Behind The Consumer Credit Collapse

CBS Evening News: Some Risky Mortgage Tactics Mirrored By Typical Lenders

(CBS)  When Pamela Sande bought her new Ford Taurus, she was thrilled.

But like most consumers, she had no reason to care how her bank got the money to give her that loan.

Now, however, it is time to care.

For years, up to 40 percent of all auto loans, all credit card purchases, even student loans, have been bundled by banks and finance companies - the same way they bundled up risky mortgages - and then sold them off as securities.

That's the problem, CBS News correspondent Wyatt Andrews reports.

All the buyers - the global investors and pension funds that got burned by mortgage-backed securities - don't want anything to do right now with securities based on consumer loans.

"Investors are suspicious of securitized products, so they are no longer willing to buy those products," said Vince Reinhart of the American Enterprise Institute.

Since investors stopped buying, the market for consumer credit has collapsed by 80 percent and shocked the American credit system. Six-hundred and thirty-eight billion dollars from investors that was available last year isn't even in the pipeline this year - and isn't being used for new loans.

That leaves the big finance companies like GMAC struggling for cash, with GM now running ads sending customers to banks which might have cash.

"Their business model - make the loan get it out the door to the investor, make new loans - doesn't work anymore," Reinhart said. "And that's what's frozen."

To get the credit markets unfrozen, Treasury Secretary Henry Paulson wants to use the remaining bailout funds - up to $50 billion - to buy or prop up consumer credit. The lack of funds, he argues, is harming growth.

"This is creating a heavy burden on the American people and reducing the number of jobs in our economy," Paulson said on Nov. 13.

So with finance companies withering and investment capital drying up, banks, once again are where the money is, including that $159 billion they got from taxpayers. So are banks making more loans now?

"Well, I'd say that they are," said Diane Casey-Landry of the American Bankers Association.

The banking industry insists it is loaning money, but that the days of easy money, or non-stop credit card offers, are over. Just like car buyer Pamela Sande, a good credit score gets you a loan, a poor credit score gets you a higher interest rate.

"For the consumer it's a much tighter market out there," Casey-Landry said. "The credit standards have tightened and you've seen a retrenchment as the non-bank players have left the marketplace."

And now with even more bankruptcies, unemployment and delinquent loans of all kinds, the declining credit picture for millions of American is an obstacle for Treasury's new strategy. As one economist put it: even if Secretary Paulson can fix the credit markets, he can't fix the credit scores of all those borrowers.

[roach9703]

When dishonesty was king, all were laughing, and now all are weeping to the bank.
The concept of bundling debt and selling it in unit bonds or CDOs will not disappear, but the future of this industry is uncertain unless integrity returns to the financial world.

[yeswedid]

Say what you will about the auto industry--at least they make something useful and tangible--cars. They get you some place.

But no bailout for them, say the Repugs!

Now the Wall Streeters and Bank CEOs--what do they produce? All they do is repackage debt and sell it for a profit. They produce nothing of value.

Half a trillion dollars for fatcat bonuses, say the Repugs and their leader Bushit!

Something smells rotten here.

Posted by jbrown88881 at 07:56 PM : Nov 18, 2008
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I agree something isn''t right here. We can bailout these dishonest Wallstreet crooks so they can go on more weekend retreats, but we will say screw it to hundreds of thousands of workers affected by the auto industry. What the hell is going on in this government??!!!

[andor3]

"I am just really anxious to see who the liberals can blame it on this time."

No need to wait: Liberals, Conservatives, Republicans and Democrats remarkably agree on this one: the problem was/is lack of reasonable regulation from the government coupled with strong enforcement. It stems from allowing the market to be shaped by the big players not the regulators as it should have been--relying on a "free market" which never has and never will exist without a regulatory framework.

