Sub-Prime: Is It My Responsibility?

**Aleta** · 04-12-2008, 11:07 AM

I'm with you. I don't think that we as tax payers should have to bail out people's mistakes. We had chances to buy houses to flip them but I read the tea leaves and it looked like a bubble to me and I felt like it was getting ready to burst. We had people telling us that we needed to chance something in order to make some money. Right now, one of the same people that told me that lost his huge boat, expensive cars and about to lose their home. I don't take any pleasure in talking about their money finances but I'm just glad that we didn't get crazy like so many did.

I learned a lot from the tech bubble some years ago and this one (the housing) felt the same way to me.

The Markets should let the market play out and let the cookies fall where they should. Those banks who took risky loans don't deserve any ones money to do it again. The market would correct itself if the govt. would just let it play out. Everytime the govt steps in, it causes the market a longer time to bounce back.

**Brokemofo** · 04-12-2008, 11:08 AM

I agree. It's too bad for affected people, but there are no victims. If you didn't know what you were signing, you shouldn't have signed predatory lenders or not. If you read it and still didn't understand, hire a lawyer to explain it to you. I'm sick and tired of people calling my bank and screaming at me on the phone about how we screwed them over.

**jc3900** · 04-12-2008, 11:51 AM

There is 3 major problems that led to the Sub prime crisis we are now dealing with:

1. Bad fed policy that instituted artificially low interest rates.
2. Problem #1 helped spur on overleveraging of banks and thus bad credit decisions on their part
3. The borrowers who couldn't afford their mortgages, took them anyway.

I don't know why we should be bailing them out either. The banks don't make money when people don't pay their loans back and people with foreclosed houses are hardly in any better situation. However, I do think that one of the biggest players in this, the FED, is not getting enough scrutiny for their artificially low interest rates. But I guess I shouldn't expect anyone to blame the fed as they are driving down interest rates AGAIN. Gosh, this type of behavior makes me so sick. By driving down interest rates, Bernanke is stealing interest from you hearty savers. Also, because of his aggressive cuts commodity prices are higher than they would have been with a more stable fed policy and thus giving you a higher cost of living. Thanks a lot ben! Maybe if he shaves that beard of his, he will get smarter.

**Aleta** · 04-12-2008, 12:02 PM

I personally think that when rates go lower and lower that we shouldn't be taxed on them. I can remember a time when savings wasn't taxed. The savers are always the ones who get the short end of the stick while the big boys get all of the breaks from the government.

**Snave** · 04-13-2008, 08:22 AM

I have agreeable moments, and then sometimes I don't agree with the comments as much. Most people tried to take on too much. They knew what they were doing and were just hoping the dramatic increase in home prices continued. However, I do believe there are probably some folks that probably aren't as financially savvy as many people on here and they ended up in a sitiuation where they might not have been aware of the ramifications. I look at my sister who is 28 and she is not the most financially savvy person. She bought a condo a few years ago and was told by the bank how much she could afford, etc... and it was WAY above what was actually doable. She wasn't looking for the loans they offered and didn't need a mortgage of that magnitude. Thankfully, my parents were working with her and knew what they were doing. She is in a fine situation and didn't take out an exotic loan or anything like that. However, had someone not been there looking out for her some, then she could have easily been "sold" on more home than she could afford. I am certain their are people like my sister out there that didn't understand exactly what was happening.

**disneysteve** · 04-13-2008, 09:11 AM

I think the whole sub-prime mess is more complex than many realize. When it first started to go sour, I felt the same as you, genchan. These people got themselves into this mess and it should be up to them to get themselves out.

The more I've read and watched and learned, the more I've altered that outlook. The sub-prime situation has pretty far reaching effects that go well beyond the lender and the borrower. For example, if a house on your block goes into foreclosure, it affects the value of your home. You may not care particularly, unless you happen to be trying to sell your place. Vacant homes are frequent targets of vandals, ripping out everything of value. It becomes an eyesore in the neighborhood and affects local crime rates. And the credit crunch brought on by the mortgages is now affecting lots of other people. College students are having a lot more trouble securing student loans to pay tuition, for example.

