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Tue Aug 13, 2013, 12:23 PM

 

How should mortgages work in the US?

It looks like Obama is planning to change the landscape for Freddie and Fannie. I know many folks here are not happy with this and wondered how exactly people think mortgages in the US should be handled?

95 replies, 4764 views

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Reply How should mortgages work in the US? (Original post)
Bunnahabhain Aug 2013 OP
oldhippie Aug 2013 #1
Bunnahabhain Aug 2013 #2
oldhippie Aug 2013 #23
muriel_volestrangler Aug 2013 #48
oldhippie Aug 2013 #49
Dreamer Tatum Aug 2013 #51
oldhippie Aug 2013 #53
Dreamer Tatum Aug 2013 #54
oldhippie Aug 2013 #64
Dreamer Tatum Aug 2013 #65
oldhippie Aug 2013 #70
Dreamer Tatum Aug 2013 #73
oldhippie Aug 2013 #75
badtoworse Aug 2013 #91
muriel_volestrangler Aug 2013 #67
FBaggins Aug 2013 #62
oldhippie Aug 2013 #63
Dreamer Tatum Aug 2013 #66
oldhippie Aug 2013 #71
FBaggins Aug 2013 #83
NoOneMan Aug 2013 #3
limpyhobbler Aug 2013 #26
bemildred Aug 2013 #4
Bunnahabhain Aug 2013 #5
bemildred Aug 2013 #7
Bunnahabhain Aug 2013 #9
bemildred Aug 2013 #18
Bunnahabhain Aug 2013 #37
bemildred Aug 2013 #79
Donald Ian Rankin Aug 2013 #15
Yo_Mama Aug 2013 #17
Igel Aug 2013 #42
1StrongBlackMan Aug 2013 #77
bemildred Aug 2013 #19
Nuclear Unicorn Aug 2013 #25
bemildred Aug 2013 #28
Nuclear Unicorn Aug 2013 #31
bemildred Aug 2013 #33
Nuclear Unicorn Aug 2013 #36
bemildred Aug 2013 #90
Igel Aug 2013 #43
oldhippie Aug 2013 #24
bemildred Aug 2013 #29
oldhippie Aug 2013 #34
bemildred Aug 2013 #35
Nuclear Unicorn Aug 2013 #32
leftstreet Aug 2013 #6
Bunnahabhain Aug 2013 #8
leftstreet Aug 2013 #10
Bunnahabhain Aug 2013 #11
leftstreet Aug 2013 #12
Bunnahabhain Aug 2013 #14
leftstreet Aug 2013 #16
PoliticAverse Aug 2013 #56
Igel Aug 2013 #45
Adam051188 Aug 2013 #13
Xyzse Aug 2013 #20
Myrina Aug 2013 #21
NoOneMan Aug 2013 #27
customerserviceguy Aug 2013 #40
Bunnahabhain Aug 2013 #41
Igel Aug 2013 #47
ms.smiler Aug 2013 #22
Egalitarian Thug Aug 2013 #30
Bunnahabhain Aug 2013 #39
Egalitarian Thug Aug 2013 #44
Bunnahabhain Aug 2013 #46
Egalitarian Thug Aug 2013 #52
Bunnahabhain Aug 2013 #59
Egalitarian Thug Aug 2013 #72
Egalitarian Thug Aug 2013 #80
Bunnahabhain Aug 2013 #85
Egalitarian Thug Aug 2013 #86
Bunnahabhain Aug 2013 #87
Egalitarian Thug Aug 2013 #88
Bunnahabhain Aug 2013 #89
Egalitarian Thug Aug 2013 #92
Bunnahabhain Aug 2013 #93
Egalitarian Thug Aug 2013 #94
Dreamer Tatum Aug 2013 #55
Egalitarian Thug Aug 2013 #58
Dreamer Tatum Aug 2013 #61
unblock Aug 2013 #57
Egalitarian Thug Aug 2013 #60
Yo_Mama Aug 2013 #95
customerserviceguy Aug 2013 #38
econoclast Aug 2013 #50
customerserviceguy Aug 2013 #78
Art_from_Ark Aug 2013 #81
econoclast Aug 2013 #84
SoCalDem Aug 2013 #68
Bunnahabhain Aug 2013 #69
demwing Aug 2013 #74
Travis_0004 Aug 2013 #76
Violet_Crumble Aug 2013 #82

Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 12:31 PM

1. Someone should loan you the money ......

 

.... and then you pay it back. What is wrong with this concept?

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Response to oldhippie (Reply #1)

Tue Aug 13, 2013, 12:34 PM

2. Great concept

 

So how should it be executed? Who should loan the money? Under what qualifying conditions? Under what terms?

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Response to Bunnahabhain (Reply #2)

Tue Aug 13, 2013, 02:12 PM

23. There you go .....

 

... trying to mess up a simple concept with those pesky details. That's what lawyers are for, not us "concept people."

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Response to oldhippie (Reply #1)

Tue Aug 13, 2013, 04:47 PM

48. So would you get rid of Fannie and Freddie?

That's what I'd take from your message. And there wouldn't be any reselling or repackaging of mortgages. This does sound the simplest idea, and it means the company that first lends the money has an incentive to make it a manageable loan.

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Response to muriel_volestrangler (Reply #48)

Tue Aug 13, 2013, 04:53 PM

49. Correct. Fannie and Freddie only facilitated ....

 

... the great breakdown. It facilitated the predatory lending and the idea that "anyone" could borrow money and buy a house.

