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more on the mortgage mess

Another illuminating take on the mortgage mess, and helps explain why so many people in the banking industry failed to see this coming; it boils down to the Usual Error - the idea that people assume that others work the same way they do, and have access to the same knowledge. What is a good idea from an economist's point of view is terrible for an average homeowner.

I would expound, but Aiden was using us as parallel bars last night and I'm kinda staring through things.


( 2 comments — Leave a comment )
Oct. 13th, 2008 03:47 pm (UTC)
did you recieve acrobatic cuddles last night?
Oct. 13th, 2008 04:18 pm (UTC)
I agree: it's the reason why banks had bank lending standards to verify that you could afford your income, by calculating the maximum payment you can make on a fixed loan or on an adjustable, assuming the maximum adjustment and income going up at approximately the rate of inflation.

Unfortunately what happened was that the rise in home prices caused banks to stop being rational: in a rational environment a bank will only loan money to someone who can afford the mortgage. Here's a good account by the Institute of Chartered Accountants in Australia: The collapse of the US sub-prime mortgage market which starts with an amazingly easy and readable description of the problem, then goes into the technical details describing problems in U.S. GAAP laws which prevented various investors along the line in understanding the risk they were actually taking. One player not given in the outline is the roll of Freddie Mae and Fannie Mac as CDO investors whose governmental mandate was to purchase 50% "really bad" CDOs in an effort to encourage low-income home ownership.

The underlying problem masking this mandate and making everyone think that while this was a problem, it was not an existential problem for the banks, is rising home prices. So long as house prices continued to rise, the whole house of cards remained standing.
( 2 comments — Leave a comment )


firesea: self-portrait
Heather Keith Freeman
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