The true story behind the financial crisis.

[PSGator66]

This spells it all out.......................

http://freebeacon.com/the-true-story-behind-the-financial-crisis/

[dangolegators]

I'll read the link later, but this should be good.

[baygator1]

Similar lessons are about to be learned with the federal student loan program. Another classic bubble taking shape...government subsidy artificially inflates value, increasing costs and debt load for consumers who are more and more ill-equipped to repay.

[Minister_of_Information]

http://farm9.staticflickr.com/8528/8511202455_76c4c27ca6.jpg

[tegator80]

Didn't break any real ground. But I am afraid that the warning of impending disaster is a little bit too late. The cattle are happily in the pens and they don't want technical details, they want toys.

[G8trGr8t]

Similar lessons are about to be learned with the federal student loan program. Another classic bubble taking shape...government subsidy artificially inflates value, increasing costs and debt load for consumers who are more and more ill-equipped to repay.

ding ding ding we have a winner...

not everybody deserves to own a home and not everybody deserves to go to college and both liberal fantasies generated giant bubbles. there is now more student loan debt than credit card debt. this is why oblamer wanted the feds to take over student loans so that the gubmnt (taxpayers) could forgive loans that private sector never would. rape and pillage future generations some more by borrowing more money to forgive loans of people that had no business going to college to begin with.

from the link

The government created Fannie Mae and Freddie Mac to buy home mortgages from banks in order to free up capital at those banks and permit more loans. And according to a 1992 piece of legislation, 30 percent of the home mortgages that Fannie Mae and Freddie Mac bought had to be from individuals at or below the area’s median income level.

The 1992 legislation also gave the Department of Housing and Urban Development the power to raise the requirement. By 2005, 55 percent of all mortgages bought by the two government-owned mortgage-backing institutions were for low-income individuals .

While Fannie and Freddie could meet the initial 30 percent requirement without too much trouble, the steadily increasing requirement forced the two institutions to lower their underwriting standards for mortgages. They reduced the minimum FICO credit score and began accepting mortgages with no down payment—two of the most important indicators for the quality of a mortgage.

“Over time, these poor quality mortgages stacked up in the financial system,” Wallison said. Half of all mortgages in the United States—28 million out of 55 million—were subprime or very low quality by 2008. And of these 28 million loans, three quarters were on the federal government’s books.

A housing bubble had been building since 1997, Wallison said, and when the bubble began to deflate, many of these low-quality mortgages defaulted. Many financial institutions that had bought so-called “mortgage-backed securities” began to struggle.

[wgbgator]

This seemed out of place in the story:

“Look, this is one of the most thoroughly researched topics out there, and every piece of the government-did-it thesis has been refuted,” Krugman fumed.

Did some funny guy just insert that in there? Because its placement is just bizarre and kinda out of context with the rest of the piece, but funny.

[gatorman_07732]

Similar lessons are about to be learned with the federal student loan program. Another classic bubble taking shape...government subsidy artificially inflates value, increasing costs and debt load for consumers who are more and more ill-equipped to repay.

That sucker is going to blow and it's not going to be pretty

[reformedgator]

That conclusion has been out there for awhile, but I thought he did a good job of explaining it to the masses. It was a political screw up resulting in massive & long lasting damages.

[dangolegators]

Krugman debunked this a week or 2 ago. To get the numbers they want to show, they have created a second category for 'high risk' loans (not subprime loans) and lumped it in with subprime loans. Why? Because Freddie/fannie backed a lot of high risk loans but not a lot of subprime loans. The high risk loans weren't an issue, the delinquency rate on high risk loans was close to the national average, around 9 or 10%. The delinquency rate on the subprimes was around 28%. The vast majority of subprime loans were not backed by Freddie/Fannie, they were completely private and quickly sold off to suckers on Wall St. This is just more of conservatives being deceitful.

So why would they lump 'high risk' loans in with subprime loans? I think we all know why.

http://rortybomb.files.wordpress.com/2011/07/min_updated.jpg

[gatorman_07732]

Krugman debunked this a week or 2 ago. To get the numbers they want to show, they have created a second category for 'high risk' loans (not subprime loans) and lumped it in with subprime loans. Why? Because Freddie/fannie backed a lot of high risk loans but not a lot of subprime loans. The high risk loans weren't an issue, the delinquency rate on high risk loans was close to the national average, around 9 or 10%. The delinquency rate on the subprimes was around 28%. The vast majority of subprime loans were not backed by Freddie/Fannie, they were completely private and quickly sold off to suckers on Wall St. This is just more of conservatives being deceitful.

So why would they lump 'high risk' loans in with subprime loans? I think we all know why.

http://rortybomb.files.wordpress.com/2011/07/min_updated.jpg

See this is garbage because sub-prime loans were high risk loans. This is a case of redefining things to make a political point.

[dangolegators]

See this is garbage because sub-prime loans were high risk loans. This is a case of redefining things to make a political point.

No, there were 'high risk' loans that weren't subprime and there were 'high risk' loans that were subprime loans. Freddie/Fannie didn't have much to do with the subprime loans but they had plenty of non subprime high risk loans on their books (because that's what they are there for). The subprime loans were the problem, and the vast majority of them were not backed by Freddie/Fannie.

[gatorman_07732]

No, there were 'high risk' loans that weren't subprime and there were 'high risk' loans that were subprime loans. Freddie/Fannie didn't have much to do with the subprime loans but they had plenty of non subprime high risk loans on their books (because that's what they are there for). The subprime loans were the problem, and the vast majority of them were not backed by Freddie/Fannie.

Sounds like a bunch of garbage and that you don't know what a sub-prime loan is. You need to peddel that Friedman stuff somewhere else.

http://financial-dictionary.thefreedictionary.com/Subprime+Mortgage

Subprime mortgage
Subprime refers to higher the risk. These are mortgages that are issued to individuals who are often not qualified. That is, the long term monthly mortgage payment is more than their income. Often, these mortgages are issued on the expectation that the homeowners income will rise in the future. These mortgages are often made feasible by teaser rates. This means that the rate might be very low for the first few years but then rise steeply. In periods of weakness in the housing market or the economy in general, these mortgages are the first to run into trouble.

[dangolegators]

Sounds like a bunch of garbage

To you, I'm sure it does.

[dangolegators]

Sounds like a bunch of garbage and that you don't know what a sub-prime loan is. You need to peddel that Friedman stuff somewhere else.

http://financial-dictionary.thefreedictionary.com/Subprime+Mortgage

Yes, we all understand that subprime loans are high risk loans. Do you understand that there were also high risk loans that weren't subprime loans?

[Row6]

Freddie and Fannie were late comers to the sub-prime market, which was developed and dominated by private mortgage companies not subject to FDIC rules. CRA loans performed way above the private market. Add to that the fact that what killed the economy and set off a worldwide financial calamity was the bundling of these loans into packages traded on Wall Street. A $1.5 trillion dollar problem screwed up a $50 trillion market. The only government complicity in this was in not holding a tighter leash on the boy wonders on Wall Street.

"Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

- More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

-Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

-Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

...Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.

...These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.

In a speech last March, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today's problems.

"Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans," she said. "The CRA has increased the volume of responsible lending to low- and moderate-income households."

In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, "that this new lending is good business."

Read more here: http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html#storylink=cpy

[108]

had to laugh at this quote:

“Anyone in the financial industry will tell you it wasn’t financial deregulation,”

as for the article, its Wall St propaganda, and you conservatives love you some of it. Anything to take the blame off of the private sector and place blame on the public sector.

"We didn't do it, they forced us" :roll:

Several independent studies have taken place since the crash, and there is little evidence that the 92 initiative had much to do with what took place afterwards....Fannie and Fredie really didn't even start picking up these subprime loans until very late, and that was to keep pace with the private sector market. They had a far less % of them comparatively.

[gatorman_07732]

This is amazing how people try to redefine things for political purposes. You have been called out and exposed but continue by all means to follow your hero from the NY Times (we all know they set your agenda and you follow lock step). Right "not all" sub-prime loans were high risk.

:laugh::laugh::laugh::laugh::laugh::laugh::laugh:

[dangolegators]

This is amazing how people try to redefine things for political purposes. You have been called out and exposed but continue by all means to follow your hero from the NY Times (we all know they set your agenda and you follow lock step). Right "not all" sub-prime loans were high risk.