If you need to borrow money to buy a house, find someone to lend it to you and then pay them back. Keep it simple. All the machinations only brought profits to the rich.

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Response to oldhippie (Reply #49)

Tue Aug 13, 2013, 04:58 PM

51. HAHAHAHAHAHAHA let me get this straight

If you need to borrow money to buy a house, find someone to lend it to you and then pay them back. Keep it simple. All the machinations only brought profits to the rich.

Did you really say that with a straight face? No irony intended?

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Response to Dreamer Tatum (Reply #51)

Tue Aug 13, 2013, 05:02 PM

53. What is your problem with that concept?

 

Seems pretty simple to me. Worked for centuries.

What do you find funny?

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Response to oldhippie (Reply #53)

Tue Aug 13, 2013, 05:04 PM

54. You think your "find a person with money" idea

is somehow going to NOT perpetuate their grip on wealth? You think people in rural or poorer areas
are going to have ANY access to liquidity?

You don't see how "find someone with money" would exacerbate the problem?

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Response to Dreamer Tatum (Reply #54)

Tue Aug 13, 2013, 05:28 PM

64. Which problem is that?

 

"You don't see how "find someone with money" would exacerbate the problem?"


The borrower should be the one looking for a lender, not the other way around. Jesus, how basic is that?

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Response to oldhippie (Reply #64)

Tue Aug 13, 2013, 05:31 PM

65. Gee, oldhippie, what if I don't KNOW anyone with a lot of money?

What if I want to buy a home out in the sticks where NO ONE has any money to lend?

Are you catching on? The WHOLE POINT of GSEs was to provide liquidity to the mortgage market,
so you didn't have to count on having a bank around the corner being able and willing to lend you
money to buy a house.

As you said, "Jesus, how basic is that?"

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Response to Dreamer Tatum (Reply #65)

Tue Aug 13, 2013, 05:54 PM

70. Then you are SOL ......

 

.... and probably shouldn't borrow money.

Look what happened when they tried the other way.

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Response to oldhippie (Reply #70)

Tue Aug 13, 2013, 05:58 PM

73. Yeah, you'd say that to people in Appalachia who had the nerve to want indoor plumbing. nt

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Response to Dreamer Tatum (Reply #73)

Tue Aug 13, 2013, 06:34 PM

75. Nope, I wouldn't because ....

 

... I wouldn't be lending them money. Nor would I be a politician promising them things that someone else has to deliver.

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Response to oldhippie (Reply #75)

Wed Aug 14, 2013, 09:42 PM

91. Excellent!

 

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Response to Dreamer Tatum (Reply #54)

Tue Aug 13, 2013, 05:34 PM

67. Many countries don't use mortgage-backed securities

Other Mortgage-Financing Approaches

As an alternative to mortgage-backed securities, the federal government could offer support for other funding mechanisms for home loans. One possibility would be to encourage greater reliance on covered bonds--bonds collateralized by residential mortgages--which many large European banks use to fund the mortgages they hold. With covered bonds, banks bear most of the risks of mortgage lending: When a mortgage is paid off or goes into default, the issuer is contractually obligated to replace the collateral with a new mortgage. That allocation of risk has both advantages and disadvantages compared with MBSs, which spread risk more widely among financial institutions, investors, and the government.

Other developed countries with high rates of home ownership rely less on government-backed MBSs to fund mortgages than the United States does. Some observers have pointed to Europe’s housing finance systems as potential models for this country; those systems have supported rates of home ownership comparable with that in the United States while relying less on MBSs. Although covered bonds are common in Europe, there is considerable variation in how mortgages are funded and what types of mortgages are available. Nevertheless, all developed countries with high rates of home ownership depend on some degree of government support to maintain the flow of credit to the mortgage market during periods of financial stress.

http://www.cbo.gov/publication/21992


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Response to oldhippie (Reply #53)

Tue Aug 13, 2013, 05:20 PM

62. Except it didn't work for centuries

Must people couldn't buy a home...

... and then there's the little challenge of the great depression.

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Response to FBaggins (Reply #62)

Tue Aug 13, 2013, 05:25 PM

63. It did work .....

 

It prevented so many people from buying homes that couldn't afford them. Our politicians forced these predatory loan programs on people to buy their votes.

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Response to oldhippie (Reply #63)

Tue Aug 13, 2013, 05:32 PM

66. Politicians loan money at gunpoint, and people then vote for them?


Does that make sense?

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Response to Dreamer Tatum (Reply #66)

Tue Aug 13, 2013, 05:56 PM

71. Politians set up and encouraged the lending schemes ....

 

.. that made many people who wouldn't otherwise feel rich. And yes, they got votes for it. AND funds from the banks.

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Response to oldhippie (Reply #63)

Wed Aug 14, 2013, 07:37 AM

83. Sorry... that's untrue.

It prevented so many people from buying homes that couldn't afford them

It also kept millions who could afford to buy trapped in rental housing where the profits went to the landlord. and...

It caused fewer people to be able to afford to buy. and...

It turned a market tumble into the Great Depression as many people who could afford the payments (and were on time) lost their homes anyway.

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Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 12:47 PM

3. The government should give you ecologically devastated land

 

You build a cob house and "pay" it off by planting trees and increasing local biodiversity.

Oh, but you want granite?

