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Theory on economy?
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<blockquote data-quote="tiredmommy" data-source="post: 319204" data-attributes="member: 1722"><p>In additions to what Heather said... our large established banks would originate the subprime loans and bundle them to sell to mortgage maintenance companies. Investors would invest in this secondary market setting the price of the bundle depending on the risk of default. So you have bundle 1 (for instance) that has a low risk of default and bundle 2 that has a high risk of default. Group 1 was, in theory, less profitable because those mortgage holders qualified for lower interest rates. Group 2, however, paid much higher interest rates and were considered desirable because of their high rate of return. It was speculation; betting that these people on the bubble wouldn't default. The speculators lost it big time when the housing market crashed and many people were stuck in homes that were worth significantly less than what they owed.</p><p></p><p>I personally think a lot of the problem can be traced back to the loosening of banking regulations in the early to mid nineties. This allowed people to buy more home than they could afford. Banks had no real incentive to properly qualify buyers because they'd be selling the loan within a few months. And, I've also read, that assessors would sometimes up the valuation of homes in an area to drive housing prices. They were influenced by unscrupulous members of the lending trade and realty associations. Everything was fine as long as the housing bubble continued to grow, it fell apart when the bubble burst.</p><p></p><p>husband and I purchased our home at the start of the bubble in our area. We were fortunate to have a realtor that had known husband since he was a child. She showed us how much we were qualified to buy and then promptly tore the paper to shreds. She told us a much more realistic number, reminding us that there would be other bills to pay as well. She also made a point to show us homes we could comfortably afford.</p></blockquote><p></p>
[QUOTE="tiredmommy, post: 319204, member: 1722"] In additions to what Heather said... our large established banks would originate the subprime loans and bundle them to sell to mortgage maintenance companies. Investors would invest in this secondary market setting the price of the bundle depending on the risk of default. So you have bundle 1 (for instance) that has a low risk of default and bundle 2 that has a high risk of default. Group 1 was, in theory, less profitable because those mortgage holders qualified for lower interest rates. Group 2, however, paid much higher interest rates and were considered desirable because of their high rate of return. It was speculation; betting that these people on the bubble wouldn't default. The speculators lost it big time when the housing market crashed and many people were stuck in homes that were worth significantly less than what they owed. I personally think a lot of the problem can be traced back to the loosening of banking regulations in the early to mid nineties. This allowed people to buy more home than they could afford. Banks had no real incentive to properly qualify buyers because they'd be selling the loan within a few months. And, I've also read, that assessors would sometimes up the valuation of homes in an area to drive housing prices. They were influenced by unscrupulous members of the lending trade and realty associations. Everything was fine as long as the housing bubble continued to grow, it fell apart when the bubble burst. husband and I purchased our home at the start of the bubble in our area. We were fortunate to have a realtor that had known husband since he was a child. She showed us how much we were qualified to buy and then promptly tore the paper to shreds. She told us a much more realistic number, reminding us that there would be other bills to pay as well. She also made a point to show us homes we could comfortably afford. [/QUOTE]
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