On Fri, 05 Dec 2008 13:10:55 -0500, Reginald P. Smithers III, Esq. wrote:


Yes, it had to do with packaging bad loans with a high probability of
default, the loans I mentioned above. Those investment instruments
would be a great investment, if the loans were going to be paid, or they
could recoup the money in foreclosure. neither can be done, when there
is no down payment, and the mortgage was for more than the home was
worth. Home loans have been packaged as investments for over 50 yrs,
and probably much longer, and were considered a fairly safe investment,
when we used reasonable criteria for determining who would get the loan.
Once Fannie Mae said, guaranteed that they would buy and resell the
loan, regardless of risk, it opened the flood gates for all banks and
mortgage companies to disregard the ability of the person to repay the
loan.

I would argue a healthy bank should be able to withstand the present
default rates. It wasn't the default rates that brought banks down, it
was leverage. 33 to 1 in Lehman's case.

I would also point out, when you lose 1/2 million jobs, as we did in
November, it isn't only the subprime loans that go into foreclosure.

On Fri, 05 Dec 2008 12:34:31 -0600, wrote:

On Fri, 05 Dec 2008 13:10:55 -0500, Reginald P. Smithers III, Esq. wrote:


Yes, it had to do with packaging bad loans with a high probability of
default, the loans I mentioned above. Those investment instruments
would be a great investment, if the loans were going to be paid, or they
could recoup the money in foreclosure. neither can be done, when there
is no down payment, and the mortgage was for more than the home was
worth. Home loans have been packaged as investments for over 50 yrs,
and probably much longer, and were considered a fairly safe investment,
when we used reasonable criteria for determining who would get the loan.
Once Fannie Mae said, guaranteed that they would buy and resell the
loan, regardless of risk, it opened the flood gates for all banks and
mortgage companies to disregard the ability of the person to repay the
loan.

I would argue a healthy bank should be able to withstand the present
default rates. It wasn't the default rates that brought banks down, it
was leverage. 33 to 1 in Lehman's case.

I would also point out, when you lose 1/2 million jobs, as we did in
November, it isn't only the subprime loans that go into foreclosure.

Thunder, thunder, thunder road....the subprime problem started the
downslide a couple years back -- not in November!
--
John H.