News Can the market alone fix the economy?

[DrClapeyron]

Skip to 2:00 for the relevant part:

I am almost convinced that the relevant part came before the 2:00 mark. The gap between the rich and the poor appears to not be an issue amongst Americans. There were times in the US history when the gap between the two was an issue and had huge impacts on politics (socialists). The last thing we need to do is neglect this gap (as much as I have done myself) or neglect those like the screaming woman on the CSPAN video; people should not have to think with their stomachs.

Overlending of mortgage-backed securities in the repo market created repo rates higher than interest rates on the mortgage-backed securities. While the repo rate increased the positions of the borrowers became a losing position. But heck, when the SEC says that you don't need 12:1 debt to equity ratios and instead gives you 40:1 you call that leverage.

Sooner or later most Americans are going to figure out why 3-month treasury notes have a 0.03% yield. Maybe they know, maybe they don't care or maybe I am wrong to suspect these things. But I felt I had to bring the issue of the wealth gap to the attention of people on this forum.

 

[OmCheeto]

I am almost convinced that the relevant part came before the 2:00 mark. The gap between the rich and the poor appears to not be an issue amongst Americans. There were times in the US history when the gap between the two was an issue and had huge impacts on politics (socialists). The last thing we need to do is neglect this gap (as much as I have done myself) or neglect those like the screaming woman on the CSPAN video; people should not have to think with their stomachs.

I disagree a bit. The gap between the rich and poor can be safely ignored by everyone, as long as the middle class is happy, and the poor class is not starving. I've been accused of hating rich people before, because I point my finger at their unethical behavior. But that's a bit of a generalization. I don't hate rich people, I hate unethical people. Whether they be poor or rich, it doesn't matter. The fact that the middle and poor classes are now pissed as hell only opens the door to inquiry as to how unethical everyone really was. But who's to say what is ethical and what is not. That's a matter of opinion. All we can do is sit back, analyze the problem, and plug the holes: a. which got us into this mess, and b. which if not plugged, will sink the ship.

And as for that screaming woman in the video, tell her to put on a sweater and turn down the heat. My utility bills are less than $300 a month. I would have to keep my house at 80'F 24/7 in the dead of winter to have that kind of bill.

Oh my. I just realized I typed all that while sitting in my living room with a ski cap on my head, and a winter scarf around my neck.

Ok. So I'm a freak. Shoot me already.

How to dress fashionably during hard times, act like a human being, and not call your congressman on the tele because you are a big baby:
https://www.youtube.com/watch?v=<object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/BSgryyxp-cg&hl=en&fs=1"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/BSgryyxp-cg&hl=en&fs=1" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>

 

[Astronuc]

This was Paulson's initial plan, but it was found to be way cheaper (following the British model) to inject capital into the banks rather than buy out the toxic assets (> $3-4 Trillion), so the plan was changed.

Originally, the plan was to buy the bad assets, but apparently that turned out to be problematic. I think part of the problem is that the banks themselves may not know which mortgages are bad, or what assets are bad (i.e. the financial instruments such as Mortgage Backed Securities, . . .).


Meanwhile - How Banks Are Worsening the Foreclosure Crisis
http://news.yahoo.com/s/bw/20090213/bs_bw/0908b4120034085635

The bad mortgages that got the current financial crisis started have produced a terrifying wave of home foreclosures. Unless the foreclosure surge eases, even the most extravagant federal stimulus spending won't spur an economic recovery.

The Obama Administration is expected within the next few weeks to announce an initiative of $50 billion or more to help strapped homeowners. But with 1 million residences having fallen into foreclosure since 2006, and an additional 5.9 million expected over the next four years, the Obama plan -- whatever its details -- can't possibly do the job by itself. Lenders and investors will have to acknowledge huge losses and figure out how to keep recession-wracked borrowers making at least some monthly payments.

So far the industry hasn't shown that kind of foresight. One reason foreclosures are so rampant is that banks and their advocates in Washington have delayed, diluted, and obstructed attempts to address the problem. Industry lobbyists are still at it today, working overtime to whittle down legislation backed by President Obama that would give bankruptcy courts the authority to shrink mortgage debt. Lobbyists say they will fight to restrict the types of loans the bankruptcy proposal covers and new powers granted to judges.

The industry strategy all along has been to buy time and thwart regulation, financial-services lobbyists tell BusinessWeek . "We were like the Dutch boy with his finger in the dike," says one business advocate who, like several colleagues, insists on anonymity, fearing career damage. . . .
. . . .

