More on the housing collapse -- the government **DID** cause it

[T.G.G. Moogly]

Honestly, is someone trying to make a distinction between Wall Street and Washington? That would constitute deceit. Who made money in the end? Who got bailed out?




Why look a gift horse in the mouth? Doing so would have risked profits.

Because looking a gift horse in the mouth without considering the future often leads to lower future profits.

A horse in the hand is worth two in the mouth.

 

[Loren Pechtel]

The reason I posted this is because many of you have insisted the CRA didn't require the writing of junk loans. With the % of loans that had to be low income how could they do that without writing junk?

Easily.

Simply by only writing loans for properties that the customers can actually afford. It doesn't matter what your customer base's income is.

If you are only allowed to offer 5 loans to people of superior income for every 6 people with inferior income, the only implication there is that you should only be offering loans on at least 6 relatively cheap properties. The other 5 properties can be cheap OR expensive. Everyone else with superior income who needs a loan can go get one from the private institutions.

There aren't enough cheap properties. The only way you can comply with that rule and write decent loans is to turn away most of your applicants. Compliance would basically kill their business.

 

[zorq]

The reason I posted this is because many of you have insisted the CRA didn't require the writing of junk loans. With the % of loans that had to be low income how could they do that without writing junk?

Easily.

Simply by only writing loans for properties that the customers can actually afford. It doesn't matter what your customer base's income is.

If you are only allowed to offer 5 loans to people of superior income for every 6 people with inferior income, the only implication there is that you should only be offering loans on at least 6 relatively cheap properties. The other 5 properties can be cheap OR expensive. Everyone else with superior income who needs a loan can go get one from the private institutions.

There aren't enough cheap properties. The only way you can comply with that rule and write decent loans is to turn away most of your applicants. Compliance would basically kill their business.

No, serving a smaller sector isn't the same as serving no sector. The business won't die just because you might be forced to downsize. If Corporations like Fannie and Freddy want to enjoy the benefits of government subsidization, they have to play by the government's rules.

 

[zorq]

Also... now that I think about it, I don't believe that there weren't enough cheap properties. I think there were plenty of cheap properties. You can always find something smaller a little bit further away. The housing markets were extremely overbuilt in the mid 2000's. That excuse just doesn't fly.

 

[Koyaanisqatsi]

Where is the fraud?

This part here:

Because the crappy loans were mixed in with good ones and the rating agencies said those loan packages were all great.

That's like putting saw dust in the good food and calling it something its not. Deceitfulness.

It wasn’t deceitful in the slightest. It was, in fact, the entire purpose of the vehicles and specifically created toward that end; to bundle a smaller portion of the “bad” in with a larger portion of the “good” so that the risks are lessened and the market is stabilized.

It was intended to help people with riskier finances nevertheless still be able to have a roof over their heads.

The same kind of fraud thats been going on since Jesus toppled the money changer tables.

Ironically, that wasn’t a “fraud” either; that was a necessary exchange due to the fact that having coins with graven images (e.g., Caesar) on them would desecrate the holy Temple.

People who deserve to be called out and go to jail as an example to others. What makes it ever so obvious to me is all the crazy high tech names they called mixing saw dust into the mix. A flim flam if ever one was to be seen.

Again, it was not. Everyone in the industry knew the nature of the assets. What wasn’t known, however, was the number of bad loans and exactly how bad they were and that due almost entirely to a new development, the creation of third party mortgage brokers who partnered with the banks and assured them that they would handle the due diligence, but failed to properly do so.

It was progressive, subtle and entirely circumstantial—at least at first—until it grew larger than anyone could have guessed precisely because so many wealthy people used the assets as a cash equivalent. Again, it was where you’d park your money that would be planned for investment at month end or quarter end in order to earn a modest interest, not something that was a primary concern and thus given greater scrutiny.

Do you go in depth into your checking account’s .02% interest returns (if you even get that these days)? No, it’s not even on your radar.

