This is really disgusting how the federal government has effectively tied the hands of the states from regulating the federal institutions. While common taxpayers were largely left in the dark about how risky their mortgages were, the states were actively prevented from protecting their citizens.

Eliot Spitzer was New York attorney general before he became governor. Here is what he said back in February 2008, after he became governor (and before his resignation):

"In 2003, during the height of the predatory lending crisis, the OCC [U.S. Treasury Dept] invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules. But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation."

Now - today - BusinessWeek came out with this 3-page article, confirming Spitzer's allegations:
http://www.msnbc.msn.com/id/27121535

Both McCain and Obama were talking about protecting the American homeowners, who are apparently "victims" in this situation. I think the notion of that is silly. Sure, I think it's worth helping out people who did put a substantial down payment, but I can guarantee that these are not people in trouble.

After all... what is predatory lending? If I go and take out a loan I think I can repay, and I can't... is it the lender's fault? It's up to people to take on these loans, and the banks HAVE to leverage the risks on NO MONEY DOWN loans. I don't try to downplay the inherent dysfunction of the banking system, yet I think that people who took out the loans should share the responsibility.

I know a dozen of people personally, who though that the housing prices will continue to rise. These were telling me to stop renting and begin to build "equity". I've pulled out a calculator and showed them, that why they should not take out a loan for house.

1) All of them were college graduates paying back their school loans,on top of their car loans, and credit card debt.

2) I showed them, that even a simple 150,000 house at a generous 5% rate, will cost them 63.5k in interest over 15 years (and 139k over 30).

Doing some basic math... that's 4.5k of interest per year + $1500 of expected upkeep costs + $1000 more on heating/cooling costs + $1000 on property taxes. Total of 8000/year they would end up paying outside of the "equity".

Now, take a 650/month rent and multiply it by 12. You get 7800. Sure, you'll be paying it to the landlord, BUT you get to keep and save and invest the EQUITY... instead of it being locked up in a house which is continually SHOULD DEPRECIATE... as any durable goods would depreciate over time due to use and wear and tear (and thus will devalue, especially is these are in abundance and demand is low).

3) From, economic perspective. Who is contributing more to the economy? I, who save the money and invest it into business and opportunity and real economy... or the people who take on a huge loan and pay immense amount in interest, which sucks money out of circulation and can only return in a form of a debt loan????


After I showed them this, my friend's reply was :" Well, I just don't see me living in apartment. I need a sense of ownership, and some backyard space."


So, that's where it all boils down to, so I don't particularly feel that these people are "victims". They took on those loans to advance their convenience, instead of grinding it out and saving.


Like my dad would always say: " THERE IS PLENTY OF "FREE" CHEESE IN A MOUSETRAP". The sad thing is that people who do save, end up paying for people who do not, in our governments attempt to keep the status quo.

I don't disagree with anything you said. The problem is, you are way more expert in economics than most people, even college graduates. The pressure was very great from all sides for people to buy homes and borrow money. When everyone is doing it and everyone is encouraging it and saying it's the smart thing to do, people are going to do it.

What disgusts me is that there actually were LOTS of people at the state level trying to speak up and do something about it, but they were muzzled by the federal government.

I find a couple of things wrong with your illustration:

1) You charged $1,000 to the homeowner for heating and cooling costs, but nothing to the person who rents. In the state where I live (Colorado) the person who rents typically pasys heating, cooling and electricity costs in addition to rent.

2) People who rent typically live in a smaller home than the one that they would purchase. If you are going to compare it is better to compare equal properties.

By the way, the principle and interest payment for a $150K loan, at 5% interest for 15 years is $1,186.20 and for 30 years is $805.24. Yes, I know you did not give those figrues. I am simply giving them for informational purposes.

3) People who rent apartments are usually renting in a building that contains multiple apartments which is owned and rented by someone in the business of renting apartments to others. That business person would soon go out of business if they rented their apartments for less than the cost of the payments of the principle, interest, taxes, insurance and upkeep. While there are exceptions, owners of apartment buildings do not realize the capital gains that individual home owners have realized in the past.

4) I agree with you that many people should not rent. For the many years that I was in the U.S. Army I did not purchase a home, I rented because I did to believe it to be financially appropriate to purchase. I purchased our fist home after I was out of the military and considered it approptiate to do so. In the 8 years that we owned it we realized a nice gain which allowed me to make a good down payment on the next home that we purchaed and have owned for 4 years. While the value of our home has dropped in the current financial situation, it is still worth (and could be sold for) more than we paid for it. And by the way, our fixed rate mortgage has a lower interest rate than we could get now without payment of points.

5) The issue is to purchase appropriately without paying more than the home is worth, without paying excessive interest rates and points and according to your financial situation along with your life style which includes how long you intend to live in the property.

Predatory lending may have multiple aspects. Predatory lending may involve actual fraud on the part of the mortagage broker and/or the lending institutaion.

I once entered into a real estate transation in which the mortgage brooker committed fraud.

NOTE: To the extent that the term is a legal term the mortgage brooker did not commit fraud because he did not violate any law. He did not violate any law becaue of the State of Colorado. At that time, there was no law that governed how he conducted his business (in the specifics as to how he cheated me) and he did not have to be licensed. In fact there was no way he could be licensed.