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Response to NoOneMan (Reply #3)

Tue Aug 13, 2013, 02:19 PM

26. Good answer. nt

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Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 01:02 PM

4. With no big fucking banks involved, for one thing. nt

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Response to bemildred (Reply #4)

Tue Aug 13, 2013, 01:07 PM

5. Sounds good

 

So more details from there.

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Response to Bunnahabhain (Reply #5)

Tue Aug 13, 2013, 01:08 PM

7. I'd have to backtrack to the whole concept of property to get into that.

And that gets very messy fast.

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Response to bemildred (Reply #7)

Tue Aug 13, 2013, 01:11 PM

9. Get messy

 

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Response to Bunnahabhain (Reply #9)

Tue Aug 13, 2013, 01:45 PM

18. Why? For you? What have you put on the table? NT

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Response to bemildred (Reply #18)

Tue Aug 13, 2013, 04:20 PM

37. I put the question on the table.

 

And without questions you don't get answers.

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Response to Bunnahabhain (Reply #37)

Tue Aug 13, 2013, 11:02 PM

79. Well you have the answer I wanted to give. nt

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Response to bemildred (Reply #4)

Tue Aug 13, 2013, 01:25 PM

15. You'd like there to be mortgages available, but not mortgage lenders?

Or you think only small - and hence more vulnerable to fluctuations, and more likely to go broke - institutions should be able to lend mortgages?

I think that needs rethinking.

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Response to Donald Ian Rankin (Reply #15)

Tue Aug 13, 2013, 01:45 PM

17. Interest costs would be a lot higher

Basically, the larger the pool of mortgages the more accurately one can assess risk, so the lower the risk premium. That is, if you calculate risk right.

Also selling off mortgages to investors removes the duration risks, so interest costs are less.

Personally I would say that Fannie is essential, because otherwise I think the top 10 banks will end up controlling the market, and if they do, they'll be happy to screw homebuyers over. We have proof of that!

Fannie and Freddie and FHA didn't create the subprime lending crisis. They were victims of it. Wall Street and the big banks created the huge subprime/Alt A mortgages, and Fannie, especially, was sent in after the fact to try to clean it up.

The good guys are being blamed here. Fannie did mortgages for decades, no disaster. Big banks get freed from the depression-era restrictions, less than 10 years later there is an epic crash. Why do we want to perpetuate this?

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Response to Yo_Mama (Reply #17)

Tue Aug 13, 2013, 04:31 PM

42. Feedback loop.

Push for redlined people to get loans.

Small lenders need to offload mortgages so they can loan more. Create CDOs. Mid-'90s.

Still need more redlined people to get loans, but most "redlining" is economic and not racial--the correlation isn't causation. So we push for lower eligibility standards.

Subprime loans made more common. They get fed into CDOs.

Fanny buys them to get the banks more money for more loans.

Private banks say, "Wait! We can do CDOs! The stock market's tanked, we have lots of cash! Buy CDOs."

There's even *more* money available to banks for mortgages and subprime loans.

Fanny sees that the mortgage business is taking off and it's losing market share. Late in the game, it vastly increases subprime buying and issuance of CDOs.

Problem 1: Collateralizing mortgages without more stringent safeguards. This was by 1995.

Problem 2: Pushing for lower-eligibility buyers to get loans because low-eligibility/minority wasn't taken as correlation, but as primarily focused on race.

The rest is just people doing what they think they can make money at. That includes Fanny.

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Response to Igel (Reply #42)

Tue Aug 13, 2013, 09:52 PM

77. Funny, someone should mention ...

 

this "blame the poor" explanation, as it was all the rage of Cavato and all the business networks ... one of the Feds every mentioned it in its analysis of what went wrong.

I am in the process of reading a paper presenting an alternate view ... one informed by me professional observations working in the Fair Housing field, followed by my involvement in prosecuting Mortgage Discrimination Claims. Based on that experience, the "Blame the Poor" narrative never seemed to ring true to me ... So I began researching the matter.

My preliminary findings are (long story short): Yes, the CRA and "Onwership Society" of Clinton and Bush played a part; but there was another, frequently (completely) ignored factor ... that of real estate "investors.

The CRA/Ownership Society programming was designed to get the "redlined" groups into home ownership; but right around 2001, we saw lenders designing the ."exotic loan products" that my research suggests was at the root of the mortgage melt down.

These exotic loans were not designed to get poor folks into homes; but rather, were designed to allow middle-incomed/upper-incomed to purchase houses to "flip" 6-12 months after purchase. When flipping failed because housing appreciation stalled, these "liar loans" began financing rental property (because the houses wouldn't sell), but this was far less attractive than flipping, because it actually involved work. These investments were fine until there was a critical mass of non-qualified (financially or a real estate professionals) investors that suddenly found they couldn't turn a profit, they simply walked away from their mortgages.

The numbers are there for anyone willing to look ... low and moderate income/CRA borrower default rate was stable (about 6%) until well after the 2007 "beginning of the melt-down." I suspect (and this is the next area of research) that the up-tick in low and moderate income/CRA borrower default rate was the result of the banks aggressive collection efforts when it became clear the investors weren't going to pay.

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Response to Donald Ian Rankin (Reply #15)

Tue Aug 13, 2013, 01:53 PM

19. I'm thinking local more than anything.

Local banks for local real estate. Too big to fail is also too big to give a shit.