Mortgages were people’s homes, after all. And as such people took care to always pay their monthly premiums first and foremost. But, incrementally, more and more people who should not have been trusted were being trusted by these third party mortgage brokers—who didn’t care because they worked on commission—and over time that packed more and more gunpowder into these assets until a match got lit.

You and Koy can and go around telling everyone it was just an honest debacle caused by idiots too stupid to care how loans were rated.

It was at first, certainly. Did some within the industry understand what kind of powder keg they were? Yes, but very few and they were largely ignored because, again, traditional thinking had it that enough “good” loans would absorb any of the “bad” loans, because it was people’s homes they were talking about.

What many didn’t know, however, is that many of those homes were not primary residences, so there was a different psychology, let’s call it, involved.

But whenever you start mixing saw dust into the pot, that's just fraud pure and simple. Con men doing their work.

Well, again, it was the purpose of the assets to mix in saw dust and everyone understood that. So that part wasn’t the con. The part that may have been the con was late in the game when it was known what the issue was and the banks/ratings agencies didn’t act. Eventually they did, and that’s what caused the dominoes, but there was a definite come to Jesus moment when everything should have blown up, but various institutions tried to keep a lid on it, both because they’d lose billions, but also because they feared it would collapse the economy.

So, yes, absolutely, there were bad actors involved (as there always are), but the original intent and purpose behind the way the assets were bundled was to mitigate against risk and allow more people to own a home.

Again, had the ratings industry done their job, there would never have been a problem. And had banks not ceded their due diligence responsibilities in regard to who was getting these loans to third party brokers, same thing. But they didn’t and hindsight is 20/20.

 

[Bronzeage]

The mortgage industry doesn’t win by writing loans to people who can’t afford them.

Any reasonable explanation would be required to explain why these greedy capitalists in the mortgage industry did things that were not consistent with sound business practices.

They didn't care who they wrote loans to because they immediately sold them.

The sub prime mortgage crisis is an example of the "bigger fool" economic principle. Simply put, it states, "I'd be a fool to buy this thing, but if I can find a bigger fool, I can sell it for a profit."

The nifty trick of packaging shaky/fraudulent mortgages into large blocks which made it impossible to accurately analyze, and then selling them through respected trading houses, simply reduced the level of foolishness needed to buy into the scam.

 

[ZiprHead]

This part here: That's like putting saw dust in the good food and calling it something its not. Deceitfulness.

It wasn’t deceitful in the slightest. It was, in fact, the entire purpose of the vehicles and specifically created toward that end; to bundle a smaller portion of the “bad” in with a larger portion of the “good” so that the risks are lessened and the market is stabilized.

It was intended to help people with riskier finances nevertheless still be able to have a roof over their heads.

You seem to feel this was done with altruistic motives, whereas most people, including experts in the field, feel it was done out of greed and indifference. Do you have some evidence to back this up?

 

[Koyaanisqatsi]

This part here: That's like putting saw dust in the good food and calling it something its not. Deceitfulness.

It wasn’t deceitful in the slightest. It was, in fact, the entire purpose of the vehicles and specifically created toward that end; to bundle a smaller portion of the “bad” in with a larger portion of the “good” so that the risks are lessened and the market is stabilized.

It was intended to help people with riskier finances nevertheless still be able to have a roof over their heads.

You seem to feel this was done with altruistic motives

Initially and only as "altruistic" as anything can be in the finance industry. Note, these assets go back to the 70's, so when I say "initially" that's a long way back.

, whereas most people, including experts in the field, feel it was done out of greed and indifference. Do you have some evidence to back this up?

My take is my own from having worked within the industry when it all went down. Here, however, is an excellent deep-dive from sociologists at Berkeley that get into the "greed and indifference" aspect that you might find interesting. It also does an excellent job of getting into the history of these assets and how many different hands not knowing what the other hands were doing led to crisis: The Transformation of Mortgage Finance and the Industrial Roots of the Mortgage Meltdown. Snippet:

A growing body of empirical data cast doubt on the utility of the disintegration/perverse incentives approach. First, the idea that the crisis occurred because perverse incentives prompted motrgage backed securities producers to sell off all the risk to unwitting investors is undercut by the fact that most of the producers of mortgage backed securities also ended up holding large investments in these bonds (Acharya and Richardson 2009; Diamond and Rajan 2009; Acharya, Schnabl, and Suarez forthcoming; Gorton, 2010). Most of the largest financial firms who originated and securitized mortgages ended up in bankruptcy, merger, or being bailed out (Fligstein and Goldstein, 2010).

