President Obama and his supporters just planted the seed of the next big financial collapse. Remember the collapse of the mortgage market in 2008 and 2009? Obama is trying to recreate that mess.
In the last week, under pressure from the top, Fannie Mae and Freddie Mac approved a new type of mortgage targeted at lower income borrowers for which the required down payment will be just 3%. If someone wants to buy a house for $200,000 he or she will need to put down only $6000.
Mortgages with very little or nothing down are the ones that led the collapse last time. The reason why this was so is that mortgages of that type have a much higher default rate than mortgages that require the standard 20% down. In fact, mortgages with very small down payments work only if housing prices always rise, but we all know from sad experience that house prices sometimes fall.
When the day comes that there are mass defaults in these new and highly risky mortgages, both Fanny and Freddie will be ready once again to collapse. The federal government will again have to spend hundreds of billions of dollars to bail these institutions out. But it is even worse. Once Fannie and Freddie approve the 3% down mortgages, all the other banks will be forced to follow suit. In fact, if a large bank like Bank of America were to refuse mortgages to low income people who had only 3% to put down on the house, the bank would surely be sued for discrimination. So all the nation's banks will be issuing these loans that are not likely to avoid default. The bankers will surely know that these are risky loans, so they will sell them. The mortgages will be packaged and sold to investors just like last time. And just like last time, the mortgage backed bonds will become worthless when the defaults start rolling in. It will be 2008 all over again.
In the last month, we all watched some of the Democrats in Washington, led by a nearly hysterical senator Warren, go berserk with outrage that the latest funding bill for the government removed certain overdone restriction on derivatives created by banks. One can argue where the line for that sort of trading by banks must be drawn. Nevertheless, no one could fairly argue that the issue being discussed would likely have much impact on the national economy. Now, however, we are watching the government return to the days of demanding the issuance of very risky mortgages to borrowers who are highly likely to default. This puts our entire economy at risk, but the silence is deafening.
It is clear that many in the government (like president Obama) have no clue how the banking system of this country works. Indeed, if these new high risk mortgages result in a wave of defaults, we will surely hear from the fools like Obama that it was the fault of the bank for "predatory" lending. We have already seen that happen. We just cannot let this happen again.
In the last week, under pressure from the top, Fannie Mae and Freddie Mac approved a new type of mortgage targeted at lower income borrowers for which the required down payment will be just 3%. If someone wants to buy a house for $200,000 he or she will need to put down only $6000.
Mortgages with very little or nothing down are the ones that led the collapse last time. The reason why this was so is that mortgages of that type have a much higher default rate than mortgages that require the standard 20% down. In fact, mortgages with very small down payments work only if housing prices always rise, but we all know from sad experience that house prices sometimes fall.
When the day comes that there are mass defaults in these new and highly risky mortgages, both Fanny and Freddie will be ready once again to collapse. The federal government will again have to spend hundreds of billions of dollars to bail these institutions out. But it is even worse. Once Fannie and Freddie approve the 3% down mortgages, all the other banks will be forced to follow suit. In fact, if a large bank like Bank of America were to refuse mortgages to low income people who had only 3% to put down on the house, the bank would surely be sued for discrimination. So all the nation's banks will be issuing these loans that are not likely to avoid default. The bankers will surely know that these are risky loans, so they will sell them. The mortgages will be packaged and sold to investors just like last time. And just like last time, the mortgage backed bonds will become worthless when the defaults start rolling in. It will be 2008 all over again.
In the last month, we all watched some of the Democrats in Washington, led by a nearly hysterical senator Warren, go berserk with outrage that the latest funding bill for the government removed certain overdone restriction on derivatives created by banks. One can argue where the line for that sort of trading by banks must be drawn. Nevertheless, no one could fairly argue that the issue being discussed would likely have much impact on the national economy. Now, however, we are watching the government return to the days of demanding the issuance of very risky mortgages to borrowers who are highly likely to default. This puts our entire economy at risk, but the silence is deafening.
It is clear that many in the government (like president Obama) have no clue how the banking system of this country works. Indeed, if these new high risk mortgages result in a wave of defaults, we will surely hear from the fools like Obama that it was the fault of the bank for "predatory" lending. We have already seen that happen. We just cannot let this happen again.
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