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Originally Posted by dalakhani
Why do you think this happened?
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I think people are still skeptical. The root of the issue is poor lending practices by banks who followed the thought process of "well, even if the homeowner can't pay the mortgage, we'll be able to recover the full loan value because housing prices ALWAYS rise" whereas in some parts of the country homes were already at a saturation point of cost versus income.
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Originally Posted by PSH
Unfortunately, the bailout was not a matter of if it was going to happen but when. Even though FNM had as of 6/30 more than enough capital on its books to at least get thru the year before another capital infusion may or may not have been necessary it became apparent that something had to be done like the Gov't announced this weekend to attempt to stop the huge markdowns being taken on the books of financial institutions. These financial institutions own billions and billions of $$$ of FNM and FRE bonds and were forced to take huge writedowns which affected their own capital on their books and hence the major equity infusions (many from sovereign wealth countries) to these institutions. The problem lies that many of these financial institutions have to continually mark down their paper as the prices of homes continue to decline and foreclosure rates increase. Everything seems to be connected in this financial world.... The hope and aim of the Gov't takeover is that it will reduce the costs to buyers of homes and that these financial institutions will once again feel confident to start making loans again. Our economy can not recover until these financial institutions get their own books in order and start to make loans. Housing prices have to stabilize in order for that to happen. Yes, it is sad that the equity holders are wiped out in FNM and FRE but unfortunately equity holders are the lowest on the totem pole in protection. We shall see if this action by the Government stabilizes the housing market and also stabilizes the spreads of mortgages and other financial fixed income instruments to Treasuries. One should remain skeptical on how this plays out.
PSH
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Therein lies the problem and why you are wrong. The lenders worked under false assumption that home prices would continue to rise at an unsustainable level, despite warning flags of the cost of housing spiraling out of control. The lenders should have been held accountable for their poor investments, and learned a lesson from it- not allow the government to step in and bail them out. Continued poor lending practices under the assumption that the "implied government backing" will only cause housing prices to further rise, putting additional pressure on the consumer and the American economy. It's a vicious cycle that must be stopped through painful lessons learned and this is NOT the answer.