…in a long and detailed post on the subject and the Washington Post article that it is based on. You should read it all but there are two points he makes that are worth emphasizing:
For many years, lenders were able to get away with making high-risk loans because of the steady upward trend in the housing market.
“Asset value” in a rising market meant that if you loaned $300,000 on a house and the borrower defaulted –hey, no problem! Foreclose on the loan and re-sell the house for $350,000. So it didn’t really matter how shady the borrower might be, as long as the value of the asset kept going up.
When the housing bubble was really cooking – 2003 through 2006 — both the borrowers and the lenders were thinking of the houses as investments.
I know my house is an asset and it has a market value, but that market values comes from it being a place to live. Yeah my wife would like to build a new one and someday if I have the money to build her that house she wants I will, but until that day comes the value of my house to me is based on the roof and walls and the shelter it provides, it has value because is it home. Who cares what the bank says it’s worth? My eventual goal is to pass it on to one of my sons to give his life a jump start.
If more people thought that way maybe we would be in better shape.
The Second bit is more about human nature:
We can generate new regulations designed to prevent a repeat of the WaMu collapse, but those new regulations — like the old regulations — will only be as good as the officials who enforce them. New regulations will inspire new evasion techniques, equally risky new ventures will attract investors with an appetite for lucrative risks, and the next “bubble” boom-and-bust will occur in some as-yet-unsuspected market sector.
There are two lessons here, it’s like computer security, you password is only as secure as the least careful person who has it. This means you have to have good people willing to enforce any rules you have. The second is about human nature, you can’t repeal it, you can only reveal it.
For example I’ve always thought the laws about not accepting a meal from a lobbyist are foolish. An honest person can’t corrupted by a meal and a dishonest person will find a way around it. That’s why campaign finance laws are a sham, they restrain the honest while giving the dishonest the veneer of respectability as they skirt the rules. Much better to just have full disclosure so people know where the money is going.
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