The Incidence Of Error
The first of two weekend topics, this one looking back at what happened, by Jim Grant. “A review of Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again, by Peter J. Wallison. Fannie and Freddie did the deed, according to Peter J. Wallison’s mortgage-centric account of what really caused the Great Recession. No need to go searching for alternative explanations. The federally chartered behemoths are the guilty parties, they and no one else. A former Reagan White House counsel and a longtime critic of the so-called government-sponsored enterprises (GSEs), Wallison has drawn up a double indictment. The first fingers the government. The second assails any who would not blame the government.”
“This is a very good, very tendentious book. It maps the road to the quasi-socialization of American housing finance, in which condition we find ourselves today. It tells you where subprime mortgages came from and how they metastasized. It parses accounting controversies, explains how regulators favor and disfavor certain categories of investment assets, and chronicles the unnatural rise in house prices between the late 1990s and the mid-2000s.”
“Wallison argues that private actors, while hardly blameless in the events of 2007-09, did not precipitate them. The author rests his case against the government on the fact that, by mid-2008, ‘there were at least 31 million nontraditional mortgages (NTMs)—57 percent of all mortgages—in the U.S. financial system,’ and that three quarters of these securitized turkeys had alighted on federally chartered balance sheets. The comprehensive, persistent decline in mortgage lending standards wasn’t the doing of private lenders, Wallison demonstrates. You may thank Congress and the Department of Housing and Urban Development for that.”
“Between 1991 and 2003, as Wallison relates, Fannie, Freddie, and lesser federal agencies boosted their share of the American housing market to 46.3% from 28.5%. It happened this way. In 1992, the House and Senate directed the GSEs to meet a quota of mortgage loans to low- to middle-income borrowers. Thirty percent, the initial minimum, presently became 42%, then 50%, and finally—in 2008, the year Lehman Brothers failed—56%. Minimum down payments were reduced, too, to nothing at all by 2000.”
“Nor did the upper-income reaches of the mortgage market, a segment not directly served by Fannie and Freddie, remain untouched by this federally induced letting down of hair. Before long, well-to-do people were taking out ‘interest-only’ loans that required no amortization of principal until their maturity date. By 2001, Alan Greenspan—then chairman of the Federal Reserve—was marveling at the ‘very substantial buffer of unrealized capital gains, which are being drawn upon through the home-equity market, through cash-outs, and through the turnover of existing homes, which has been, as you know, quite substantial despite the weakness in the economy.’ The single-family American house was on the way to becoming an automated teller machine.”
“Wallison seems to forget that money isn’t humanity’s best subject. You can satisfy yourself on this point with a simple calculation. One hundred dollars invested continuously at 2% interest since the year of Cleopatra’s death would work out today to $5.3 billion for each of the world’s 7.3 billion people. Of course, the average earthling is worth nothing like that much money. Banks fail, currencies are inflated away, thieves break through and steal.”
“Error is endemic in finance—people will buy high, and they will sell low. Given half a chance, they’ll over-borrow, too. The incidence of error is all the greater when the incentives of law and regulation invite it. Wall Street was no Garden of Eden when financial responsibility rested chiefly with individuals—when, for instance, the general partners of Morgan Stanley were personally responsible for the debts of the firm they led. The Street is that much further from paradise since personal responsibility has given way to corporate responsibility—Morgan Stanley became a publicly traded corporation in 1986—and, increasingly, to collective responsibility.”
“Once upon a time, the stockholders of a bank were responsible for the solvency of the institution in which they held a fractional interest. To restore the solvency of the biggest banks in 2007-09, the taxpayers had to reach into their own pockets.”
“To any who wished to see, it was obvious that house prices were much too high, that the securities fashioned from subprime mortgages were anything but creditworthy, and that some of the biggest Wall Street banks and brokerage houses were wobbling on their high stilts of debt. Grant’s Interest Rate Observer, the financial publication that I own and edit, issued its first cautionary piece on runaway house prices in 2001, its first bearish analysis of subprime mortgage securities in 2006. We were far from alone.”
“There was no ‘perfect storm,’ the author insists, no constellation of causes that form a satisfactory explanation for the calamity of 2008. Those who would argue the multi-causal case confront the insuperable problem of not knowing when to stop listing causes. The more they cite, he insists, ‘the less we learn, and the less the theory can serve as a guide for policy makers in the future.’”
