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 What "Sub-prime Crisis"?

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_Howard
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PostSubject: What "Sub-prime Crisis"?   Tue Sep 12, 2017 11:13 am

Good article here. Poor people buying their first homes were apparently not the cause of the bubble or of it bursting - it was people with money trying to get more money.

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Mounting evidence suggests that the notion that the 2007 crash happened because people with shoddy credit borrowed to buy houses they couldn’t afford is just plain wrong. The latest comes in a new NBER working paper arguing that it was wealthy or middle-class house-flipping speculators who blew up the bubble to cataclysmic proportions, and then wrecked local housing markets when they defaulted en masse.

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...the biggest growth of mortgage debt during the housing boom came from those with credit scores in the middle and top of the credit score distribution—and that these borrowers accounted for a disproportionate share of defaults.

The lowest quartile in the credit score distribution accounted for 70% of foreclosures during the boom years, falling to just 35% during the crisis
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PostSubject: Re: What "Sub-prime Crisis"?   Tue Sep 12, 2017 4:32 pm

That aligns with what I've read about the housing bubble. The packaging of mortgage-backed securities into CDOs and CDFs allowed banks to ignore credit worthiness, which allowed investors to get into the market with insufficient credit and insufficient capital. Everyone assumed they would "grow out of the hole" they were digging.

A lot of housing speculation took place -- not only individuals (in the middle incomes) but a lot of corporations that were insufficiently capitalized too. Poor people buying homes (they couldn't afford) happened too, but they generally didn't default on the mortgages. They live in the homes. They're working with lenders to re-finance. They're applying for relief.

The people who walked away were the speculative investors. When they owed more than the property was worth they had no incentive to re-fi.
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PostSubject: Re: What "Sub-prime Crisis"?   Fri Sep 15, 2017 3:18 pm

When I mentioned the article to my wife, she said it was absolutely correct. (She's a corporate executive vice president and the director of residential lending for a bank.)

There was a federal program at the time to assist those low-income debtors who had been badly screwed - primarily by mortgage brokers. My wife said she was disgusted by the number of well-to-do people who tried to get a loan reduction under the program, even though none of them qualified. While the assistance program applied only to a mortgage on a single-family home which was the primary residence of the mortgage holder, she had people coming in complaining because they couldn't get the program to lower their loans on speculative purchases of several houses and even on construction loans. Assholes.
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