Mar

14

Why is it whenever the government decides to protect us from market forces, we tax payers get the shaft? Would it not be better just not to interfere in the first place?

Financially it would be better to let the foreclosures happen. Not foreclosing on bad debts means the economy doesn't get to reallocate capital to its best uses. That, in short, was the cause of the 10-year recession in Japan.

If it is in the interest of the lenders to give people breathing room, they will do so without the government forcing them to.

Rich Ghazarian adds:

Not long ago, I was involved in building predictive models for sub-prime products for one of the major shorts in the market today. There was no way of predicting today's scenario, because a large part of the poor credit performance is due to fraudulent mortgages (loans originated on falsified information). Thus, most of the models are based on false historical data. For instance, a borrower with a Debt to Income Ratio (DTI) of 0.4 is now all of a sudden a borrower with a DTI of 1.4 … oops! It is interesting that this fraud was mostly conducted by "Loan Officers" and not the borrowers. Here is an example of quant models being useless! 


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