It takes more than a manic desire to inflate a bubble. The ability to deliver capital to the market is also an essential element. Repost from OC Housing News 2011-2016 Many people who believe in the wisdom of the markets subscribe to the efficient markets theory. It postulates that market participants have equal access to good information and they make rational judgments based on the available data. The theory appeals to vanity as everyone likes to believe they demonstrate above-average financial acumen and make rational decisions. Unfortunately, that isn’t the world we live in. People often fall victim to groupthink, pick and chose what data to believe and what to ignore, and seek the perceived safety of the herd when making…[READ MORE]

More than eight years after the government took over mortgage finance, the US taxpayer still insures the bulk of the loans in the housing market. Repost from OC Housing News 2011-2016 Prior to the collapse of the housing bubble, when lenders foolishly loaned money to people operating personal Ponzi schemes, it was theirs to give — and to lose. But when the losses overwhelmed our banking system, the government took conservatorship of the GSEs, and they backstopped the largest banks with our too-big-to-fail guarantees. With those two steps, the government now assumes nearly all risk of loss in the US mortgage market. With taxpayers absorbing future losses through explicit and implicit guarantees, lenders have no reason to fear inflating another…[READ MORE]

Hedge funds profited from banks that failed to execute the same business plan to recover more of their original loan capital. Repost from OC Housing News 2011-2016 If banks had taken the same approach to the bust as hedge funds, they could have recovered much more on their bad bubble-era loans. By 2012 they bankers finally realized they could stop foreclosing and selling the REO for rock-bottom prices and instead wait until prices recovered to execute an equity sale. However, there was another business model they could have used to recover more money quicker. Special Home Investment Trust By far the fastest and most efficient way to recover lender capital was to foreclose on their non-performing loans, rent the properties…[READ MORE]

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