While many will argue that we need more regulations, I’d like to point out that perefection doesn’t exist. No system is fully secure. There are experts out there spending their time to search for exploitable loopholes. That’s human creativity after all. Nonetheless, reforms should always be encouraged.  

The only way to solve horrors like this one is first to expose the fraudsters restlessly and second to learn economics 101 urgently.

When interest rates are cheap, there are just too cheap to be true. Period. Every bubble is the result of people afraid to miss the boat. And this fear makes them fall prey to unscrupulous individuals. Here is how the formula to trap you was set up:

… In the past decade, as regulators discarded rules, shady mortgage banking companies, financed by the bluest-chip outfits on Wall Street, calculated that they could make a lot of money offering bait-and-switch mortgages to poor credit risks. Default and foreclosure rates would be greater, but higher profits would more than compensate for the risks. So the subprime mortgage industry, enabled by the big banks, invented amazing gimmicks. These included not just variable-rate mortgages, but mortgages that were initially interest only, mortgages with introductory teaser rates, mortgages with no down payment. No income verification required! No credit check! Subprime operators targeted people with horrific credit histories and families desperate for housing who could not afford the debt they were taking on. Last year, 60 percent of subprime loans required no meaningful documentation.

The author, By Robert Kuttner, continued:  

Why is the market so nervous? … the collapsing $1.3 trillion “subprime” mortgage business, which now accounts for one mortgage in three…

Last week, an investment guru named Jim Rogers was among those forcasting a full crash of the housing market that would trigger defaults and spread contagion to emerging markets. 

You can’t believe how bad it’s going to get before it gets any better,” the prominent U.S. fund manager told Reuters by telephone from New York.  “It’s going to be a disaster for many people who don’t have a clue about what happens when a real estate bubble pops.

 

“It is going to be a huge mess,” said Rogers… “Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it’ll be worse because we haven’t had this kind of speculative buying in U.S. history”… “This is the end of the liquidity party,”… “Some emerging markets will go down 80 percent, some will go down 50 percent…. said Rogers.

Last year I read on CBSmarketwatch the following scary projection made by former Goldman Sachs investment banker John Talbott:

America’s top 40 cities are facing a average 47.2% decline: Boston is 49.4%. Miami 44.8%. New York 44.6%. And Chicago is 27.3% overpriced. Yikes!