Solvency of Big Banks Is Questioned
http://dealbook.blogs.nytimes.com/2009/02/13/large-banks-on-the-edge-of-insolvency/

Some of the nation’s large banks, according to economists and other finance experts, are like dead men walking, The New York Times’s Steve Lohr reports.

A sober assessment of the growing mountain of losses from bad bets, measured in today’s marketplace, would overwhelm the value of the banks’ assets, they say. The banks, in their view, are insolvent.

None of the experts’ research focuses on individual banks, and there are certainly exceptions among the 50 largest banks in the country. Nor do consumers and businesses need to fret about their deposits, which are federally insured. And even banks that might technically be insolvent can continue operating for a long time, and could recover their financial health when the economy improves.

But without a cure for the problem of bad assets, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, say the economists and experts, is a larger, more direct government role than in the Treasury Department’s plan outlined this week.

The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.
. . . .
“The historical record shows that you have to do it eventually,” said Adam S. Posen, a senior fellow at the Peterson Institute for International Economics. “Putting it off only brings more troubles and higher costs in the long run.”
. . . .

So much for an economy, which Bush et al declared as having strong fundamentals.

 

[mheslep]

...Sooner or later most Americans are going to figure out why 3-month treasury notes have a 0.03% yield. Maybe they know, maybe they don't care or maybe I am wrong to suspect these things. But I felt I had to bring the issue of the wealth gap to the attention of people on this forum.

Guess I missed it, what do t-bill rates have to do with the 'wealth gap'?

 

[mheslep]

https://www.youtube.com/watch?v=<object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/BSgryyxp-cg&hl=en&fs=1"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/BSgryyxp-cg&hl=en&fs=1" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>

Julie Christie. Man. Blue eyes for the ages.

 

[WhoWee]

Originally, the plan was to buy the bad assets, but apparently that turned out to be problematic. I think part of the problem is that the banks themselves may not know which mortgages are bad, or what assets are bad (i.e. the financial instruments such as Mortgage Backed Securities, . . .).


Meanwhile - How Banks Are Worsening the Foreclosure Crisis
http://news.yahoo.com/s/bw/20090213/bs_bw/0908b4120034085635


Solvency of Big Banks Is Questioned
http://dealbook.blogs.nytimes.com/2009/02/13/large-banks-on-the-edge-of-insolvency/

So much for an economy, which Bush et al declared as having strong fundamentals.

Forget about Bush and Paulson...Barney and Chris are still on the job.

This is WHY they/we(?) couldn't do without Mr. Geithner (supposedly)...he is THE FOREMOST EXPERT on this subject (apparently)...he IS absolutely familiar with the largest NY banks as he oversaw them on the way into this mess and help with the strategy of TARP 1...and reportedly overpaid $78billion already.

The strategy of placing "toxic assets" into a separate bank/entity based on the Resolution Trust template is flawed (by the way Congress helped create that mess also). Many of the S&L assets were just financed wrong (many reasons - but)...lot's of naive S&L execs were taken by Wall St...cash flows couldn't pay debt service...and many were done in by changes in depreciation rules in 1986. (By the way, some of those Wall St guys went into the Mortgage business and switched their client base from small town S&L Execs to first time home buyers)

The current "real estate bubble" was fueled by speculation...over-inflated land values and over-leverage of consumers this time. The properties aren't worth the values carried on the books. When credit is loose...the price (apparently) doesn't matter.

The answer to the crisis might be to let the banks write down ALL of their assets...take a huge loss NOW (it will mean no taxes for a long time) AND renegotiate ALL OF THE LOANS to the new value...AND provide loans to the banks to write new loans AND to (A+ credit only) large ticket leasing companies to fund business expansion (yes even a few corporate jets).

The problem needs to be dealt with now and decisively...prolonging will make it worse.

Moving forward, the banks can prevent ALL future "bubbles" by making 1 loan requirement...anyone wanting a loan must own their land free and clear...then loan only based on asset value (time and materials). This would be bad news for large production builders and land speculators...but builders like Schumaker Homes that follow this business model are still building in this economy.

 

[Astronuc]

Interestingly Dodd has his first negative rating in the Quinnipiac poll. Apparently more disapprove of his job than approve.

 

[DrClapeyron]

Guess I missed it, what do t-bill rates have to do with the 'wealth gap'?