Second, the premises of the perverse incentives account do not square with the evolving structure of MBS production markets as the bubble grew during the 2000s. Fligstein and Goldstein (2010) show that by 2007, there were a small number of large financial firms mass producing mortgage backed securities products in vertically-integrated pipelines whereby firms originated mortgages, securitized them, sold them off to investors, and were investors themselves in these products. These findings raise the key empirical puzzle for our paper: If the structure of the MBS production market was becoming more integrated rather than fragmented, and if the same firms that were producing the risky mortgage backed securities were also holding it as investments, how do we understand the relationship between the organization of the market and the destabilizing forces which ultimately undid it? What caused the race to the bottom?

The answer to this question lies in understanding the logic of the vertically integrated structure which banks came to embrace for making money at all phases of the mortgage securitization process. Using the “markets as politics” approach, we locate the development of mortgage securitization markets within the context of what can be called an industrial conception of control. Conceptions of control refer to overarching dominant logics of organization and behavior, which shape the tactics firms use to make money (Fligstein 1996; 2001). In this case, financial firms came to understand that they could make money off of all parts of the securitization process. We call this an industrial conception of control because it is predicated on securing a supply of raw mortgages in order to fill the firm’s vertically-integrated pipeline and thereby guarantee itself fees at all parts of the process. Internalization of this whole value chain within large firms, and resulting high-throughput scale economies, represented a kind of industrialization where the goal was to mass produce financial instruments.

Using both secondary and archival sources, we document the growth of this cultural conception in mortgage finance. Countrywide Financial pioneered this model in the 1990s and they did so spectacularly well that most of the largest investment banks, commercial banks, and mortgage lenders aggressively followed suit. We show how the largest financial firms vertically integrated both forwards and backwards in accordance with this model. We also show how the industrial conception shaped the reorientation of the industry toward nonconventional, “subprime” mortgage securitization in response to a supply shock in the prime market in 2004.

[RELEVANT FOOTNOTE]2 While the idea of an industrial model and vertical integration may strike some readers as odd for financial products, we think that what happened quite closely parallels the way that vertical integration worked in some industries historically. For example, vertically integration in the oil industry began mainly as an effort to control the supply of oil. But by the mid-20th century, oil companies were using oil as feed for many kinds of products, some where they would sell petrochemicals to others as well as use them for their own downstream industries
(Williamson, 1983). [/FOOTNOTE]

Finally, we show how this reorientation in turn solidified the industrial model and propelled further vertical integration into more exotic financial products.

The problem that ultimately undid this system was that the industrial model required the input of more and more risky mortgages in order to reap the maximum profit along the entire chain of production. This strategy promoted high throughput over careful scrutiny, thereby prompting banks to securitize any mortgages they could acquire and issue ever-riskier mortgage backed securities. Firms’ forward integration into underwriting the highly engineered secondorder collateralized debt obligations (which were resecuritizations of existing subprime mortgage backed securities) accelerated this process by creating demand for more of the highest-risk, highinterest raw mortgages to use as inputs. In direct contrast to the perverse incentives account, this view suggests that the disconnection between lending and diligence was driven not by the incentive to pass the risk on to someone else, but instead by the logic of vertical integration. Without mortgages, banks could not feed their pipelines, create financial products, sell them, or leverage and hold them as investments.

ETA: And here's a good history of piece. Snippet:

The original notion behind the establishment of the GSEs [government-security enterprises] was that a national mortgage market would reduce the cost of home ownership by creating a more liquid mortgage market. The creation of MBS [mortgage-backed securities] was a further step along this path. The argument customarily advanced is that tradable MBS attract a wider set of investors to the mortgage market, which, in turn, reduces the cost of housing finance.

