The banks loaned money to people who could not afford to make their payments. To people with no jobs. To people with no assets. To people with no money or income.
This created a false demand. The demand was false because the ability to pay did not exist.
The Glass-Steagall Act of 1933 separated commercial banks from investment banks. When that separation was essentially repealed with the Financial Services Modernization Act of 1999, a conflict of interest was created. Suddenly commercial banks could give loans that were securitized by investment banks owned by the same institution. Mortgages could be created, the risk was irrelevant because the debt could be packaged into securities and sold to the public at large.
Some people think that what happened with housing followed the template that Milken had for the issue of junk bonds in the 1980’s. That’s really not true, because if it had followed his ideas, at least high risk borrowers would have to pay higher interest rates to offset said risk.
The banks just gave home buyers the loans, couldn’t care less whether they could pay, and then offered them interest rates that offered no possible chance of ultimately paying the debt.
Every person with a mortgage that is or was underwater should receive restitution, in the amount that they were defrauded from the banks and individuals who profiteered on this banking scam. Under this implementation of justice, the people who have never defaulted on a loan would have the most to gain, since they are the ones who are being victimized the most. It is the duty of the banks to determine whether a loan should be offered. That’s why we have loan officers. They failed to perform the obligation that was their duty. By seizing this money through restitution, we set a precedent that encourages responsible banking practice.
If the paper value could be written up, the paper value could be written down. I think that we are rewarding the perpetrators by allowing for deficiency judgments against strategic defaults.
So the next concern is whether prices will return to bubble levels.
This is an even stronger argument against the way we are handling this now. We are printing up money and bailing out banks and AIG, the company that insured many of these mortgages against default.
Capital reserves, are now being held by banks for two reasons. First, there is fearful sentiment that another credit freeze would cause insolvency, second, they are required by law to keep reserves for each foreclosure that they have on their books.
If the amount of money that is sitting in reserve ever gains velocity, we could see inflation that would easily bring houses back to their bubble values in a matter of a few years. If this happened, I think we would not have pennies in our currency anymore because they would be quite worthless, the price of everything else would go up, minimum wage would rise, and the fed would raise interest rates.
There is a city near where I live that is offering $100K 45 year, zero interest, interest only balloon payment second mortgages for one particular development.
It seems like we are handling our mistakes with more mistakes.