Housing Bubble - Part 1

Housing Bubble Part 1 

Caused by investors? Caused by banks? Caused by would-be homeowner? Maybe by all of them?I have read many articles of how the housing bubble was caused by investors, or banks, or would-be homeowners. Some even try to say all of them had a part to play.

I would like to suggest another source, but first lets look at all the above.

INVESTORS
                                                                                                                               Some have said that the investors are the main cause because they are greedy and extend credit to perspective homeowners who do not qualify for a regular loan, then sell them off to government backed lenders knowing they will eventually default.

This might have been able to be done once or twice, but the reputation of such investors would not let them be investors long. And this could not possibly account for the reported 30 to 50% of loans in danger of default.

Any reasonable thinking person would ask "If this is true, how could one do it with all the regulation on lending?” This is our first indication of where the real problem lies.

But, in reality, if the investor could not do many deals each year then he could not survive and have been responsible for so many bad loans as this would suggest.

BANKS

The banks have been often criticized for allowing the investors, and homeowners; to practically finance deals risk free to them as they get themselves into situations whereby they cannot recover is anything goes wrong (or south) for them.Again here is a problem, but did the banks do this as part of any plan on their behalf?

I would not think so as the only way they could make money on those loans (good or bad) is for them to be paid back long enough so that the few bad loans are covered by the profits of the many good loans. When we look deeper into the financing that was done, we find that there were changes allowed by the loan insurance underwriters that allowed the banks to give out many more questionable loans to many more people.

In the beginning of this, home values continued to rise, albeit more slowly, these same new looser lending rules were also applied to the commercial side of lending. Which led to what we are just beginning to see as the upcoming CRE crisis. But I digress on that and may have to cover it at a later time.

Again the reasonable thinking person would ask "If this is true, how could one do it with all the regulation on lending?” This is our second indication of where the real problem lies.


This first part of the answer is to get you thinking. In part 2 we will look at the other two questionable causes as seen by the summary statement at the beginning.  

Jim Wineinger Do what is right, it is the best policy.