Really? Henry Paulson was US Treasury Secretary. We would someone making millions in salary and millions in annual bonuses leave his position as CEO of Goldman Sachs to take the lowly paying job of US Treasury Secretary.

Supply and deman. Interest rates go down when supply goes up.
http://blogs.cfr.org/setser/2009/01...reasuries-with-non-chinese-investors-in-2008/

The US placed about $1.3 trillion of Treasuries with non-Chinese investors in 2008
Posted on Saturday, January 24th, 2009

By bsetser

Yes, China probably bought close to $400 billion of Treasuries too. My top secret model says China bought exactly $374.571 billion of Treasuries in 2008, a record. China certainly bought far more Treasuries in 2008 than in 2007. My model, which accounts for flows through London, suggests that China added $120.3 billion to its Treasury portfolio in 2007.

But the big surge in demand for Treasuries in 2008 didn’t come from China. Other investors increased their holdings of marketable Treasuries by $1310 billion. That is a huge increase from the (estimated) $127 billion increase in their holdings of marketable Treasuries in 2007.

Why even have interest rates if the US Treasury is going give out 0.03% interest loans or for that matter why issue bonds? The road to hyperinflation may not be far off. A majority, $800 billion (stimulus package), of the amount above was issued within the final 3 months of 2008. 40:1 requirments have failed miserably, now we have 0.03% 3-month notes.

 

[mheslep]

Really? Henry Paulson was US Treasury Secretary. We would someone making millions in salary and millions in annual bonuses leave his position as CEO of Goldman Sachs to take the lowly paying job of US Treasury Secretary.

Supply and deman. Interest rates go down when supply goes up.
http://blogs.cfr.org/setser/2009/01...reasuries-with-non-chinese-investors-in-2008/


Why even have interest rates if the US Treasury is going give out 0.03% interest loans or for that matter why issue bonds? The road to hyperinflation may not be far off. A majority, $800 billion (stimulus package), of the amount above was issued within the final 3 months of 2008. 40:1 requirments have failed miserably, now we have 0.03% 3-month notes.

Nonsense

 

[Ivan Seeking]

Tuesday, Feb 17th, on PBS - Frontline

For those struggling to make sense of the economic crisis, help is on the way. Inside the Meltdown is producer Michael Kirk's gripping account of how the country ended up in the worst financial crisis since 1929. The program airs Tuesday night on PBS and will be watchable online after that. This preview excerpt tracks the crisis back upstream to a key source -- the government's failure to heed early warnings on the housing bubble, and the havoc that ensued as a result.

http://www.pbs.org/wgbh/pages/frontline/story/2009/02/banking-at-the-brink.html

 

[WhoWee]

I'd like to invite everyone to read this book

http://books.google.com/books?id=Uj...=X&oi=book_result&resnum=7&ct=result#PPA16,M1

Written over 20 years ago, it puts a lot of our problems into perspective.

The point I made a few posts ago...many of the traders from this era (after the S&L collapse) went on to the (largely unregulated) mortgage business. They applied many of the same strategies described in this book to help fuel the housing bubble...basically initiate a loan, bundle and flip...repeat. This eliminated the problem of having to deal with banks/regulators and REALLY sped things up.

Most of them cashed out when things were very good...with LARGE PROFITS (all legal too).

A side note...a few of them have now moved on to the collection business...buying bad loans for a few cents on the dollar and collecting sometimes more than the original amount...sometimes nothing...just destroy the credit and move on.

 

[WhoWee]

This is a must read...

Shock and awe...the Economy is officially Obama's Iraq

http://news.yahoo.com/s/ap/20090214/ap_on_go_pr_wh/stimulus_stakes

 

[Astronuc]

Interesting background to Liar's Poker.
http://en.wikipedia.org/wiki/Salomon_Brothers

In the work [Liar's Poker], Lewis portrays the 1980s as an era where government deregulation allowed less-than-scrupulous people on Wall Street to take advantage of others' ignorance, and thus grow extremely wealthy.

Pretty much set the stage for where we are now.

People may remember Salomon Smith Barney, Travelers and now Citigroup.

 

[WhoWee]

Like I said...puts a lot of things into perspective

 

[WhoWee]

There is one other critical piece to our current puzzle not often discussed...when the books were opened on the S&L's, they decided to also look at a few banks AND MORE IMPORTANTLY...the PENSIONS...it wasn't good and the investigation stopped.