After I discovered the fraud I caused so much commotion that the company he worked for fired him. But, he simply went to work for another company. I simply took my loss and charged it up to a lesson learned and I did not repeat it again. In addition I saw to it that the lending institution also took a loss on the loan that they had given me. So, everyone lost something: I suffered a loss of money, the mortgate broker lost his job but got another one and the lending institution took a loss of income on the loan they gave me.

My win has been that I have been more astute in the future about real estate matters. I learned a lesson.

Predatory lending may involve fraud on the part of others than the person purchasing the property.

Generally, a house is more expensive to heat and cool than an apartment, on top of that... many of the owners will include the heating cost in the rent (mine does).



While it's true to a certain degree, the living space is overrated in my opinion. Currently, I do rent a 2 bedroom/2 bathroom apartment for 650$. And that's the reason that I gave a $150,000k home comparison, although I do realize that homes will have basement, but I don't consider these to be any living space.



Yep, and I would contend that people on 30 year plan are in much worse shape. I've committed these figure, because these are really meaningless without calculating of long term return. In 15 years, unless you've been lining your kitchen sink with gold, your house will loose value due to the wear and tear. YET! Completely opposite has happened in our magic economy.

A simple explanation as to why, I put Ukraine (my homeland) as exhibit A. When I left in 1996, the 4 bedroom condo price where we resided was valued $5500. In 2004 (some mere 8 years), the same condo was now valued $75.000 !!!!! Now, either people were absolutely stupid before, or perhaps a Godzilla went through the city and our condo complex was the only one standing... BUT that was not the case. The building has increased. So what happened?

What happened was the American way of buying a place to live. People who could not afford it were given money to buy it by singing their lives away to pay for these. Now, the Realtors were also happy to overvalue the prices to get hefty commissions, and the banks were only happy to give have people payng back interest payments as long as they lived.

The housing prices will come down soon to the nominal, and real value. Not the one artificially inflated by free credit. You were lucky enough to get in early, when the boom started to happen, but the people who got in at it's peak, expecting the prices to come up and finance their vocations will be very surprised.




I do agree with you on that one. BUT, if the "capital gains" you are talking about are inflated, then these are not gains... but losses. And the economy as a whole looses, as evidenced by the contraction we are experiencing right now.

Granted that most of people live in apartments because they can't afford to buy house, YET if people who who can barely afford to buy s house would live in comparable apartment and invest the principal... they would be better off in the long run. Of course, I'm talking about someone like myself, who would rather save up to build my own house with minimum borrowing... and outside of the US.



As I said, many people were lucky enough to get in at the market bottom, what I protest is the idea that today, borrowing immense amount of money to buy a house will somehow build your equity better than toughing it out, renting and saving.



The problem with "buying a house" by borrowing as I see it, is that the moment you get into any financial trouble, and the house now goes for less than you bough it... you are in a deep doodoo. You can walk away from rented property with the principal money you saved. But you can't walk away from a house with the "equity" that you invested unless you realize that equity as something more than a devalued property. And that's the saddest trap of it all. People really working and putting it all in the house, but the moment they miss a couple of payments... their "equity investment" is not given back to them at foreclosure.

Actually we did not get in early before the boom began.

We purchased well and we give the Lord credit for that.

We purchased a fairly new home from an investor who needed the cash, sold at a loss, paid the total commission due our real estate agent and more.

We sold our home to an investor who has taken a big loss and we paid no agent commissions on that sale.

Hint for people selling or purchasing a home: If you want to sell, retain an agent under a "buyers agent" basis. In that situation your agent has the obligation to represent you and no one else. If you are selling, retain an agent under a "sellors agent" basis. In this case the agent represents you and no one else.

In the case of the home purchase above our "buyers agent" told the investor that the sale was contingent upon the total payment of her commission and at under market price.

On the day the investor signed the agreement, which our agent presented him on the spot, his "sellors agent" had a valid offer for $5,000 more. But, she did not get up early enough that morning and our agent had the signature before his agent presented him with the offer that she had.

NOTE: I say again: We can not take credit for all that happened. The Lord led. But, even with the leading of the Lord, God expects people to exercise business sense.

I agree that there are many situations where it makes better business sense to rent than to purchase. That was why while in the military we never purchased. We rented.

But Greg,

Most of the lending that we experience today is predatory if we apply that principle, depending on how you define fraud. Would you consider it fraud that if even 15% of the bank account holders would ask to close their account and for cash at hand, hardly any bank would have the reserves to give the people their entitled money? People make deposits with expectations for these being available any time that would like (unless these are locked up in investment deposits which are fair game).

I guess, the reason why I'm saying it, is people are not being educated our every day financial basics. They are being told one thing, and behind the scenes they get completely different picture... and this goes beyond the housing.

For example... where did the money come from for the current bailout? Realistically. It did not come from the taxpayers account immediately. It did not come from China or other countries, and it sure did not come from Government reserves. It just appeared out of nowhere.

So, if solving financial crises is that easy... why do we even have a crises? People are oblivious to what's going on.

I will place my comments in []s and with my initials: