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As I watch the financial news where the experts attempt to analyze what went wrong with the economy, I hear them state that the consumer must start spending to stimulate the growth. My question is, Where will the consumer get the money from to spend it?
I also hear some expressing, more accurately I think, that the banks loaned more money to the buyers than they could afford to pay back. In the housing market it is definitely true. They first convinced the Federal Gov't, which it had no business doing, to give guarantees to the various Lenders backing the loans, should something go wrong with the transaction down the road. in order to do this they had to form Gov't agencies to govern the guarantees they would do for the individual applications for the loans. As the applications progressed, the Lenders would investigate the credit of the individual applying for the loan. Once they were satisfied the applicant qualified for the loan, it would be forwarded to one of 2 Federal Agencies for backing of the approval. Those 2 Agencies were Fannie Mae and Freddy Mac. They were much the same except the first was for non Veterans and the second for Veterans. Special provisions were afforded for Veterans because they had been placed, or willing to be placed, in harms way for the good of their country. I'm not clear on what the exceptions were.
There were different ways these loans could be managed and I'll try to clarify them. The first is the most sensible because once established, the payment stays the same throughout the full term of the contract.Neither the Lender or the buyer can change it unless agreed to by both parties. This means then, that although your payment remains the same, your wages can increase over a period of time and the payments can become easier to make and life can become a little more affordable for other things. The one I've just described is definitely the best for everyone involved. The potential for loss to anyone is the least. It's referred to as a fixed rate mortgage. All the parties involved can come out winners. In that case a substantial or at least reasonable down payment is required to assure credibilty.
From here on in it gets more risky for the buyer. Lesser or no down payment is required.
The provisions introduced here are good for the Realtor because it allows them to market more houses, therefore more people qualify for loans. The Lenders make more money because they lend more. But the home buyer's risk gets greater since he can't be guaranteed raises to correspond with the increased payments over the coming years. It's referred to as the Adjustable Rate Mortgage.or ARM.
This allows the buyer to qualify for a larger loan because the Lender is allowed by Freddie Mac or Fannie Mae to lower the interest rate under the condition it gets raised a few years down the road to equal or exceed the original rate for buyers of a Fixed Rate Mortgage. After 5 years or so in the agreement, the ARM contract will definitely accellerate to the point it is decidedly higher than a Fixed Rate contract. It's a "Pay now or Pay Later" kind of arrangement.
This would all be fine except we, as consumers, aren't assured of job security, raises in income, protection by regulated rises in the consumer price index or inflation, all of which are totally out of the buyer's control.
So for a while, too long a while I might add, the Realtor, the Lenders, the Mortgage Co.'s and Fannie Mae including Freddie Mac were all in bed together making inflated money on the backs of the consumers. It was obvious to any economist that someday the much too large bubble was gonna burst. Well it did and with a huge bang that we're still hearing today. This dangerously created a demand for more houses due to the relaxed lending laws. The demand allowed the Realtors to inflate the prices because of supply and demand. By manipulating the banks into lending more money to increase their own profit, The housing construction also flourished due to demand. The race was on. Creative lendin pursued. No body glanced ahead to see what was going to happen.
So who could have prevented this from happening? The Federal Gov't, if they had spent more time regulating on behalf of the consumer instead of guaranteeing profits no matter what for the Financial groups I've previously mentioned.
When I vote for a politician I expect him or her to represent my interests and protect us from monetary harm too. They haven't done that nor have they showed any signs of doing it.
I commend Bill O'Reilly for coming down on Barney Buttbanger for mishandling Fanny Mae the way he did. He's just another two bit Socialist politician who fools other buttbangers that he's looking after their interests when he really isn't.
If there isn't regulation passed tying Real Estate prices to the inflation rate the way they calculate it now, It's gonna happen all over again.
Just so you know, The cost of food and everyday commodities are not considered in the cost of inflation. They are placed in the cost of consumer index to make the rate of inflation look like it's under control. That's the way I understand it, anyway.
Until the Gov't decides to protect the consumer through proper regulation more, as we elect it to do, things aren't gonna change. The Success of this Nation is, and always has been, on the backs of the consumer. Regulators need to have that more in mind than protecting businesses. Don't hesitate to remind your Congressman. Just sayin'.
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