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Response to bemildred (Reply #19)

Tue Aug 13, 2013, 02:19 PM

25. TBTF is just nouveau chic way of saying "monopoly"

The consumer always loses under a monopoly.

If smaller, more competitive banks came along and undermined the TBTF the bigger banks would then demand the government step in to save them with some sort of market-killing "reform" that would screw the smaller banks and their costumers.The TBTF banks would have enough money to buy the votes or intimidate the uncorrupted with grandiose tales of economic devastation.

We shouldn't mince words -- The government has gone into the business of protecting monopolies.

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Response to Nuclear Unicorn (Reply #25)

Tue Aug 13, 2013, 02:25 PM

28. Our politicians have always loved money.

And monopoly is how you get money fast, exclusivity, the cornered market.

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Response to bemildred (Reply #28)

Tue Aug 13, 2013, 02:29 PM

31. Everybody loves money, some more than others.

Those who love it enough and have a marketable aptitude go into business.

Those who love and lack any discernible value to others go into politics.

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Response to Nuclear Unicorn (Reply #31)

Tue Aug 13, 2013, 02:32 PM

33. I like having enough, too much gets in the way, you start worrying about it.

It becomes who you are, what you do, and why you do it. It depends on whether you see it as a means or an end, I think.

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Response to bemildred (Reply #33)

Tue Aug 13, 2013, 02:47 PM

36. Yeah, but that's a personality thing

Some people are assholes. It will ever be thus. So long as they don't get too assholey society tolerates them. Ditto those who make the pursuit of money their life's calling.

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Response to Nuclear Unicorn (Reply #36)

Wed Aug 14, 2013, 09:39 PM

90. I think we've all been assholes a time or two, but some people do make a habit of it.

And then, yeah, you have to un-tolerate them because it gets too unpleasant otherwise. But you don't want to let them make you an asshole too, or they win. That's how I look at it, but sometimes it's hard to remember.

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Response to bemildred (Reply #19)

Tue Aug 13, 2013, 04:33 PM

43. Local banks for local real estate was the norm in a lot of areas in the early '90s.

However, the local banks couldn't meet the political need in economically redlined areas.

And that's why the first CDOs were allowed. To get the mass of loans off the small, local banks' asset sheets and replace it with cash that could be used for more loans.

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Response to bemildred (Reply #4)

Tue Aug 13, 2013, 02:14 PM

24. Little fucking banks should be OK, ....

 

... and Credit Unions. They're good.

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Response to oldhippie (Reply #24)

Tue Aug 13, 2013, 02:25 PM

29. Yeah, you get it. nt

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Response to bemildred (Reply #29)

Tue Aug 13, 2013, 02:34 PM

34. Yep, it would cut way down on ...

 

... the number of low and middle income people that are buying houses that shouldn't be.

Limiting loans to those originating from small local banks and credit unions would vastly limit the pool of money available to those too poor to afford it. Then only the upper middle class and the rich would have access to funds at higher rates and could buy rental properties for the poor to live in. This would greatly protect the poor and uneducated from predatory lending, as they would not even be able to afford to think about a mortgage.

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Response to oldhippie (Reply #34)

Tue Aug 13, 2013, 02:37 PM

35. And limit the amount of speculative cash slopping around in real estate.

Having a beneficial calming effect on prices in general and real estate in particular. Less fun, and also less scary.

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Response to oldhippie (Reply #24)

Tue Aug 13, 2013, 02:31 PM

32. "Little fucking banks should be OK"

I guess that would put whole new spin on the term "making a deposit with a withdrawal."

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Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 01:08 PM

6. You don't say what changes Obama is planning

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Response to leftstreet (Reply #6)

Tue Aug 13, 2013, 01:09 PM

8. Given the number of threads on it

 

I figured everyone knew.

But let us set that aside, as it's really not needed for the conversation: how should mortgages work in the US?

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Response to Bunnahabhain (Reply #8)

Tue Aug 13, 2013, 01:12 PM

10. I can't find any current threads

Could you give a brief synopsis?

Thx

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Response to leftstreet (Reply #10)

Tue Aug 13, 2013, 01:12 PM

11. It's not needed for the conversation

 

Forget I pointed it out as the motivation for this thread.

How should mortgages work in the US?

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Response to Bunnahabhain (Reply #11)

Tue Aug 13, 2013, 01:14 PM

12. Is there something wrong with the way they work now?

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Response to leftstreet (Reply #12)

Tue Aug 13, 2013, 01:23 PM

14. You slept through 2008-212?

 

Okay, so one vote for the system is fine?

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Response to Bunnahabhain (Reply #14)

Tue Aug 13, 2013, 01:33 PM

16. Fannie made a huge profit!

Since receivership anyway


Fannie Mae Books $10.1 Billion In Second-Quarter Profits

by
August 08, 2013 9:19 AM

Driven by a recovery in the U.S. housing market, mortgage finance giant Fannie Mae netted profits of $10.1 billion in the second quarter, its sixth-straight quarter with positive results. The company, which has operated under federal conservatorship since 2008, Thursday.

http://www.npr.org/blogs/thetwo-way/2013/08/08/210121993/fannie-mae-books-10-1-billion-in-second-quarter-profits


Sounds like status quo is good!