“In the Isaiah Berlin world of hedgehogs (those with a single big idea) and foxes (those with many ideas), there was never such a hedgehog as Peter Wallison. His brief is thoroughly researched, clearly written. He anticipates his critics’ likely objections to his mono-causal view of the crisis and attempts to answer each argument in turn. He succeeds to the impressive extent that his point survives his own exaggerated telling of it—barely.”
“The author rests his case against the government on the fact that, by mid-2008, ‘there were at least 31 million nontraditional mortgages (NTMs)—57 percent of all mortgages—in the U.S. financial system,’ and that three quarters of these securitized turkeys had alighted on federally chartered balance sheets.”
Does anybody have today’s comparable figures? It seemed that Uncle Sam’s share of the housing market went up in the wake of the Great Recession.
‘In Congressional hearings earlier this year, critics of the Federal Housing Administration argued that the mortgage insurance premium reduction enacted in January has imperiled the program and put the taxpayer in jeopardy.’
‘In contrast to this dire prediction, the facts show that the opposite is happening. Simply put, the FHA is getting stronger, faster.’
‘Critics of the FHA’s basic single-family program…contend that the actuary’s forecasts have repeatedly understated FHA’s problems, and argue that the lower premium has only increased risky lending by helping higher income borrowers buy more expensive homes.’
The premium reduction is actually increasing the FHA’s revenue in two important ways. First, FHA’s volume during fiscal year 2015 is growing much faster than was expected last year. At its current pace, insurance volume for fiscal year 2015 should exceed $200 billion, or be 60% higher than was forecasted last year (prior to the implementation of the premium reduction in January). The FHA’s rapidly growing origination volume is generating a significant increase in revenue that will more than offset the financial impact of the premium reduction.’
‘The premium reduction has also sparked an increase in FHA’s recapture rate (i.e. percentage of FHA loans that pre-pay and then return as FHA refinances). The recapture rate has doubled since the premium was reduced. An improving recapture rate reduces the threat of excessive portfolio run-off. FHA is retaining performing loans in its portfolio as new originations that will continue to pay the FHA annual premiums (albeit at a lower amount in some cases) and will also be paying a new upfront premium of 1.75% that provides additional revenue.’
‘The critics also maintain that the projections in FHA’s actuarial reviews have consistently underestimated potential risks to the fund. While changing economic forecasts have resulted in downward revisions to actuarial projections, the far more important finding is that these revisions are consistently overestimating FHA’s actual claims: FHA claim activity has averaged 30% “lower than projected” since FY 2010.’
‘Those who might think that FHA’s impending claims are merely backlogged in the foreclosure process, and will eventually be filed, will probably be surprised to learn that the dollar volume of FHA’s seriously delinquent loans has fallen 37% from $95 billion in January 2013 to $60 billion in July 2015.’
‘What makes this $35 billion decline in serious delinquencies even more encouraging is that the FHA still has $46 billion in cash reserves to pay claims. Add in the administration’s improving loss severity rate (FHA now recovers 50% of the loss when it disposes of a property) and the FHA would still have about $16 billion in capital even if every seriously delinquent loan ended up in foreclosure.’
‘Finally, critics argue that the premium reduction has resulted in higher loan amounts in the program. Leaving aside the fact that it is well-documented in the FHA program that higher-balance loans perform better than lower-balance mortgages, FHA’s average home purchase loan in the second quarter of 2015 was $186,000 and only 4% of FHA loans in that quarter were above $400,000.’
When everything is going up and away, these guys look like geniuses. We’ll see how marvelous it looks if prices go down.
Apparently the old adage “genius is a rising market” is exceptionally apt for describing the success or failure of subprime lending schemes.
PS A short-run comparison of FHA revenues and payouts against the backdrop of an epic bubble to tout program success amounts to accounting nonsense.
“Leaving aside the fact that it is well-documented in the FHA program that higher-balance loans perform better than lower-balance mortgages,…”
Since this is so well-documented, why not hand anyone who asks for one a $500K loan to buy a California starter home?