Not long after, interest rates were cut, savings/CD's left the bank and the stock market took off...everyone knows the rest of the story.

 

[WhoWee]

I just realized something else...this book is also relevant to what is happening currently in Mr. Geithner's world as related to establishing the value of bank assets...Liar's Poker is a very timely read.

 

[WhoWee]

Congress gets some deserved credit in this article about pensions

http://www.barlettandsteele.com/journalism/time.php

 

[Astronuc]

. . . . Critics of the 70-year-old system were determined to chip away at Social Security as part of a larger effort to promote what the Bush Administration calls an "ownership society." As Treasury Secretary John Snow told a congressional committee in February 2004: "I think we need to be concerned about pensions and the security that employees have in their pensions. And I think we need to encourage people to save and become part of an ownership society, which is very much a part of the President's vision for America."

Of course, it's much easier to own a piece of America when you have a pension like Snow's. When he stepped down as head of CSX Corp.—operator of the largest rail network in the eastern U.S.—to take over Treasury, Snow was given a lump-sum pension of $ 33.2 million. It was based on 44 years of employment at CSX. Unlike most ordinary people, who must work the actual years on which their pension is calculated, Snow was employed just 26 years. The additional 18 years of his CSX employment history were fictional, a gift from the company's board of directors.

Snow is not alone. The phantom employment record, as it might be called, is a common executive-retirement practice in corporate America—and one that is spelled out in corporate filings with the Securities and Exchange Commission (SEC). Drew Lewis, the Pennsylvania Republican and onetime head of the U.S. Department of Transportation, got a $ 1.5 million annual pension when he retired in 1996 as chairman and CEO of Union Pacific Corp. His pension was based on 30 years of service to the company, but he actually worked there only 11 years. The other 19 years of his employment history came courtesy of Union Pacific's board of directors, which included Vice President Dick Cheney. And then there's Leo Mullin, the former chairman and CEO of Delta Air Lines. Under Mullin's stewardship, Delta killed the defined-benefit pension of its nonunion workers and replaced it with a less generous plan. Now, little more than a year after he retired, the airline is in bankruptcy and can dump its pension obligations. But you need not fret about Mullin. On his way out the door, he picked up a $ 16 million retirement package. It's based on 28.5 years of employment with Delta, at least 21 years more than he worked at the airline.

Corporations have more rights than individuals, and politicians seem quite pleased to enable corporations to break contracts/promises, or to allow individuals (managers) to help themselves to funds that rightfully belong to the workers. The corruption mentioned herein is something I would expect in the Russia, various South and Central American nations, and various countries under authoritarian regimes. Sadly, we find the US federal government emulating those practices.

 

[WhoWee]

It really doesn't matter who is in charge either...just different players...business as usual...hand in hand.

I love this quote from Chuck Schumer "chattering class that so much focuses on those little, tiny, yes, porky amendments. The American people really don't care,"
http://www.newsday.com/news/local/ne...,1008429.story

 

[Astronuc]

It really doesn't matter who is in charge either...just different players...business as usual...hand in hand.

I love this quote from Chuck Schumer "chattering class that so much focuses on those little, tiny, yes, porky amendments. The American people really don't care,"
http://www.newsday.com/news/local/ne...,1008429.story

So, NY had a choice between Schumer and D'Amato.

Newsday is another Murdoch tabloid.

The Newsday link is corrupted - it got parsed.

 

[WhoWee]

Here's another one

http://www.nypost.com/seven/02102009/news/politics/schumer__americans_like_pork__154427.htm

 

[Astronuc]

"And let me say this to all of the chattering class that so much focuses on those little, tiny, yes, porky amendments, the American people really don't care," Schumer said on the Senate floor. "The American people care far more that there's a proposal in the bill, this one I pushed, that gives a $2,500 credit to families who pay tuition to put their kids through college. Great relief.

"They care far more about that than about some small provision in the bill that shouldn't be there because the tax relief from tuition costs that they're going to get means far more to them. They care more about a provision that keeps the teachers in their schools."

Schumer complained about his comment being taken out of context. Well, there's the context. What an @$$.

 

[WhoWee]

Schumer complained about his comment being taken out of context. Well, there's the context. What an @$$.

I wonder why he didn't mention the benefits for us all of honey bee insurance and too bad he didn't know about Harry's railroad or Nancy's marsh...I know we're all excited here in Ohio.