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Response to leftstreet (Reply #6)

Tue Aug 13, 2013, 04:37 PM

45. Nothing detailed.

He wants to shift mortgage lending entirely to the private sector to avoid government risk exposure. Then again, right now the rules are that the feds will make a lot of money from the Fannies and those holding Fanny stock will be given annual financial crewcuts. This wasn't part of the original deal for the Fannies' bailout; it was unilaterally imposed later.


Nothing he can actually do by himself. Congress would have to be involved. First.


Nothing that's very likely to happen. I'm not sure Congress really cares, unless it's just to make Obama happy. Some Senators might go for it. They might even see a reason for it. Otherwise it'll be a kind of cudgel used, if possible, to score political points.

Meh. It's textured soy protein for the faithful. Doesn't even rise to the level of white meat, much less red meat.

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Response to Bunnahabhain (Original post)


Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 01:54 PM

20. I like the Australian System

http://activerain.com/blogsview/258297/what-is-an-australian-mortgage-
Basically:

1. A HELOC (ALOC) is acquired as a first on the subject property.
2. This HELOC will be used as your primary checking account, ATM and on-line bill pay account. In essence it replaces you current checking and savings account.
3. Your monthly income from paychecks, dividends etc is deposited directly into the HELOC which dramatically drives down the principal balance on your mortgage.
4. All your expenses, including bills, grocery shopping, entertainment etc is paid out of your mortgage. The longer the money stays in the account, the less interest that you pay on your principal balance. This uses the money that is currently sitting in your checking account, earning little or no interest, and keeps your loan balance lower.

With this concept, less of your income is going towards paying interest which leaves more money to pay down principal which pays off your home mortgage faster with no change in spending habits.
--
I was helping out with this product for a bit and it helped quite a few friends. I was doing this with United First Financial.

You really need discipline with this though, and if you don't have that, then forget it.

I think this should be built in with some mortgages. It helps out quite a bit, especially if you have a financial planner to show how you should pay and what to allocate for expenses.

Heck, I did that part as pro-bono at some points.
---
Still, they really have to fix things here first. The way mortgage companies have done things here, particularly the way they repackaged and bundled that debt is insane.

The mortgage system, in relation to the individual level, I don't think should change much. It is the behind the scenes that I have a problem with. The way they tied up the loans to the point that you have no idea who owns things is ridiculous.

It is also gouging the consumers since the new banks don't always adhere to the mortgage terms as signed initially.
That is why interest rates also go much higher at times.

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Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 01:54 PM

21. Interest charged should be = or near what customers MAKE on bank accounts ...

I know they "need" profits but seriously, my bank pays me something like 1.5% on my savings accounts, then turns around and charges me 4% on my mortgage? Bullshit.

Also I think ARMs and JUMBOs should be illegal; they're predatory IMHO. Loans like that are part of what caused the crash - not that 'people bought houses they couldn't afford' but that people were essentially told that their mortgage payment would be $x per month and then in a whisper or very tiny small print it said "until year 5, when it will balloon to $x times 10 per month". Most people get the original $x per month in their heads while being shown the house of their dreams, and all the small print fades until that bill arrives & they can't pay it. It's misleading/ bait n switch/ call it what you want -- it shouldn't be allowed to happen.

I also think folks who buy homes in 'distressed' neighborhoods and who are willing to put some sweat equity into the property & 'hood should qualify for no-interest or perhaps have x% forgiven after 10 years residence ... as an incentive to stabilize the areas (and the tax coffers and mom/pop businesses).

Just a couple thoughts ...

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Response to Myrina (Reply #21)

Tue Aug 13, 2013, 02:22 PM

27. Which means people would take out HELOCs and play the market to pocket the difference.

 

And if that sounds crazy to you, believe it or not, with enough ingenuity and knowledge of investment accounts many people in Canada have done that for years.

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Response to Myrina (Reply #21)

Tue Aug 13, 2013, 04:28 PM

40. ARM's were just fine

when interest rates declined in the 1980's. They allowed people to borrow at fair rates, and not have to pay refinancing fees just to chase interest rates when they were in decline. They also gave security to folks willing to lend their money in longer-term CD's, who would get higher rates when the fear factor of rising interest rates was eliminated. What went wrong with ARM's is when they were used to pump up the housing bubble, enabling borrowers to bid up the price of homes above what they would have been able to afford under strictly thirty-year fixed rate loans.

Also, where do you have a savings account that pays 1.5% per year? I'd like that rate.

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Response to Myrina (Reply #21)

Tue Aug 13, 2013, 04:30 PM

41. Why should jumbos be illegal?

 

You just don't think people should be allowed to borrow more than 419k for a house (outside of certain metro areas)?

And I do not understand your logic between what a bank pays in interest for savings vs. what it charges for mortgages.

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Response to Myrina (Reply #21)

Tue Aug 13, 2013, 04:43 PM

47. Sure.

Then let it float with that rate.

When you have a mortgage and pay interest on it, you're automatically denying the bank's use of that money for anything else for a long time. If the bank thinks it's going to be able to use that money for something more profitable than the current passbook savings rate it's going to build that into the interest rate you pay for the length of the loan.


A lot of banks took a tumble in the early '80s because they had loans out at 3% and 4% when passbook interest hit 10%. That's selling low and buying high.

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Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 02:05 PM

22. Bunnahabhai, personally I’d like to see Fannie & Freddie return to their intended purpose

and operation. With mortgage securitization though, they’ve been greatly corrupted. Of course Newt Gingrich didn’t do them any good. Fannie operates now in violation of state law.

