A Good Look at the Subprime Mess

[Douglas Johnson[_2_]]

Here is an excellent article on how the sub prime mess was created, how it is
playing out, who is winning, who is losing, and who is pointing fingers.

http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postversio

-- Doug

[Daniel T.]

Douglas Johnson > wrote:

> Here is an excellent article on how the sub prime mess was created, how it is
> playing out, who is winning, who is losing, and who is pointing fingers.
>
> http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postv
> ersio

...when you rely on the underwriter and the rating agencies to do all
your homework for you, you don't have safety. You have only the
illusion of safety.

Right, like I'm going to be able to divine the risks better than either
Moody's or S&P.

[bondguy1824]

On Oct 27, 5:09 pm, "Daniel T." > wrote:
> Douglas Johnson > wrote:
> > Here is an excellent article on how the sub prime mess was created, how it is
> > playing out, who is winning, who is losing, and who is pointing fingers.
>
Here's another one, with a bit of a different take.

http://bondguy1824.blogspot.com/2007/09/httpwww.html

[joetaxpayer]

bondguy1824 wrote:

> On Oct 27, 5:09 pm, "Daniel T." > wrote:
>
>>Douglas Johnson > wrote:
>>
>>>Here is an excellent article on how the sub prime mess was created, how it is
>>>playing out, who is winning, who is losing, and who is pointing fingers.
>>
> Here's another one, with a bit of a different take.
>
> http://bondguy1824.blogspot.com/2007/09/httpwww.html

Had the credit ratings agencies assigned proper ratings to these loans,
the market for them would have dried up when the first package of
collateralized loans failed to sell. Robert Reich speaks to the credit
rating agencies role in this mess:
http://robertreich.blogspot.com/2007/10/they-mystery-of-why-credit-rating.html

JOE

[Elizabeth Richardson]

"joetaxpayer" > wrote in message
. ..
>
> Had the credit ratings agencies assigned proper ratings to these loans,
> the market for them would have dried up when the first package of
> collateralized loans failed to sell.

There's probably enough blame to spread around, starting with the borrower
who thought he could make a killing with the appreciation of housing. What
is it they say? Bulls make money, bears make money, but pigs get
slaughtered.

Elizabeth Richardson

[Elle]

"Douglas Johnson" > wrote
> Here is an excellent article on how the sub prime mess was
> created, how it is
> playing out, who is winning, who is losing, and who is
> pointing fingers.
>
http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postversio


The most troubling point to me is that Goldman was in the
business of selling junk mortgages (in whatever package) and
simultaneously hedging them. The more Goldman pushed junk
mortgages and promoted a bubble, the more it stood to gain
from its hedging. Were its analysts really not savvy enough
to recognize that home prices would not keep going up? Was
Goldman "working" investors, promoting a product in which
Goldman really did not believe?

Also worrisome is how Moody's and S&P would pay heed only to
short term performance of junk mortgage borrowers. So much
of the investment industry relies on these credit rating
agencies. This blunder should cause a loss of confidence.
Could Moody's and S&P been so swept up by the rises in home
prices that they bet this was no bubble?

Our education system is failing, with instant this, instant
that failing to ground younger people that nothing good
comes easily, except by luck?

[HW \Skip\ Weldon]

On Sun, 28 Oct 2007 09:00:50 -0500, bondguy1824
> wrote:

>> > Here is an excellent article on how the sub prime mess was created, how it is
>> > playing out, who is winning, who is losing, and who is pointing fingers.
>>
>Here's another one, with a bit of a different take.
>
>http://bondguy1824.blogspot.com/2007/09/httpwww.html

How about a one or two pararagraph synopsis?

-HW "Skip" Weldon
Columbia, SC

[Thumper]

On Sun, 28 Oct 2007 12:29:38 -0500, "Elizabeth Richardson"
> wrote:

>
>"joetaxpayer" > wrote in message
. ..
>>
>> Had the credit ratings agencies assigned proper ratings to these loans,
>> the market for them would have dried up when the first package of
>> collateralized loans failed to sell.
>
>There's probably enough blame to spread around, starting with the borrower
>who thought he could make a killing with the appreciation of housing. What
>is it they say? Bulls make money, bears make money, but pigs get
>slaughtered.
>
>Elizabeth Richardson


The "borrower's" didn't think they could make a killing. They saw the
cost of real estate soaring beyond what they would ever be able to
afford. Then a lender tells them "of course you can afford it" and in
desperation they bite. It seemed like a now or never scenario for
them. The blame is almost entirely the lenders.
Thumper

[Douglas Johnson[_2_]]

"Daniel T." > wrote:

> ...when you rely on the underwriter and the rating agencies to do all
> your homework for you, you don't have safety. You have only the
> illusion of safety.
>
>Right, like I'm going to be able to divine the risks better than either
>Moody's or S&P.

Neither can I, but this stuff was being sold to major institutions. They should
be able to do their own due diligence or invest in something they can
understand.

However, some of this stuff is getting so complex, that no one can understand
it. At least part of the troubles is caused by the rating agencies' risk models
that were untested against the real world, particularly the real world as it was
at the time with foolishly lax lending standards.

Now none of that excuses the culpability of the ratings agencies. I hadn't
thought of it, but they are paid by the investment banks to do the ratings. So
there is more than a small conflict of interest.

-- Doug

[Elizabeth Richardson]

"Thumper" > wrote in message
...
>
> The "borrower's" didn't think they could make a killing. They saw the
> cost of real estate soaring beyond what they would ever be able to
> afford. Then a lender tells them "of course you can afford it" and in
> desperation they bite. It seemed like a now or never scenario for
> them. The blame is almost entirely the lenders.

Don't be ridiculous. Nobody forced these people to borrow money they
couldn't afford to repay. These were 2nd mortgages because the people didn't
have enough money to purchase the houses in the first place and they were
buying more house that they could actually afford. Houses have gotten way
too large. I grew up in a slightly upper-class neighborhood, and our house
was 1450 sf, but lots of custom stuff for the times (1950s). Plenty big
enough for a family of 5. Few home buyers these days would even look at a
house that size. Greedy, keep up with the Jones' attitude is just as much to
blame for this fiasco as anything. These borrowers couldn't figure out how
to live below their means, on of the first principles of financial planning.

