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Packaging small proportions of subprime mortgages with lower risk mortgages means that the bank is spreading risk across their mortgage portfolio while still gi

Packaging small proportions of subprime mortgages with lower risk mortgages means that the bank is spreading risk across their mortgage portfolio while still giving people the opportunity of breaking the cycle of poverty by investing in them. Packaging all high risk mortgages together with a higher interest rate increases the probability of default on that portfolio while helping to keep those in poverty there by increasing the burden of the loan on them. So on one hand you've got a bank that enjoys massive profits spreading and thus decreasing their risk while assisting those in poverty to claw their way out by allowing them the benefit of lower interest rates. On the other you've got a bank that enjoys massive profits increasing the risk of one of their portfolios while making it extremely difficult for those in poverty to keep up with interest payments. I'm not discounting the fact that packaging large volumes of those mortgages as AAA and selling them on to other companies was fraudulent, it was, but the reality is, doing so was far less predatory than the alternative if you look at it from this perspective.

gedy 8y ago
> "giving people the opportunity of breaking the cycle of poverty" By borrowing beyond their ability to repay? That's gambling at best or just debt slavery at worst.
- docker_up 8y ago
  Subprime loans are not lending to people who can't repay. It's lending to people who don't have the credit history or have a poor history and giving them a chance to borrow money. If they can't afford the loan they shouldn't be getting it in the first place.
- balabaster 8y ago
  > "By borrowing beyond their ability to repay" That's a different argument. I'm not arguing the point of allowing them to borrow more than they can afford to repay. I'm arguing the point of allowing them to borrow what they can afford to repay at rates that allow them the opportunity to do so rather than making them pay rates they can't afford for money they desperately need. Preventing them borrowing more than they can afford to repay is a different and necessary oversight. Nobody should be put into a position of debt slavery. So I agree with your point, I just don't agree with your premise.
nyghtly 8y ago
The practice of securitizing mortgages is one of the main root causes of the financial crisis. Continuing the practice, which tends to increase risk, should be done only with extreme caution and sufficient financial regulation. A small snippet for context, although insufficient to explain a very complex problem: "In many ways, the practices employed by SIVs (Structured Investment Vehicles) and underwriters to structure MBS [Mortgage-Backed Securities] ... tended to magnify rather than reduce risk in the financial system. A key risk-enhancing design feature of MBS was the practice of tranching, whereby several categories of securities were created in each securitization issue ... the senior tranche would have sold at its nominal value and would have been rated risk-free [despite comprising 85% of the entire MBS]." - "Banking: A Very Short Introduction" by John Goddard and John O. S. Wilson (pg 43-53)
- balabaster 8y ago
  I agree it should be done with caution and even more regulation. I disagree that securitizing mortgages was the absolute cause of the financial crisis. I do think that the manner in which it was done and the disregard with which it was executed was the cause of the financial crisis. With banks offloading risky debt as if it were AAA to other institutions, all passing the buck to someone else making it someone else's problem until the bubble imploded and everything fell to pieces - like a giant Ponzi scheme. I'm not saying that mislabeling wasn't fraudulent, it was. What I'm saying is that spreading the risk among your portfolio allowing those who need it to leverage lower interest rates is less predatory than forcing them to make interest payments they can't afford, thus keeping them in debt slavery longer. You spend less time in debt slavery if you don't have exorbitant interest rates making up the bulk of your loan repayments... this is why countless times, I end up buying a new car rather than used, because when the interest payments and restrictive loan terms are taken into account, the monthly payments for a new truck aren't significantly different than those for a previously owned. Sure, the used truck at 9% will be paid off 2 years quicker, but more of my money is paid back towards the privilege of having the loan instead of paying for the cost of the truck. I'm already paying that amount every month and I'm used to making those payments, would I rather pay off a used truck that I had to compromise on a whole bunch of features, or would I rather have the brand new truck with exactly the featureset I want at the same monthly rate, but for an extra couple of years? I don't mind the extra couple of years payment to have the one I really want - especially given that my monthly payments for both well within my budget. I don't want to pay for the loan. I want to pay for the truck. So that's the difference. Forcing someone to pay the higher interest rate means they can't have what they really need because they're paying more for the loan than they are for what they need. They could pay the same amount for a larger mortgage with lower interest rates and have the nicer home. I guess this is a long winded way of saying that despite the mortgage lender's fraudulent and underhanded execution, there is a perspective here that's valid.