They already do this? I see…
21,201 nearby properties found Charlotte, NC Real Estate and Homes for Sale
http://www.realtor.com/realestateandhomes-search/Charlotte_NC?ml=4
6,841 nearby properties found Charlotte, NC Price Reduced Homes for Sale
http://www.realtor.com/realestateandhomes-search/Charlotte_NC/show-price-reduced?ml=4
32% of all Charlotte, NC sellers slashed their prices at least once.
“Wallison argues that private actors, while hardly blameless in the events of 2007-09, did not precipitate them.
Private actors “did not precipitate” the events of 2007-2009? Maybe not by a tricky use of semantics. Which came first, the chicken or the egg? It was both the private sector and the public sector responsible for the housing bubble. (Plus monetary policy via the Fed and a stoked bubble mentality of the public)
One can say the public sector precipitated it by buying and allowing lessor quality mortgages through deregulation of the mortgage market.
One can say the private sector precipitated it by lobbying and pressuring for changes in regulations (Gramm–Leach–Bliley Act ) that allowed them to invent and sell and bundle more non-traditional mortgages. This is what happens when government is captured by business. Business owns the government, gets government to deregulate, then now blames the government when their deregulated private wild schemes go wrong.
This is what Bernie Sanders is talking about.
‘Between 1991 and 2003, as Wallison relates, Fannie, Freddie, and lesser federal agencies boosted their share of the American housing market to 46.3% from 28.5%. It happened this way. In 1992, the House and Senate directed the GSEs to meet a quota of mortgage loans to low- to middle-income borrowers. Thirty percent, the initial minimum, presently became 42%, then 50%, and finally—in 2008, the year Lehman Brothers failed—56%. Minimum down payments were reduced, too, to nothing at all by 2000.’
Ah yes. Blame the poors, blame the welfare queens.
Well, you have to expect that from Peter Wallison, former White House Counsel to Ronald Reagan who now “studies financial markets and banking and financial services” at the American Enterprise Institute.” (sourcewatch).
No, it was what Rio said. Lobbysists begged Congress to allow Fannie and Freddie to go private to chase profit like any other banking outfit, while the taxpayer would bail them out if they got into trouble. And yup, they had fun fun fun until their Daddy took the t-bills away.
‘Lobbysists begged Congress to allow Fannie and Freddie to go private’
They were always quasi-private, whatever that means. Question is, who’s going to get the blame now?
‘If there’s one thing with which most of Washington has long agreed, it’s this: Fannie and Freddie must die. That’s Fannie Mae and Freddie Mac, the mortgage giants that prop up much of the American housing market and have been operating under government control since the financial crisis seven years ago.’
‘But we still need Fannie and Freddie, even more now than before. They own or guarantee the payments on more than $5 trillion in American mortgages, or about 60 percent of the total. In the years since the financial collapse, they have been the major source of credit for most people who got mortgages, and the only source of credit for less-than-pristine borrowers. Washington is paralyzed.’
‘As a result, there’s no plan for how the United States will finance housing in the future. Without a housing finance policy, there is no housing policy. And that’s a huge problem, because another crisis — about how people will afford a place to live — is brewing.’
‘There is fairly widespread agreement that some things we take for granted, such as a 30-year, fixed-rate, pre-payable mortgage, wouldn’t exist without a government backstop. Investors simply don’t want that risk. That’s part of the reason Congress has done nothing with the institutions since the government took them over.’
‘But most analysts agree that a great swath of the middle and lower class probably would get five- to 15-year mortgages with floating rates, rates that would vary significantly depending on income and geography. Mortgage capital might be hard to come by in times of stress. Home prices probably would decrease. With an affordable-housing crisis in the works, and when even the Wall Street Journal is publishing essays about the squeeze on the middle class, it is probably not politically feasible or wise to experiment if you care about the social fabric of the country.’
‘Many economists also argue that any subsidy eventually leads to corruption. But there are ways to mitigate these issues. Regulate Fannie and Freddie like utilities, with limits on the returns they can make. Create incentives that encourage them to pull back from the market when it’s overheating, instead of chasing market share. Give them as competent a regulator as possible. Encourage Fannie and Freddie to get private capital to bear risk ahead of them, which they are trying to do, and which is how their existing multi-family businesses operate.’
