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Message:: [QUOTE="NorthKorea, post: 1982934, member: 29643"]That's half true. Much of the "Home Affordability" legislation in Congress is a result of the Realtors lobby groups plowing a lot of money into the concept of home ownership. If mortgage lenders didn't create the ratchet ARMs (negative interest rate in some cases pre-ratchet), people wouldn't have tried to buy "more home" than they could afford. The housing market collapse from 2006-2009 was a direct result of 3-/5-/7-year ARMs issued in 2001-2005 ratcheting up. The current housing bubble is essentially reactionary to 2006-2009, since politicians obviously aren't economists; self-preservation dictates that they do what their constituents demand, regardless of overall impact on the economy. It's like I've told my friends and family: If you want to buy a house, find a financing vehicle not attached to the home itself. In that way, you can have 50% or more to place as a down-payment during a higher rate period, buy the house at a discount, then refinance when rates come down. This cycle is self-perpetuating, since banks/lenders insist on paying brokers for loan origination. In essence, mortgages are collateral-backed, fully-callable loans. When rates go up, no one who isn't planning on defaulting on their mortgage anyway will refinance. When rates go down, everyone who has a mortgage broker refinances. Basically, this is the bank's dilemma: The federal government essentially requires banks to lend to home-owners and/or prospective home-owners, through odd subsidies and tax-modifications. The banks, end up taking on the following risk proposition: Offer high-interest loans to highly qualified buyers during a buyers' housing market. This is a boon for banks, as they are more than willing to hold the property, in event of default. Offer low-interest loans to poorly qualified buyers during a sellers' housing market. This is a bane for banks, but the "cost of doing business," so to speak. Normally, that risk would be viewed as balanced, but it's really not, since you end up with a compounded dilemma: Sellers have an incentive to sell during low-rate environments, since they'll get the highest prices. Banks end up lending far more dollars during low-rate periods than high-rate ones. Cash can be acquired at a discount, since the general population operates under a debt-spending mentality. Prices continue to get driven up... until they don't. Once prices top out, banks have two choices: drop rates or stop lending. Since the majority of bank revenues are generated through loans, they can't really stop lending. They continue to throw money at marginally worse and worse opportunity, just to avoid going out of business. Since these banks lent a lot of money during the low rate environment, once rates go up, their cost to carry also goes up. This is exacerbated by increased default rates and the additional inventory of over-priced homes in a shrinking market. Anyway, eventually, the market bottoms out again, and those with the most cash on hand or access to low-cost cash start to buy up under-priced assets. During this period, you often see bank closures or consolidations, as write-downs lead to bank failures. Efficiently run banks purchase the assets of default banks, keeping the good paper (loans that are likely recoverable), default security-backed paper, and fully-leveraged non-collateral paper. Most other assets are liquidated and sold off to attorneys who specialize in asset recovery. After a few years of high rates, people start to complain, the government steps in, and we begin the beautiful cycle anew.[/QUOTE]

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