If mortgages are going to be securitized, the mortgages and Notes need to directly involve the actual lender which is the Trust as the source of funding. Notes should be payable directly to those Trusts with a mortgage lien granted to the Trust. That eliminates the bankster middleman who defrauded both investors and homeowners.

In over 4 years of research though, no one has been able to explain to me the lawful process by which a security is converted back into a Promissory Note. It appears to me that once a Note has been converted into a security, the Note no longer exists.

Wall Street banksters made a bundle, trillions by defrauding investors, homeowners and taxpayers so they won’t like my solution.

I would like to see the formation of state banks across the nation that offered banking services that accept deposits and that would handle traditional mortgage lending. There would be no need for MERS or mortgage securitization and it would strengthen our banking system.

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Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 02:26 PM

30. More than just mortgages, the entire banking system should be returned to the commons.

 

Banking is unique. It is an essential service that receives unique license to perform a function that is highly illegal for any other person or organization, and as such, must be tightly controlled with multiple layers of competing, disinterested oversight.

The first thing to change that would benefit the entire nation, would be to outlaw interest and switch to a strict fee-based system. It doesn't "cost" a bank any more to write a $2,000,000,000 loan than it does to write one for $2,000, so where's the justification for a private enterprise to profit so much more for doing the former?

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Response to Egalitarian Thug (Reply #30)

Tue Aug 13, 2013, 04:26 PM

39. So you reject the time value of money?

 

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Response to Bunnahabhain (Reply #39)

Tue Aug 13, 2013, 04:35 PM

44. In the case of banks, yes. I tried to be pretty specific while keeping it short enough

 

for the 20 second attention span. Private lending falls outside the purview of the commons, but the special license granted to traditional banks to literally create money must carry special responsibility and severe restrictions.

The fee-based model also serves to encourage a more robust model for lending practices.

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Response to Egalitarian Thug (Reply #44)

Tue Aug 13, 2013, 04:42 PM

46. Hmmm

 

Sounds like you are also against fractional reserve banking then? Since the time value of money is the most central concept to finance how do you price this fee based model to make it meaningful? Do you have a basic formula?

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Response to Bunnahabhain (Reply #46)

Tue Aug 13, 2013, 04:59 PM

52. No, quite the opposite. The brilliance of the fractional reserve system is that it is by its

 

nature self-regulating. Any time the capacity or supply falls out of balance, it expands or contracts to restore it. It cannot do any differently.

Eliminating interest is bad for bank owners and to a lesser degree, financial speculators, but it yields a far more stable economic engine and the often requested predictability that business loves (or claims to love).

Oh, and monopolies. Monopolies* would also really hate it as it makes competition not only possible, but inevitable.



*Includes all variations of monopoly, duopoly, cartel, consortium, etc.

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Response to Egalitarian Thug (Reply #52)

Tue Aug 13, 2013, 05:17 PM

59. Formula?

 

What would be the formula for this fee based model, preferably with assumptions.

Btw, I do not agree with your comments re: fractional reserve, but that's another conversation. I'd just like to see the basic formula to replace present value of an annuity and its assumptions.

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Response to Bunnahabhain (Reply #59)

Tue Aug 13, 2013, 05:56 PM

72. OK. Got to go make some money and what you're asking will take more time

 

than I have at the moment. Back in a couple hours.

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Response to Bunnahabhain (Reply #59)

Wed Aug 14, 2013, 01:25 AM

80. Back. I've tried three times to write this out in an acceptably brief form and each

 

time it gets way too long. I think I'm going to try another tack tomorrow.

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Response to Egalitarian Thug (Reply #80)

Wed Aug 14, 2013, 11:27 AM

85. Just give me your formula

 

You say you have a fee based model for pricing mortgages that is not based on the time value of money. The formula for pricing a mortgage (a form of annuity) is pretty straight forward. A = amount of payment, N = number of payments, P = amount to be amortized, and i = interest rate. So you get a pretty simple formula of:

A = P ( i + i / (1 + i ) ^ n - 1)

That's nothing arcane just the basic formula everyone learns in finance. So just shoot me the variables in your formula to start with if it's that complicated. Just identifying what variables you are (or are not) using should be enlightening.

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Response to Bunnahabhain (Reply #85)

Wed Aug 14, 2013, 04:23 PM

86. Here.

 

Last edited Wed Aug 14, 2013, 05:04 PM - Edit history (1)

Where:
P=Principle
TIL=Total Amount of Potential Institutional Loans (Total Deposits/Reserve Requirement)
C=Institutional Costs
IP=Institutional Profit (fixed %)
T=Length of Loan in Years
A=Total Repayment

A=(P/(TIL+IP+C)*T)/T

Edit: Summer time cold, bad head. If I mixed up the equation, you can fix it yourself. Principle as percentage of total loan availability plus costs plus profit divided by term equals total repayment. With no interest amortization is not required.

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Response to Egalitarian Thug (Reply #86)

Wed Aug 14, 2013, 05:17 PM

87. Well, that is...novel

 

How do you calculate TIL? Is it a systemic metric or an institutional one? Let's say it's institutional.

So, do realize deposits will change constantly, right? So tomorrow's total deposits will be different from today's. Why should this impact the cost carry? But let's say a bank has $10 000 000 in deposits and the reserve rate is 15%.