How about this whopper:
‘Home prices probably would decrease. With an affordable-housing crisis in the works…essays about the squeeze on the middle class’
Prices would decrease and an affordability crisis in the next sentence. The MSM can’t even have a sensible discussion about this cluster-farck.
Oh, and Washington Post, you can’t “bail-out” a $5 trillion collapse with $190 billion:
‘Jan 16 (IFR) - Investors including US mortgage giant Fannie Mae holding decade-old residential mortgage bonds are fretting over potentially huge losses on securities where delayed foreclosures could lead to complete write-offs on defaulted loans.’
‘Mortgage servicers, whose job is to ensure bondholders receive repayments on loans, have frequently failed to foreclose on delinquent debt in a timely manner, and therefore risk falling foul of legal deadlines which limit the time home-owners can be chased for payment.’
“If a foreclosure runs afoul of the statute of limitations, it’s a problem,” said Bruce Bergman, a partner at Berkman Henoch Peterson Peddy & Fenchel, a New York law firm which represents lenders and loan servicing firms in mortgage foreclosure cases. “If the court says the mortgage is gone because too much time has passed, it’s gone. The loss, if it occurs, is catastrophic because it is complete.”
‘Analysts are struggling to estimate the size of resulting losses in the US$820bn of private label RMBS sold before the financial crisis, and investors are just waking up to how big a problem it could become.’
‘Fannie Mae’s general counsel held a conference call just before the Christmas holidays - all of its retained law firms were required to participate - to ask how the government-run mortgage agency could alleviate such losses, a person with knowledge of the call told IFR.’
“[Fannie Mae's] general counsel asked: ‘How bad is it?’” the person said, adding that one of the lawyers on the call answered: “We can’t even begin to tell you - there are so many loans.”
“A 30-year, fixed-rate, pre-payable mortgage, wouldn’t exist without a government backstop. Investors simply don’t want that risk…. But most analysts agree that a great swath of the middle and lower class probably would get five- to 15-year mortgages with floating rates”
That’s because most analysts assumed that the middle and lower classes will be forced to go to a private bank for their loans. Private loan or no loan; the analysts are too stupid to see a compromise.
I suggested that compromise in today’s thread: Let private banks underwrite their strict loans. If they don’t want the risk of 30-year fixed loans, that’s fine. Simply set up FHA a “public option” mortgage for the masses. All-in the gov. No approved banks, no middleman.
The problem is, Fannie/Freddie need high prices and high volume to dig themselves out hole they got into when they were still private. I don’t see why Congress doesn’t just declare Fannie/Freddie Chapter BK, wipe out the debt, and start with a clean FHA. It can’t cost any more than these multiple QE’s and that bailout of AIG. Oh wait, I know why: banks make a lot of profit off selling their paper to Fannie. So, of course they hate on Fannie with one side of their mouths and suck up to Congress with the other.
“Oh wait, I know why: banks make a lot of profit off selling their paper to Fannie.”
And they do it with US Government authorization and backing.
Govt. is the problem Donk. The solution is simple.
Are you forgetting the foam the runway for the banks? It was foam for the GSE’s too. We didn’t need 30 year loans at one time because people could pay it off in 15. The fact is, IMO, 30 year loans and other easing resulted in prices completely dislocated from incomes. We are so far down this road no one has any idea where prices would land if the government wasn’t propping it up. I expect rounds of government money will be exhausted until congress throws in the towel.
Foaming the runway for the banks was to shore up the credit default markets, because banks took it into their fool heads to make trillion dollar wagers on whether Main Street would pay back a billion dollars of debt. It’s even worse than Chinese doubling up collateral on a storehouse of rusting I-beams.
And we’ve gone through this before. It wasn’t the 30 year loans. Those have been around since the Depression, and prices did not dislocate from incomes. What did it was “other easing,” in particular, loans that were not fully amortized from Day 1. ARM, I/O, and neg-am allowed a $50K income to “get INTO” a house that you would normally need $100K income to buy. That’s almost the very definition of disconnecting prices from income.
Let’s address your falsehoods;
-The bailouts were by the Feds at the behest of the Feds. The motives are immaterial. It’s the Fed Gov that is the problem.