 

[WhoWee]

As for his $2,500 credit...I could use a $250,000 credit...I'm looking at 4 kids approaching college.

 

[OmCheeto]

Solvency of Big Banks Is Questioned
http://dealbook.blogs.nytimes.com/2009/02/13/large-banks-on-the-edge-of-insolvency/

So much for an economy, which Bush et al declared as having strong fundamentals.

From the same website:

Edward L. Yingling, president of the American Bankers Association, called claims of technical insolvency “speculation by people who have no specific knowledge of bank assets.”

In an effort to put some of these "trillions of dollars" into a broader prospective, I've looked at a couple of websites hoping to find exactly how bad things really are.

There are 111,000,000 households(http://bucknakedpolitics.typepad.com/buck_naked_politics/2008/12/american-homes-lose-trillions-in-value-as-bubble-deflates.html" )
Their mean values dropped from $209,000 to $176,000 between Dec 07 and Dec 08(http://www.realestateabc.com/outlook/overall.htm" )
This corresponds to net values of $23.2 trillion and $19.5 trillion, for a loss of $3.7 trillion, around 19%.
The worst part of this is that 10% of the homes are worth less than their mortgages.
The up side is that 90% are not.

I also looked at GNP.
We have a GNP of a little over $1 trillion a month.
So the housing bubble collapse cost us, on the average, about 3 months wages.
Not really nation destroying, or indicative of a collapsed economy.
Just a really big and nasty correction.

Ah! What's this? China was blamed for the housing bubble? 4 years ago? hmmm...

May 2005
http://www.pkarchive.org/column/052005.html"

Here's what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy.

I assume the above was written by Paul Krugman.

hmmm... Here's an interesting note by him:

http://en.wikipedia.org/wiki/Paul_Krugman#Criticism"

I was no more perceptive than anyone else; during the bull market years [of the late 1990s] some people did send me letters claiming that major corporations were cooking their books, but - to my great regret - I ignored them. However, when Enron - the most celebrated company of its time, lauded as the very model of a modern business enterprise - blew up, I immediately saw the implications: if such a famous and celebrated company could have been a Ponzi scheme, it was very unlikely that the rest of U.S. business was squeaky clean. In fact, it quickly became clear, the bubble years were both the cause and effect of an epidemic of corporate malfeasance.

So what does all this mean to me?
[Op-ed]
American's have lost their faith in the financial world.
Fast talking wall streeters* have sweet talked Washington into deregulating our financial system because they claim regulations are the work of commie rat finks.
The lack of faith has caused a panic because no one knows what to do now.
The banks don't trust us because we can't be fiscally responsible.
We don't trust the banks because they are a bunch of crooks.
Someone has sucked the entire money supply out of the country.
(I'm not sure who did this. Maybe everyone saw my Soros post and has pulled their money out of their bank accounts and have traded them in for Riyals hoping to get rich.)
Almost everything everyone is doing is the wrong thing to do right now.
Except for Washington. I'm barely starting to comprehend the complexities of what's going on, but I've not heard any viable constructive alternatives for the current situation.

This is almost like the perfect financial storm. The rise of the global economy, running head-on into the American economy, driven by obscenely rich individuals, corporations and nations, facilitated by the transfer of information and money over the internet, with the population multiplier yielding incredible sums to anyone who can profit just a dollar from everyone, making you a billionaire overnight.
[/Op-ed]

I think my head is going to explode.

I have to go do some gardening now.

* I use wall streeters as a metaphor for anyone who would manipulate our leaders for financial gain. This would of course include just about everyone.

 

[WhoWee]

If the tooth is dead...you pull it.

It's time to WRITE DOWN ALL BAD DEBT...pull it and move on.

The greatest fear in doing this is a loss of confidence in our institutions(?) or a collapse of stock prices (?) or what?

I have no doubt in my mind, traders have made their best guesses already and the bad debt is already factored into stock prices, as for confidence in our institutions...LOL!

It's time to address the problem head-on, take the losses, re-negotiate ALL of the loans, put people into the inventory of new homes sitting vacant, rehab the foereclosed vacancies and re-capitalize the banks.

In the future only loan on asset value...not speculative value...and protect our proprietary domestic technologies and industries from foreign control.

Politically...it's time to shut down all lobbyist activities.

 

[OmCheeto]

If the tooth is dead...you pull it.