The creation of CMOs [collateralized mortgage obligations] was yet another step in that direction. Specifically, the idea was that some investors were reluctant to become active in the MBS market because their long- term maturities coupled with the mortgagor’s prepayment option means that the actual maturity of the security is unknown and can be quite long term, thereby exposing a potential investor to substantial interest rate risk, while at the same time exposing the investor to a great deal of uncertainty as to the actual maturity date of the security. Sequential pay CMOs were thought to be a way of overcoming the disadvantages of simple MBS in that an investor who preferred a shorter-term security could buy an early tranche, whereas one who was willing to bear more risk (possibly in return for a higher yield) would be attracted to the later pay tranches.

Much more, of course, in both.

 

[Harry Bosch]

This part here: That's like putting saw dust in the good food and calling it something its not. Deceitfulness.

It wasn’t deceitful in the slightest. It was, in fact, the entire purpose of the vehicles and specifically created toward that end; to bundle a smaller portion of the “bad” in with a larger portion of the “good” so that the risks are lessened and the market is stabilized.

It was intended to help people with riskier finances nevertheless still be able to have a roof over their heads.

You seem to feel this was done with altruistic motives, whereas most people, including experts in the field, feel it was done out of greed and indifference. Do you have some evidence to back this up?

There were many people on the government side who believed that owning a home would help a poor person climb up. For many people, their largest most valuable asset is their home. But bankers are just like all other professions: they are mostly looking out for themselves, trying to make a living...

 

[Loren Pechtel]

There aren't enough cheap properties. The only way you can comply with that rule and write decent loans is to turn away most of your applicants. Compliance would basically kill their business.

No, serving a smaller sector isn't the same as serving no sector. The business won't die just because you might be forced to downsize. If Corporations like Fannie and Freddy want to enjoy the benefits of government subsidization, they have to play by the government's rules.

You can't just wipe out the majority of a business' income and expect it to survive. From a practical standpoint the government said write bad loans or go out of business.

 

[Loren Pechtel]

Also... now that I think about it, I don't believe that there weren't enough cheap properties. I think there were plenty of cheap properties. You can always find something smaller a little bit further away. The housing markets were extremely overbuilt in the mid 2000's. That excuse just doesn't fly.

It was the falling house prices that crashed the market--thus falling house prices couldn't be the way to avoid it.

 

[zorq]

You can't just wipe out the majority of a business' income and expect it to survive. From a practical standpoint the government said write bad loans or go out of business.

No. It didn't. Especially since your excuse that there wasn't enough cheap housing is false. Also, the government isn't in the business of making sure corporations stay alive. If corporations like government subsidies they have to play by the rules. The fact that the corporations decided to break their own rules for lending can't be blamed on the government.

Also... now that I think about it, I don't believe that there weren't enough cheap properties. I think there were plenty of cheap properties. You can always find something smaller a little bit further away. The housing markets were extremely overbuilt in the mid 2000's. That excuse just doesn't fly.

It was the falling house prices that crashed the market--thus falling house prices couldn't be the way to avoid it.

The house prices fell because there was an overabundance of housing. i.e. There was plenty of housing to choose from. Both expensive AND affordable. You live near Las Vegas right? I dare you to go drive around the suburbs and find the houses that were built 15 years ago. A lot of them are upscale and expensive, but a heck of a lot of them were affordable too.

There was no reason for Freddy and Fanny to feel pressured to write loans for properties that customers couldn't afford. There was plenty of selection.

 

[Loren Pechtel]

No. It didn't. Especially since your excuse that there wasn't enough cheap housing is false. Also, the government isn't in the business of making sure corporations stay alive. If corporations like government subsidies they have to play by the rules. The fact that the corporations decided to break their own rules for lending can't be blamed on the government.

Simply saying it is false doesn't make it so. Got some evidence of this supposed cheap housing?