-30 year debt pledges(mortgages) never existed until securization(late 1970’s early 1980’s)
-Prices since 2000- current are 5x HH income. The long term trend is 2x.
-A 30 year, 3.5% downpayment mortgage is the definition of Neg-Am. These mortgages are ubiquitous now and have been since 2009.
I expect rounds of government money will be exhausted until congress throws in the towel.
But will that happen in my lifetime? Hard to predict, but I expect that governmental insanity can go on for much longer than I would like to believe.
-30 year debt pledges(mortgages) never existed until securization(late 1970’s early 1980’s)
False.
Reference:
The American Mortgage in Historical and International Context
http://repository.upenn.edu/cgi/viewcontent.cgi?article=1000&context=penniur_papers
Note: link is to a PDF.
Those are ceilings my friend. Nobody was dumb enough to sign up for 30 years of debt servitude. The interest rate prohibited it.
It wasn’t until securitization did 30 year mortgage become common.
‘During the 1960s and the 1970s, the U.S. government closely regulated the single-family housing finance system. The regulation manifested itself in a highly specialized system with four notable characteristics. First, because federally chartered depository institutions were prohibited from originating adjustable-rate mortgages (ARMs), virtually all home buyers used the long-
term (twenty- to thirty-year) fixed-rate mortgage (FRM).’
‘Second, portfolio restrictions and tax inducements led nonbank depository institutions (savings and loans [S&Ls] and mutual savings banks [MSBs]) to supply two-thirds of
all funds to the home mortgage market. Moreover, the tax inducement caused home mortgage rates to be roughly a half percentage point lower than they would otherwise have been. Third, because depository institutions were funding their FRMs with short-term deposits, deposit rate ceilings were imposed when interest rates rose significantly. Fourth, because the capital market could
not compete with “cheap” deposit money, few conventional mortgages (those not government insured) were pooled into mortgage pass-through securities.
As a result of these four characteristics, the U.S. housing sector was extremely vulnerable to increases in interest rates that caused deposits to flow out of the
depository institutions, thereby restricting credit availability.’
‘Portfolio restrictions, tax inducements, prohibitions against ARMs, and deposit rate ceilings were all removed in the 1980s, and, not surprisingly, the
housing finance system changed markedly. Between early 1982 and 1989, two-fifths of all new loans had adjustable, not fixed, rates, and S&Ls reduced their
holdings of FRMs (both whole loans and mortgage pass-throughs) by 15 to 20 percent. Moreover, the fraction of conventional FFW originations that have
been pooled into pass-throughs rose from less than one-twentieth before 1981 to over one-half after 1985.’
PDF:
http://www.nber.org/chapters/c8822.pdf
My parents loan in 1963 was a 15 year mortgage and they paid it off a couple years early.
Continues:
‘In 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) was chartered to spur the development of a secondary market for conventional mortgages. Freddie Mac introduced the first conventional mortgage pass-through security in 1971. Fannie Mae initiated a conventional pass-through program similar to Freddie Mac’s in 198 1. Investors in pass-throughs receive a pro rata share of the underlying mortgage payments, both scheduled and early in the event of prepayment or default. A major attraction of these pass-throughs is that Fannie Mae and Freddie Mac guarantee the investors’ payments even if the underlying mortgages default. 2
The conventional loan volume that can be securitized by the sponsored agencies (Fannie Mae and Freddie Mac) is restricted by limits on the dollar value of loans that can be pooled into their pass-through securities. The dollar limit, known as the “conforming” limit, changes annually with a house price index and was $187,600 in 1989, up 63 percent since 1985 (the limit was virtually unchanged in 1990). In 1987, over 90 percent of home mortgage loans (80 percent of dollar volume) was eligible for pooling by the agencies, and this percentage has been fairly constant in the 1980s.’
‘$187,600 in 1989, up 63 percent since 1985′
This is amazing to me. 190k was a lot of house in 1989. In 1996 guys I worked with were buying brand new houses south of Austin TX for around $53,000. When I went there in 2010, new houses in the exact same area were advertised at $150,000 - zero down, of course. I think the conforming limit in Texas is over 300k now.
