Driving the bubble bus
It was only due to extremely bad policy and regulatory decisions at all levels of government, first and foremost at the Fed, that the housing bubble was allowed to grow to the enormous proportions. However, it was the private sector that actually drove the bubble. The top executives in major financial institutions took extraordinary risks. These risks may have increased short-term profit, but they eventually led to enormous losses, which is endangering the survival of many of the country's largest financial institutions.
What prompts this? A new CreditSights.com report about Wachovia, which inherited option adjustable-rate mortgages when it acquired lender Golden West. New York Times financial correspondent Floyd Norris sums up the findings on his blog:
Wachovia has discovered that people who take out loans that let them make smaller initial monthly payments often do so because they cannot afford other loans. Given that option ARM loans cost more in the long run, that should not be a huge surprise. And homeowners who have no money invested in a home are more likely to walk away when it loses value. Who could have foreseen that?