Elizabeth Richardson

[Douglas Johnson[_2_]]

"Elizabeth Richardson" > wrote:

>
>"Thumper" > wrote in message
...
>>
>> The blame is almost entirely the lenders.
>
"Elizabeth Richardson" > wrote:
>Don't be ridiculous. Nobody forced these people to borrow money they
>couldn't afford to repay.


In my mind, the structural issue is that the actual lenders (the people that
bought the CDOs and other mortgage paper) were disconnected from the actual
borrowers and associated risks. Everyone in between had more incentive to make
loans than not make loans, because they got paid on loan volume, not loan
quality.

Given all that, the rest is human nature. The lenders were getting high returns
on "AAA" rated paper, so they pushed money into the system (or at least eagerly
bought the paper when offered). The investment bankers were paid for creating
the paper, the mortgage brokers were paid for creating the loans. No one cared
whether the loans were any good. The lender is normally the one who cares, but
the paper is AAA, right?

The borrowers' share of the blame? It's all over the map. There are some
speculators, some greedy fools, and some ordinary fools. We have all commented
on the degree of financial illiteracy in the world. We've seen posting on this
group from people who clearly did not understand their mortgages.

By the way, this is just a variation on the 80's S&L mess. There, the actual
lenders were buyers of government guaranteed CDs issued by the S&Ls. Their
money was safe, no matter what happened downstream. The S&Ls were paid to make
loans, so they did.

At least the taxpayers will not be on the hook for the current mess.

-- Doug

[Usenet2007@THE-DOMAIN-IN.SIG[_2_]]

In article >,
says...
> On Sun, 28 Oct 2007 12:29:38 -0500, "Elizabeth Richardson"
> > wrote:


> >"joetaxpayer" > wrote in message
> . ..

> >> Had the credit ratings agencies assigned proper ratings to these loans,
> >> the market for them would have dried up when the first package of
> >> collateralized loans failed to sell.
> >
> >There's probably enough blame to spread around, starting with the borrower
> >who thought he could make a killing with the appreciation of housing. What
> >is it they say? Bulls make money, bears make money, but pigs get
> >slaughtered.


> The "borrower's" didn't think they could make a killing. They saw the
> cost of real estate soaring beyond what they would ever be able to
> afford. Then a lender tells them "of course you can afford it" and in
> desperation they bite. It seemed like a now or never scenario for
> them. The blame is almost entirely the lenders.


The buyers still have responsibility, even if they weren't trying
to speculate or flip the house.

Some time ago, I picked up a brochure from a mortgage broker.
And the sales pitch looked really tempting. You know, about the
"dream" of owning my own house. And how they "know how to make
it happen." And how they will work with me. And even some very
interesting things like, "100% Finance" and like, "No Proof Of
Income."

And I will admit to having a certain emotional reaction to that.
For about thirty seconds.

And then, I jolted myself back to reality. And started asking
myself questions. The kind of questions that weren't in the
brochure.

About interest rates. And what can happen to them. And fees.
And the real estate price bubble that my area is experiencing.
With jargon like, "Upside Down On The Mortgage." And that whole,
"Getting In Over One's Head" concept. Plus the consequences if I
were to be, shall we say, "overly optimistic" in stating my
income.

It's kind of like walking past the pastry or deli case in the
supermarket. And feeling tempted by the yummy instant
gratification.

And then jolting myself back to the reality of the potential
long-term consequences of eating the fat, sugar, etc.

It is MY responsibility to take a hard, honest look at those
impulses, and to restrain myself.


--
Earn Money With Your Web Site
http://www.WebSponsorZone.Net
Web Site Advertising Directory

[Elizabeth Richardson]

> wrote in message
...
>
> It's kind of like walking past the pastry or deli case in the
> supermarket. And feeling tempted by the yummy instant
> gratification.
>
> And then jolting myself back to the reality of the potential
> long-term consequences of eating the fat, sugar, etc.
>
> It is MY responsibility to take a hard, honest look at those
> impulses, and to restrain myself.
>

Excellent analogy. A large part of the current health care crisis is in the
size of our collective bellies. Are we blaming the grocers for selling
potato chips, salami, and chocolate cake? Same goes with the sub-prime
crisis.

Elizabeth Richardson

[joetaxpayer]

Elizabeth Richardson wrote:
> Excellent analogy. A large part of the current health care crisis is in the
> size of our collective bellies. Are we blaming the grocers for selling
> potato chips, salami, and chocolate cake? Same goes with the sub-prime
> crisis.
>
> Elizabeth Richardson

People should be responsible for themselves, I agree there. But you give
them more credit than they deserve. That you can navigate the investing
required to manage your own retirement doesn't prove it's easy, just
that you are smart. That you (and I) knew to not get sucked in by the
allure of the low teaser rate may be confirmation of our financial
savvy, but little more.
The mess we are in was foreseeable and avoidable. The people who
borrowed the money, the broker who wrote it up, the bank the packaged
it, the companies that sliced it up for resale, and the ratings
companies. I miss anyone?
JOE

[Daniel T.]

"Elizabeth Richardson" > wrote:
> "Thumper" > wrote:
> >
> > The blame is almost entirely the lenders.
>
> Don't be ridiculous. Nobody forced these people to borrow money they
> couldn't afford to repay.

Oh please, the lenders were practically throwing money at people. They
were loaning money to people who were known credit risks without having
any idea how much money they made, or even if they were employed.

I'm just cynical enough to believe that the banks knew that if things
worked out, they would make a mint, and if things fell apart, the
government would help them out of the hole they dug.

[Daniel T.]

Douglas Johnson > wrote:

> At least the taxpayers will not be on the hook for the current mess.

Of course they will.

[Elizabeth Richardson]

"joetaxpayer" > wrote in message
. ..
>
>That you (and I) knew to not get sucked in by the
> allure of the low teaser rate may be confirmation of our financial
> savvy, but little more.

Does it take financial savvy to know how much you make and, therefore, how
much you can afford to spend? I don't understand ARMS or other fancy
mortgages. I've said before my first mortgage was a fixed 13-7/8%, in a time
of very high interest rates. Was that stupid? Perhaps. So getting a lower
fixed rate loan when interest rates dropped to 6-3/4 was smarter. My sister
always talked about ARMs, and I thought she had 3 heads. Why would anyone in
their right mind, get a mortgage that you don't know how much it's going to
cost you 6 months from now, when you're already spending near your max and
you probably have little chance of increasing your income? And let's face
it, these are probably the same people who are paying the minimums on their
credit cards. They already knew they were in trouble.