[wardoglrs]

Let them fail or the US will die. Your money is counterfeit and they robbed the world with these fake paper dollar''s not backed by any value like Gold or Silver "JUST AIR".

your in danger America the Neo Cons you voted in are about to cut your throat. You have been giving your labor away to a fake Government your entire wealth is built on a unconstitutional counterfeit currency
created by the Federal Reserve Bank which is a private corp created by the corps. It''s called Fractured Banking meaning all dollars are debt base currencies never to be paid back "EVER".
America paying only on the interest not the principal. A Debt you cant ever pay back.

[andor3]

"People cannot pay what they owe. How do you borrow you way out of that? You cannot. "

You make a good point! The only way that would work is if people could replace high interest rate debt with low-rate debt from the government program: if the average Joe could sell his debt the same way banks do: refinance everything from cars to credit card debt. But their plan of making credit available to buy more things and increase debt leads nowhere.

[steamed2]

The posting by ThatGuy56 has it right, America shot itself in the foot with institutionalized ''easy credit''. Still, it''s obscene to listen to people like Henry Paulson, one the chief architects of the crisis misleading the public about how and why he''s already spent 350 billion taxpayer''s dollars by giving it to banks and brokerage houses, including his own cash cow Goldman Sachs. This is the guy that in 1999 played a role in repealing Glass-Steagall, a law in effect since 1933 which prohibited a bank from offering investment, commercial banking, and insurance services (can you say conflicts of interest?). In 2004 as CEO of GS he urged Congress to release the major investment houses from the net capital rule, the requirement that their brokerages hold reserve capital (which many blame as a trigger for the meltdown). You want to know owns a big share of responsibility for all the ''easy credit? It''s the guy in charge and his buddies. For some interesting info on Paulson, check out http://www.peak.org/~LW584

[frankfurt200]

So much for trickle down. What a catastrophe. If the consumer isn''t buying, forget it.

[hitah]

Anybody remember the statement that this congress has the lowest approval rating ever?

Hey libs - you have been in control of the lowest rated congress since 2006! You are just lucky the general public does not pay enough attention to really know who has caused the problems. 3 years from now this country will be in such bad shape you will not be able to find anyone that will admit voting for Obama! Go get em" Jimmy Carter jr.!

[frankfurt200]

Posted by HITAH at 09:35 PM

Thanks to Bush, we is so happy. The economy is so robust. Well, that''s what he said! And McCain too.

[pcreversed]

Credit was being extended to people who had no intention, ability, or want to pay it back. That being said, our economy was artificually inflated for years now. If credit was resticted to only the ones who could afford it and had the intention of paying it back, our economy would never have been nearly as strong over the last decade. Our economy was built off undeserved credit and now we need to reajust it back to conventional lending practices. It should have never gotten out of hand like it did and allot of you who own house you can not afford should never have been allowed to buy them. Also, with the number of illegals we still have here(though there are fewer here since the economy started its crash, thank God), our economy will take longer to recover. They are filling jobs that Americans could and would fill. Also, our auto makers need to finally go out of business, it is a death that is far over-due. They have not built anything worth owning since the early 70''s.

[pcreversed]

AAnd the american people will be remembered as the people who elected those morons because their over riding priority was stopping them thar *** getting married



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Posted by cause_y at 09:42 PM : Nov 18, 2008

Nobody is keeping anybody from getting married. No one that matters anyway. The only group I can think of that has been kept from marrying, as insignificant as the ****''s are, they are the only group that can not marry in this country, and who cares about them. On that note though, the Reps did not keep them from getting married, it was the Dems. They are the ones who came out in droves to vote this year and voting it in place, thank God for that

[pcreversed]

Can''''t wait to see the new GM Volt!! Saving my money for one now.


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Posted by rightbehind

I hope you were kidding, not that it matters though. By the time the Volt gets released it will be known as the Toyota Volt since that is who will own GM by the end of next year

[downsteamjim]

Imagine if loans were only given to people who could pay them back. No that would be politically incorrect and make too much sense.

[yeswedid]

The only group I can think of that has been kept from marrying, as insignificant as the ****''''s are, they are the only group that can not marry in this country, and who cares about them.

