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DanKarmelSecondPaper 13 - 03 Jun 2010 - Main.DanKarmel
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Mark, I've made some changes but am still working on it. I'll change this message when the rewrite is done. I left your comments since I don't know if you've read my responses yet.
-- DanKarmel - 01 Jun 2010 | | | The Collapse | |
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< | When we discussed the collapse of the mortgage industry in class, Eben solicited suggestions for what had gone wrong. One person stated that the problem was the widespread societal assumption that home prices would never stop appreciating. At some level, this was correct. With few exceptions, home prices had grown steadily for generations. Borrowers were willing to accept adjustable-rate mortgage (ARM) loans because they were confident that by the time the rates on their mortgages were due to adjust, they would have almost certainly generated wealth in their homes simply by living in them, and they could refinance their mortgages before the more onerous rates kicked in. | >
> | When we discussed the collapse of the mortgage industry in class, Eben solicited suggestions for what had gone wrong. One person stated that the problem was the widespread societal assumption that home prices would never stop appreciating. At some level, this was correct. With few exceptions, home prices had grown steadily for generations. Borrowers were willing to accept adjustable-rate mortgage loans because they were confident that by the time the rates on their mortgages were due to adjust, they would have almost certainly generated wealth in their homes simply by living in them, and they could then refinance their mortgages before the more onerous rates kicked in. | | | | |
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< | As Eben pointed out though, this was only part of the story, since lenders and investors made similarly poor decisions. The issue isn’t why most laypeople thought real estate values would never depreciate, but rather why so many supposed economic and financial experts thought so. First of all, not all of them did. Yet some of the legitimately most qualified minds in finance actually bought into the hype. Personally, I recall a friend who received a Finance degree from Wharton telling me how her professor used to sing the praises of the subprime securitization invention – it had made the dream of home ownership possible for millions of people, and all the while at very little risk. | >
> | However, as Eben pointed out, this was only part of the story, since lenders and investors made similarly poor decisions. The issue isn’t why most laypeople thought real estate values would never depreciate, but rather why so many supposed economic and financial experts thought so. First of all, not all of them did. Yet some of the legitimately most qualified minds in finance actually bought into the hype. Personally, I recall a friend who received a Finance degree from Wharton telling me how her professor used to sing the praises of the subprime securitization invention – it had made the dream of home ownership possible for millions of people, and all the while at very little risk. | | | Hot Potato |
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