> The people who
> borrowed the money, the broker who wrote it up, the bank the packaged
> it, the companies that sliced it up for resale, and the ratings
> companies. I miss anyone?

That just about covers it.

Elizabeth Richardson

[wyu@talisys.com]

Douglas Johnson wrote:
> Here is an excellent article on how the sub prime mess was created, how it is
> playing out, who is winning, who is losing, and who is pointing fingers.
>
> http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postversio


One thing that has always puzzled me. U.S. Treasuries -- backed by the
full faith and taxing power of the largest/strongest economy in the
world -- are rated AAA. How on earth can S&P or Moody's give that same
rating to a mortgage-backed security and then investors just swallow
it hook-line-sinker?

[Don]

"Elizabeth Richardson" > wrote in message
...

>Greedy, keep up with the Jones' attitude is just as much to
> blame for this fiasco as anything. These borrowers couldn't figure out how
> to live below their means, on of the first principles of financial
> planning.

And then the greedy, get richer still attitude of the lenders came into play
and turned the greedy, keep up with the Jones' attitude of the borrowers to
their own advantage.

[Elle]

"Elizabeth Richardson" > wrote
> Why would anyone in
> their right mind, get a mortgage that you don't know how
> much it's going to
> cost you 6 months from now, when you're already spending
> near your max and
> you probably have little chance of increasing your income?

I think one really has to ask why these folks were "not in
their right mind."

How can the financial literacy of people be improved,
particularly with the overwhelmingly low educated masses?
That is, some 80% of the age-eligible population do not have
a 4-year college degree. A large fraction of those
foreclosed or facing foreclosure come from cultures of
historical poverty, and so less education is communicated at
the dinner table...

Simply complaining about these people's stupidity is no
solution, that's for sure.

Joe wrote:
>> The people who
>> borrowed the money, the broker who wrote it up, the bank
>> the packaged
>> it, the companies that sliced it up for resale, and the
>> ratings
>> companies. I miss anyone?

One interpretation of the Robert Reich article you cited
seems to me to be that the federal government did not do
enough to preclude conflicts of interest in the work of
credit rating agencies. (Doug Johnson re-iterated this
conflict of interest here.) It makes me wonder a little
whether government officials purposely looked the other way,
so as to enrich their more wealthy supporters further.

[Don]

"Elle" > wrote in message
...

> One interpretation of the Robert Reich article you cited seems to me to be
> that the federal government did not do enough to preclude conflicts of
> interest in the work of credit rating agencies. (Doug Johnson re-iterated
> this conflict of interest here.) It makes me wonder a little whether
> government officials purposely looked the other way, so as to enrich their
> more wealthy supporters further.

I could be mistaken, but I seem to recall that the Savings and Loan crash
back in the 80's (with which the current debacle certainly has many
similarities) also occurred during an administration with a reputation of
favoring wealthy supporters.

[HW \Skip\ Weldon]

On Sun, 28 Oct 2007 22:52:22 -0500, "Elizabeth Richardson"
> wrote:


>>That you (and I) knew to not get sucked in by the
>> allure of the low teaser rate may be confirmation of our financial
>> savvy, but little more.
>
>Does it take financial savvy to know how much you make and, therefore, how
>much you can afford to spend?

Within a half-days drive from my office are several large
universities, school districts and private colleges, each chock full
of intelligent people with advanced degrees in a variety of fields
including business/finance. And many of these people have barely
positive to negative net worths. Further, some don't balance their
checkbook - the beginning point for living within one's means.

I've concluded that making good financial decisions has little to do
with education of any kind and everything to do with common sense
(street smarts.)


-HW "Skip" Weldon
Columbia, SC

[Douglas Johnson[_2_]]

wrote:

>One thing that has always puzzled me. U.S. Treasuries -- backed by the
>full faith and taxing power of the largest/strongest economy in the
>world -- are rated AAA. How on earth can S&P or Moody's give that same
>rating to a mortgage-backed security and then investors just swallow
>it hook-line-sinker?

Well, the theory was that the rating agency would take a package of loans and
plug it into a computer model. The model would use history to say that loans
of this type and mix defaulted x% of the time with an associated loss of y%.

Now the revenue stream from the loans would sliced into groups, called tranches.
The highest rated tranche would get first call on the payments and interest from
the loans, the next highest would have the next call. So on down to the lowest
(and highest yielding) tranche, which would have first call on the losses.

So, if the model held up, the likely losses would be down in the lowest one or
two tranches. The highest tranche should have little or no chance of loss
because they not only get paid soonest, they have all those other tranches that
have to lose everything before they do.

But the model is based on history. In the meantime, the lending standards were
deteriorating. The loans actually being made were not nearly as good as the
history in the model, so the model was optimistic at best. The decline in
housing prices exposed this when people that used to be able to sell when they
got in trouble couldn't anymore.

In fact, the AAA rated tranches will probably come out all right. They really
are a long way from any risk of loss. But they are currently priced around 80
cents on the dollar because nobody is sure.

The magic I don't understand is how the investment banks can round up a bunch of
the mid-level tranches, repackage them into tranches, and get AAA ratings on the
best of the repackaged junk. Same thing, I guess.

-- Doug

[Douglas Johnson[_2_]]

"Daniel T." > wrote:

>Douglas Johnson > wrote:
>
>> At least the taxpayers will not be on the hook for the current mess.
>
>Of course they will.

I have trouble understanding why you say this, other than general cynicism. In
the 80's the CDs (up to $100,000) were insured by the full faith and credit of
the United States. The taxpayers paid roughly $150 billion to meet the
obligation.

The federal government has not guaranteed any paper in the current mess, other
than conventional loans through Fannie Mae and Freddie Mac. While there has
been some discussion of helping homeowners, especially by allowing refinancing
through Fannie Mae or Freddie Mac, I don't see much stomach in Congress for a
bail out of Country Wide or Merrill Lynch.

Do you know differently?