Posted by PCreversed at 09:49 PM : Nov 18, 2008
---------------------------------------------
As insignificant as the "homos" are? Do you know gaays are everywhere in the country? You are among homosexuals everyday in your life you frickin'' idiot.

[whitemale08]

Now that our phony economy of debt and ''structured-finance'' garbage and krap derivative-swaps evaporate into plumes of smoke, we are left staring at the ''contraction'' of the ''real economy'' that has been taking place for the last 40 years ever since we took ourselves off the gold-standard back in 1971-72.

So our economy along with the stock market is shrinking and has to shrink to what it was 40 years ago when there were 100 million less people in this country.

The contraction of the ''virtual economy'' made up of garbage and krap full of worthless derivate-swaps, and ''structure-finance'' nonsense will be morre painfull beyond belief until we ''nationalize'' the private Federal Reserve System and re-organize it under Congressional bankruptcy proceedings headed by Ron Paul.

Folks, this is not just a recession/depression but the ''breakdown-crisis'' of the world-wide monetary system championed by the British Financial Empire.

And we cannot allow the British to continue touting messages of ''free-trade'' and ''globalization'' because that is what has killed the system and any attempt at trying to resurrect that system will eventually kill us all.

larouchepac.com

[yeswedid]

Folks, this is not just a recession/depression but the ''''breakdown-crisis'''' of the world-wide monetary system championed by the British Financial Empire

Posted by whitemale08 at 10:51 PM : Nov 18, 2008
------------------------------------------------------What it is is the breakdown-crisis of morals & honesty. Until we can all start being honest these perils in our society are going to keep coming up time & time again...

[james4truth]

Sorry to crash your party but the US was taken off the gold standard long before 1972.

As for consumer credit, it was brought on by banks looking for larger profits. Taking bigger risks, and not thinking about where the road would lead. So we have hit the end of the line for free money to people who cannot pay it back. Oh Well.

If they can''t pay it back, they shouldn''t get the loan.

[edward1975-2009]

They were willing to dive in for greed, now let them find their own way out. They weren''t worried about sharing profits with the taxpayers when money was good, but they sure know us now when they need us to bail them out. We are under no obligation to save them.

[rhs648]

Imagine if loans were only given to people who could pay them back. No that would be politically incorrect and make too much sense.

Posted by downsteamjim

At last a poster with common sense. It appears that banks, mortgage companies, automotive financing companies, and credit card companies did not care if they made loans to people with risky credit because they could bundle these loans into derivatives and sell them to investors. Like a pyramid sceme, the last people to receive these iffy loans packaged as derivatives are the losers. For those who look down on investors, you can smile. The only problem is that without investors, the economy comes to a halt. It is investors who provide capital to businesses. Now the government is doing it.

[rhs648]

They were willing to dive in for greed, now let them find their own way out. They weren''''t worried about sharing profits with the taxpayers when money was good, but they sure know us now when they need us to bail them out. We are under no obligation to save them.

Posted by Edward1975

You are correct. Now the taxpayers have to bail them out to save the economy. The injustice is helping the same people who created the problem. Unfortunately, consumers and workers are between a rock and a hard place. If the economy nosedives, it is our jobs and our investments that go down the tube. This reminds me of having to take awful tasyting medicine in order to get better when we are sick.

[edward1975-2009]

rhs648: Not if the government assumed the debt and offered the people terms they could afford. Let the banks go under and let the people who owe pay back the government. We, the taxpayers would then get a return on our money. Now we are just funding the people who caused this in the first place.

[diverinnl]

What the article doesn''t address is exactly how the mortgage securities dried up in the first place. It doesn''t point back to the 1993 Credit Realignment Act that imposed heavy fines on creditors for not issueing mortgage loans to high risk, low income families. The ease of getting a home mortgage with an adjustable rate or interest only loan drove the housing cost out of control. When the feds raised the primes to try to get the economy under control, the variable rates were readjusted driving up the monthly payments and forcing people into forclosure. This in effect burst the housing bubble. In 2005, Bush tried to kill the CRA but he lost the battle with Congress.

