[ExI] How do we construct workable institutions and ethical behaviors?

[spike]

>... On Behalf Of Kelly Anderson
Subject: Re: [ExI] How do we construct workable institutions and ethical
behaviors?

On Thu, Dec 8, 2011 at 4:49 PM, spike <spike66 at att.net> wrote:
>> compelled to buy the bad loans, but healthy institutions wanted more 
> certainty than the risky institutes would allow, so plenty of people 
> who had never missed a payment were foreclosed and lost their homes 
> and all their equity.

>Help me understand this... this isn't an urban legend or something?
People who never missed a payment got foreclosed on? That just seems like a
breach of contract, how does that happen?
...LOL! Seriously, if there are documented cases of this, I would really
like to know about it. That's just messed up. -Kelly

The reason it wasn't breach of contract is that banks gave out loans to
people who exaggerated their income, in areas known to be risky, where
property values declined.  During the meltdown, existing risky loans were
sold by failing banks to more cautious and healthy banks.  The loans did not
conform to the risk standards of the new bank.  Apparently there were at
least some of these loans called in, for which the admittedly risky
borrowers had not missed a payment.  I don't have the documentation.

This turns into a wildly complicated question, for we saw legislation
against red lining.  That is the practice where banks were reluctant to loan
for houses inside an arbitrary boundary.  Consequently the prices of the
real estate inside there was lower than a comparable property outside the
red line, since a general refusal of banks to loan money on that property
means a restricted market: those who don't need a loan.  Further
consequences: a lot of those properties are rentals.  Lower priced
properties attract the kinds of neighbors that lower priced property
attracts.  Crime is high inside the red line, lots or parolees end up there,
and so forth.

Legislatures outlaw the practice of redlining, banks make loans on the
property, value goes down, bank sells the loan to a different bank which
already has its conforming share of special loans and wants no more, so it
forecloses on the redline property.

We saw plenty of wackiness during the peak of the pre-meltdown subprime
lending debacle.  Down the street from us was a house for sale into which
four adults moved into in 2008.  They owned exactly nothing: the house was a
see-through the entire time they lived there.  You could look in their
curtain-less front window and see all the way through the house.  There was
no furniture, no pictures on the walls, to tables, desks, dishes,
appliances, nothing.  There were four junky old cars, but nothing in the
garage, no tools, no usual garage clutter, no mower, no washer or dryer,
nothing at all except the four cars and the four people.  They lived there
for over a year, never did acquire anything.  What does that seem like is
going on there?  Any speculation?  Hint: all four residents were minority,
two men and two women, all between about 40 and 55 yrs, not at all obvious
if they were two traditional couples, or if so who went with whom.  Four
bedroom house, peak value about 900k.  What was that about?

But that is a subject for another time, for I have grown weary.

spike