:laugh::laugh::laugh::laugh::laugh::laugh::laugh:

What? Who said that? You got it backwards, not all high risk loans were subprime.

[ncgatr1]

I thought the financial crises was caused by GW Bush when he ran the New York Fed and got paid to look the other way as Wall Street ran their elaborate credit default swap Ponzi scheme.......no wait, wrong person.

[gatorman_07732]

What? Who said that? You got it backwards, not all high risk loans were subprime.

:laugh::laugh::laugh::laugh: Indeed they were
I supplied the definition and you're still in denial. Sub-prime mortgages by definition were high risk

[dangolegators]

:laugh::laugh::laugh::laugh: Indeed they were
I supplied the definition and you're still in denial. Sub-prime mortgages by definition were high risk

Do you not understand English?

[gatorman_07732]

Do you not understand English?

I do understand that your premise is incorrect at faulted badly. You seriously changed you tune after I nailed the false claim of the premise of your post. Now you are trying to tread H2O. :yes:

[corpgator]

Students loans as a whole are not a bubble. They create huge positive externalities, which far outweigh the costs.

Student loans to degree factories/for profits, on the other hand, do need to go.

[dangolegators]

I do understand that your premise is incorrect at faulted badly.

You understand that my 'premise is incorrect at faulted badly'?

I guess that sort of answers my question of whether or not you know English.

[gator996]

dangolegators & row are 100% correct here

07732

No doc loans traditionally were done for people with little or no credit documentation but because of the huge downpayment required default rates were low because the borrower had a large skin in the game at inception.

Subprime loan.....Low risk

[Swampmaster]

Similar lessons are about to be learned with the federal student loan program.

big difference: student loans are not dischargeable in bankruptcy and mortgage debt is.

[G8trGr8t]

big difference: student loans are not dischargeable in bankruptcy and mortgage debt is.

Not yet but 0 isn't done yet

[CHFG8R]

One question: Where was Goldman Sachs, Chase, etc. in terms of lobbying for that 1992 piece of legislation that supposedly caused all of this? For or Against?

[gatorman_07732]

dangolegators & row are 100% correct here

07732

No doc loans traditionally were done for people with little or no credit documentation but because of the huge downpayment required default rates were low because the borrower had a large skin in the game at inception.

Subprime loan.....Low risk

If your saying subprime was low risk your completely wrong. They were by definition high risk because they were made to people that could not ordinarily get loans somewhere else.

[viningsgator]

As someone who's in the business and watched this unfold I can attest that both Fannie & Freddie were late to the game and not the primary causes of the housing collapse. However, whenever you factor that we the taxpayer are now on the hook for up to $500,000,000,000 in present and future losses one has to ask why in the hell did they even enter the race?

[busigator96]

With new technologies, why should the cost of education be so much still? Have you heard of MOOC's?

Also, is it the students' faults the cost of education climbed much faster than the rate of inflation while they were taught they need to be additionally credentialed in order to get a better job?

Again, the banks are involved...big surprise!

[Row6]

As someone who's in the business and watched this unfold I can attest that both Fannie & Freddie were late to the game and not the primary causes of the housing collapse. However, whenever you factor that we the taxpayer are now on the hook for up to $500,000,000,000 in present and future losses one has to ask why in the hell did they even enter the race?

According to this column, simple human greed and/or wish to personally excel by Mae and Mac's executives:

"..But the S.E.C. complaint makes almost no mention of affordable housing mandates. Instead, it charges that the executives were motivated to begin buying subprime mortgages — belatedly, contrary to the Big Lie — because they were trying to reclaim lost market share, and thus maximize their bonuses.

As Karen Petrou, a well-regarded bank analyst, puts it: “The S.E.C.’s facts paint a picture in which it wasn’t high-minded government mandates that did [Fannie and Freddie] wrong, but rather the monomaniacal focus of top management on market share.” As I wrote on Tuesday, Fannie and Freddie, rather than leading the housing industry astray, got into riskier mortgages only after the horse was out of the barn. They were becoming irrelevant in the most profitable segment of the market — subprime. And that they couldn’t abide...".

http://www.nytimes.com/2011/12/24/opinion/nocera-the-big-lie.html

This column by the same author further explains the tardiness and relative conservatiness of Mac and Mae in respect subprimes:

"...Fannie and Freddie got into subprime mortgages, with great trepidation, only in 2005 and 2006, and only because they were losing so much market share to Wall Street. Among other things, the Wallison-Pinto case relies on inflated data — Pinto classifies just about anything that is not a 30-year-fixed mortgage as “subprime.” The reality is that Fannie and Freddie followed the private sector off the cliff instead of the other way around...

..On Friday, the Securities and Exchange Commission waded into the Fannie/Freddie wars by filing a lawsuit against three executives from each company. The complaint charges them with making “materially false” disclosures about the size of the companies’ subprime portfolios...

The complaint is extraordinarily weak. Taking its cues from the Wallison/Pinto school of inflated data, it claims that Fannie and Freddie failed to reveal to investors the true extent of their subprime portfolios. To make this claim, however, the S.E.C. has included categories of loans, such as so-called Alt-A loans, that may have had a subprime characteristic, such as low documentation, but which were often made to borrowers with high credit scores.

There are no damning internal e-mails in the complaint, with executives contradicting their public statements, and no examples of sleazy insider stock sales. A quick look at Fannie and Freddie financial disclosure statements shows that they clearly laid out the credit characteristics of their mortgage portfolios, even if they didn’t label every non-30-year-fixed loan as subprime. More than a year ago, a federal judge presiding over a shareholder lawsuit against Fannie Mae threw out the allegations surrounding lack of disclosure. Why? Because, he said, the company’s disclosure of its subprime portfolio had been adequate...The truth is, for all their mistakes, Fannie and Freddie had some scruples about the nonprime loans they guaranteed or bought — and they have the default numbers to prove it.

For instance, according to David Min, a leading Wallison critic at the Center for American Progress, as of the second quarter of 2010, the delinquency rate on all Fannie and Freddie guaranteed loans was 5.9 percent. By contrast, the national average was 9.11 percent. The Fannie and Freddie Alt-A default rate is similarly much lower than the national default rate. The only possible explanation for this is that many of the loans being characterized by the S.E.C. and Wallison/Pinto as “subprime” are not, in fact, true subprime mortgages."

http://www.nytimes.com/2011/12/20/opinion/nocera-an-inconvenient-truth.html

[Matthanuf06]

All of this finger pointing is just ridiculous when its obvious what happened on the surface.

The government made the rules and set the parameters. That much is obvious. They created moral hazard, interest rate manipulation, legislation, play favorites with dollars, taxes (and deductions) and even created monstrous govt backed agencies.

Clearly this wasn't a private market. Not even close.

Yet none of this wouldn't have happened if greedy main stream citizens and businesses as well as greedy Wall Street banks were not complicit. We'd like to think that we'd be smart enough to do the smart and right thing but we weren't. On all levels. But we played the game by the rules set up by the government.

If the government didn't meddle then this certainly wouldn't have happened. The GSOs wouldn't exist. Incentives wouldn't exist for both the lender and borrower. Interest rate manipulation wouldn't exist.

There would be other consequences for that, without a doubt, but not the one we faced

[gator996]

If your saying subprime was low risk your completely wrong. They were by definition high risk because they were made to people that could not ordinarily get loans somewhere else.



You truly don't know what your talking about...

Simply because you don't have credit history doesn't make you high risk.

My bank had been doing no doc loans since the 1800's.

Many, many immigrants come to the USA...with cash but no credit history.


I could waste the next hour explaining the Alt-A, No Doc, sub prime world but I'm lazy... :grin:


...but seriously, you're 100% wrong here...


Poor underwriting standards, poor asset/liability modeling, loose credit review/standards, & fraud all had a hand in the mortgage crisis...


What I will say is this...For anyone who was/is in the business, the problem wasn't Fannie & Freddie leading the charge...they were followers of the private labels...in terms of market direction & origination...

[gatorman_07732]

You truly don't know what your talking about...

Simply because you don't have credit history doesn't make you high risk.

My bank had been doing no doc loans since the 1800's.

