(snip)"It was flawed models (and the habit of booking earnings on these models) that enabled financial companies to concoct the elaborate securities that funded the bubble. And yes, the bank CEOs who paid themselves handsome bonuses ahead of the hurricane deserve a public flogging. But they weren't the only ones making out like bandits. While Wall Street was booking fantasy profits on bad assumptions about real estate, Fred and Ethel down the street were operating under their own mark-to-model dreams.

Really ...
In their model, house prices always go up. In their model, you can pay any price for a home, so long as you can make the monthlies with a teaser-rate ARM, never mind the upcoming adjustment to 9%. In their model, you avoid that via a refinance down the line with an equity cash-out to boot. In their model, it's OK to buy on a less-than-forthcoming, Alt-A "liar's loan," because there's no real punishment for lying on a mortgage application -- particularly if everyone's doing it. With this model, it makes sense to buy three other homes, in order to flip them later. And it makes sense to extract HELOC cash from the home, based on fantasies about continually increasing "equity."

This is not so different from what Enron was doing. Fred and Ethel were marking up the value of their assets (the home) to a model (their belief that real estate prices always go up) and then spending the "income" immediately, on iPods, Hummers, $250 jeans, and fancy vacations. This happened all over the country, and millions of people behaved the same way. In fact, the American Fantasy of owning a home (for no money down) that would provide leveraged, 10% annual returns for a decade, is precisely what enabled those Wall Street suits to do what they did. It takes two to tango, folks. And this was the biggest dance party in economic history.

Last year's model got ugly
Alas, this dream's "income" wasn't actually matched by real cash flows, just bank loans -- precisely the problem at Enron. The "income" was all hot air. And now that the "income" from home appreciation has turned negative, it must be supported by cash mortgage payments. But many people can't pay those bills, the mortgages are defaulting in huge numbers, and now, we are all paying a price, even those of us who didn't throw our money into a flimsy, overpriced McMansion. "(snip)


^^^ reference to imminent proposals for taxpayer funded bailouts of 'subprime' mortgages.