-- Doug

[BreadWithSpam@fractious.net]

"HW \"Skip\" Weldon" > writes:

> Within a half-days drive from my office are several large
> universities, school districts and private colleges, each chock full
> of intelligent people with advanced degrees in a variety of fields
> including business/finance. And many of these people have barely
> positive to negative net worths. Further, some don't balance their
> checkbook - the beginning point for living within one's means.

For what it's worth, there are some folks who make perfectly
reasonable arguments against balancing one's checkbook. Or,
perhaps, if you'd like to interpret it this way, against
balancing it oneself.

I, myself, meticulously record every credit card and checking
account (and savings account and brokerage account) transaction
in Quicken. And I can't tell you how many times it's helped
me to figure out what or when I paid for something. But it
certainly doesn't in any way guarantee that I spend less
than I earn, nor have I ever - ever - found the bank to
make a mistake (at least in a checking account - credit
card fraudulent charges, I think, are something else).

> I've concluded that making good financial decisions has little to do
> with education of any kind and everything to do with common sense

It would help a whole lot of folks would embrace a few
truly basic ideas. Spending less than one earns is the
first, of course. Second is probably that if something
sounds too good to be true, it probably is (ie. no money
down mortgages for folks who don't have squat in income).
Third may just be to never buy or invest in something you
don't understand.

But, as I said, even though *I* find great value in
documenting all the details, I can easily understand
where other folks may not. Budgets may be rough as
long as they are reasonably accurate. And a brief
review of monthly statements by eyeball may be
enough for much of what I use Quicken for.

Anyway, just for fun, here's Eric Tyson's note about
balancing one's checkbook (he says the same thing in
at least one of his books which I recommend to folks
all the time):
http://marketplace.publicradio.org/features/archive_articles/commentary020112.htm

If I have a limited amount of time (and attention span)
from someone I'm trying to help out with his or her
finances, as long as we're pretty sure they're spending
less than they earn, I'd rather use my time to convince
them to max out a 401k than to spend time balancing their
checkbook.

That all said, they should all at least know *how* to
balance it and if folks choose not to do so, it should
be a conscious decision not to, rather than a default
due to lack of knowledge.


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

[Sgt.Sausage]

"Daniel T." > wrote in message
...

> ...when you rely on the underwriter and the rating agencies to do all
> your homework for you, you don't have safety. You have only the
> illusion of safety.
>
> Right, like I'm going to be able to divine the risks better than either
> Moody's or S&P.

Actually, given their recent track records, it's quite
likely that you would have done better. It's highly likely
that a blind orangutan shaking up the old MagicEightBall(tm)
would have done just as well, if not better.

[Sgt.Sausage]

"joetaxpayer" > wrote in message
. ..






> The mess we are in was foreseeable and avoidable. The people who borrowed
> the money, the broker who wrote it up, the bank the packaged it, the
> companies that sliced it up for resale, and the ratings companies.

Joe, you're good guy I generally agree with on this forum but ...


> The mess we are in was foreseeable and avoidable.

Um ... No.

The only way to make it "avoidable" would have been to
clamp down on folks freedom to borrow what they want,
when they want, and from whom they want to borrow.

I don't want Uncle Sugar telling me (nor any other American)
from whom or how much or at what terms I (we) can borrow.

Sorry. When that happens it's game over for all of us.

The other side of that, of course, is the "damned if you
do, damned if you don't" logic. Obviously, we're damned
because we did (let folks borrow the money).

If we didn't (damned if we don't, they'd all be have been
screaming how _unfair_ (whine) it is that they don't have
access to all that money and can't buy the house they
(whine) _deserver_ to own.

There's no winning that one.

>I miss anyone?

Not as far as I can tell -- you pretty much nailed it.

The only way out is to let 'em *all* feel the pain of their
mistakes. The brokers lose their jobs. The banks lose their
money and ... yes, virginia, the folks lose their homes.



> JOE
>

[Sgt.Sausage]

"Elle" > wrote in message
...

> How can the financial literacy of people be improved, particularly with
> the overwhelmingly low educated masses?

Unfortunately, the same way you let a kid get educated
about the hot burner on the stove. You can tell 'em all
you want how hot it is. You can scold 'em and punish 'em
and watch over 'em all you want. The reality is ... no kid
ever really *learns* until he feels the pain of the red hot
stove burner eating throught that first layer of pain receptors.

As much as you want to love and protect 'em ... As much as you
want to keep 'em out of harms way ... the only way they ever
really learn the lesson is to let 'em get burned once or twice.

Life is about choices. You have to let folks make their
choices and ... here's the really important part -- deal
with the consequences of those choices.

> That is, some 80% of the age-eligible population do not have a 4-year
> college degree.

Not an excuse. The mathematics necessary to calculate
simple interest, compound interest, time value of money,
present value, future value -- all is commonly taught
by the 7th grade in the U.S. For most of us we had the
tools necessary by the time we were 12 or 13 years old.

> A large fraction of those foreclosed or facing foreclosure come from
> cultures of historical poverty, and so less education is communicated at
> the dinner table...

See above. If they went through the public school systems
in America, they were given the tools to calculate these
things by the time they reached (if not before) high school.

If they *chose* to ignore the information, that is not
my fault. That is not your fault. That is not Uncle Sam's
fault and that is not the TaxPayers' faults.


> Simply complaining about these people's stupidity is no solution, that's
> for sure.

Education, in and of itself, solves *nothing*. It's
what folks *choose* to do with the information that
makes all the difference in the world and for you to
force their choice is assenine. Let 'em choose. Let
'em learn.

It's been said a bazillion times before: You can lead
a horse to water ...

These folks have been lead to the water. It's up to
them whether they want to drink the water or drink
the Kool-ade.

You *have* to leave the choice to them and, yes, that
means you leave them the choice to fail. Let them fail.
Let them deal with the consequences.

[Sgt.Sausage]

"Thumper" > wrote in message
...

> The "borrower's" didn't think they could make a killing. They saw the
> cost of real estate soaring beyond what they would ever be able to
> afford.

If I see something I currently can't afford, and *especially*
if I "would never be able to afford" it -- I don't buy it. I
wait until I can afford it or I don't buy it at all.

It's what adults do.

Q.E.D.


> Then a lender tells them "of course you can afford it" and in
> desperation they bite. It seemed like a now or never scenario for
> them. The blame is almost entirely the lenders.