10 000 000 / .15 = 66666666

No idea what is in your C but let's say it's 5% of principle so 50k. Let's say the period is 20 years. Let's say the IP is 5%. We get

A = 1 000 000 / (66666666 + (.05 * 1000000) + 50 000) * 20 / 20

= $1.03

A buck to borrow one large for 20 years? Sign me up!

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Response to Bunnahabhain (Reply #87)

Wed Aug 14, 2013, 07:05 PM

88. Are you looking for a conversation or a fight?

 

Banks must be boring, slow, and stable. Article I, Section 8, the part reserving the right to coin money and determine the value thereof, was written specifically to keep the European banking cartels out of our country by making it unattractive for them as profits would have been meager. Obviously it was circumvented, but the idea was brilliant and should be revived.

Deposits do fluctuate but not wildly, unless the bank is being run in the interest of investors rather than the customers/community. Loan terms are set at the time of origination. A 10% reserve requirement (which is high) allows the bank a $1000 loan capacity per $100 on deposit, you seem to be thinking like a retail bank, this model is much closer to the Federal Reserve or pre-'70s USPS model. The whole idea is not to make banksters rich, but to fulfill the banks only legitimate functions, those being regulation of the currency supply and security of deposits.

Did you miss the very first thing I wrote, "the entire banking system should be returned to the commons"? There is a small and consistent profit allowed on top of operating costs, period.If a bank were to choose to pay its President $8M per/year its costs are going to be much higher and as a result will have a hard time attracting borrowers, which will in turn reduce it's actual loan factor, which will discourage deposits, which will create a downward spiral into insolvency. OTOH, a bank which works to constantly contain its costs will create better terms for borrowers which will get the bank closer to the optimal 1.0 carrying capacity.

How can you have no idea of how to calculate operating costs? Fixed costs plus variable expenses.

The intent of this system is to make banks a part of, and subservient to, the community, not a free ride for those hoping to clip coupons for their livelihood.

Now, since I feel like shit, I'm going to do something far more interesting. If you want to converse and work through an idea, feel free to ask some questions or contribute some creativity, if not, buh-bye.

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Response to Egalitarian Thug (Reply #88)

Wed Aug 14, 2013, 08:09 PM

89. Working through your formula is a fight?

 

All I did was plug some numbers in. How is that picking a fight?

Btw, if a bank paid a CEO $8 million, but he brought $20 million worth of value to the organization, its costs would be lower and therefore attract more borrowers.

I feel like shit too. Why? A 12 hour day at work, and while I'm watching a beautiful sunset, in other tabs of my notebook I have a couple of work issues open.

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Response to Bunnahabhain (Reply #89)

Wed Aug 14, 2013, 10:01 PM

92. As I said, summer cold, allergies, plague, whatever, I haven't done this stuff for a long time.

 

As far as I've ever known and in all my experience, the $20M (or whatever) CEO is a myth. On the exceedingly rare occasion that it happens, it's some trust fund parasite that constitutes a one-shot buy-in based on familial ties that has nothing left afterward.

I was with HP when Fiorina was sold to the board as just this kind of wunderkind, and we all know how well that worked out.

Somewhat strange for a computer-geek/systems whiz, I am math challenged and I type for shit. My ideas are sound, but I rely on the truly gifted to fix my errors in their areas and to translate them into geek-speak. Fortunately, I've always had a knack for spotting them and for then taking what they teach me and conveying that to the executive class.

Sounds like neither of us is having a particularly good day. Take a look at what I wrote tomorrow or later, I doubt anybody else is following this at this point, and get back to me.

Sorry for the foul mood and so on.

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Response to Egalitarian Thug (Reply #92)

Wed Aug 14, 2013, 10:18 PM

93. I am sorry

 

but I do not think your ideas are sound. Clearly the risk of a very large loan over a long period of time is greater than the risk of a small loan over a short period of time. In fact, a loan of the same amount with a 20 year payback has a greater risk than the same amount loaned for a year. That's simply true and your formula does not reflect that. As the pay back period increases, risk increases. As the amount increases, risk increases. This has nothing to do with the credit worthiness of the borrower but rather the ever increasing chance of a change in the macro environment impacting the initial assumptions the loan was based on.

I also really do not think you understood what I said about CEOs as evidenced by your reply about trust fund babies. What I said has nothing to do with a buy in.

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Response to Bunnahabhain (Reply #93)


Response to Egalitarian Thug (Reply #30)

Tue Aug 13, 2013, 05:13 PM

55. Wait a minute. You think the risk of a $2B loan is the same as a $2K loan?

HAHAHAHAHAHAHAHA


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Response to Dreamer Tatum (Reply #55)

Tue Aug 13, 2013, 05:16 PM

58. Did you have an actual point?

 

Oh wait, I just saw who you are.

Thanks for the kick anyway.

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Response to Egalitarian Thug (Reply #58)

Tue Aug 13, 2013, 05:19 PM

61. I think the point would elude you, but ok...

Interest rates reflect risk.

Jumbo loans have higher rates because they represent more aggregate risk than smaller loans. Processing them may cost about the same, but that's not the point. The financial risk is higher, so the return needs to be higher.

It's a pretty straightforward concept in finance that's been around, oh, forever.

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Response to Egalitarian Thug (Reply #30)

Tue Aug 13, 2013, 05:16 PM

57. unique? highly illegal for any other person or organization? what?

any more than say, doctoring, lawyering, teaching, emt-ing, policing, soldiering, tax advising, real estate brokering, etc.; all of which involve things that require licencing and/or proper authorization?

banking is perhaps least among these, in that non-banks are permitted to engage in private contracts to do all sorts of banking activities.

simple financial transactions are not, for the most part, "highly illegal".