[rhs648]

The first round of an IPO is investment, everything after that is nimrods trading overvalued paper chits. Yeah, and I know that these IPOed companies may eventually buy their stock back, but I do not care. 80 percent plus off all businesses in America are mom and pop 10 or less employees, they are the ones that ultimately count.

Posted by curse914

Hi curse914 - America does have many small businesses and you may be right about them making up 80% of the businesses in America. One thing I''m not familiar with is what per centage of the goods and services are produced by small businesses vs large corporations. Are you familiar with this?

[rhs648]

What the article doesn''''t address is exactly how the mortgage securities dried up in the first place. It doesn''''t point back to the 1993 Credit Realignment Act that imposed heavy fines on creditors for not issueing mortgage loans to high risk, low income families. The ease of getting a home mortgage with an adjustable rate or interest only loan drove the housing cost out of control. When the feds raised the primes to try to get the economy under control, the variable rates were readjusted driving up the monthly payments and forcing people into forclosure. This in effect burst the housing bubble. In 2005, Bush tried to kill the CRA but he lost the battle with Congress.

Posted by diverinnl

Hi diverrini - Was the 1993 Credit Realignment Act something pushed by the Democrats, the Republicans, or both. Bush apparently wanted to put reigns on Fannie Mae and Freddy Mac several years ago but could not get support from Democrats such as Chris Dodd and Barney Franks. So far, these guys appear successful in sheltering themselves from criticism. Was Clinton president when this act became law and were the Democrats in a majority?

[incog-nito]

The U.S. economic downturn can be directly traced back to globalization and free-trade policies. Prior to that, America was a self-sufficient, self-sustaining nation that produces ALL of its goods and exports a lot of it. Americans'' wages were multiples of those of other countries. Tariffs were used to prevent the "dumping" of cheap foreign products designed to damage the domestic manufacturing sector.

With the advent of globalization, what used to be called "dumping" became legal, decimating the domestic manufacturers and forcing them to outsource and move plants to other countries in order to survive. The American worker is being asked to "compete" against those in other countries working for a few dollars a day, with little or no labor laws and regulations. Guess what? There was no competition.

Proponents of globalization promised that new industries would emerge to replace old ones, and that new "innovations" would keep the American worker competitive. Well, that didn''t happen. They neglected to explain what those new industries would be, and even if they existed, why corporations wouldn''t just go ahead and have them produced in other countries anyway, since labor is still so much cheaper.

(continued)

[incog-nito]

(continued from previous post)

Well we all are witnessing the results of those misguided policies now. America no longer produces value-added goods, but imports them from abroad. The increasingly larger trade deficit means that wealth, along with jobs, is being continually drained out of the country. But how did we still manage to get by for so long? By continually borrowing and adding to the national debt.

The ONLY solution that works, that nobody dares mention, and that some immediately deride, is to PROTECT America''s industries. Other nations do it for theirs. It''s time for America to do the same, once again. It''s not just a matter of economics; it''s a matter of national security.

[brundage3]

Ah simplicity/ A wonderous tonic.

It was the libs in Congress, (bad guy) who MADE the bancks and loan based companies (innocent citizens) loan money. Then when President Bush and the Republicans (Good Guys) tried to stop this FORCED loan making those terrible awful, horrible and mean Bad Guys wouldn''t let them!

Presto! We are educated. The rich and their friends are good guys who try to take care of all of us. The non rich and their friends are the bad guys.

Sure.

[diverinnl]

rhs648,

Clinton signed the CRA into law after it was passed by I believe a Republican majority Congress. It was a bi-partisan effort to stimulate the economy. On it''s face, not a bad idea but where it failed was not having tighter regulations on the type of loans covered, it should have stipulated a down payment requirement of some sort and required a fixed interest rate, similiar to the VA loan and it didn''t force a debt to income ratio requirement to bleed out the real dead beats.

