We met this week with a regional director for Wells Fargo in order to try and get a handle on what is going on in Washington and how it will effect us all.
Without putting blame anywhere, as I understand it, the "Crisis" occured because there were too many questionable loans made, due to the felling that prices will continue to go up and thus protect the asset. When prices dropped, the investors that bought the mortages saw better returns else where, so they stopped buying. When they stopped buying, the banks didn't have the liquidity to make any more loans. Most all commercial loans and lines of credit dried up. Even GM and McDonalds couldn't borrow money!
He told us about some of the riduculous loans that were approved. NINA loans - No Income, No Assets. Sounds pretty dumb, doesn't it! But wait, there is more...
NINJA Loans - No Income, No Job!!! Who in their right mind would make a loan like this? Apparently many companies, because they had an investor to sell them off to. ie. No risk!
So what is next?
If the Government buys these loans and then resells the properties when the market gets back to "normal" it could actually produce a profit! In the short term, loans will be harder to get and interest rates will rise to more normal rates instead of the artifically low 5 to 6% range we have all become accustomed to.