It was the falling house prices that crashed the market--thus falling house prices couldn't be the way to avoid it.

The house prices fell because there was an overabundance of housing. i.e. There was plenty of housing to choose from. Both expensive AND affordable. You live near Las Vegas right? I dare you to go drive around the suburbs and find the houses that were built 15 years ago. A lot of them are upscale and expensive, but a heck of a lot of them were affordable too.

There was no reason for Freddy and Fanny to feel pressured to write loans for properties that customers couldn't afford. There was plenty of selection.

Even the low end houses here weren't cheap enough. Lets put some numbers on it--I'll use 2019 numbers as finding the stats for back then would be hard.

Median income: $57,189. Throwing that into a mortgage calculator and assuming no other debt (unlikely!) and a 5% down that translates to a $189k house.

Search: < $189k, house, new (I can't select this directly, I said max age 1 year), Las Vegas. Zero hits.
Search: < $189k, condo, new (I can't select this directly, I said max age 1 year), Las Vegas. 7 hits.

Note that I'm being very generous here and yet not finding those houses you talk about. Note, also, that when things fell apart our house was worth about 50% more than it is now--while it will not perfectly translate you can figure the houses then were more expensive than they are now.

 

[zorq]

Simply saying it is false doesn't make it so. Got some evidence of this supposed cheap housing?

The house prices fell because there was an overabundance of housing. i.e. There was plenty of housing to choose from. Both expensive AND affordable. You live near Las Vegas right? I dare you to go drive around the suburbs and find the houses that were built 15 years ago. A lot of them are upscale and expensive, but a heck of a lot of them were affordable too.

There was no reason for Freddy and Fanny to feel pressured to write loans for properties that customers couldn't afford. There was plenty of selection.

Even the low end houses here weren't cheap enough. Lets put some numbers on it--I'll use 2019 numbers as finding the stats for back then would be hard.

Median income: $57,189. Throwing that into a mortgage calculator and assuming no other debt (unlikely!) and a 5% down that translates to a $189k house.

Search: < $189k, house, new (I can't select this directly, I said max age 1 year), Las Vegas. Zero hits.
Search: < $189k, condo, new (I can't select this directly, I said max age 1 year), Las Vegas. 7 hits.

Note that I'm being very generous here and yet not finding those houses you talk about. Note, also, that when things fell apart our house was worth about 50% more than it is now--while it will not perfectly translate you can figure the houses then were more expensive than they are now.

https://en.wikipedia.org/wiki/Aliante,_North_Las_Vegas

Aliante is a master-planned community located in North Las Vegas, Nevada. In 2001...
The community was ultimately expected to include 7,500 homes and 20,000 residents.
...
Most of Aliante's neighborhoods would be priced between $130,000 and $200,000, while some larger homes, starting at 3,000 sq ft (280 m2), would sell for $270,000.
...

Sun City Aliante...
...
Sun City Aliante, an age-restricted 55-plus community by Del Webb, was completed in March 2003, and is located within Aliante.[12][7][13] Sun City Aliante was the third best-selling age-restricted community in the Las Vegas Valley during the second quarter of 2003, with 130 closings averaging $181,198.[14] Sun City Aliante became the third best-selling community of 2003, with 400 home closings.[15]

This is more than 10 years into the 50% quota rule for Freddy and Fanny that started in 1992 that the OP article mentions. But you think that this quota rule is what caused Freddy and Fanny to disregard their responsible lending policies and start doing irresponsible lending? ... Because there were NO MORE affordable houses? No. There were affordable houses.

This story just doesn't track.

 

[Canard DuJour]

(Barney Frank's) most successful effort was to impose what were called "affordable housing" requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy--in other words, prime mortgages--but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

So said law explicitly concerned loans already made by non-GSEs. The fact remains that most subprime loans originated with non-GSEs to which said quotas didn't apply. Whatever % ended up on "on the books of government agencies like Fannie and Freddie" doesn't really tell you anything.