It's time to WRITE DOWN ALL BAD DEBT...pull it and move on.

agreed

The greatest fear in doing this is a loss of confidence in our institutions(?) or a collapse of stock prices (?) or what?

I have no doubt in my mind, traders have made their best guesses already and the bad debt is already factored into stock prices, as for confidence in our institutions...LOL!

It's time to address the problem head-on, take the losses, re-negotiate ALL of the loans, put people into the inventory of new homes sitting vacant, rehab the foereclosed vacancies and re-capitalize the banks.

In the future only loan on asset value...not speculative value...and protect our proprietary domestic technologies and industries from foreign control.

What do you think of forbidding financial institutions from selling home loans to other institutions?

http://www.nytimes.com/2008/02/01/business/01legal.html"
February 1, 2008

In recent years, as subprime lending proliferated, a small law firm played a big role on Wall Street.

The young firm, McKee Nelson, helped investment banks and mortgage lenders bundle home loans into securities — lots of them. Since 2000, McKee has been involved in almost 3,300 deals totaling $2.7 trillion, according to Asset Backed Alert, an industry newsletter.

Politically...it's time to shut down all lobbyist activities.

Is that how you got your name?

Whoweeeeeeeee!

http://www.nytimes.com/2008/02/01/business/01legal.html"
But after profiting from the mortgage boom, McKee Nelson is now positioning itself to profit from the bust by riding the coming wave of lawsuits. In January, the firm flew its partners and their spouses to Charleston, S.C., aboard four Delta commuter jets, to map out its strategy.

“We’re heavily committed to doing more litigation,” Mr. Nelson said. The firm hopes to represent investment banks, hedge funds and other financial companies, as well as their executives, in a variety of litigation, he said.

And no one's said "just shoot all the lawyers" recently.

 

[WhoWee]

agreed

What do you think of forbidding financial institutions from selling home loans to other institutions?


Variable rates on home loans need to be abolished...they are the culprit...created unnecessary risk.

In order to maintain liquidity, the mortgage companies need a way to bundle loans and write fresh paper. It might be better to make smaller bundles and distribute them differently or over a different length of time than the original loan...basically make them safer.

Let me explain...the mortgage company needs to earn their profit on the difference between the rate they borrow at and the rate they loan at...not the mark-up opportunity on resale that variable rates create. A fixed rate solves this problem. To build in further protection, the resale rate should be ultra-conservative and structured over a longer period of time...maybe 10 years longer...just in case the loan gets into trouble and needs to be restructured.

At a lending rate of 5% this doesn't sound feasible...but when rates take off to 10% or more (plan on it...historical average is 8%) this will sound very good. If you look at bond trading, .25% is a good profit...a 5% hit would get you killed...or at least run out of the business.

I'll give an example:

A $100,000 loan written at 5% fixed for 30 years = $536.82/mos and 193,255 total

On resale the same loan repackaged (and bundled with others) would sell for $100,000 and repayment (from the bank to the investor - like a sale/leaseback) would be structured as follows $100,000 @ 3.75% over 40 years = $402.53/mos and $193,214 total

The mortgage company would realize a surplus cash flow of $536.82 - 402.53 = $134.29/mos, $1,611.48/year and $64,459 over 40 years...which could be reinvested over time (40 years) to create additional earnings.

Boring(?)...YES...but a lot safer. Who would buy these you ask...3.75% is better than the savings rates we've been offered for the past 10 years.

 

[mheslep]

Schumer complained about his comment being taken out of context. Well, there's the context. What an @$$.

Schumer appears to be the pure politician. I can't find in his bio where he's ever had a job, any job, other than professional politician. Graduated from law school and went straight to the NY State Assembly at the age of 23.

 

[mheslep]

...What do you think of forbidding financial institutions from selling home loans to other institutions? ...

I understand the idea - force the lender to concentrate more on the risk, but I'm not sure the consequences are worth it. First, mortgages would become more expensive (higher rates). Then in localized areas with temporary downturns it might be hard to get a mortgage at all.

Variable rates on home loans need to be abolished...they are the culprit...created unnecessary risk.

Sen Phil Gramm agrees with you:

Gramm's solution is tougher mortgage regulation. Down payments should be at least 5%, borrowers should be required to provide tangible proof of income, adjustable rate mortgages should only be approved if the borrowers can afford to make the payments after the rates have adjusted upward, home equity loans should be restricted, etc.

On resale the same loan repackaged ...

You were just proposing above that mortages could not be resold?