Many, many immigrants come to the USA...with cash but no credit history.


I could waste the next hour explaining the Alt-A, No Doc, sub prime world but I'm lazy... :grin:


...but seriously, you're 100% wrong here...


Poor underwriting standards, poor asset/liability modeling, loose credit review/standards, & fraud all had a hand in the mortgage crisis...


What I will say is this...For anyone who was/is in the business, the problem wasn't Fannie & Freddie leading the charge...they were followers of the private labels...in terms of market direction & origination...

I think you should get into a new line og business if you don't know subprime lines were high risk. They were inherently risky.

[Row6]

All of this finger pointing is just ridiculous when its obvious what happened on the surface.

The government made the rules and set the parameters. That much is obvious. They created moral hazard, interest rate manipulation, legislation, play favorites with dollars, taxes (and deductions) and even created monstrous govt backed agencies.

Clearly this wasn't a private market. Not even close.

Yet none of this wouldn't have happened if greedy main stream citizens and businesses as well as greedy Wall Street banks were not complicit. We'd like to think that we'd be smart enough to do the smart and right thing but we weren't. On all levels. But we played the game by the rules set up by the government.

If the government didn't meddle then this certainly wouldn't have happened. The GSOs wouldn't exist. Incentives wouldn't exist for both the lender and borrower. Interest rate manipulation wouldn't exist.

There would be other consequences for that, without a doubt, but not the one we faced

You really need to read something about this event than the right wing propaganda quoted in the OP. Private mortgage companies drove the subprime market, and they were not under the CRA regs or any of those that apply to banks. Wall Street then invented a seemingly foolproof money machine by bundling these mortgages and reselling them, again without any government involvement. If the government can be faulted in any of this it is for not having stricter rules in place for those who played craps on the back porch with the nations accumulated wealth in the balance.

[108]

why the need for conservatives to deflect blame from the private sector, even when multiple studies show that Clinton's initiative had very little to do with it?

what the public sector is responsible for is looking the other way while it all went down

in fact, more than just looking the other way, but preventing states from protecting its citizens from predatory lending




By Eliot Spitzer
Thursday, February 14, 2008

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no. Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers. In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. But the curbs we sought on predatory and unfair lending would have in no way jeopardized access to the legitimate credit market for appropriately priced loans. Instead, they would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position.

When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.

The writer is governor of New York.

[gator996]

I think you should get into a new line og business if you don't know subprime lines were high risk. They were inherently risky.


Our Alt-A (subprime) portfolio had lower default rates than the conventional loan portfolio...


You think all "subprime" loans are the same thing...kinda simplistic but...whatever.


:roll:

[Matthanuf06]

You really need to read something about this event than the right wing propaganda quoted in the OP. Private mortgage companies drove the subprime market, and they were not under the CRA regs or any of those that apply to banks. Wall Street then invented a seemingly foolproof money machine by bundling these mortgages and reselling them, again without any government involvement. If the government can be faulted in any of this it is for not having stricter rules in place for those who played craps on the back porch with the nations accumulated wealth in the balance.

I'm in the business.

Look, you are ignoring steps 1-100 where the government set the rules and jumping to step 101 where the private market acted. If you don't see the government involvement then I don't know what to tell you. Ever hear of the Fed? Taxation and deduction? City/county incentives? I can go on and on.

I bought a house in June 2011, first time home buyer. It was a USDA loan with county/city incentives I ended up having to put $0 down and in fact with the incentives they knocked down my principal a few grand. Yeah, no involvement in the housing market.

[108]

I'm in the business.

Look, you are ignoring steps 1-100 where the government set the rules and jumping to step 101 where the private market acted. If you don't see the government involvement then I don't know what to tell you. Ever hear of the Fed? Taxation and deduction? City/county incentives? I can go on and on.

I bought a house in June 2011, first time home buyer. It was a USDA loan with county/city incentives I ended up having to put $0 down and in fact with the incentives they knocked down my principal a few grand. Yeah, no involvement in the housing market.

you are throwing around generalities without being specific, what exactly did the government do in steps 1-100 to set the rules for rampant fraud?

[Minister_of_Information]

Excising context is propaganda 101.

[gator996]

I'm in the business.

Look, you are ignoring steps 1-100 where the government set the rules and jumping to step 101 where the private market acted. If you don't see the government involvement then I don't know what to tell you. Ever hear of the Fed? Taxation and deduction? City/county incentives? I can go on and on.

I bought a house in June 2011, first time home buyer. It was a USDA loan with county/city incentives I ended up having to put $0 down and in fact with the incentives they knocked down my principal a few grand. Yeah, no involvement in the housing market.


Who made the argument that the govt isn't involved in the housing market?

The private market only got involved at Step 101?

Who originated those loans?


Was there someone holding a gun to Countrywide's head forcing them to make bad loans?

[Matthanuf06]

Who made the argument that the govt isn't involved in the housing market?

The private market only got involved at Step 101?

Who originated those loans?

Was there someone holding a gun to Countrywide's head forcing them to make bad loans?

Everyone that isn't putting a good chunk of the blame on the government is by definition claiming they were not involved.

The private market can only play the game by the rules set by the government. That right there is a distortion. There is a laundry list of distortions here.

And you are right, Countrywide took a huge risk and lost. In business companies fail all the time.

Yet in this case the government stepped in, in various forms and degrees, across the board. This moral hazard was well known, and another distortion of the market.

I'm not claiming individuals and businesses did not make bad business deals. Many took a risk and lost. What I am saying is that it is incredibly naive to think that this same scenario would have occurred with a different set of government distortions, whether its more (even more heavily regulated) or free.

On a different hand there is nothing wrong with securitizing loans. That wasn't the cause of the collapse.

[gator996]

Everyone that isn't putting a good chunk of the blame on the government is by definition claiming they were not involved.

The private market can only play the game by the rules set by the government. That right there is a distortion. There is a laundry list of distortions here.

And you are right, Countrywide took a huge risk and lost. In business companies fail all the time.

Yet in this case the government stepped in, in various forms and degrees, across the board. This moral hazard was well known, and another distortion of the market.

I'm not claiming individuals and businesses did not make bad business deals. Many took a risk and lost. What I am saying is that it is incredibly naive to think that this same scenario would have occurred with a different set of government distortions, whether its more (even more heavily regulated) or free.

On a different hand there is nothing wrong with securitizing loans. That wasn't the cause of the collapse.



Well, then you blame any disruption in any business sector as the fault of the government because there are almost no markets that aren't governed by laws.


Countrywide lost?
Really?


As noted by river elsewhere...if companies were forced by law to retain 10% of all of the deal collateral or origination purchased it would have dramatically slowed the fraud.

The whole reason why fraud & bad paper became rampant was because everyone decided who cares I'll just sell it to the next guy...

Your idea that no type of regulation would have changed things is pure fantasy.


Securitization wasn't a problem?

It is when companies are originating any type of crappy paper to sell to Wall St. who can magically turn it into AAA tranches...

[Row6]

I'm in the business.

Look, you are ignoring steps 1-100 where the government set the rules and jumping to step 101 where the private market acted. If you don't see the government involvement then I don't know what to tell you. Ever hear of the Fed? Taxation and deduction? City/county incentives? I can go on and on.

I bought a house in June 2011, first time home buyer. It was a USDA loan with county/city incentives I ended up having to put $0 down and in fact with the incentives they knocked down my principal a few grand. Yeah, no involvement in the housing market.

I didn't say there was no government involvement in the housing market, I said that the sub-prime crash was driven by a lack of government regulations on private mortgage companies and the Wall Street gamblers who bundled and resold them. That's is a fact.

[Matthanuf06]

No, the problem was the increasing default rates due to crashing home prices. The risky borrowers were not technically the problem, the problem was the default rate assumption. The problem was not with the securitization itself. If the default rates stayed within normal bands they would have performed within expectations. The problem is they didn't because home prices crashed.

[Matthanuf06]

Well, then you blame any disruption in any business sector as the fault of the government because there are almost no markets that aren't governed by laws.

Countrywide lost?
Really?

As noted by river elsewhere...if companies were forced by law to retain 10% of all of the deal collateral or origination purchased it would have dramatically slowed the fraud.

The whole reason why fraud & bad paper became rampant was because everyone decided who cares I'll just sell it to the next guy...