More from the link:
‘The best measure of the agencies’ presence in the conforming FRM market is the share of new (generally defined as less than one year since origination) conventional FRMs eligible for agency securitization (under the conforming limit) that is, in fact, securitized by Fannie Mae and Freddie Mac. This share rose from 4 percent in the 1977-8 1 period, to almost 25 percent in the 1982-85 period, and to over 50 percent since 1986, including 69 percent in 1989 (Hendershott 1990).3 That is, in less than a decade, the agencies and their pass-throughs have gone from being a negligible factor to being the driving force in the market.’
Thanks for the detailed info, Ben! It sure does sound like the 30yr became dominant with securitization, even if it had existed since 1948. Wow, that change in the 80’s from Fannie/Freddie controlling 4% to 69%—yikes! And what are they at now? Total domination.
Truth my friend truth. Stick with the truth.
Seattle, WA Housing Prices Plummet 19%
http://www.zillow.com/ballard-seattle-wa/home-values/
Business owns the government, gets government to deregulate, then now blames the government when their deregulated private wild schemes go wrong.
^^^ This is exactly what happened and how it works. And I would add at the end, “and business blocks any attempt by government to indict and prosecute wrongdoing by business.”
Wallison is a closed minded hedgehog who can’t see the forest for his burrow. The only way to answer singularists is with singularity. So here is my answer to him:
Originators of all SF home loans are financially liable for 5% of the loan for 5 years and must hold the loan and season it for 12 months before selling it to anyone, including the government.
Done. No more fraud. Case closed.
‘Senator Bernie Sanders (I-Vt.) slammed Hillary Clinton as naive on Wall Street during the CNN Democratic debate on Tuesday night in Las Vegas. Sanders went on the attack as Hillary Clinton defended her stance on Wall Street regulatory policies during her time as a senator in New York. The former secretary of state stated that she told Wall Street bankers to “cut it out” and that the Glass-Steagall Act, implemented in 1933 and repealed in 1999, would not have prevented the 2008 economic crash.’
‘According to The Washington Post, Hillary Clinton claimed that December of 2007, she warned Wall Street about the big crash. “I went to Wall Street in December of 2007, before the big crash that we had, and I basically said, ‘cut it out, quit foreclosing on homes! Quit engaging in these kinds of speculative behaviors.’”
‘Politifact noted that Hillary Clinton did indeed raise concern about the financial system. In fact, as early as March of 2007, Clinton raised concerns about the housing bubble. Bernie Sanders rebutted Hillary Clinton and gave one of the most memorable quotes of the CNN Democratic debate. “In my view, Secretary Clinton, you do not, Congress does not regulate Wall Street. Wall Street regulates Congress. Saying, ‘please, do the right thing’ is kind of naive.”
‘Senator Bernie Sanders and former Maryland governor Martin O’Malley both agreed that reviving the Glass-Steagall Act is necessary in order to tackle Wall Street institutions. However, Clinton was adamant that the act would not have prevented the big crash. It is worth noting that her husband, President Bill Clinton, signed the Gramm-Leach-Bailey Act in 1999 which repealed some of the Glass-Steagall provisions.’
quit foreclosing on homes!
Yeah, all you pension funds and 401ks, you don’t have a right to collect collateral when people stop paying back money you loaned them. Just cut it out! This simplistic crap passes for a presidential debate?
I’ll make this point for the thousandth time; after a boom, foreclosures are how prices get lowered when the house “owners” can’t or won’t lower them. How many defaults were strategic? How many were because the FB’s couldn’t or refused to bring money to the table to get out from under the deal?
You can’t get around this part of a bubble; prices went way too high. The prices must be lower. So just how does this happen? there’s gonna be pain. That is apparently hard to accept, but there isn’t any way around it.
“I went to Wall Street in December of 2007, before the big crash that we had, and I basically said, ‘cut it out, quit foreclosing on homes! Quit engaging in these kinds of speculative behaviors.’”
Not only is ‘foreclosing on homes’ a red herring for the GSE subprime lending shenanigans that set the stage for the collapse many years earlier, but the timing is off, as the Great Recession had just started in 2007 and few had lost jobs and the ability to pay the monthly.
“The comprehensive, persistent decline in mortgage lending standards wasn’t the doing of private lenders, Wallison demonstrates. You may thank Congress and the Department of Housing and Urban Development for that.”
