pknopp
Diamond Member
- Jul 22, 2019
- 71,460
- 27,651
It would have stopped the involvement of customers money.
It wasn't customer money.
Banks basically have two kinds of loans: prime loans and subprime loans. Prime loans are where the bank lends it's own money to the customer. Subprime loans (as the name suggests) are loans that are not as secure as prime loans, therefore the bank only makes money on processing the loan, and then sells it as securities to other entities.
And then there was the investment side.
And that's what caused the crash, not prime loans.
At one time, the only loans you could just about get were prime loans. The problem was (particularly for Democrats) that your credit and history had to be so good that a bank would be willing to risk making you a loan. It left a lot of people out of the loop, mostly minorities. Subprime was exit legislation from the Jimmy Carter years.
To compensate for the additional risk, government allowed for banks to charge higher interest rates, and use Adjustable Rate Mortgages (ARMS) in order to make loans to less than perfect creditworthy customers (Credit score of 620 or under). It was key to the housing collapse because even people that were paying on their home, got screwed when the interest rate increased. They didn't have the smarts to understand that if you get a loan at 2% on an ARM, it's only likely to go up from there. They were owning homes paycheck to paycheck, and even one percent more was enough for them go into default.
Bankers totally mislead people on ARM's. A few were at least fined. Should be know what they are getting into? They should but they should also be able to trust the banker or investment broker to not be corrupt.
Borrows knew they would be in trouble when the balloon payments came. Lenders told them they could just remortgage at that time but when that time rolled around, home values had decreased.
No, these were people who never expected to be able to afford a home. The banker showed them how fast housing was rising and by the time any balloon payments came due they would have a ton of equity.
Again, should people be prepared going in? They should but these were people on the lower end of the scale who never expected to get a loan and we're not as educated as they should have been.
The commissions were higher though on the ARM's so they were misled.