So the sub-prime stuff is affecting each and every one of us in one way or another. It is causing broad economic impact. From that point of view, some type of bailout looks like a more responsible course of action. I don't like it, but I recognize that it might be necessary to avoid even bigger problems down the line.

**Daylily** · 04-14-2008, 05:34 PM

I'm on the fence. Agreed, that many people bit off more than they could chew and why should I care what happens to them. Agreed, that if the whole thing goes down the tube it will impact all of us in some way.
I heard an interesting radio program recently that made me think longer about the idea of a bailout. The quote was something along the lines of 'the problem with a bailout is that we are trying to socialize the loss, but at the other end, the government doesn't socialize the profits of the big companies in good times.' Give me a slice of the pie when times are good and I won't feel so bad during a bailout.

**disneysteve** · 04-15-2008, 04:57 AM

Originally posted by Daylily View Post

The quote was something along the lines of 'the problem with a bailout is that we are trying to socialize the loss, but at the other end, the government doesn't socialize the profits of the big companies in good times.' Give me a slice of the pie when times are good and I won't feel so bad during a bailout.

I think we were getting "a slice of the pie" when times were good. We had record low borrowing interest rates, reasonably high savings interest rates, great stock market performance, low inflation, etc. What do we have now? Rising rates on loans and tougher qualifying, plummeting savings rates, a struggling stock market, rising inflation and a stumbling economy overall.

**jIM_Ohio** · 04-15-2008, 06:37 AM

I could post the same thing about welfare, foodstamps, social security and medicare/medicaid.

Probably could add unemployment and many other government programs to that list.

Are these programs my problem? I have a job and close to 15% what I make goes to these programs. WAY too much.

**LuxLiving** · 04-15-2008, 06:48 AM

But Geeee Steve, I didn't get to live in a resort-like 6,000 sq. foot McMansion w/a pool out back for nineteen months and then just walk-away! Dagnabit, I missed my slice o' the pie!!

**jIM_Ohio** · 04-15-2008, 07:08 AM

The whole sub prime situation is about risk and reward.

Banks want to make money (reward). Rates were low so borrowing could be done easily. There was a given market, probably saturated with employed people, which refinanced and got good borrowing returns. My expectation would be the average rate of return on an investment like this for a bank is 5%.

Two more issues- some real estate investors chose to use the low rates to buy more properties and flip them or rent them. These investors took on a given risk to get a reward. probably an average gain of around 7-10% for renting (annually) and around 25-50% for flipping.

This problem then morphed into 2-3 other problems.

People see 25-50% returns and they immediately try to flip, This does 2-3 things.
1) people which know nothing about flipping try to enter market and make the quick money.
2) the profit margins drop (higher prices for purchase, more supply of product lowers selling prices too)
3) the banks are the ones on the hook for these small busineeses- so the banks have more risk, probably getting a 6-7% return on these risks.

Another seperate issue is the banks bottom line. The banks see making 5-6-7% returns and decide they need to make more money. So they need to take on more risk to do it.

They choose to lend money to
a) people which flip- expected return is probably 1% higher than most residential loans.
b) people which have lower credit- this can probably project more long term returns in line with 8-9-10%.
c) banks also see closing costs as another way to make money- they can close loan, make money and sell the loan to someone else (to transfer some of the risk away from the bank which simply wanted the closing costs).

At same time banks needed capital to borrow. So they chose to offer high money market rates to people which gave them deposits. Because the money markets were paying 5%+, you know the banks were lending that money out expecting to get 6-7% returns- AT LEAST.

But then the reverse happens-
banks cannot make 6-7% lending money out
so they lower returns on money markets
so the depositers pull money out
which means banks need to raise capital to justify how much is already lent
which lowers liquidity
which prevents the good people (see first para) from getting credit and using credit.

The banks took on way to much risk to try to get incremental profits. They were way too greedy.

People were greedy too, but IMO people can be protected from their own greed if they are not allowed to borrow money they do not have.

**prosper** · 04-15-2008, 10:47 AM

Originally posted by jIM_Ohio View Post

The whole sub prime situation is about risk and reward.

Banks want to make money (reward). Rates were low so borrowing could be done easily. There was a given market, probably saturated with employed people, which refinanced and got good borrowing returns. My expectation would be the average rate of return on an investment like this for a bank is 5%.

Two more issues- some real estate investors chose to use the low rates to buy more properties and flip them or rent them. These investors took on a given risk to get a reward. probably an average gain of around 7-10% for renting (annually) and around 25-50% for flipping.

This problem then morphed into 2-3 other problems.

People see 25-50% returns and they immediately try to flip, This does 2-3 things.
1) people which know nothing about flipping try to enter market and make the quick money.
2) the profit margins drop (higher prices for purchase, more supply of product lowers selling prices too)
3) the banks are the ones on the hook for these small busineeses- so the banks have more risk, probably getting a 6-7% return on these risks.

Another seperate issue is the banks bottom line. The banks see making 5-6-7% returns and decide they need to make more money. So they need to take on more risk to do it.

They choose to lend money to
a) people which flip- expected return is probably 1% higher than most residential loans.
b) people which have lower credit- this can probably project more long term returns in line with 8-9-10%.
c) banks also see closing costs as another way to make money- they can close loan, make money and sell the loan to someone else (to transfer some of the risk away from the bank which simply wanted the closing costs).

At same time banks needed capital to borrow. So they chose to offer high money market rates to people which gave them deposits. Because the money markets were paying 5%+, you know the banks were lending that money out expecting to get 6-7% returns- AT LEAST.

But then the reverse happens-
banks cannot make 6-7% lending money out
so they lower returns on money markets
so the depositers pull money out
which means banks need to raise capital to justify how much is already lent
which lowers liquidity
which prevents the good people (see first para) from getting credit and using credit.

The banks took on way to much risk to try to get incremental profits. They were way too greedy.

People were greedy too, but IMO people can be protected from their own greed if they are not allowed to borrow money they do not have.

I totally agree. I think the loaner has a little more responsibility than the borrower.

I would also like to add that I think some kind of plan is needed to hedge the current economic conditions. Do nothing and we all will eventually be affected directly or indirectly. As stated earlier, your house is subject to depreciation. Also, less spending money in the economy will result in firms cutting cost.( i.e. jobs)

**jIM_Ohio** · 04-15-2008, 11:12 AM

Originally posted by prosper View Post

I totally agree. I think the loaner has a little more responsibility than the borrower.

I would also like to add that I think some kind of plan is needed to hedge the current economic conditions. Do nothing and we all will eventually be affected directly or indirectly. As stated earlier, your house is subject to depreciation. Also, less spending money in the economy will result in firms cutting cost.( i.e. jobs)

I don't think the loaner has more responsibility, I jsut think they took on more than their share of risk, or did not understand their risk exposure enough relative to the returns they were expecting.

No plan needed, just let this thing crash. Rebuilding the crash will be an opportunity for profit for someone. preventing the crash is delaying that opportunity.

I say this because the longer we keep money illiquid, the more we risk

a) a depression which rivals the 1930's. Liquidity was a major cause of the great depression (lack of liquidity really).
b) weak dollar causing a collapse of the US banking system, global banking system and overall currency system.
c) weak dollar causing economic downturn which makes it to expensive for companies to do business here in states (the opportunities for high profit will be where higher values currencies exist)
d) people not being able to invest (because they cannot borrow). If people cannot borrow to expand their business, they will rely on cash from current operations to fund investments, or not invest at all. that will shrink economy and cause a) to be first issue again. Viscious cycle.

Until the mortgage and credit markets collapse, we are closer to a downturn than an upturn.

I said it in 2000 and will say it again. We are in a credit bubble and until that bubble pops, we have a false sense of security. A portion of the credit bubble burst, but the problem is going to get worse before it gets better right now.

**bjl584** · 04-15-2008, 12:03 PM

Well, I would say that it isn't my fault. I am responsible with my finances and have always paid my mortgage on time. As far as it being my responsibility, I don't have the power to fix it. I would say that at a very least I, and many others, are feeling the effects of it. (Weakening economy, higher retail prices, slowing job market, etc.) So, in a sense, I guess that almost everyone is paying for it in some way whether it is our responsibility or not.

Sub-Prime: Is It My Responsibility?