Your idea that no type of regulation would have changed things is pure fantasy.

Securitization wasn't a problem?

It is when companies are originating any type of crappy paper to sell to Wall St. who can magically turn it into AAA tranches...

It's insane that you don't think the government meddles in the housing market. The whole crisis was due to the bubble. If you don't think the GSOs, FED, laws and regs, tax policies, etc had anything to do with the run up you are living in your own fantasy world.

[Row6]

No, the problem was the increasing default rates due to crashing home prices. The risky borrowers were not technically the problem, the problem was the default rate assumption. The problem was not with the securitization itself. If the default rates stayed within normal bands they would have performed within expectations. The problem is they didn't because home prices crashed.

Of course risky borrowers were the problem. When the bubble crashed - as was inevitable - most people who bought high are still paying their mortgages and hoping their home values regain at least some of what they lost - they will. Those who bought sub-primes with exploding interest rates after 2 years - and many of them were speculators, not poor people - are the ones who choked and caused the crash on Wall Street.

[Row6]

It's insane that you don't think the government meddles in the housing market. The whole crisis was due to the bubble. If you don't think the GSOs, FED, laws and regs, tax policies, etc had anything to do with the run up you are living in your own fantasy world.

The bubble fueled speculators, many of whom got sub-primes, but it didn't cause poor people to buy - the easy money sub-primes did. Even with that problem however, tjis was still a manageable problem. the total value of all subprimes at the time was estimated to be about $1.5 trillion. In a $50 market, that's a problem but it is not the end of the world. The end of the world is when that $1.5 trillion gets mixed up and lost so no one knows where it is. That's the Wall Street end of this.

[Matthanuf06]

Of course risky borrowers were the problem. When the bubble crashed - as was inevitable - most people who bought high are still paying their mortgages and hoping their home values regain at least some of what they lost - they will. Those who bought sub-primes with exploding interest rates after 2 years - and many of them were speculators, not poor people - are the ones who choked and caused the crash on Wall Street.

You have your causation wrong. In a normal market environment the risky borrowers would have defaulted as modeled and the loans would have performed as modeled.

The defaults soared BECAUSE the market crashed. Then some of it became self fulfilling, the market went down, caused defaults, which cause the market to go down further.

But the initial problem was the market collapsing, not the securitization. Securitized loans are great actually if you know what you are doing.

[gator996]

It's insane that you don't think the government meddles in the housing market. The whole crisis was due to the bubble. If you don't think the GSOs, FED, laws and regs, tax policies, etc had anything to do with the run up you are living in your own fantasy world.



Where did I say that????? :lie:

[Matthanuf06]

And I understand and agree that securitization increased the demand for riskier loans. But why is that a bad thing? If the market behaved normally then there would have been no issue.

[Row6]

You have your causation wrong. In a normal market environment the risky borrowers would have defaulted as modeled and the loans would have performed as modeled.

The defaults soared BECAUSE the market crashed. Then some of it became self fulfilling, the market went down, caused defaults, which cause the market to go down further.

But the initial problem was the market collapsing, not the securitization. Securitized loans are great actually if you know what you are doing.

Markets go up and down all the time and the explosion of sub-primes partly fueled the speculation, as well as increasing the number of mortgages that would fail when it did. Again, that remains a local problem if Wall Street didn't get into the act.

[Row6]

And I understand and agree that securitization increased the demand for riskier loans. But why is that a bad thing? If the market behaved normally then there would have been no issue.

The market did behave normally. If have read anything about free markets, they "normally" cycle through boom and bust and have for centuries. Through regulation and government spending we have gotten better at minimizing the swings.

[G8trGr8t]

Who made the argument that the govt isn't involved in the housing market?

The private market only got involved at Step 101?

Who originated those loans?

Was there someone holding a gun to Countrywide's head forcing them to make bad loans?

Was there somebody holding a gun to the borrower's head? Did Reno threaten banks?

[Matthanuf06]

Markets go up and down all the time and the explosion of sub-primes partly fueled the speculation, as well as increasing the number of mortgages that would fail when it did. Again, that remains a local problem if Wall Street didn't get into the act.

Increased demand overall was a factor in the bubble. Subprime demand a major factor in that. Securitization though, was only a small part of the increased subprime demand.

And pardon me laughing, but do you really think we didn't realize markets go "up and down". Come on? This market decline and default increase was unprecedented.

When I say "normal" I mean in the statistical sense that is incorporating typical market swings. What we went through in the 00s was certainly not statistically normal within any standard confidence level.

Models have been updated, and the risk field has grown to focus more on the tail risk. But we weren't there in the 00s.

And I'm not one to resume pump but I'm not some newbie to the financial and risk space.

[dangolegators]

The market did behave normally. If have read anything about free markets, they "normally" cycle through boom and bust and have for centuries. Through regulation and government spending we have gotten better at minimizing the swings.

No, markets are always perfect. Nothing bad ever happens as long as the government stays out of the way.

Here's some examples of perfect markets:
http://filmlinccom.siteprotect.net/archive/nyff/2007/program/avantgarde/images/full/capitalsim_child_labor2.jpg

http://www.wttw.com/img/dto/dto1-broadside-slaves-at-auction.jpg

[Matthanuf06]

Was there somebody holding a gun to the borrower's head? Did Reno threaten banks?

Individual borrowers should bear the least of the blame. First of all there is massive information asymmetry. Secondly and more importantly they've behaved "rationale" in the sense of what we'd expect.

Why wouldn't a subprime borrower accept a loan that is generally reserved for higher quality borrowers?

Why wouldn't a borrower step away from an upside down mortgage? Yes I know there are some moral considerations hence why the expectation isn't 100% (and of course it depends how underwater they are).

[Matthanuf06]

No, markets are always perfect. Nothing bad ever happens as long as the government stays out of the way.

Here's some examples of perfect markets:



In the case of slavery that is definition the fault of the government. Free markets require protection of property rights. The most important property we all have is ourselves.

[Row6]

Increased demand overall was a factor in the bubble. Subprime demand a major factor in that. Securitization though, was only a small part of the increased subprime demand.

And pardon me laughing, but do you really think we didn't realize markets go "up and down". Come on? This market decline and default increase was unprecedented.

When I say "normal" I mean in the statistical sense that is incorporating typical market swings. What we went through in the 00s was certainly not statistically normal within any standard confidence level.

Models have been updated, and the risk field has grown to focus more on the tail risk. But we weren't there in the 00s.

And I'm not one to resume pump but I'm not some newbie to the financial and risk space.

The primary cause of the bubble was speculation, and much of that was through sub-primes. After the market crash of 200-2001 capital went looking for a safe haven and thought it had found it in real estate. Big and small investors got in, and in 2005 about 30% of homes being built were for speculation by the buyer and that was and is a record. Demand from poor people was not driving this.

[dangolegators]

In the case of slavery that is definition the fault of the government. Free markets require protection of property rights. The most important property we all have is ourselves.

Yes, it is the fault of the government for doing nothing about it. In other words, the government should have stepped in and outlawed slavery.

[wgbgator]

Actually WRT to slavery, the government was protecting property rights, because slaves are property. It was written into the Constitution. Later, the Confederacy formed to continue to protect those property rights once the expansion of slavery was halted and put the institution in danger. People not viewing other people as property had to happen organically, though the abolitionist movement and cultural change, culminating in the 13th Amendment.

[Matthanuf06]

Yes, it is the fault of the government for doing nothing about it. In other words, the government should have stepped in and outlawed slavery.

Correct. Free market proponents are not anarchists. Protecting property rights and contracts are essential roles of government.

[dangolegators]

Actually WRT to slavery, the government was protecting property rights, because slaves are property. It was written into the Constitution. Later, the Confederacy formed to continue to protect those property rights once the expansion of slavery was halted and put the institution in danger. People not viewing other people as property had to happen organically, though the abolitionist movement and cultural change, culminating in the 13th Amendment.

Yes, but slavery predated the constitution and the US government. In this case the government was just allowing a market that already existed to continue essentially unregulated.

[wgbgator]

Yes, but slavery predated the constitution and the US government. In this case the government was just allowing a market that already existed to continue essentially unregulated.

