But what if there is not a real "crisis" in the home mortgage market? According to the first article I have posted a link to below, the actually number of home mortgages that are in foreclosure or default is less that 1%. Henry Paulson, the Secretary of the Treasury, placed the rate at 2% during a CNN interview on Sunday.
The panic that has spread from a relatively few home mortgages in the US to into a world-wide credit crisis that brought down a major investment bank and caused a decline the value of the dollar on world markets appears to be based on pure fear and panic because of the leverage factor in the world financial markets.
Leverage is a financial term that is not difficult to understand. Assume you buy a house for $200,000 and put $50,000 down. You have "leveraged" your $25,000 by a factor of four ($200,000 divided by $50,000) to allow you to buy a house that will be paid for out of your future earnings. Another way to look at leverage is to call it debt, loans or borrowings. Your, and the worlds, leverage, debt, or loans, are based on the assumption that the person of organization borrowing the money will be able to pay back the amount of the loan, plus interest, out of future earnings. That is why credit ratings, income verification and accurate valuation of the purchased item are so critical to the whole system. If loans for anything are granted to individuals that do not have the income to support the debt, are not credit worthy, or if the valuation of the item purchased is inflated, the whole process of granting credit is called into question.
On a worldwide basis, all of the national economies are producing about $50 trillion in annual gross domestic product (GDP), that is the total value of all goods and services sold. The estimated worldwide debt is estimated at about $700 trillion, a "leverage" factor of 14 times. This would be the save leverage as you buying that $200,000 home with only $14,000 as a down payment with an annual income of $35,000, not a good idea.
Modern economies are built on leveraged debt, whether we are talking about you buying a car or home with borrowed funds or a major international company or a nation borrowing money for investments by issuing bonds. The critical issue is the leverage factor. If we had to pay cash for a home or car, very few of us would own them. Without well-managed debt levels, and rational leverage factors disaster will always loom for an individual, company or nation.
Smart regulation are needed to ensure that debt levels are well managed and that appears to be where the problem started, with a few mortgage brokers gaming the system and falsifying home values and allowing people to buy homes at inflated values that their income could not possibly support. New regulations have been put into place now, but the damage has been done. Greed and fraud in the sub prime mortgage market played a major role in the current meltdown of all the financial markets.
http://articles.moneycentral.msn.com/Banking/HomeFinancing/ForeclosureCrisisIsOverblown.aspx
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Comments: 30
I don't care what "they" say - there are foreclosed, abadoned and auction homes all over the place here.
I am originallyfrom Cleveland and I know how bad it is there, and in Michigan as well as Florida and some areas in California and Nevada.
There are some areas here that look like a wasteland.
If the 80s we had the savings and loans crisis which I believe resulted in a $500 Billion dollar bailout of the banks using my (and your) tax money.
Now we get this mortgage crises from bad loans.
In every case, supposedly regulations are changed to prevent such things in the future but they keep happening anyway. And governments give money to the bankers who made the bad loans. :-(
Isn't is obvious that this will continue to happen over and over again? Isn't it obvious that no matter who is in office, the nature of our money will allow and motivate such actions again and again?
We will always have such problems so long as we use the same old (thousands of years old) kind of money. Why would we expect a kind of money that developed before recorded history began to be appropriate or suitable or even workable in our industrialized economy? Why would we expect a device that was adequate when it was used by only a small percent of the total population and then only a few times a year to still be adequate when it is used by almost every functional adult almost every day? It is just plain silly for us to still be using a kind of money that creates such suffering and destruction and prevents so much production.
To understand what's wrong with our money visit the POM Education group page and read the POM articles there. It's at:
http://pomeducation.gather.com/
To understand how an improved money might work read the novel "Invisible Hand" which is also on gather at:
http://www.gather.com/viewArticle.jsp?articleId=281474977234427&nav=Namespace
That society has no poverty, no unemployment, no credit, no taxes, no government regulation of business, only individual private property (no joint or public ownership), no organized crime, reduced pollution, reduced crime in general, no social security problems, and no silly campaign ads on TV. (Besides, it's fun to read.)
