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I know there's always a lot of discussion about bad loans to individual homeowners, and I am certainly in agreement that the notion of an "ownership society" leading to low downpayment and lack of steady-income requirements in government-backed loans, as well as the non-existent credit standards of the make-a-buck private lenders and the packaging of bad home loans, etc. created a disaster for which no one has a viable solution—I think the consequences of doing nothing to stabilize the housing market are probably worse than doing something, but attempts to do something have so far proven ineffective. Obviously low lending standards are not the solution,although there ought to be some flexibility as to standards—when we bought our house, when rules were strict, we did not yet have the savings for a downpayment (my in-laws chipped in) but clearly were on an income path that we could easily have paid the mortgage with 5% down instead of 10%.

What has not been sufficiently discussed is bad loans to developers. In my investigations to try to prevent our city officials from leading us to ruin (we think the tide has turned, but not out of the woods yet), I have been amazed, cynical as I was, at just how bad the loans were. Mega loans to a poorly-capitalized developer with a poor credit risk profile who had never developed anything of consequence(one bank, which was one that ended in a forced merger with collapsed stock price because of bad commercial loans, lost about $80 million on this one developer alone). As folks here helped me understand, this developer (and I assume many like him) operated what amounted to a Ponzi scheme: soliciting capital for new developments to pay the bills on earlier developments (not to mention huge executive compensation) then, when no new capital came available when the bubble burst (what we are trying to prevent with our boondoggle) he simply walked away from limited liability companies leaving lenders with losses totaling something like $200 million. There were no restrictions in place. Full mortgage amounts were given for future (i.e., completed development) collateral. Bankers got their bonuses (who needs kickbacks?) and were never punished. Taxpayers bailed out the banks.
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