Slavery was regulated, as much as it could be. The ban on importation, the fugitive slave laws, the slave codes, policing of black market activity, etc.

[Matthanuf06]

Actually WRT to slavery, the government was protecting property rights, because slaves are property. It was written into the Constitution. Later, the Confederacy formed to continue to protect those property rights once the expansion of slavery was halted and put the institution in danger. People not viewing other people as property had to happen organically, though the abolitionist movement and cultural change, culminating in the 13th Amendment.

I understand the history but a person cannot be the property of others. We were just wrong.

Either way you cannot blame the free market and the protection of property rights for that. A fallible society defined property incorrectly, that is where the blame is.

[Matthanuf06]

The primary cause of the bubble was speculation, and much of that was through sub-primes. After the market crash of 200-2001 capital went looking for a safe haven and thought it had found it in real estate. Big and small investors got in, and in 2005 about 30% of homes being built were for speculation by the buyer and that was and is a record. Demand from poor people was not driving this.

I don't dispute this. Although that doesn't answer why the speculation was occurring. Others were blaming the collapse on securitization, which I was pointing out is completely false.

[wgbgator]

I understand the history but a person cannot be the property of others. We were just wrong.

Either way you cannot blame the free market and the protection of property rights for that. A fallible society defined property incorrectly, that is where the blame is.

Seems like the protection of property rights was a big cause of the Civil War. Obviously, no one today thinks humans are property (a result of the outcome of the war), but in 1861 a lot of people quite clearly did. Anytime someone today says "state's rights" that's pretty much the right they are talking about - the right of the states to keep defining humans as chattle property as the nation at large slowly adopted free labor as an ideal.

[dangolegators]

Slavery was regulated, as much as it could be. The ban on importation, the fugitive slave laws, the slave codes, policing of black market activity, etc.

Those came later. Yes, slavery was regulated.

[Matthanuf06]

Seems like the protection of property rights was a big cause of the Civil War. Obviously, no one today thinks humans are property (a result of the outcome of the war), but in 1861 a lot of people quite clearly did. Anytime someone today says "state's rights" that's pretty much the right they are talking about - the right of the states to keep defining humans as chattle property as the nation at large slowly adopted free labor as an ideal.

And they were wrong. That doesn't mean the philosophy and ideology failed. Property rights were not protected whether they 'thought' they were or not.

[wgbgator]

And they were wrong. That doesn't mean the philosophy and ideology failed. Property rights were not protected whether they 'thought' they were or not.

I'm not sure why you would view it as a failure. Slaves were valued as commodities, so the free market & government treated them as such. People decide what has value, the market just facilitates exchange, gov't protects the property. The $ to be made in the new world created a vast demand for labor, it was filled by slave traders. If anything, that's successful capitalism, not failed capitalism.

[gator996]

And I understand and agree that securitization increased the demand for riskier loans. But why is that a bad thing? If the market behaved normally then there would have been no issue.


Because the retail arm of the business was originating more crap loans because they were easier to close when your basically ignoring the underwriting process...


...and there was a more than eager buyer for these crap loans called Wall St. who turned crap into gold through securitization and fraudulent rating agency opinions.


Bonds that should never have been rated AAA were sold as such...

That's why your increased demand occured....


And you are standing here in 2013 saying there wasn't any problem with the securitization market?

You think any of the banks would have driven the business if they didn't have a securitization market to unload the crap to?

And then re-sell over and over and over again? CDO, CDO squared, CDO cubed...

And Moody's, S&P, & Fitch played right along with the game...


Was all of that the government's fault also?

[dangolegators]

I'm not sure why you would view it as a failure. Slaves were valued as commodities, so the free market & government treated them as such. People decide what has value, the market just facilitates exchange. The $ to be made in the new world created a vast demand for labor, it was filled by slave traders. If anything, that's successful capitalism, not failed capitalism.

It's a failure if you believe that taking away a person's freedom and forcing them to work under brutal conditions is a bad thing and costly to society. In markets, that is called an externality. Child labor is an externality. Pollution is an externality. These are things where the true cost of a good or service is not fully recognized by the sale price. When a factory pollutes a river and sells its product for a price that doesn't generate enough revenue to clean the river, that is an unrecognized cost, or externality.

You could say that one of the externalities of slavery was the Civil War and the huge cost that went with it. But then we'll get people who will actually say that slavery didn't cause the division in this country that lead to the Civil War.

[wgbgator]

It's a failure if you believe that taking away a person's freedom and forcing them to work under brutal conditions is a bad thing and costly to society. In markets, that is called an externality. Child labor is an externality. Pollution is an externality. These are things where the true cost of a good or service is not fully recognized by the sale price. When a factory pollutes a river and sells its product for a price that doesn't generate enough revenue to clean the river, that is an unrecognized cost, or externality.

You could say that one of the externalities of slavery was the Civil War and the huge cost that went with it. But then we'll get people who will actually say that slavery didn't cause the division in this country that lead to the Civil War.

Yes, the capitalist free-market doesnt fit neatly with any existing or historical human institution or social order or morality. That's why Ayn Rand had to invent one. Also why many conservatives hated Rand, because there has long been a conservative critique of what the free market does (the uprooting of families from established communities, women/children having to work, commoditizing social ills and sex, etc - not to mention slavery).

[108]

lets just pretend Matthanuf06 is correct and this lays at the feet of Government relaxing standards.....how does this make the case for less regulation?

[Row6]

I don't dispute this. Although that doesn't answer why the speculation was occurring. Others were blaming the collapse on securitization, which I was pointing out is completely false.


The speculation was a self fulfilling frenzy. Looked like a sure thing to too many people, who had forgotten that yes, real estate values could fall. It has been noted that this bubble was accompanied by a massive tax cut to the top income brackets which also became excess capital looking for an investment.

[gator996]

I don't dispute this. Although that doesn't answer why the speculation was occurring. Others were blaming the collapse on securitization, which I was pointing out is completely false.


Not only do you not understand what I'm saying but I highly doubt you understand macro side of the business all that well...

Should I take a guess that you worked on the retail side of the business?


This is like the guy who worked on the assembly line at GM saying he knows the auto industry like management.


And I'm not saying that in a condescending manner ...seriously.


The start of the financial crisis & the mortgage meltdown was the inability for Soc Gen to value the MBS securities in two specific funds.

They announced they couldn't value them (not good, very public)
There were liqudity rumours circling (by that afternoon)
There was a run on those funds by investors (the next morning)

And quickly Soc Gen stopped redemptions... (how could they they couldn't value them)


Investor confidence was shaken and the rest is history...


If you think this has been caused by crap going on at the retail level then GM went under because "Rosie the Riveter" didn't bolt the door on well enough...


The individual loan collateral was a problem but that alone didn't cause this....

The amplification through securitization multiplied the positive & negative effect well beyond anything that could be contained...

The amount of times that crappy individual loan was sliced diced resold & repackaged caused this meltdown...


...not some appraiser or loan officer in Orange county. :laugh:



Its a very complex issue that had sources all over the "business"...retail, financial markets, government, rating agencies, investors...

Trying to assign all of the blame to one entity is kinda futile but if I had to say who was repsonsible for magnitude of the problem I would start with Wall St.

[gator996]

lets just pretend Matthanuf06 is correct and this lays at the feet of Government relaxing standards.....how does this make the case for less regulation?


It doesn't.

:grin:

[Matthanuf06]

Because the retail arm of the business was originating more crap loans because they were easier to close when your basically ignoring the underwriting process...

...and there was a more than eager buyer for these crap loans called Wall St. who turned crap into gold through securitization and fraudulent rating agency opinions.

Bonds that should never have been rated AAA were sold as such...

That's why your increased demand occured....

And you are standing here in 2013 saying there wasn't any problem with the securitization market?

You think any of the banks would have driven the business if they didn't have a securitization market to unload the crap to?

And then re-sell over and over and over again? CDO, CDO squared, CDO cubed...

And Moody's, S&P, & Fitch played right along with the game...

Was all of that the government's fault also?

Yes, they didn't realize all of the risks, correlations, and sensitivities to other factors. That was a major failure. But as a whole, do I see anything wrong with securitization? Heck no. It's great.

Again, if the market acted "normally" then those products would have performed as "normally" expected.

I'm certainly not saying risky borrowers should get the same terms as less risky borrowers.