I'll be okay but I do sincerely worry about those who do not know how to survive on minimal resouces or have lived so far out of their means that they have absolutely nothing that they own outright including their pots and pans and dishes.
Shameful.
Add to that the fact that, if existing homes are in crisis, then the number of new homes being built is also going to drop. The home construction industry is also in crisis.
I do agree that individual stupidity and greed play a role here, but predatory lenders play a much larger part. They played on the fact that a lot of folks didn't understand what they were getting into with those subprime mortgages, and simply saw their only chance of getting their own home. I have no sympathy for the speculators and flippers. I hope they lose their shirts. They prey on human misfortune.
> "Smart regulation are needed to ensure that debt levels are well managed and that appears to be where the problem started, with a few mortgage brokers gaming the system and falsifying home values and allowing people to buy homes at inflated values that their income could not possibly support. New regulations have been put into place now, but the damage has been done. Greed and fraud in the sub prime mortgage market played a major role in the current meltdown of all the financial markets."
Deregulation is ALWAYS one of the major calling cards of repugnicans. Deregulation means less government interaction which brings the greedy to take advantage of said deregulation. Wherever deregulation happens the public at large are the ones to pay. The rich CEO's take advantage of their overly financed retirement packages and move on while us taxpayers keep on paying for their greed and moneytheism.
When will everyone wake up and realize that the things we need to live should never be deregulated? I don't trust a CEO who has to show big increases in quarterly profit statements to be making the right decisions where my money is concerned. Every single middle class idiot who votes for any repugnican is always voting AGAINST their own best interest. When will these people wake up and use their brains to make the obvious connections before they vote for some idiot?
Things that should never be deregulated and always have price/cost controls to keep them affordable are housing, food, fuel, electricity, water, life, liberty, and the pursuit of happiness. You can't have any of those if the companies providing them are only interested in boosting their bottom line. The two issues are mutually exclusive.
As to the mortgage crisis: deregulation set up an atmosphere of greed in banking. The big banks couldn't wait to give loans to people they knew couldn't pay them off for houses that were over-valued AND the people who took out those loans were too stupid to understand that they would never be able to pay them off. From my POV the fault lies with many. Why in the world would anyone think for one minute that they could pay off a loan for a house that cost more than they could honestly pay off. It's insane thinking. Never purchase more than you know you can pay for.
Among markets measured by Forbes Magazine, Greenville ranks the LOWEST in foreclosures in the entire country. Source link: http://tinyurl.com/yntq3t
And those numbers really haven't changed over the last year to 18 months. Additionally, that 1% is located in less than a half dozen states.
based on pure fear and panic because of the leverage factor in the world financial markets
Surprise surprise, such is the validity of the world economy. It can all be brought down with a few whispers, smears, and good luck.
The estimated worldwide debt is estimated at about $700 trillion
The USA is about 60th on the list of nation's with the greatest debt, compared to GDP of their economies. In other words, most of Europe has far more debt than the USA, in comparison to the size of our repsective economies.
We certainly aren't alone in having some "issues" to work out. We're just the biggest bully on the block, so everyone wants to blame the USA.
It isn't so much that the USA fears a depression, as it is the rest of the world fears their own depression. Such an environment leads to those whispers and innuendo that are currently roiling the world financial arenas.
There is no "meltdown" other than in the zeitgeist's imagination.
Since the economy was not diversified, people started losing their homes to lack of employment. Our "blue collar" community is struggling to survive with these changes.
There are people who have had their mortgages for years, abandoning their homes because they can't sell them. They have to move to another community just to find employment. Unfortunately, these foreclosures are lumped in with "the people that bought over their heads". You can't pay a mortgage with "fast food" wages!
fact 2) The estimated worldwide debt is estimated at about $700 trillion
I think those were the only "facts" I offered up....