Sunday, October 05, 2008

Non-Partisan Thoughts on the Final Month of the Presidential Campaign

Yesterday I had brunch with a longtime friend of mine here in Chicago. In case her particulars matter, she is:

  • In her early 60's
  • The mother of 3 grown children
  • A non-orthodox though practicing Jew
  • A widow
  • Well read
  • A successful residential realtor
  • A life-long Democrat (hey it's Chicago, most people are!)
We talked for a long time about the current financial situation in the U.S. Because much of it is directly connected with bad mortgages, she has a special insight into the situation. I asked her to think back several years and see if she could pinpoint precisely when she felt things were beyond the proverbial tipping point and eventually would go awry.

She couldn't exactly but did share some interesting historical points:
  • Traditionally people often paid 10% or 20% down to buy a home. The rest was paid for via a long term mortgage. Looking at these numbers in reverse, they were considered to be 90% or 80% mortgages respectively.
  • When 95% mortgages were allowed, realtors welcomed them because it enlarged their potential customer base.
  • When 100% mortgages (ie. no money down) were allowed, some realtors raised their eyebrows but still accepted the increased business.
  • When 105% mortgages were allowed (the extra 5% was to cover lawyers costs and fees) then many more realtors thought something very odd was occurring. They still accepted the extra business though.
As long as the price of real estate kept going up then all was fine. But of course, nothing keeps on going up forever, at least not at the same rate. Much like a long row of dominoes, when one falls backward, it's inevitable than many others will fall as well. That's what's happening now.

In talking with my friend and many more Americans on this trip, it's clear that most everyone is looking for someone to blame. Completely understandable. I've come to the conclusion that what will ultimately decide the presidential race, is where the average undecided voter places the blame for the situation. Will it be the Republicans and the notion that they are generally in favor of less restrictions on financial institutions? Or will it be the Democrats and their close ties with Freddie Mac and Fannie Mae?

In just under a month we'll know.

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