ConservativeINC

In this story from the Wall Street Journal we find out that the average guys is not completely out on his a$$.

A survey by the Mortgage Bankers Association found that mortgages on properties that aren’t occupied by the owner — mostly investment homes — account for between 21% and 32% of the defaults on prime-quality home loans in Arizona, California, Florida and Nevada, states where overdue payments are mounting fast.

This is something that is definitely sad for those investors but it does show that the market does (surprise, surprise) work. These people bid up the prices for homes because they thought they would continue to make money indefinitely. Well, that party ended and now one would have to assume they have all gotten jobs.

What worries me about this news is that politicians will seize in on this because these were investment properties. These investment properties were probably acquired with little, maybe nothing, down. This represents a huge amount of leverage. For those of you who already know why the stock market crash that spurred the Great Depression happened then you can stop reading and eat a cookie. For those of you who don’t know the answer read on and whip yourself afterwards for being ignorant.

It was leverage then that caused the crash. When you buy stocks on leverage you agree to pay the lender money if your stocks fall past a certain point. This point, known as a margin call, is suppose to guarantee the lender you have a sufficient amount of money left over to pay back the loan. Well, back in the good ol’ days people were allowed to leverage their stock buying significantly more than the fifty percent today (i.e. fifty percent borrowed fifty percent your money). Back then positions could be 90% borrowed money.

When the stock market started to go down people with leverage started selling their stocks significantly increasing the amount of supply and dragging the prices of stocks down. This lead to many people defaulting on their loans and banks losing out with many going under.

I would like to think we are a more savvy nation after that happened but, sadly, some things don’t change. Politicians are going to grab onto this data and use it to put restrictions on who can buy homes and for what purposes. Instead of allowing lenders the ability to straighten themselves out our betters are going to come to the rescue to save us from ourselves.

Once congress gets around to having hearings on the sub-prime collapse we will begin to see what they plan on doing. Before this happens I hope that the big lenders band together and create standards of their own that will limit the possibility of something like this happening again; but I doubt it. We can hope though. BigT