Who made the *conscious* and fully aware (by your premise
above) decision that "Hey! I can't afford this" but went
ahead and signed the papers anyway?

[Elle]

"Douglas Johnson" > wrote
> While there has
> been some discussion of helping homeowners, especially by
> allowing refinancing
> through Fannie Mae or Freddie Mac, I don't see much
> stomach in Congress for a
> bail out of Country Wide or Merrill Lynch.
>
> Do you know differently?

Congress's motivation to bail out homeowners and possibly
some financial institutions would be to keep the economy
from going into a worse tailspin. You really have not seen
discussion of this?

I am not saying the taxpayers will definitely be on the hook
for this. But right now, I do think it's possible that
taxpayers will pay en masse for some of this. It's better to
educate people early (and keep the already-educated from
preying on the uneducated through deceptive practices), or
else we all pay later. Same thing with health care.

How people and organizations with conflicts of interest are
so ready to rationalize them is just disgusting. Nor do I
understand why more people are not taught that a terribly
complicated investment vehicle necessarily implies (1) one
helluva lot of people skimming fees off the top, and so not
actually believing in the substance of the product being
sold; and (2) a high risk, house of cards.

[Elle]

"Sgt.Sausage" > wrote
Joe wrote
>> The mess we are in was foreseeable and avoidable.
>
> Um ... No.
>
> The only way to make it "avoidable" would have been to
> clamp down on folks freedom to borrow what they want,
> when they want, and from whom they want to borrow.

Before interest rates dove, lending institutions had in fact
done this.

Joe is right.

[Elle]

"Sgt.Sausage" > wrote
> "Elle" > wrote
>> How can the financial literacy of people be improved,
>> particularly with the overwhelmingly low educated masses?
>
> Unfortunately, the same way you let a kid get educated
> about the hot burner on the stove. You can tell 'em all
> you want how hot it is. You can scold 'em and punish 'em
> and watch over 'em all you want. The reality is ... no kid
> ever really *learns* until he feels the pain of the red
> hot
> stove burner eating throught that first layer of pain
> receptors.

Your argument defeats the purpose of this newsgroup, for
one, because people do learn from it and without getting
burned.

Maybe you should do some thoughtful reading on psychology.
What you describe is one way to "really *learn*." There are
others. I am betting you yourself did not have to get
"burned" first before you subsequently made all your good
decisions.

> You *have* to leave the choice to them and, yes, that
> means you leave them the choice to fail. Let them fail.
> Let them deal with the consequences.

Your arguments rest on a presumption that every, say,
two-year-old could become as smart as, say, Yale econ yada
professor Robert Shiller through becoming burned, and only
burned, enough. The reality is a high proportion of
two-year-olds left to their own devices would die. A certain
foundation is needed before people, on their own, can
survive and keep learning. If anything, we might simply
disagree on when this foundation is laid and a person should
be allowed to sink or swim, no more public education or help
from the parents, etc. But we'll never agree that the only
way to learn is by getting burned, as an academic,
scholarly, realistic matter. That's just baloney.

[joetaxpayer]

Sgt.Sausage wrote:

> "Elle" > wrote in message
> ...
>>Joe is right.
>
> No, he's not. The only way to make it avoidable is
> for Government Intervention -- which is a bad, bad
> way to go. You really don't want to go down that
> road, do you?

Sgt, the opposite of 'avoidable' is 'inevitable'.
If you believe that the combination of greed, for lack of a better word,
and ignorance came together in such a way that there was no other
possible outcome, I'm listening.

I believe that the interest rate cycle made a housing crunch (note: I do
not say bubble) a probable outcome. Allowing for the ignorance of the
average borrower, I'll concede that people will be happy to borrow what
looks good today with no thought for tomorrow. And I'll hazard a guess
that most of these ridiculous teaser rate loans were not held in-house
but packaged and sold. So we go down a path which lead to a complete
breakdown of a system that was working until recently. That may suggest
inevitable.

The 'regular' (i.e. corporate) junk bond market found a way to raise
huge sums of money, and if we ignore for a moment, the Milken/Boesky
insider trading issues, the money raised helped to finance companies in
the US which would otherwise have been unable to raise capital.

Sup-prime used to not be a dirty word, not when these loans were
properly rated.

JOE

[Elle]

"Sgt.Sausage" > wrote
> Let me rephrase, then: For most,
> Joe-and-Sally-SixPack-America,
> making good choices based on knowledge of mistakes made
> by others is a pipe-dream.

You seem to be ignoring my main point, which is that most of
America does not have the education (be it from mum or dad
at the dinner table; public schools; a mentor; the military;
whatever) to know how to make the right choices. Most folks'
brains are in fact wired to emulate someone close to them.
Otherwise, people are in fact not unlike two-year-olds with
regard to budgeting.

I like Chris Gardner's story. He's the guy portrayed in the
recent film, "The Pursuit of Happyness." But I note that, in
his rags to riches story, he credits some family role
models.

Otherwise, I guess you're saying that this group, and fora
like it, do not help most of the people who post to it.

We disagree.

[Elle]

"Sgt.Sausage" > wrote
[The government] however, has no legal right, nor the
> obligation to tell anyone -- you, me, nor the banks
> who and how to loan money.
>
>> Joe is right.
>
> No, he's not. The only way to make it avoidable is
> for Government Intervention

Joe said this was avoidable, without elaboration. You
assumed, incorrectly, he meant through government
intervention. Foul.

Fact is it was avoidable, through, for one, applying
historical lending practices instead of new ones.

Government intervention is being discussed elsewhere in this
thread. To understand that it might not be a bad idea
(though I really do not know for sure right now), one has to
understand why it is we live fairly harmoniously in the U.S.
It is largely due to government intervention on a number of
levels. Government intervention does aid the economy, and
make you and me richer, by, for one, making sure the "lower
class" is not so poor and uneducated that they turn to crime
(in desperation), or that two parents have to work such
crazy hours to pay for a mistake (wrought by deceptive loan
practices and poor education) that they cannot supervise
their children. Said children are then subject to unsavory
influences that do affect your neighborhood. Said parents
are so unskilled that they cannot take certain blue collar
jobs. Said parents cannot afford health insurance, and guess
who gets to pay for their ER visits? And so on. Invest now
in society, or pay the piper later. Don't support
freeloading, but don't cripple our economy by making the
divide between rich and poor so great we have higher and
higher gates, and increasingly more expansive gated
communities. Because some day you will have to walk outside
those gates, risking life and limb.