But securitizing those loans isn't a problem, and is without a doubt an investment grade option.

The key point you are all missing: if the market was normal (typical cycle) then those securitized products would have performed fine and you'd have never heard of them. The market crashed which caused the loans to default.

An extreme analogy would be if Iran nuked Israel causing a major market decline, and then blaming the decline on anything other than the nuke.

[gator996]

Uhhh, I respectfully disagree with you...

But let me ask you a quick question and then I'll explain why I think you're wrong.



When you say if the market acted "normally" what market are you referring to?

The home loan market?
The securitization market?

What market do you mean needed to act normally?



While I wait for your answer....


You regulate markets so that they operate "normally" & efficently...


Its kinda like contracts...you don't write them for "normal" operation, you write them to resolve conflicts when "normal" doesn't occur.

[CHFG8R]

The private market can only play the game by the rules set by the government. That right there is a distortion. There is a laundry list of distortions here.

Yet we all know how much power these banks have over policy, especially financial policy. So I'll ask again, did they lobby for these types of things or against? If the former, then the Private Sector vs. Government argument is moot.

[Matthanuf06]

lets just pretend Matthanuf06 is correct and this lays at the feet of Government relaxing standards.....how does this make the case for less regulation?

It's not just relaxing standards. It's distortion of the market at all levels. Even something such as the mortgage interest deduction comes into play. The government is so involved here, at all levels, that they really have to sleep in the bed they made.

[Matthanuf06]

Not only do you not understand what I'm saying but I highly doubt you understand macro side of the business all that well...

Should I take a guess that you worked on the retail side of the business?

This is like the guy who worked on the assembly line at GM saying he knows the auto industry like management.

And I'm not saying that in a condescending manner ...seriously.

The start of the financial crisis & the mortgage meltdown was the inability for Soc Gen to value the MBS securities in two specific funds.

They announced they couldn't value them (not good, very public)
There were liqudity rumours circling (by that afternoon)
There was a run on those funds by investors (the next morning)

And quickly Soc Gen stopped redemptions... (how could they they couldn't value them)

Investor confidence was shaken and the rest is history...

If you think this has been caused by crap going on at the retail level then GM went under because "Rosie the Riveter" didn't bolt the door on well enough...

The individual loan collateral was a problem but that alone didn't cause this....

The amplification through securitization multiplied the positive & negative effect well beyond anything that could be contained...

The amount of times that crappy individual loan was sliced diced resold & repackaged caused this meltdown...

...not some appraiser or loan officer in Orange county. :laugh:

Its a very complex issue that had sources all over the "business"...retail, financial markets, government, rating agencies, investors...

Trying to assign all of the blame to one entity is kinda futile but if I had to say who was repsonsible for magnitude of the problem I would start with Wall St.

I'm in portfolio management in something like a fund of fund structure. So while I don't analyze securitized products directly, I interview and hire the best in the world that can. I'm also a CFA charterholder and a certified FRM, so yeah this isn't something I just read about in the newspaper with my talking points fed from my favorite biased commentator.

And I never said it was caused by loans to risky borrowers. Those loans have an investment purpose and serve an important role in our markets. Packaging them and reselling them also played a minimal at most role, which is my point.

Securitized products are not that complex. They really aren't. For your sake its just a bunch of loans packaged into one. By definition they are less risky than a single loan if the correlation isn't one, hence the higher quality. The failure from a risk management standpoint is vastly underestimated the correlation amongst loans. So it's just a package of loans instead of owning a single loan, like owning 30 stocks instead of 1. What's wrong with that? Now of course it gets more specific and marginally more complex depending on risk tolerances (and return expectations) leading to tranching, liability type matching needs, and generally other desires when it comes to what you want out of the product. It's still just a package of loans. Customization to suit someone's needs is a good thing.

Now the complexity is more on the modeling side, aka how it should perform, once your slice and diced the package of loans to suit various needs. And that really comes down to the correlation failure.

But even still, NONE OF THAT MATTERS, if we don't have a major standard deviation event that crushed the market. Those loans would have NEVER defaulted at that rate with those correlations. Hence the problem was the market decline. I never pinned the failure solely on the government. I said they set up the rules, the distortions to the market, the incentives, the moral hazards, etc. We played their game. But can we improve? Damn straight we can. Our analysis was tremendously shallow then as it is now from a risk standpoint.

[Row6]

I don't dispute this. Although that doesn't answer why the speculation was occurring. Others were blaming the collapse on securitization, which I was pointing out is completely false.

I think it does explain why speculation was happening. I am small potatoes and so are my friends, but I knew several who started buying rental properties and decided on a beach condo as a good investment, and it was because they got burned on the stock market. Big money was doing the same thing and it resulted in a real estate bubble that largely carried the economy after 9/11. If you had taken real estate and building out of the stats economic growth was non-existent in the first half of the last decade. Did the tax cuts, which handed high earners a windfall, exacerbate the speculation? I don't have hard data, and it might be difficult to know, but wealthy people generally look to invest "extra" capital, as opposed to buying groceries and a new car, as the lower and middle earners do. Maybe a new beach house! Hey, how could you lose on that?

[Matthanuf06]

Uhhh, I respectfully disagree with you...

But let me ask you a quick question and then I'll explain why I think you're wrong.

When you say if the market acted "normally" what market are you referring to?

The home loan market?
The securitization market?

What market do you mean needed to act normally?

While I wait for your answer....

You regulate markets so that they operate "normally" & efficently...

Its kinda like contracts...you don't write them for "normal" operation, you write them to resolve conflicts when "normal" doesn't occur.

I'm talking in statistical lingo for the real estate market. The home price decline caused default rates to increase, loans to correlate, and individual and packaged loans to perform much worse than expected.

The market decline was so extreme that it was a major outlier in any type of housing market analysis done. To model the loans you need default rates which is somewhat based on market values. Now the distribution isn't normal, but for these purposes that works. Long story short default rates were modeled off of a distribution assumption of home values, and the decline was such an extreme outlier that it tossed the analysis out the window. In my previous post I mentioned how we've come a long way, and much of it is how we treat extreme events.

[Matthanuf06]

It's also important to note the correlation spike wasn't isolated across just mortgage performance, but all assets. Most of us heard how equities had a correlation spike, but lets just talk paper.

The housing decline also caused the quality of credit card debt, auto loan debt, student loan debt, etc all to decline. So the entire book got worse, at the same time, due to a unmodelable event. This is where the complexity is, not at that securitization level.

[reformedgator]

Matt, thanks for taking the time to explain the issue to the rest of us who had to live with it, but don't understand how we got into this mess.

[108]

Correct. Free market proponents are not anarchists. Protecting property rights and contracts are essential roles of government.

but not protecting its citizens from harm by the way of business right :huh:

you're living in a fantasy

[108]

It's not just relaxing standards. It's distortion of the market at all levels. Even something such as the mortgage interest deduction comes into play. The government is so involved here, at all levels, that they really have to sleep in the bed they made.

you're saying stuff that needs to be shown how it specifically relates to the crash

please be more detailed

[Minister_of_Information]

So what caused the bubble.

[Row6]

So what caused the bubble.

http://www.gatorcountry.com/swampgas/showpost.php?p=6440159&postcount=61

[Matthanuf06]

you're saying stuff that needs to be shown how it specifically relates to the crash

please be more detailed

Isn't it all obvious? I don't mean that in a condescending manner. You quoted me when I mentioned the mtg interest deduction. That increases demand for home ownership vs. renting, which in turns raises the price of homes. The moral hazard is a huge one. That exists across the board (not with just companies, but individuals as well), entities behave differently when they know Uncle Sam will bail them out. Again, not just firms, can apply that to individuals and entitlements.

[Matthanuf06]

So what caused the bubble.

The short answer is a lot of things, which can be traced to increased demand.

Low interest rates (FED), Govt incentives and loans and certain policies, irrational exuberance (everyone wants on a rocket ship), poor financial modeling (correlation and tail risk analysis mainly), moral hazards, simple speculative buying, etc.

Lots of those things fall into the chicken or the egg type of problem. So the key is what started it? I'd say really owning vs renting. The price to rent ratio was low, essentially saying you are better off to buy than rent. This increased demand, which set off the irrational exuberance even when it was technically better to rent than buy because everyone thought home prices were a rocket ship, so even if you couldn't "afford it" you'd gain equity via appreciation.

