Stitch on 22/3/2010 at 17:41

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I thought it was the climate change scientists :confused:

Pardoner on 22/3/2010 at 17:54

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I wonder who he thinks he is addressing. I guess TTLG is just deluged with policymakers.

Pardoner on 22/3/2010 at 18:09

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Your guess blows.

Stitch on 22/3/2010 at 18:26

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Sweet, it's been awhile since we had a proper Fragony thread :cool:

Rug Burn Junky on 22/3/2010 at 18:38

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You're not even speaking English, but nevertheless, you are ignorant of the basic facts.

I've gone in depth before explaining how mortgage securities work, so I'll skip that part so as not to bore everyone to tears and sidetrack this, but the crisis came to a head when the big investment banks became illiquid - Bear Stearns and then Lehman Brothers. That is common knowledge, and easily proven. They became illiquid because of the massive amount of bad debt on their books - primarily derivatives based on MBS deals. That also also fairly common knowledge.

Now, the way derivatives work is that they magnify gains and losses. Used properly, this can be a good thing. Used improperly... well, that's the rub isn't it.

Here's the thing that you're missing. These derivatives were NOT based on mortgages obtained due to the CRA. They just weren't. Most of the loans made under the CRA have to qualify for fannie mae and freddie mac protection, which means that there are still high standards of documentation, and means testing so as not to give inappropriate loans. Oh, and if the borrower defaults, the bank that made the loan still gets paid because it has backing from Fannie/Freddie. These are called PRIME loans.

If you'll recall, this has been referred to as the "SUBPRIME Mortgage Crisis." There's a good reason for this.

The real risk taking in the mortgage market was with Alt-A loans (loans unable to qualify for backing from fannie/freddie because of insufficient documentation, loans exceeding the prime limits in either size or any one of a number of important ratios such as debt to equity or loan to value), or high-risk low-income loans (subprime) to people who couldn't qualify under the CRA or for Fannie/Freddie backing. The banks were not FORCED to make these loans. They made them by choice because there was such a high demand for the derivatives based off of them.

The CRA loans are banks making 60k loans to people who could legitimately afford 80-100k, knowing that if the person defaults that fannie or freddie will likely pick up the slack (that is, if they were not loans outright made by fannie/freddie in the first place). Before the crisis these loans performed very well. Even after the crisis they didn't do too badly, and only got into trouble because the bubble popping brought housing prices down across the board. Most importantly though, because they're so tightly regulated, they're not among the mortgages used to create derivatives.

The jumbo loans, however, are another story entirely - they're the equivalent of the banks making $800,000 loans to people who could realistically only afford $700k. And the subprime loans were $80k loans made to people who couldn't even afford 40. With the variance magnified through the use of derivatives, banks made a profit to a point, but once they stopped, the losses quickly overtook them.

In short though, you're full of shit and don't know what you're talking about. I know you like to argue until you're blue in the face even in spite of evidence and logic to the contrary, but the difference between that clusterfuck of the global warming thread and this one is that you didn't have a climate scientist in that one telling you you were wrong, whereas I actually know the mechanics of the mortgage securities market like the back of my hand - having worked in it for almost a decade. So really, I know you think you know what you're talking about, but reality says otherwise.