I do not wish to split hairs with you. I am only saying that
some government intervention may be appropriate. It
certainly is in some other situations. In the past it has
often profited all of us.

[joetaxpayer]

Elle wrote:

> "Sgt.Sausage" > wrote
> [The government] however, has no legal right, nor the
>
>>obligation to tell anyone -- you, me, nor the banks
>>who and how to loan money.
>>
>>
>>>Joe is right.
>>
>>No, he's not. The only way to make it avoidable is
>>for Government Intervention
>
>
> Joe said this was avoidable, without elaboration. You
> assumed, incorrectly, he meant through government
> intervention. Foul.
>
> Fact is it was avoidable, through, for one, applying
> historical lending practices instead of new ones.

Thanks for taking the time to understand my view.

> I am only saying that
> some government intervention may be appropriate.

Kind of like how Freddie Mac was created to provide a secondary market
for mortgages back in 1970, and the criteria for those mortgages was
strictly regulated by the Government.
I was avoiding asking for government intervention, hoping the wisdom of
the market would be to self-regulate, but there's a certain irony in
wanting the government to stay away from regulating us away from a
mistake but asking them to come in to fix one after the fact.
JOE

[Greg Hennessy]

>> That is, some 80% of the age-eligible population do not have a 4-year
>> college degree.
>
> Not an excuse. The mathematics necessary to calculate
> simple interest, compound interest, time value of money,
> present value, future value -- all is commonly taught
> by the 7th grade in the U.S. For most of us we had the
> tools necessary by the time we were 12 or 13 years old.

I'd disagree. I never saw those types of calculations until
college. I never saw algebra till high school.

> You *have* to leave the choice to them and, yes, that
> means you leave them the choice to fail. Let them fail.
> Let them deal with the consequences.

Of course it might be nice of mortgage brokers had a fiduciary
responsibility to recommend suitable mortgages to those who paid them
money, but they don't.

[Greg Hennessy]

On 2007-10-29, Sgt.Sausage > wrote:
> Uncle Sugar, however, has no legal right, nor the
> obligation to tell anyone -- you, me, nor the banks
> who and how to loan money.

If you believe that, why don't you try advertising "Loans
available. No Blacks, Women, or Jews need apply."

I think you will find that Uncle Sugar does the the legal right to
tell you how to loan money.

> No, he's not. The only way to make it avoidable is
> for Government Intervention -- which is a bad, bad
> way to go. You really don't want to go down that
> road, do you?

That ship sailed long ago.

[kastnna]

On Oct 30, 11:57 am, Greg Hennessy
> wrote:

> Of course it might be nice of mortgage brokers had a fiduciary
> responsibility to recommend suitable mortgages to those who paid them
> money, but they don't.

Nice for who (or is it whom, I can't remember)? The "no such thing as
a free lunch" principal applies here. Company expenses are increased
by errors and omissions coverage, ethical and fiduciary training,
compliance with regulatory agencies, et cetera... Corporations, being
the profit-seaking entities that they are, pass these expenses on to
us, the consumers. I personally don't care to pay higher fees, closing
costs, intrest rates, whatever... just to ensure that an "uninformed"
borrower doesn't hurt himself.

There may be more factors at work than Sgt. Sausage includes in his
analysis but for the most part I agree with him (I do think that some
of Elle's points are also very valid). I have a feeling (not proof,
just a feeling) that the majority of borrowers that lose their homes
in this mess will not willingly get caught up in it again. I hope
their children, friends, and family that watched on in horror will
also "learn by watching others get burned."

-Just my $0.02

[Sgt.Sausage]

"Elle" > wrote in message
...
> "Sgt.Sausage" > wrote
>> Let me rephrase, then: For most, Joe-and-Sally-SixPack-America,
>> making good choices based on knowledge of mistakes made
>> by others is a pipe-dream.
>
> You seem to be ignoring my main point, which is that most of America does
> not have the education (be it from mum or dad at the dinner table; public
> schools; a mentor; the military; whatever) to know how to make the right
> choices. Most folks' brains are in fact wired to emulate someone close to
> them. Otherwise, people are in fact not unlike two-year-olds with regard
> to budgeting.

You seem to be ignoring the fact that I wrote that
every single kid who attended public schools in America
(probably any time in the latter half of the last century
through this very day, today), in fact, *did* have the
necessary education but *chose* to ignore it.

It's simple 'rithmatic. Plusses, minuses, a few ratios,
quotients and multiplications. More complex (compound
interest, time value of money (present value/future value) --
*all* is taught to every single kid by early high school.
I have my mathematics textbooks from the seventh grade.
All of this is in there. All was taught, and tested,
in grade school. The education happened. The results
you're looking for based upon said education did not.

It is not an education issue. These folks were educated
and had the necessary tools, but chose denial instead.


> I like Chris Gardner's story. He's the guy portrayed in the recent film,
> "The Pursuit of Happyness." But I note that, in his rags to riches story,
> he credits some family role models.
>
> Otherwise, I guess you're saying that this group, and fora like it, do not
> help most of the people who post to it.

I'm not saying that at all. I'm saying that most people
wouldn't be helped. The fact that some are coming to
this particular forum and others like it -- that specifically
excludes 'em from the "most people" category. "most people"
don't actively seek out information. "most people" just let
life happen to 'em. "most people" will fall for any salesman's
pitch. "most people" won't back up the saleman's BS by crunching
the numbers themselves. "most people" have the necessary
cognitive development and skills to handle this, but *choose*
to ignore it. By definition, the folks actively seeking out
information are *not* these "most people".

The folks who come to this forum certainly ain't "most
people".

> We disagree.

[Sgt.Sausage]

"Daniel T." > wrote in message
...
> "HW \"Skip\" Weldon" > wrote:
>
>> Within a half-days drive from my office are... intelligent
>> people... And many of these people have barely positive to
>> negative net worths.
>
> Just think of all the investment bankers in that area. They honestly
> thought they would make money loaning money to a people with a 500 or
> so beacon and no proof of income?
>
> A major theme in this thread seems to be, "oh those stupid borrowers,
> they deserve what they get." That sentiment should go both ways when
> it is expressed.