[diverinnl]

brundage3,

Your response is "simplistic" at best. Did Dodd and Barney fail to take their share of responsiblity? Without a doubt. Did Bush and the Republicans scream from the top of the rafters what was about to happen? No they didn''t. Why? Easy, they were making money hand over fist on these securities. They are all to blame for this disaster, both Democrat and Republican.

[diverinnl]

obamasNUTZ, *** are you talking about? When did I ever state that I had any financial issues? Facts are facts. If you can''t read the posts and comprehend them, I suggest you try again when you finish the 9th grade.

[mikezembill]

No new parts for cars over 4 yrs old its coming.

[rhs648]

do you need somebody to tell you that you are spending too much??

do you need somebody to tell you that you are whiney moron who is fast on blaming everybody and anybody for your incomptence??

here let walk a bit closer to your ear..STOP SPENDING MORE THAN YOU ARE MAKING........!!!!!

***my duty to the weak and the moron is done..I warned the likes of you..*****

Posted by obamasNUTZ

Hi obamasNUTZ - Without question many people spend more than they make and lack self discipline and seek immediate gratification. However, public policy does influence consumer behavior. It appears that public policy enabled people who should have been turned down for loans to get loans they could not afford. Home ownership may be good for most people. However, there are people who purchased more house than they could afford. Did public policy make it too easy for these people to get loans?

[andor3]

"here let walk a bit closer to your ear..STOP SPENDING MORE THAN YOU ARE MAKING"

Not sure what that is supposed to mean since it is so over-simplistic. But if you mean stop using credit, then it is an idiotic idea. In that case virtually no one could buy a house, a car, or major appliances. In many situations, borrowing is not only needed, it is smart financially. Any analyst will tell you a business not using its credit is likely not well-run.

But borrowing requires certain assumptions about the future. When those turn out to be wrong, then loans are no repaid.

[McHineguy]

Not sure what that is supposed to mean since it is so over-simplistic. But if you mean stop using credit, then it is an idiotic idea. In that case virtually no one could buy a house, a car, or major appliances. In many situations, borrowing is not only needed, it is smart financially. Any analyst will tell you a business not using its credit is likely not well-run.

But borrowing requires certain assumptions about the future. When those turn out to be wrong, then loans are no repaid.


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Posted by andor3 at 12:31 AM : Nov 19, 2008

Borrowing is to civilization as fire was to the caveman. Necessary to stay warm and fend off attacks but dont let it get too big or it will destroy your posessions and could kill you. You have to be smarter than the tool you are using. Dont borrow without a workable payback plan. Dont allow others to tell you what is enough. If you don tknow then its already too much.

[McHineguy]

too many people are spending mroe than they can afford SPECIALLY those using credit..

how can you justify a person who makes $10 an hour who buys a $40,000.00 escalade??

(that is where banks are part to blame..)


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Posted by obamasNUTZ at 02:04 AM : Nov 19, 2008

I know a guy who bought a $500,000 house without knowing how much he made. He was self employed and "felt the Karma was right". In fact, his cash flow was high but so were expenses and he was "only" making $40k per year.

[spinproof]

Many people will live in the moment, live in the "now" and don''t care about how to pay for it later. This is where common sense lending comes into play, if you loan someone money who can''t verify their income or who you can see from their income and shaky credit history may not be able to repay the loan then you should not lend the money. The problem is many loan agencies work on commissions so they get their commissions up front, pocket their cut and let the chips fall where they may, usually on Taxpayers backs. It''s called greed and predatory lending and these outfits should be shut down, there should also be a nation wide limit on ''interest rates'', there really is no need for any interest rate to be above 10% and that may be too high.

[incog-nito]

You know, I''ve always thought that the American Dream is somewhat overrated anyway.

[lacroix6-2009]

So this actually means people have lended their own retirement savings from the bank, and can''t pay back...
That''s creative capitalism! Only those ones on the top of the ladder (ceo''s, bankowners etc) has got the big money, the rest has lost theirs. Congratulatiions for the ultimate capitalism lesson!