[dangolegators]

Isn't it all obvious? I don't mean that in a condescending manner. You quoted me when I mentioned the mtg interest deduction. That increases demand for home ownership vs. renting, which in turns raises the price of homes. The moral hazard is a huge one. That exists across the board (not with just companies, but individuals as well), entities behave differently when they know Uncle Sam will bail them out. Again, not just firms, can apply that to individuals and entitlements.

With regards to the recent housing bubble, the mortgage interest deduction had been around for decades prior to that. It wasn't a factor.

[Matthanuf06]

With regards to the recent housing bubble, the mortgage interest deduction had been around for decades prior to that. It wasn't a factor.

It artificially increases demand for housing. Considering that was what caused the bubble it certainly was a factor, albeit a small one. And even still it's simply a market distortion. It's an incentive for people to buy vs rent.

[dangolegators]

It artificially increases demand for housing. Considering that was what caused the bubble it certainly was a factor, albeit a small one. And even still it's simply a market distortion. It's an incentive for people to buy vs rent.

If the mortgage deduction had changed to make home ownership more favorable in the years preceding the bubble, you could certainly make a case for it, but the deduction has been around for decades. It is a factor in only the tiniest of ways.

[Matthanuf06]

If the mortgage deduction had changed to make home ownership more favorable in the years preceding the bubble, you could certainly make a case for it, but the deduction has been around for decades. It is a factor in only the tiniest of ways.

You could say that about every non-emotional factor. The housing boom was due to a multitude of factors as I listed, eliminating any single one wouldn't have solved it.

Either way I'm not sure how you don't see how it played a role. It increased demand ever since implementation. So over the years it caused more homes to be built than what is optimal. That increased demand (over optimal) continued to exist during the boom. Therefore more people bought homes than would have if that incentive did not exist. And one the downswing it added to the supply of homes on the market and vacant given the decades of increased supply it caused. I'm not claiming it was the only factor, or even a large one, this incentive was a small contributing factor.

Consequences are a pesky thing.

[dangolegators]

You could say that about every non-emotional factor. The housing boom was due to a multitude of factors as I listed, eliminating any single one wouldn't have solved it.

Either way I'm not sure how you don't see how it played a role. It increased demand ever since implementation. So over the years it caused more homes to be built than what is optimal. That increased demand (over optimal) continued to exist during the boom. Therefore more people bought homes than would have if that incentive did not exist. And one the downswing it added to the supply of homes on the market and vacant given the decades of increased supply it caused. I'm not claiming it was the only factor, or even a large one, this incentive was a small contributing factor.

Consequences are a pesky thing.

It played a role in the same way an extra in movie crowd scene of 1000 extras plays a role. Interest deduction on mortgages, which began 100 years ago, isn't worth discussing as a cause of the housing bubble.

If you want to go back far enough, you can say it's Christopher Columbus' fault. If he hadn't discovered America, there never would have been a housing bubble. Maybe there would have been a teepee bubble instead. That's similar to the logic you are using here. It's silly to include every possible factor, no matter how small, when trying to determine the cause of something. In statistics, too many input variables just ruins the usefulness of the model.

[wgbgator]

Man, not only did Columbus commit genocide, he made the housing bubble possible. And we still have Columbus Day why? :)

[Minister_of_Information]

I actually think that deductible interest, especially when rates are very low, could be a large accelerant in an expanding valuation bubble as it directly impacts the affordability of mortgaging higher purchase prices. Without the tax deduction the amplitude of the bubble could never have been as large, probably not even close. The mistake is giving all factors a static weight at all times, while the truth is they interact in unpredictable ways.

[Matthanuf06]

It played a role in the same way an extra in movie crowd scene of 1000 extras plays a role. Interest deduction on mortgages, which began 100 years ago, isn't worth discussing as a cause of the housing bubble.

If you want to go back far enough, you can say it's Christopher Columbus' fault. If he hadn't discovered America, there never would have been a housing bubble. Maybe there would have been a teepee bubble instead. That's similar to the logic you are using here. It's silly to include every possible factor, no matter how small, when trying to determine the cause of something. In statistics, too many input variables just ruins the usefulness of the model.

So if the mortgage interest deduction doesn't increase demand then why have it at all?

[Lawdog88]

I actually think that deductible interest, especially when rates are very low, could be a large accelerant in an expanding valuation bubble as it directly impacts the affordability of mortgaging higher purchase prices. Without the tax deduction the amplitude of the bubble could never have been as large, probably not even close. The mistake is giving all factors a static weight at all times, while the truth is they interact in unpredictable ways.


Yeah . . . but . . . that could not have been the sufficient reason to have produced the incentive to purchase beyond one's means, and to have it OK'ed by Fannie, Freddie, Sam, and the Capitalist Greedy Bankers and Instrument Traders.

Slight influence, I would think for some 'thinking" overpurchasers, but not many.

[Matthanuf06]

I actually think that deductible interest, especially when rates are very low, could be a large accelerant in an expanding valuation bubble as it directly impacts the affordability of mortgaging higher purchase prices. Without the tax deduction the amplitude of the bubble could never have been as large, probably not even close. The mistake is giving all factors a static weight at all times, while the truth is they interact in unpredictable ways.

Exactly right. It is very clear that the government has set up numerous incentives to boost housing demand, before, during, and after the boom. If the folks on the left do not think they increase demand, then why have them at all? You can't on one hand say it played no role in a demand bubble, and then on the other want the incentives to continue to spur demand. Makes no sense.

[Gatormb]

If your saying subprime was low risk your completely wrong. They were by definition high risk because they were made to people that could not ordinarily get loans somewhere else.

Having been in the business 36 years (and NOT an originator of sub-prime loans) the bolded definition above would apply to FHA and VA loans which are higher risk because they require no to low down payments and are available to those with lower credit scores.

These loans (as well as USDA) are not sub-prime loans but do carry higher risk.

Alt-A loans where income verification was not required with substantial down payments and excellent credit carried a slightly higher risk than the same with income verification but are also not considered sub-prime.

True sub-prime was little to no DP with lower credit scores and allowed bank statement cash flow to be considered as income.

Often on refinances the only requirement was equity.

A note on teaser rate loans. Prime adjustables would have margins (added to index at the time of adjustment) of 2-3%. Sub-prime margins were 5-7% with a basement of the start rate.

Oh, and most prime adjustable rate mortgages are presently enjoying rates under 3.5%.

BUT, when the government quits printing money....beware and click on the link below!:joecool::yes:

[Matthanuf06]

Having been in the business 36 years (and NOT an originator of sub-prime loans) the bolded definition above would apply to FHA and VA loans which are higher risk because they require no to low down payments and are available to those with lower credit scores.

These loans (as well as USDA) are not sub-prime loans but do carry higher risk.

Alt-A loans where income verification was not required with substantial down payments and excellent credit carried a slightly higher risk than the same with income verification but are also not considered sub-prime.

True sub-prime was little to no DP with lower credit scores and allowed bank statement cash flow to be considered as income.

Often on refinances the only requirement was equity.

A note on teaser rate loans. Prime adjustables would have margins (added to index at the time of adjustment) of 2-3%. Sub-prime margins were 5-7% with a basement of the start rate.

Oh, and most prime adjustable rate mortgages are presently enjoying rates under 3.5%.

BUT, when the government quits printing money....watch out and click on the link below!:joecool::yes:

And that's another thing to the folks that do not believe the government distorts the housing market...look at how they are distorting interest rates?

[dangolegators]

I actually think that deductible interest, especially when rates are very low, could be a large accelerant in an expanding valuation bubble as it directly impacts the affordability of mortgaging higher purchase prices. Without the tax deduction the amplitude of the bubble could never have been as large, probably not even close. The mistake is giving all factors a static weight at all times, while the truth is they interact in unpredictable ways.

When rates are low less interest is paid, making the mortgage deduction less of an incentive.

[Gatormb]

The short answer is a lot of things, which can be traced to increased demand.

Low interest rates (FED), Govt incentives and loans and certain policies, irrational exuberance (everyone wants on a rocket ship), poor financial modeling (correlation and tail risk analysis mainly), moral hazards, simple speculative buying, etc.