It, in fact, goes farther with me.

"oh those stupid borrowers"
Who borrowed the money.

"oh those stupid brokers"
Who found the (equally stupid) folks to loan the money

"oh those stupid bankers"
Who initially put up the money to loan.

"oh those stupid investers"
Who put up good money to pay for bad paper and relieve
the bankers of their risk.

It extends from the bottom to the top -- all the way
up and back down again.

They were all ignorant.

My only hope is that it doesn't eventually lead to
"oh those stupid taxpayers" who bail out any of
the above mentioned ignorant folk. Sorry. No bailouts
for anyone. That's the only true solution.

[Sgt.Sausage]

"Greg Hennessy" > wrote in message
omain...

>>> That is, some 80% of the age-eligible population do not have a 4-year
>>> college degree.

>> Not an excuse. The mathematics necessary to calculate
>> simple interest, compound interest, time value of money,
>> present value, future value -- all is commonly taught
>> by the 7th grade in the U.S. For most of us we had the
>> tools necessary by the time we were 12 or 13 years old.

> I'd disagree. I never saw those types of calculations until
> college. I never saw algebra till high school.

Most of the necessary calculations are "pre" algebra.
Simple arithmetic, really. You're telling me you were
in high-school before you could calculate the difference
between 4% and, say, 9% of $200K? No algebra involved in
that one, and that's the one that's putting so many of
these folks into foreclosure and bankruptcy.

[Elle]

"Sgt.Sausage" > wrote
> You seem to be ignoring the fact that I wrote that
> every single kid who attended public schools in America
> (probably any time in the latter half of the last century
> through this very day, today), in fact, *did* have the
> necessary education but *chose* to ignore it.

Whence we are back to the judgement that any five-year-old,
aided only by the public school system and regardless of the
presence of bad or no parenting, is a deadbeat when she or
he does not know how to choose wisely at that age and then
build on those choices.

We disagree.

Financial education is not taught strictly through the
public schools. I would say most education, of any flavor,
is not delivered through schools (public or private).

[Sgt.Sausage]

"Greg Hennessy" > wrote in message
omain...
> On 2007-10-29, Sgt.Sausage > wrote:
>> Uncle Sugar, however, has no legal right, nor the
>> obligation to tell anyone -- you, me, nor the banks
>> who and how to loan money.
>
> If you believe that, why don't you try advertising "Loans
> available. No Blacks, Women, or Jews need apply."

While I've got no reason to exclude those folks (green is,
after all, green) regardless of where it comes from ...

There is absolutely nothing to stop me from choosing not
to loan to, say, folks from Outter Mongolia simply because
I may or may not like the slant in their eyes or the color
of their skin. (FYI, I *would* loan to an Outter Mongolian,
I'm just making a point here).

> I think you will find that Uncle Sugar does the the legal right to
> tell you how to loan money.

I'll give you the banks. You got me on that.

I won't give you me. He still has no legal right to tell
you and me how to make a personal loan. We don't fall under
those rules.

Speaking of which, those rules don't even apply to banks
in terms we're speaking of. The rules you cite deal with
race, religeon, ethnicity. There are no such rules defining
who's a good credit risk and who's not -- and more to the
point, defining who a bank chooses to loan to based on
the assessment of said risk. Wrong rule book, Greg.

[Sgt.Sausage]

"joetaxpayer" > wrote in message
. ..

> I was avoiding asking for government intervention, hoping the wisdom of
> the market would be to self-regulate,

They'll only self-regulate if you let them feel the pain.
Let a few banks go under. The rest won't be in such a hurry
next time to write bad paper.

> but there's a certain irony in wanting the government to stay away from
> regulating us away from a mistake but asking them to come in to fix one
> after the fact.

I'm saying: Yes, the only way to avoid it is Govt. Intervention.
I'm also saying, No -- that's exactly the wrong thing to do.

Back up a few posts. I said "let them feel the pain". It's the
only way (outside of Govt. mandate) that they will self-regulate.
Why should they regulate if someone comes in and bails 'em out?
They won't have any reason to. The obvious answer: Don't intervene
and let 'em feel the pain. They'll be sure to self regulate next
time (at least for a while, anyway).

[Greg Hennessy]

On 2007-10-31, Sgt.Sausage > wrote:
>> I'd disagree. I never saw those types of calculations until
>> college. I never saw algebra till high school.
>
> Most of the necessary calculations are "pre" algebra.
> Simple arithmetic, really. You're telling me you were
> in high-school before you could calculate the difference
> between 4% and, say, 9% of $200K?

Now you are shifting your claims. That is a much easier calculation
than the future value of money, which is what you first claimed was
taught to everyone by 7th grade.

Your claim is false. Repeating it won't make it true.

[Daniel T.]

"Sgt.Sausage" > wrote:

> We rode the refi train all the way down. Initial ARM to
> get the low "introductory" rate. Refi to 30 year at 7.75%
> Refi to 20 yr at 6.25%. Refi to 15 yr at 4.99%. Not once
> during those refis did we "cash out". When everyone and
> their brother was getting into an ARM, we were getting
> out.

What would have happened if, after your purchase (while you still had
the ARM) the rates had started going up and property prices had started
going down?

[Sgt.Sausage]

"Elle" > wrote in message
...

> We disagree.

I think I'm finally getting that through my thick skull.

> Financial education is not taught strictly through the public schools. I
> would say most education, of any flavor, is not delivered through schools
> (public or private).


Then, how do you suggest we provide said financial
education to those whom you think are in need of it?

[jIM]

>
> > You seem to be ignoring my main point, which is that most of America does
> > not have the education (be it from mum or dad at the dinner table; public
> > schools; a mentor; the military; whatever) to know how to make the right
> > choices. Most folks' brains are in fact wired to emulate someone close to
> > them. Otherwise, people are in fact not unlike two-year-olds with regard
> > to budgeting.
>
> You seem to be ignoring the fact that I wrote that
> every single kid who attended public schools in America
> (probably any time in the latter half of the last century
> through this very day, today), in fact, *did* have the
> necessary education but *chose* to ignore it.
>
> It's simple 'rithmatic. Plusses, minuses, a few ratios,
> quotients and multiplications. More complex (compound
> interest, time value of money (present value/future value) --
> *all* is taught to every single kid by early high school.
> I have my mathematics textbooks from the seventh grade.
> All of this is in there. All was taught, and tested,
> in grade school. The education happened. The results
> you're looking for based upon said education did not.
>
> It is not an education issue. These folks were educated
> and had the necessary tools, but chose denial instead.
>

Learning the math is the responsibility of the public school system.
But math is only a tool- learning how to apply mathematical principles
is something most people lack, in my opinion.