[lacroix6-2009]

So this actually means people have lended their own retirement savings from the bank, and can''t pay back...
That''s creative capitalism! Only those ones on the top of the ladder (ceo''s, bankowners etc) has got the big money, the rest has lost theirs. Congratulatiions for the ultimate capitalism lesson!

[ffoulkes-2009]

The real reason for the credit crunch is people buying homes they could not afford. They used the stupid variable rate mortgages to get into homes that were way above their pay scale.

[jodyrae4]

GREED...

[mikezembill]

When you walk in wall-mart to shop just take a look at where it is made 95% or more is made in China you can look for things made n the USA but may not find very many. And if things keep going the way they are it will not work credit or no credit. Most people not all but most people will buy more with a credit card than they would if paying cash. This is not good if you pay with cash out of pocket in the long run you will be better of as the saying the best payment plan is 100% down and 0 payments credit is good but credit cards are not the way to go.

[babooph]

The banks & finance guys bribed the politicians with lobbyists to end bankruptsy for the middle class. The crooked greedy fools thought they could trap the borrower FOREVER -now they find you cannot get blood from a stone !!!Like all their crooked scams -comes to a bad end !!

[mikezembill]

If you buy a house and your payment is more than 25% of your net income then you may be getting over your head.

[mikezembill]

Bush and the republicans was hoping with the $600.00 check he could make it work until he was out of office but it did not work. a lot of people says let the auto makers go under this may be ok if this country can stand to loose three million jobs.

[perk235]

When you walk in wall-mart to shop just take a look at where it is made 95% or more is made in China you can look for things made n the USA but may not find very many. And if things keep going the way they are it will not work credit or no credit.
posted by rxzyu
-----------------
How can an economy with GDP that relies on consuming be expected to survive?

[rhs648]

When you walk in wall-mart to shop just take a look at where it is made 95% or more is made in China you can look for things made n the USA but may not find very many. And if things keep going the way they are it will not work credit or no credit.
posted by rxzyu
-----------------
How can an economy with GDP that relies on consuming be expected to survive?

Posted by perk235

It isn''t just Walmart. Upscale stores also sell goods made in China. If you go on a cruise to Alaska or Hawaii, the shops that the tourists shop at all have good made in China. This includes American flags.

[jackp32]

There is $3 trillion in consumer credit card debt just waiting to explode. This is going to be the next big crises but this one will bring down the US financial system. Who is at fault? The stupid consumers who buy things on credit to impress their neighbors and friends and don''t think about how to pay the bill. They are going to pay a heavy price when the system collapses in the near future. Stupidity will soon be rewarded.

[insight2008]

Big cars. Big homes. Easy credit. No savings, NONE. Happy that our homes were appreciating 8%/yr and portfolios 20%. We really thought this could last forever. The commerical "I want it all and I want it now" speaks volumes. Instant gratification. No personal responsibility. It is always someone''s fault but not mine. I "need" it. Paying $200 for tennis shoes that costs less than $1 to make.

One generation ago the credit card debt/family was $600. Today, $7300. Not for essentials. For "stuff."

My friend bought an Escalade, which then put him within missing 1 paycheck of not being able to meet his obligations. Nothing wrong with his 5 yr old suv. Now, he is ticked because he has been laid off and is in serious financial trouble.

Trickle down, trickle up, trickle sideways has nothing to do with anything. My Dad had a 7th grade education, but he dammn well knew what was in his wallet and he had no problem with saying "no, I can''t afford it and I ain''t charging it either."

Paying for "stuff" thru credit. We are now paying dearly.

Obama picks Eric Holder as Attorney General. Eric Holder supports very strict gun control. HIDE YOUR GUNS...Posted by mr22587
---
Maybe if we buy them on layaway we won''t have to HIDE them. We''ll just let the seller HOLDER them til we need them.