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<p><strong>Oldies but goodies</strong></p>
<p>Commentary: These adages hold value and may have helped avert subprime mess</p>
<p>Last Update: 10:24 PM ET Nov 26, 2007</p>
<p>PORT WASHINGTON, N.Y. (MarketWatch) -- If home buyers, sellers, lenders and investors had only taken heed of some of the old expressions we all learned as we grew up, the subprime-mortgage situation might not have become the mess it has.</p>
They include these standbys:
<em>If it sounds too good to be true, it probably is.</em> Many people bought more house than they could afford and as a result were unable to hold on to it when conditions changed.
<em>What goes up must come down.</em> One reason people did this is that home prices were rising faster than personal incomes for a number of years, but that could not go on forever, as we know now.
<em>Home is where the heart is.</em> Forgetting that a home is first and foremost a place to live, many people began thinking of their houses as investments and thus took risks they might not otherwise have taken.
<em>Be careful what you wish for.</em> Both real-estate buyers and investors looked for something special. What they wound up with was not what they expected.
<em>Beware of the law of unintended consequences.</em> The Community Reinvestment Act of 1977 was the first of many regulations designed to make it easier for certain groups to buy homes, but it also had the effect of relaxing lending standards, which persisted until recently, when both lenders and borrowers discovered that prescribed payments were too high for these folks to bear. Some 20 years later, the Basel Accord, by raising capital requirements behind mortgage loans, encouraged the banks to get these loans off their books by securitizing them and selling them to others. And the superlow interest rates of 2003-04 whetted money managers' appetites for any security that would enable them to achieve the returns they'd promised their investors.
<em>You can't make a silk purse from a sow's ear (or kiss a frog and turn it into a prince).</em> These securities were based on loans of questionable quality that, when bundled together, somehow were blessed with AAA ratings by the debt-rating agencies.
<em>There is no such thing as a free lunch.</em> It boggles the mind how many money managers, investors and just about everyone else thought these securities could be rated almost as high as supersafe U.S. Treasurys -- without any added risk. No wonder people from all corners of the planet, from sophisticated hedge funds and banks to the proverbial man or woman on the street, put chunks of money into these mortgage-backed issues.
>
Supplementing these oldies but goodies are some of my other favorites:
<em>What, me worry?</em> Home prices have gone up every year since the Great Depression and will continue to do so as far as the eye can see, so it's OK for me to spend more than I earn, since all I have to do to make up the difference is take out a home-equity loan.
<em>This time it's different. </em>There may have been all kinds of bubbles in the past, but this can't happen to housing, since all real estate is local, and, at any rate, people need a place to live (see <em>Home is where the heart is,</em> above).
<em>There's a sucker born every minute. </em>These are the folks who believe that "this time it's different."
<em>The only thing we have to fear is fear itself.</em> This -- and not a lack of liquidity -- is what's freezing up the credit markets. And, indeed, it's going to take more than infusions of liquidity to thaw them.
>
<p>Commentary: These adages hold value and may have helped avert subprime mess</p>
<p>Last Update: 10:24 PM ET Nov 26, 2007</p>
<p>PORT WASHINGTON, N.Y. (MarketWatch) -- If home buyers, sellers, lenders and investors had only taken heed of some of the old expressions we all learned as we grew up, the subprime-mortgage situation might not have become the mess it has.</p>
They include these standbys:
<em>If it sounds too good to be true, it probably is.</em> Many people bought more house than they could afford and as a result were unable to hold on to it when conditions changed.
<em>What goes up must come down.</em> One reason people did this is that home prices were rising faster than personal incomes for a number of years, but that could not go on forever, as we know now.
<em>Home is where the heart is.</em> Forgetting that a home is first and foremost a place to live, many people began thinking of their houses as investments and thus took risks they might not otherwise have taken.
<em>Be careful what you wish for.</em> Both real-estate buyers and investors looked for something special. What they wound up with was not what they expected.
<em>Beware of the law of unintended consequences.</em> The Community Reinvestment Act of 1977 was the first of many regulations designed to make it easier for certain groups to buy homes, but it also had the effect of relaxing lending standards, which persisted until recently, when both lenders and borrowers discovered that prescribed payments were too high for these folks to bear. Some 20 years later, the Basel Accord, by raising capital requirements behind mortgage loans, encouraged the banks to get these loans off their books by securitizing them and selling them to others. And the superlow interest rates of 2003-04 whetted money managers' appetites for any security that would enable them to achieve the returns they'd promised their investors.
<em>You can't make a silk purse from a sow's ear (or kiss a frog and turn it into a prince).</em> These securities were based on loans of questionable quality that, when bundled together, somehow were blessed with AAA ratings by the debt-rating agencies.
<em>There is no such thing as a free lunch.</em> It boggles the mind how many money managers, investors and just about everyone else thought these securities could be rated almost as high as supersafe U.S. Treasurys -- without any added risk. No wonder people from all corners of the planet, from sophisticated hedge funds and banks to the proverbial man or woman on the street, put chunks of money into these mortgage-backed issues.
>
Supplementing these oldies but goodies are some of my other favorites:
<em>What, me worry?</em> Home prices have gone up every year since the Great Depression and will continue to do so as far as the eye can see, so it's OK for me to spend more than I earn, since all I have to do to make up the difference is take out a home-equity loan.
<em>This time it's different. </em>There may have been all kinds of bubbles in the past, but this can't happen to housing, since all real estate is local, and, at any rate, people need a place to live (see <em>Home is where the heart is,</em> above).
<em>There's a sucker born every minute. </em>These are the folks who believe that "this time it's different."
<em>The only thing we have to fear is fear itself.</em> This -- and not a lack of liquidity -- is what's freezing up the credit markets. And, indeed, it's going to take more than infusions of liquidity to thaw them.
>