I teach adults and kids for a living. There are skills which people
need to succeed in anything. But true mastery of anything (decision
making) is knowing when to apply what skill to a given situation.

Experience teaches us most of this skill application, but mentoring
can also point us to which skills to apply when in doubt.

[jIM]

>
> Sgt. thanks, I try. You may have read more in to my post than I was
> trying to imply. I liked the rules 28/38, that 28% of one's gross income
> is the limit for mortgage payments, and 38% total debt to income. (this
> was the rule when such things impacted me) I was not inviting the
> government to do anything, I was lamenting that the lenders should have
> known better. I am with Elizabeth, and had that same 13-5/8% (1/4% under
> her) fixed mortgage. Back then, I recall the ARM mortgages still had
> qualification requirements, i.e. the borrower had to qualify at some
> higher rate than the teaser.
> Sgt., I know life is not a bell curve, but I am smart enough to know
> that at 1% 1yr t-bill, there's far more room to go up than down. Some
> portion of borrowers will get laid off, some will get ill, but the rate
> rise impacted every last one, and this is being treated as totally
> unexpected. My last refi moved be to a 15 yr fixed at 5.24%, an ARM was
> not even considered, and no one I advise found themselves in an ARM as
> the fixed rates hit recent lows.


I live in SW Ohio, and during the last 7 years I have bought my first
house, refinanced it, sold it, bought a second house and refinanced
it.

During the whole process I learned a few different things. First
house was bought with a buy down on the interest rate (2 points 1st
year, 1 point second year, normal payment the third year). Loan had
PMI. The ratios as listed above were calculated, known and quite
tight (we had to do some funny math to make ratios work prior to
closing).

Learned to avoid PMI

refinanced to lose PMI. Had a first and second fixed rate loan.

Bought a second house with a 30yr fixed first and 15 year ARM of some
sort for second. I quickly learned the second is not what I thought
it was, and refinanced whole mortgage bundle (1st and 2nd) within 14
months. This time the ratios weren't an issue- I'm sure they were
calculated, but few people within the loan process discussed them.

After the ARM got larger, I recalculated the budget and ratios, and it
was clear to me I needed to do something.

During the 4th time, I was able to ask lots more questions based on
the experience of first 3. 4th time we bought the rate down, we
avoided PMI, both loans are fixed rate.

At same time I watched the budget and ratios.

My point is that we did get sucked into some of this, but if a person
is on top of things (persnal finances), they can get out with common
sense (as Skip alluded to 2 pages above).

[Elle]

"jIM" > wrote
> Learning the math is the responsibility of the public
> school system.

Studies show that the best predictors of a student's success
in primary and secondary school--any primary/sec school--are
socioeconomic status; parents' education; and parental
involvement. If parents want to be certain their kids get an
education in financial planning, they need to be involved.
This of course can take many forms, from dinner table talk,
to time dedicated to reviewing the monthly budget; to
setting up the kids with their own allowance and requiring a
budget; etc.

That the public school system, and not bad parenting, is
chiefly to blame for inadequate educaiton is unfortunately
one of the biggest urban legends today.

[Elle]

"Sgt.Sausage" > wrote
E
On financial planning education:
>> I would say most education, of any flavor, is not
>> delivered through schools (public or private).
>
>
> Then, how do you suggest we provide said financial
> education to those whom you think are in need of it?

As I indicated in my post to jIM, I think more focus must
be placed on educating parents about how their involvement
is the best predictor of their kids' educational success,
from reading, writing, and arithmetic to, as Skip calls it,
"street smarts." (The high falutin' synonym for "street
smarts" is perhaps "logic and critical thinking skills,
applied especially to real life situations.")

Motley Fool plugged the following not-for-profit financial
planning education (for young people) organization recently:
www.jumpstart.org (a.k.a "jump$tart.org)

I agree one way people learn is by getting burned. But I
think a kid can get (seemingly) "burned" at a very young
age, losing what to him or her is a large amount of money
but in fact is tiny on an absolute scale. Much education can
be delivered in this fashion. I still remember a sibling
winning some five dollars or so from me in poker when I was
around ten-years-old. (I guess that would be around $50,
worst case, in today's dollars.) I hated this experience so
much that I have never been to a casino nor otherwise
gambled since.

Aside: It is "who" not "whom" above. Rephrase to figure out
the case of "who" in such situations. E.g. "You think [they
or them?] are in need of it?"

[Thumper]

On Fri, 2 Nov 2007 12:03:06 -0500, "Elle"
> wrote:

>"jIM" > wrote
>> Learning the math is the responsibility of the public
>> school system.
>
>Studies show that the best predictors of a student's success
>in primary and secondary school--any primary/sec school--are
>socioeconomic status; parents' education; and parental
>involvement. If parents want to be certain their kids get an
>education in financial planning, they need to be involved.
>This of course can take many forms, from dinner table talk,
>to time dedicated to reviewing the monthly budget; to
>setting up the kids with their own allowance and requiring a
>budget; etc.
>
>That the public school system, and not bad parenting, is
>chiefly to blame for inadequate educaiton is unfortunately
>one of the biggest urban legends today.


Yeah? Try sending your kids to an inner city public school.
Thumper

[Elle]

"Thumper" > wrote
E wrote
>>That the public school system, and not bad parenting, is
>>chiefly to blame for inadequate educaiton is unfortunately
>>one of the biggest urban legends today.
>
>
> Yeah? Try sending your kids to an inner city public
> school.


Where single parent families with working mothers and
poverty income are common? Did you really not consider that?

[kastnna]

On Nov 2, 11:26 am, "Elle" > wrote:

> Aside: It is "who" not "whom" above. Rephrase to figure out
> the case of "who" in such situations. E.g. "You think [they
> or them?] are in need of it?"

Thanks.