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Response to unblock (Reply #57)

Tue Aug 13, 2013, 05:19 PM

60. Any other entity that does what banks are licensed to do is called counterfeiting

 

and the secret service takes a pretty dim view of it.

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Response to Egalitarian Thug (Reply #30)

Thu Aug 15, 2013, 06:31 PM

95. Where do you think the banks get the money?

The banks pay people to deposit money (interest or costs) and then they loan it out. They have to pay a whole lot more out to get $2,000,000 to lend rather than $200,000.

Are you going to outlaw interest for depositors? If so, wouldn't everyone just buy stocks? There would be no mortgages!!

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Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 04:23 PM

38. We had a pretty good system about fifty years ago

Local S & L's would take deposits of local savers' money, and lend it out within the community. Some of the portfolio of loans would be sold on the secondary market to pension funds, insurance companies, and other solid lenders, who would perform the paperwork correctly.

Where things went off the track is when the sharpies got in and treated mortgage loans like stocks, divvying them up and selling fractional interests in them, while pocketing fat commissions for doing so.

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Response to customerserviceguy (Reply #38)

Tue Aug 13, 2013, 04:56 PM

50. Worked great until inflation/interest rates spiked

All those local banks ans S&Ls had tons of 6% fixed rate 30 year mortgages on their books. Then rates spiked.

As a youngster working as a teller in an S&L i recall 17.25% CDs

Cant pay 17.25 while earning 6 for long. And they went bust in droves.

That was the impetus for the first securitizations/CMOs. After that episode it was difficult to get investors into 30 year fixed rate paper. Hence the advent of the securitization and tranching.

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Response to econoclast (Reply #50)

Tue Aug 13, 2013, 10:03 PM

78. I don't have a problem

with variable rate CD's and variable rate mortgages, tied to each other. That would keep lending local.

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Response to econoclast (Reply #50)

Wed Aug 14, 2013, 03:21 AM

81. It wasn't just interest rates, although they were a large part of the problem

After deregulation in the early '80s, S&L's started venturing into schemes beyond their original purpose of providing home loans, and as a result a lot of bad loans were made. There was also a lot of fraud, as exemplified by the Silverado scandal of the late '80s.

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Response to Art_from_Ark (Reply #81)

Wed Aug 14, 2013, 08:25 AM

84. The deregulation was a RESULT

Of the spiking of interest rates and the dawn of the Money Market Account

S&Ls were hemorraging deposits to places like Dreyfus. Customers taking savings and checking accts out of S&Ls to get paid higher interest rates at the new Money Funds. The ones remaining were moving to those 12% 15% 17% CDs. The S&Ls were doomed.

The deregulation was an attempt to let them save themselves by investing outside their traditional mortgage space. The hope was that they'd be able to earn better returns than their 6% mortgages.

Predictably, lots of those institutions "reaching for yield" mucked it up very bery badly.

But the driver of the whole process was the spike in interest rates that created the "mismatch" between interest earned and interest paid.

In a sense, everything we experienced in the recent financial crisis are the ripple effects of that high inflation/interest rate period.

The demise of the S&Ls meant that lots of homebuyers no longer had access to a stable local lender who would hold those mortgages on their books or sell them to other local investors.

This ushered in the securitization of mortgages. And it began the deregulation in banking. And the rising consolidation of banks yielding bigger and bigger institutions further and further removed from rhe customers they serve. And the increasing government / quasi government role in the housing market.

It all began back then with the high inflation/ interest rates back then.



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Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 05:44 PM

68. 20% down

Gotta have "skin in the game".. Nothing down/3% down loans created a LOT of homeowners who were on the edge of a very sharp razor, and one financial crisis could (and did) drive them right into delinquent payments, and then foreclosure.

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Response to SoCalDem (Reply #68)

Tue Aug 13, 2013, 05:52 PM

69. I would agree

 

In fact, "skin in the game" is a phrase I use myself.

In some other thread I suggested that home ownership is overly mystified in the US and perhaps we need to admit that not everyone, maybe even not the majority of people can own homes. I pointed to progressive Euro social democracies that tend to have lower (not all, Finland is very high) home ownership rates. I was thoroughly attacked.

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Response to Bunnahabhain (Original post)

Tue Aug 13, 2013, 06:14 PM

74. How about we address credit scoring

 

Make credit worthiness transparent and simple.

1. Can you afford the payment?

2. Can you show a history of timely rent payments?

3. Ever default on a mortgage?

If you can answer: Yes, Yes, No - you get a home loan...

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Response to demwing (Reply #74)

Tue Aug 13, 2013, 06:39 PM

76. Isn't that basically what a credit report is?

 

I'll agree the exact formula for a credit report is not transparent, but the actual credit report is. You can log in and get a free copy of each report once a year.

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Response to Bunnahabhain (Original post)

Wed Aug 14, 2013, 05:38 AM

82. The way they do here, I guess...

Here's how it works:


  1. Go to the Credit Union/Building Society/Bank and apply for a mortgage[/il]
  2. If you've got the deposit and the ability to repay they approve the loan[/il]
  3. Spend the next 25 years paying off the loan, secure in the knowledge that they can't pass on the mortgage to some other bank or company.


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