As soon as I read this in the article I stopped reading. This is the same old partisan argument that’s been used to try to deflect blame away from banks.
There was no government regulation or policy that required IndyMac and WaMu to hand out no doc liar loans like candy to the public. It was all about the loan origination fees and points. And there absolutely was no government involvement in the big banks’ fraudulent reclassification of junk mortgages into A-rated CDO’s. The private sector did that all on its own.
Public and private knowingly financed grossly inflated amounts for depreciating assets.
Remember… Construction costs for a SFR is $55/sq ft (lot,labor, materials and profit)
‘I stopped reading’
I know, it burns. Sticking your head in the sand will help.
‘There was no government regulation or policy that required IndyMac and WaMu to hand out no doc liar loans’
Maybe I’m missing what regulation is. I don’t think it is requiring them to do such things as much as seeing that they don’t.
‘fraudulent reclassification of junk mortgages into A-rated CDO’s.’
Moody’s and Fitch, etc, explicitly said GSE MBS’s were triple A because the government would back them. Kinda circular logic, I know, but it was no secret. I can pull up the 2005 posts if you want.
In 2005, 10,000 appraisers signed a petition to congress telling them they were being pressured to “hit the numbers” and that the industry was going along. Nothing happened. There were intense congressional hearings in 2005 about the GSE’s because they couldn’t produce financials. Nothing happened.
‘Error is endemic in finance—people will buy high, and they will sell low. Given half a chance, they’ll over-borrow, too. The incidence of error is all the greater when the incentives of law and regulation invite it’
‘Wall Street was no Garden of Eden when financial responsibility rested chiefly with individuals—when, for instance, the general partners of Morgan Stanley were personally responsible for the debts of the firm they led. The Street is that much further from paradise since personal responsibility has given way to corporate responsibility—Morgan Stanley became a publicly traded corporation in 1986—and, increasingly, to collective responsibility’
This is the LLC arrangement writ large. How many houses of Wall Street execs were seized because of their bad decisions? And maybe an even larger problem is this; if you don’t put criminals in jail, what message do you send?
“Last February, a state court judge in West Virginia found that Detroit-based Quicken had committed fraud against a homeowner by misleading her about the details of her loan, charging excessive fees, and using an appraisal that exaggerated the value of her home by nearly 300 percent. The judge called the lender’s conduct “unconscionable.””
Once banks figured out they could unload mortgages one day after they closed, it was all about the loan fees and points. This is well documented.
“Moody’s and Fitch, etc, explicitly said GSE MBS’s were triple A because the government would back them.”
That’s like asking one mobster to explain the actions of another. Goldman, Citi, Merrill, et al have all been found guilty of misleading investors and even taking positions against their client’s positions.
The banks were guilty of fraud, it’s public record.
‘The banks were guilty of fraud, it’s public record.’
‘There was no ‘perfect storm,’ the author insists, no constellation of causes that form a satisfactory explanation for the calamity of 2008. Those who would argue the multi-causal case confront the insuperable problem of not knowing when to stop listing causes. The more they cite, he insists, ‘the less we learn, and the less the theory can serve as a guide for policy makers in the future.’
You’re just taking a similar if opposite position. “It was all the banks, the end.’
Yes, the CRA and government-encouraged minority mortgages did play a small role in the banking/mortgage collapse as well as Fannie Mae’s presence as a mortgage buyer. But the largest factor remains greed and fraud by the big banks, who pushed it to the next level.
You miss the fact that the banks would not have been nearly as EAGER to write cr@p-loans, if the GSEs had not been clamoring to buy more and more of them, and demanding further for those “more and more” to have even lower standards attached.
The root-cause is where the fundamental demand was coming from that incented the behavior. To know the proximate cause of the demand, you need only look at where the MBS ended up: ~75% of them ended up at the GSEs, and ~25% of them ended up being owned by the big banks (who probably didn’t intend to hold quite that much when the music stopped). In other words, more than 75% of the responsibility lies at the door of the GSEs, and less than 25% of the responsibility lies at the door of the big banks.
Littleton, CO Housing Prices Nosedive 18% YoY; Inventory Skyrockets 18%
http://www.movoto.com/littleton-co/market-trends/