[ExI] A new low

Chris Hibbert hibbert at mydruthers.com
Sat Dec 22 02:19:51 UTC 2007

Spike wrote:
> I came to an uncomfortable realization.  Over the years, somehow we
> have come to regard a good credit rating as equivalent to money in
> the bank. Like the cold cash game, it somehow demonstrates a lack of
> understanding of the importance of negative numbers.  The critically
> important number now is not the amount of money one has in the bank
> but rather how much the bank is willing to loan one.
> Am I the only one who sees a deep pathological social condition here?

I have recently been pursuing real estate investment (yes, even in the 
face of the sub-prime mortgage meltdown; real estate prices will rise 
again.)  In that context, your credit-worthiness is as important as your 
net worth.  With sufficient net worth, you can stop worrying and change 
your lifestyle.  (Stop working for money if that's what you do, and 
spend your time on what you love.)

But until you get there, your credit-worthiness is a measure of how much 
people will lend you.  I borrow to increase my net worth.  Banks will 
loan you most of the money you need to buy real estate.  They do that 
when they're sure they can get their money back even if you are wrong 
about how quickly it will grow in value.  But most of the time, if you 
borrow 80% of the money, and the property grows by %5-%20, you've made 
%20-%100 on the money you put in.  That's better than nearly everyone 
does in the market, and it's reliable enough that banks will lend you 
the money.

So, yes, for me a good credit rating is money I can invest.

The report I heard today on lenders' decisions on the mortgage crisis 
was that three of the biggest banks had decided not to create a bailout 
fund.  The explanation was that they wanted to stop throwing good money 
after bad.

If the borrowers can't afford the long term rates after the teaser rates 
expire, then the bank should stop the bleeding ASAP.  Extending the 
teaser rate won't give the borrower the ability to actually pay back the 
loan.  The only reason the banks should want to extend the teaser rates 
for borrowers who can't make the full principal and interest payment is 
if they're convinced that the property will appreciate and rescue the 
borrower.  But that still means the bank won't be repaid until the 
borrower sells the house.

It is easy to turn an aquarium into fish soup, but not so
easy to turn fish soup back into an aquarium.
-- Lech Walesa on reverting to a market economy.

Chris Hibbert
hibbert at mydruthers.com
Blog:   http://pancrit.org

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