Do people realize that its an error to blame this economic mess on Subprime lending?

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The fact is subprime lending was a good idea (helping people with lower fico scores if they had enough income). The dangerous part was the ARM and Option Arm Lending. About 80% of subprime mortgages are good…and still good. This financial mess we’re in was influenced by lax regulation in giving out ARM’s (Adjustable Rate Mortgages).

I find it sad to see the media blame folks with subprime loans for this mess, when the issue is really the ease at which lending institutions gave out ARM loans because they felt home prices would continue to rise forever, and when that didn’t happen and people mortgage payments adjusted and they couldn’t refinance due to lack of equity the whole system crashed and they blame the borrowers. Just despicable.

Anyone have any insight on this situation?

  1. Reply
    May 3, 2011 at 11:51 pm

    It’s NOT the receivers of subprime loans that are being blamed.

    It’s the people who did not do credit and income checks, and then sold the paper 30 holders deep – and it’s all worthless.

    People who were not eligible for conventional fixed rate loans were not eiligible because their credit (therby responsibility level in managing their obligations) was very questionable. Just because one makes good income, DOES NOT MEAN they can be counted on to use the income to fulfill the debts they incur. Not only that, ARMs are NEVER a smart idea because that DAY WILL COME when the note is too high.

    Those who did not qualify for good fixed loans are not to BLAME – they should never have been GIVEN the loans in the first place. Because so many have gone into default DUE TO ARM TERMS – that is the downfall – orchestrated by GREEDY BANKERS/LENDERS. Who all should end up going to jail for about 5 yrs because they well knew what they were doing and that it was unworkable. All they were interested in was making a buck now, and selling the crap paper to some other stupid firm.

    PS – MANY subprime loan recipients do not have sufficient income to own a home. IT IS SO MUCH MORE THAN PAYING ONLY THE NOTE. There are taxes, association fees, routine and emergency maintenance, the debt the familis already have such as car notes, student loans, credit cards and medical debt…so as much as people may feel entitled, a person or family does need a legitimate minimum financial standing to own their home. Otherwise, renting is most appropriate.

  2. Reply
    May 4, 2011 at 12:36 am

    “Anyone have any insight on this situation?” No beyond what you wrote above. I agree that lack of adequate regulation was the problem and weakness that led to the current crisis.
    I go farther, it is the shortsighted tendency of Conservatism in believing that an economy can “take care of itself” so to speak that is at the root of the problem. Shortsighted because some people will be dishonest and engage in fraud and thievery if there is opportunity. While I agree with some free-market, limited-government principles, I think that to be a “purist” regarding economic and governmental principles is naive and dangerous.

  3. Reply
    James Hassle
    May 4, 2011 at 1:00 am

    I just answered a question about the tie between the war and the crash and yes, loads of people are blaming the housing thing for this mess. Preposterous! The whole thing was meant to be a stimulus to the flagging housing industry which was another great idea ruined by greed. (ARM) It’s nice to see someone else research rather than judge and blame. ARM and gas related inflation are what took many of those people over the edge. This economic mess has been building since the new deal. It began to really pick up speed when we went off the gold standard and got a tremendous shot in the arm from 9/11 and the resultant gas gouging indulged in by OPEC, big oil and the speculators on Wall street. I believe if those rates had been fixed (ie honest not greed based) this plan stood a great chance of succeeding. It was not a solution but it could have been a very effective firewall for quite awhile. Sure some of these people should not have gotten loans but many who deserved a chance got it and either held on or lost out because of inflation and a good strong ARM tactic.

  4. Reply
    May 4, 2011 at 1:19 am

    It’s not wrong at all, subprime lending is very much one of the legs of the stool and very much a heart of the problem. Other complexities exacerbated the issue, but subprime is the foundation of the problem.

    Morever, ARM’s are largely an extension of the subprime concept. Sub prime loans extended ownership to people who should not have been given mortgages. Sub prime loans with ARM’s extended that a few more percentage points to people who couldn’t quite afford a sub prime 30-year fixed mortgage.

    Yes, sub prime lending was a socially “nice” thing to do, which is why the government promoted it. And now we know the cost of that charity and that market interference. Hope everybody’s happy.

  5. Reply
    May 4, 2011 at 1:32 am

    Subprime lending would have had inherent limitations if government had not interfered with market. Normal market requirements would price a high risk loan so high that there would be relatively few takers. But the government, though Fannie Mae and Freddie Mac, created government guarantees which allowed the loans to be priced so low that there were many, many takers.
    Borrowers and lenders also made the fantastic assumption that the price of the underlying asset would continue to rise rapidly.

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