We had exactly the same subprime lending here (in UK they were called NINJA mortgages - No Income, No Job, no Assets) with no such law or quota. As did pretty much everywhere that went down the neoliberal route. Now govts certainly bear some responsibility for that.

 

[Loren Pechtel]

https://en.wikipedia.org/wiki/Aliante,_North_Las_Vegas

Aliante is a master-planned community located in North Las Vegas, Nevada. In 2001...
The community was ultimately expected to include 7,500 homes and 20,000 residents.
...
Most of Aliante's neighborhoods would be priced between $130,000 and $200,000, while some larger homes, starting at 3,000 sq ft (280 m2), would sell for $270,000.
...

Sun City Aliante...
...
Sun City Aliante, an age-restricted 55-plus community by Del Webb, was completed in March 2003, and is located within Aliante.[12][7][13] Sun City Aliante was the third best-selling age-restricted community in the Las Vegas Valley during the second quarter of 2003, with 130 closings averaging $181,198.[14] Sun City Aliante became the third best-selling community of 2003, with 400 home closings.[15]

This is more than 10 years into the 50% quota rule for Freddy and Fanny that started in 1992 that the OP article mentions. But you think that this quota rule is what caused Freddy and Fanny to disregard their responsible lending policies and start doing irresponsible lending? ... Because there were NO MORE affordable houses? No. There were affordable houses.

This story just doesn't track.

1) Note: "Masterplanned". That means association fees, thus you can afford less house. I was making very optimistic assumptions to get that $189k figure! If you have a car payment it's going to be more like $150k even with a cheaper car.

2) Note that it was the 2000's where things blew up. You're also citing what the plans were, not what the prices ended up being. There are currently two houses for sale in that area, I took the cheaper one and went looking for the association fees--$60/mo. That's going to reduce that $189k to $179k. Note that the house went for more at it's initial sale than it's going for now.

2) You're looking at prices from 18 years ago--does it not occur to you that wages were lower back then also?

4) I've been in that community before--it's way out there.

 

[Loren Pechtel]

(Barney Frank's) most successful effort was to impose what were called "affordable housing" requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy--in other words, prime mortgages--but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

So said law explicitly concerned loans already made by non-GSEs. The fact remains that most subprime loans originated with non-GSEs to which said quotas didn't apply. Whatever % ended up on "on the books of government agencies like Fannie and Freddie" doesn't really tell you anything.

We had exactly the same subprime lending here (in UK they were called NINJA mortgages - No Income, No Job, no Assets) with no such law or quota. As did pretty much everywhere that went down the neoliberal route. Now govts certainly bear some responsibility for that.

You're still missing the sequence of events:

1) The Feds mandate low-income loans.

2) It's impossible to find enough qualified borrowers. The government reacts by lowering standards.

3) The market reacts by figuring the government standards are prudent underwriting.

4) Kaboom!

 

[Canard DuJour]

(Barney Frank's) most successful effort was to impose what were called "affordable housing" requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy--in other words, prime mortgages--but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

So said law explicitly concerned loans already made by non-GSEs. The fact remains that most subprime loans originated with non-GSEs to which said quotas didn't apply. Whatever % ended up on "on the books of government agencies like Fannie and Freddie" doesn't really tell you anything.

We had exactly the same subprime lending here (in UK they were called NINJA mortgages - No Income, No Job, no Assets) with no such law or quota. As did pretty much everywhere that went down the neoliberal route. Now govts certainly bear some responsibility for that.

You're still missing the sequence of events:

1) The Feds mandate low-income loans.

(..etc)

At no point were low-income loans mandated. Not by the CRA or the legislation the OP author refers to, or in other countries which saw the same subprime lending.

 

[Jimmy Higgins]

I've looked around quite a bit, but have not found any metrics on prices of homes, incomes of homes that defaulted.

 

[Loren Pechtel]

You're still missing the sequence of events:

1) The Feds mandate low-income loans.

(..etc)

At no point were low-income loans mandated. Not by the CRA or the legislation the OP author refers to, or in other countries which saw the same subprime lending.

So what do you call the situation I just described? Monty Python, perhaps?