Lots of those things fall into the chicken or the egg type of problem. So the key is what started it? I'd say really owning vs renting. The price to rent ratio was low, essentially saying you are better off to buy than rent. This increased demand, which set off the irrational exuberance even when it was technically better to rent than buy because everyone thought home prices were a rocket ship, so even if you couldn't "afford it" you'd gain equity via appreciation.

Good stuff matt. Spot on.

[Matthanuf06]

When rates are low less interest is paid, making the mortgage deduction less of an incentive.

It is still an incentive. Do you not realize it distorts the market? That is like saying FHA, VA, USDA don't distort the market.

I'm living proof of government distortion. My county gave me 7k on top of a USDA loan to love where I live. If I didn't get that, I would not be living where I am today.

[dangolegators]

I am not saying that government doesn't distort the market. But 'distorting the market' is not necessarily a bad thing.

As for the actual impact of the interest deduction on the housing market, there's this:

To begin with, most taxpayers do not benefit from the deduction at all. This is because they do not itemize deductions on their federal income tax returns. According to Joseph Rosenberg, a research associate at the Urban-Brookings Tax Policy Center, only about 30 percent of taxpayers itemize, rather than take the standard deduction. And the majority of these itemizers are upper-middle and upper-income households.

http://www.nytimes.com/2012/10/28/realestate/mortgages-who-really-benefits-from-interest-deductions.html

[Minister_of_Information]

When rates are low less interest is paid, making the mortgage deduction less of an incentive.

Lower interest leads to higher purchase price and same net payment. Then this equity is monetized and added to the bubble.

[dangolegators]

Lower interest leads to higher purchase price and same net payment. Then this equity is monetized and added to the bubble.

Thus balancing out the effect of the interest deduction you were claiming was an 'accelerant' in times of low interest rates.

[Minister_of_Information]

Thus balancing out the effect of the interest deduction you were claiming was an 'accelerant' in times of low interest rates.

False, as interest and therefore the interest deduction is weighted to the front end of the mortgage its importance to the expenses of homeownership is outsized and any incremental tax loss due to lower rates is more than offset by the chain of equity passed to the seller (who then reseeds the market with, in all probability, at least a portion of this capital gain via his own purchase). You would have a better point if most mortgages were paid to maturity.

[baygator1]

big difference: student loans are not dischargeable in bankruptcy and mortgage debt is.

Incorrect.

http://www.studentloanborrowerassistance.org/bankruptcy/

[Row6]

Exactly right. It is very clear that the government has set up numerous incentives to boost housing demand, before, during, and after the boom. If the folks on the left do not think they increase demand, then why have them at all? You can't on one hand say it played no role in a demand bubble, and then on the other want the incentives to continue to spur demand. Makes no sense.

Of course governmental action has macro-effects, otherwise why do it. One may recall that after the market crash of 2000-2001 and then 9/11, the economy was shaky and most were eager to see something help it. Low interest rates were part of that reaction and so were the Bush tax cuts, which amounted to a windfall for high earners, a group more likely to invest their bundle then the lower and middle classes who would spend it. By themselves we probably don't have a problem, but confidence it the market was low and real estate was deemed a good and conservative place to put capital. There would have been a bubble without the subprime element, but it wouldn't have been the disaster it turned into without those toxic mortgages being lost in new investment "products" from the boy wonders on Wall Street.

[dangolegators]

False, as interest and therefore the interest deduction is weighted to the front end of the mortgage its importance to the expenses of homeownership is outsized and any incremental tax loss due to lower rates is more than offset by the chain of equity passed to the seller (who then reseeds the market with, in all probability, at least a portion of this capital gain via his own purchase). You would have a better point if most mortgages were paid to maturity.

This is nonsense. You yourself said 'Lower interest leads to higher purchase price and same net payment.'. With the same net payment, there is little or no change in the incentive to buy a house that the mortgage deduction provides. You are claiming that in times of low interest rates, the mortgage deduction 'accelerates' the market. I'd say the exact opposite. The lower the interest rate, the less the incentive is to take advantage of the mortgage interest deduction.

[Matthanuf06]

I am not saying that government doesn't distort the market. But 'distorting the market' is not necessarily a bad thing.

As for the actual impact of the interest deduction on the housing market, there's this:

http://www.nytimes.com/2012/10/28/realestate/mortgages-who-really-benefits-from-interest-deductions.html

You do realize that the only people that can realistically itemize are people that are paying mortgages?

So saying only 30% itemize isn't relevant in this discussion. It's more about the % of homeowners itemize.

But even still, it makes homes more affordable. It increases demand. It was a very minor contributor to the bubble. Just like no or minimal down mortgages backed by the govt increases demand. That's a larger contributor to the bubble than the mtg interest deduction, but also just a factor.

[dangolegators]

Of course governmental action has macro-effects, otherwise why do it. One may recall that after the market crash of 2000-2001 and then 9/11, the economy was shaky and most were eager to see something help it. Low interest rates were part of that reaction and so were the Bush tax cuts, which amounted to a windfall for high earners, a group more likely to invest their bundle then the lower and middle classes who would spend it. By themselves we probably don't have a problem, but confidence it the market was low and real estate was deemed a good and conservative place to put capital. There would have been a bubble without the subprime element, but it wouldn't have been the disaster it turned into without those toxic mortgages being lost in new investment "products" from the boy wonders on Wall Street.

I agree with this. Though I don't think the Bush tax cuts were a reaction to the shaky economy. That's something Bush and the Repubs were hellbent on doing, as there was actually a surplus at the time and rather than use the surplus to pay down the debt, they wanted to give it back in the form of tax cuts.

[dangolegators]

You do realize that the only people that can realistically itemize are people that are paying mortgages?

So saying only 30% itemize isn't relevant in this discussion. It's more about the % of homeowners itemize.

But even still, it makes homes more affordable. It increases demand. It was a very minor contributor to the bubble. Just like no or minimal down mortgages backed by the govt increases demand. That's a larger contributor to the bubble than the mtg interest deduction, but also just a factor.

We are talking about the change in demand. Mortgage deduction played no measurable role in the sudden increase in demand we saw in the mid 2000s. To my knowledge, the rules of the mortgage deduction did not change prior to the bubble. If they had changed to create more incentive for home ownership prior to the bubble, you would have a point. But, and correct me if I am wrong, the rules did not change.

Extremely easy credit, low interest rates, and a speculative ponzi-scheme-like craze were the drivers.

[Row6]

I agree with this. Though I don't think the Bush tax cuts were a reaction to the shaky economy. That's something Bush and the Repubs were hellbent on doing, as there was actually a surplus at the time and rather than use the surplus to pay down the debt, they wanted to give it back in the form of tax cuts.

That's true. The state of the economy was not the main driver of the tax cuts.

[Matthanuf06]

We are talking about the change in demand. Mortgage deduction played no measurable role in the sudden increase in demand we saw in the mid 2000s. To my knowledge, the rules of the mortgage deduction did not change prior to the bubble. If they had changed to create more incentive for home ownership prior to the bubble, you would have a point. But, and correct me if I am wrong, the rules did not change.

Extremely easy credit, low interest rates, and a speculative ponzi-scheme-like craze were the drivers.

Sure, that's fair and I agree. However these things are dynamic as well. As the market was rising, the deduction became more important to more people as they were buying more expensive homes, and reduced the cost of the home.

[Minister_of_Information]

This is nonsense. You yourself said 'Lower interest leads to higher purchase price and same net payment.'. With the same net payment, there is little or no change in the incentive to buy a house that the mortgage deduction provides. You are claiming that in times of low interest rates, the mortgage deduction 'accelerates' the market. I'd say the exact opposite. The lower the interest rate, the less the incentive is to take advantage of the mortgage interest deduction.

Yes that's true if people are making the same net payments on traditional mortgages during the period of asset inflation, but in fact they begin speculating on appreciating assets by taking on more leverage either via higher payment, ARMs with teasers, or interest only loans. In that environment the mortgage deduction is subsidizing a cycle of appreciation and speculation by reducing its cost and increasing the palatability of these novel financing instruments. When no cycle of appreciation and speculation exists the effects are as you describe, and novel financing instruments hardly exist.