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February 09, 2007

Comments

Matt

How much of the run-up in real estate values do you think was fueled by investors (or more truthfully, speculators) who had access to money via this type of loan?

Dick Lepre

It was just another factor and hardly the core reason why prices ran up. What is distressing is that the increase in B-paper lending did provide some folks the opportunity to become homeowners.

I did not see a lot of speculative buying by B-paper borrowers. From what I saw speculative borrowing in an attempt to flip properties came from folks with good credit. Please understand that this is my own personal experience and should in no way be read as any sort of "big picture" comment.

(the following was added on 2/26)

I do believe that stated income helped, in general, to contribute to the real estate price runup apart from B-paper stated or speculation. Perfectly legitimate buyer/borrowers who will make their payments probably were likely able to qualify for "more loan" than with full documentation and that only served to help run prices up. That was especially applicable when prices were moving up and multiple aggressive (over asking price) offers were made.

ashok

Yes, all concerned have role: the borrower, mortgage agent, the broker, the Wall Street hotshot and the investor in the making of a risky mortgage. However, the person who has the ability to say "No" is the investor. It seems incomprehensible that someone, who is already overstretched, would want to borrow more, but human nature being what it is, people will ask. The mortgage agent gets paid on loans made, not on loans paid without a problem. So he or she has no motivation to say "NO" if they can find a willing investor. If the investor says "too risky, not worth the additional premium that borrower pays", then the matter comes to an end and borrower is told to rent for some more time. Unfortunately, we live in a dream world that says “good things never end” and when things get bad, the people burnt turn to the honest and responsible tax payer to bail them out. If someone disagrees, remember the S and L crisis? The investor is not less greedy than the other people in the food chain, but definitely more sophisticated. If they find Wall Street to trying to sell them products they don’t need, then they need to say “NO” to Wall Street. The buck has to stop somewhere and the investor should be the person. If there is no secondary mortgage for very risky mortgages, guess what, there will be no more very risky mortgages

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