that
even the safest-rated instruments can be hit by default, *and* the
insurance is worthless, then people panic and want to dump their
investment before they lose the whole pie.

After all, what makes a $20 bill worth $20? The fact that people will
accept it as valuable for a certain range of goods & services...
pretend for a moment that terrorists had broken into the Mint and
infected random $20 bills with AIDS (or something), then you'd have
the same effect... free-fall!

And this is *still* only part of the problem, as I see it... we've
been thru cycles of tight credit before, and cycles of loan default
(remember the junk-bond scandals). The answer is, people who have
money to loan insist on higher interest rates. But now we (the U.S.A.
is not just addicted to credit, we need CHEAP credit! We cannot afford
to take on higher debt just to service the debt we've already taken
on! The country is balancing on the edge of a cliff here and Paulson &
Bernanke are desparate not just to ease credit but to keep interest
rates low.

But Doug, when problem solving you always need to look for root cause.

Agreed. And I think the CRA (you might as well add in President Bush's
'Ownership Society') is indeed part of what got us here. I just don't
see it as The Big Cause.

The red X in statistical DOE terms. *There are many contributing
factors, however the root cause, the red X is simply setting up a
system to give people who could not afford these properties and loans
in the first place a way to get them with no skin in the game.

But they *did* have skin in the game. The same as you or I... keep
paying or lose your home.

No, I had to put 20% down on my last home as a requirement to avoid
PMI and to get the payment to something I could afford. They
essentially had the same situation as a renter. Nothing substantial
down, If you can't do it, just walk away, nothing lost except I got to
move.

I remember buying my first home. 1971, 24 years old, college graduate
with a first entry level professional job, good work record, no debt,
good credit, proof of savings for down payment and closing costs, I
was trying to borrow $18,000 and the PITI would be $123/month. I was
making $700/month and was in the Marine Corp reserve making another
$30 or so. Mortgage was to be an VA/FHA combo, available to
reservists.

I was turned down. Builder (who was also my landlord and friend of
the family) drove me 180 miles to Jackson to have an appeal interview
with the FHA people to try to get me in the house. After the
interview they approved the loan.

How did we get from that to where you could get a "liars loan" from a
street corner loan originator, where you don't even have to show proof
of income, assets, credit worthiness or anything to get a loan.

Root cause my friend, simple as that.
Frank

Dave's point about computers enabling the dizzying array of mortgage
loan terms is also a good one.

IMHO one of the inherent factors in being "conservative" means to be
leery of new things such as new types of financial instruments.

Regards- Doug King