gedy 8y ago

> "giving people the opportunity of breaking the cycle of poverty" By borrowing beyond their ability to repay? That's gambling at best or just debt slavery at worst.

docker_up 8y ago
Subprime loans are not lending to people who can't repay. It's lending to people who don't have the credit history or have a poor history and giving them a chance to borrow money. If they can't afford the loan they shouldn't be getting it in the first place.
balabaster 8y ago
> "By borrowing beyond their ability to repay" That's a different argument. I'm not arguing the point of allowing them to borrow more than they can afford to repay. I'm arguing the point of allowing them to borrow what they can afford to repay at rates that allow them the opportunity to do so rather than making them pay rates they can't afford for money they desperately need. Preventing them borrowing more than they can afford to repay is a different and necessary oversight. Nobody should be put into a position of debt slavery. So I agree with your point, I just don't agree with your premise.

nyghtly 8y ago

The practice of securitizing mortgages is one of the main root causes of the financial crisis. Continuing the practice, which tends to increase risk, should be done only with extreme caution and sufficient financial regulation. A small snippet for context, although insufficient to explain a very complex problem: "In many ways, the practices employed by SIVs (Structured Investment Vehicles) and underwriters to structure MBS [Mortgage-Backed Securities] ... tended to magnify rather than reduce risk in the financial system. A key risk-enhancing design feature of MBS was the practice of tranching, whereby several categories of securities were created in each securitization issue ... the senior tranche would have sold at its nominal value and would have been rated risk-free [despite comprising 85% of the entire MBS]." - "Banking: A Very Short Introduction" by John Goddard and John O. S. Wilson (pg 43-53)

balabaster 8y ago
I agree it should be done with caution and even more regulation. I disagree that securitizing mortgages was the absolute cause of the financial crisis. I do think that the manner in which it was done and the disregard with which it was executed was the cause of the financial crisis. With banks offloading risky debt as if it were AAA to other institutions, all passing the buck to someone else making it someone else's problem until the bubble imploded and everything fell to pieces - like a giant Ponzi scheme. I'm not saying that mislabeling wasn't fraudulent, it was. What I'm saying is that spreading the risk among your portfolio allowing those who need it to leverage lower interest rates is less predatory than forcing them to make interest payments they can't afford, thus keeping them in debt slavery longer. You spend less time in debt slavery if you don't have exorbitant interest rates making up the bulk of your loan repayments... this is why countless times, I end up buying a new car rather than used, because when the interest payments and restrictive loan terms are taken into account, the monthly payments for a new truck aren't significantly different than those for a previously owned. Sure, the used truck at 9% will be paid off 2 years quicker, but more of my money is paid back towards the privilege of having the loan instead of paying for the cost of the truck. I'm already paying that amount every month and I'm used to making those payments, would I rather pay off a used truck that I had to compromise on a whole bunch of features, or would I rather have the brand new truck with exactly the featureset I want at the same monthly rate, but for an extra couple of years? I don't mind the extra couple of years payment to have the one I really want - especially given that my monthly payments for both well within my budget. I don't want to pay for the loan. I want to pay for the truck. So that's the difference. Forcing someone to pay the higher interest rate means they can't have what they really need because they're paying more for the loan than they are for what they need. They could pay the same amount for a larger mortgage with lower interest rates and have the nicer home. I guess this is a long winded way of saying that despite the mortgage lender's fraudulent and underhanded execution, there is a perspective here that's valid.