Meanwhile, I'm seeing commenters claim that the housing crisis is really all about the Democrats making lenders lend money to poor people.
The data doesn't track you. The legislative pushes to expand lending to the poor do not match very well the subprime crisis, either in time or scope. Probably they contributed somewhat, but at best only slightly.
It would be nice if everything that went wrong in the world was a result of the scheming of our ideological opponents. But the sad fact is, stuff goes wrong. All the time. And there is usually no villain behind it.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
this is what free market capitalism is all about, cycles and self-correction. in the long run we just hope that the self-corrections teach us something about how we are to do business in the future and that they aren't so painful that we can't ever get out of them.
there maybe nothing the republicans or democrats could have done to prevent this, but i wonder about the people these two candidates would hire to run the regulatory bodies. through their appointees wouldn't the regulatory bodies have different agendas? just look at this administration and its dealing with the EPA or the Justice Department. in their quest for small government they undermined the working of the government that we need. The key question going forward is which administration would have listened to the small minority and had been in a position to anticipate such crisis, even if there wasn't much to do about it.
the answer may well be neither...
Indeed! I know several people with high incomes way over their heads in mortgages, too. Too much money was borrowed by too many people across the entire income scale. The subprime sector was just the first to go bad.
"Meanwhile, I'm seeing commenters claim that the housing crisis is really all about the Democrats making lenders lend money to poor people."
Replace "Democrats" with "Democrats and Republicans" and replace "poor people" with minorities and this is a far representation of Sailer's take:
"Uncovering the roots of the disastrous home mortgage bubble that popped last year will keep economic historians busy for decades. Yet, one factor has so far been largely overlooked: the bipartisan social engineering crusade to drive up the rate of homeownership by handing out more mortgages to minorities. "
http://tinyurl.com/659wcc
Why would you expect it to track with legislative pushes ... there could be years of lag for market response, because the problems don't show themselves until the real estate prices quit rising.
Certainly lots of the problems won't show up in statute, because it will have been implemented by regulation in agencies with oversight of the lending institutions.
So it isn't clear what the proper cause and effect factors would be, or what kind of correlation one would expect ... but a one-for-one with legislation doesn't make any sense.
Try again.
The legislative pushes to expand lending to the poor do not match very well the subprime crisis, either in time or scope
Could you give us an example of this?
What do you mean regarding "legislative pushes" exactly?
Believe it or not, the best summary of why this *actually* happened, without finger pointing or partisan accusations, is The Giant Pool of Money episode of This American Life.
Thanks for jumping on that. I've heard the meme coming from callers to local radio stations as well -- the notion that lenders somehow were "required" to extend risky loans in order to avoid being accused of redlining. If you understand what redlining is, though, it makes no sense. Redlining is the practice of declining to extend credit to otherwise qualified people based on their race or the neighborhood in which the collateral is located. A key factor in determining that redlining going on is detecting a pattern where the lender is making loans to some people, but not to others who are similarly situated from a standpoint of creditworthiness.
The problem we're faced with now isn't that lenders were somehow required to lend to minorities (which is really what this pernicious meme is all about). It's that lenders were allowed to participate in creating a financial system where the lenders could "sell" the risk (in the form of weird-ass securities) rather than carry it on their books.
Sailer's take
Yeah, he started with his premise and supported it. Whoop-dee-doo. You could also start with the premise that all appraisers are crooked and/or idiots and support it just as well. Or that the separation of risk from reward thru use of mortgage brokers and RMBS created a moral hazard was the source of the problem.
The problem wasn't encouraging lending to minorities, it was making loans in stupid, unsupportable amounts to all sorts of people. "Sorry, the house isn't worth that much" was never said to anyone from '99-'07; that was the fundamental problem.
IMHO, it seems to me that the biggest problem was that the risk associated with these investments was hidden.
The people buying the investments thought they were buying lower risk investments than they turned out to be. If the buyer had been fully informed about the risk, either they would have refused to buy, or demanded a higher return to compensate for the risk.
The fully informed buyers would have driven the industry to either lower the risk by demanding such things as income verification or larger down payments, or, they would have hiked the interest rates to cover for the risk. If either or both had happened, the pool of these investments would have shrunk dramatically. And, we wouldn't be in our current mess.
So, I place the blame on lack of proper regulation. The government should have forced the people selling the investments to fully disclose the risk.
"Redlining is the practice of declining to extend credit to otherwise qualified people based on their race or the neighborhood in which the collateral is located."
The problem is that neighborhood does matter. Look at my hometown of Detroit. The average home price has fallen from over 80K a few years ago to under 20K. Homes in bad neighborhoods, for lack of a better term, tend to fall further and faster in a downturn, hence being a bad risk.The buyers may be as qualified, but that doesn't mean the properties are.
Megan, do you have an answer to Sailerite's link?
Homes in bad neighborhoods, for lack of a better term, tend to fall further and faster in a downturn, hence being a bad risk.
The corollary is that homes in the bad neighborhoods (at least in San Diego) appreciated far more on a percent basis during the last 8 years as well. The fall peak to trough is going to be greater, because the rise trough to peak was greater.
Steve Sailer and his white supremacist flock blame everything on minorities. Absurd and disgusting.
Dantonj: no.
There are two problems with what you say. First, you're using hindsight. The loans were not just risky after the fact, they were losers. But you can't use that information in deciding how risky they were. Blackjack doesn't become more risky when my bet on red turns out badly. If my particularly security guarantees principal until more than 18 percent of the loans default, why are you saying that's not safe? (Make sure you don't use any information not available in 2005 when you make that assessment.)
Second, the securities were rated AAA by Moody's and S&P based on entirely transparent standards.... so transparent, in fact, that Moody's and S&P in essence shared their model with the the issuers to tell them what they needed to do to get a AAA rating. How much more transparent can you be than that?
So what exactly do you want gov't to do?
I have to agree with pb.
Business / market cycles are fundamental to economics. The government is trying to be the little dutch boy putting his fingers into holes, and later finding new holes in the dam elsewhere. After the tech crisis and Enron, we devoted all of our energy and regulations neutering public companies and equity research departments, that no one saw the securitization revolution. Now, we will spend years concentrating on neutering the securitization and mortgage industries. While in the background, something new is already developing that we can't even fathom.
The intent was good. Let's get minorities in the home-ownership business (ie. let's overcome redlining). The subprime debacle doesn't have anything to do with minorities per se (lenders aren't forced to make loans); it has more to do with a) lenders knowingly providing loans with pernicious payback options, b) borrowers borrowing more than they knew they could pay back, c) the inevitable collapse of the housing bubble (which was not created because more minorities bought homes - most of their homes aren't the ones with wildly out-of-whack appraisal values) and d) lenders spreading their risk throughout the broader economy.
so transparent, in fact, that Moody's and S&P in essence shared their model with the the issuers to tell them what they needed to do to get a AAA rating.
So they told the banks exactly how to game the system so they could get AAA ratings. Considering they were paid by those same banks, it's not surprising at all. This is the problem, the ratings agencies had no incentive to rate the risk appropriately. In fact, if they had they would likely have not gotten any business because everyone wanted that AAA rating. Just like appraisers had to hit an appropriate value, otherwise they'd be blackballed from the industry.
Blackjack doesn't become more risky when my bet on red turns out badly.
If you're betting based on red v. black in Blackjack, I'd say that you might want to reassess your risk assessment model. GIGO, my friend, GIGO.
Beat regulatory analysis I've seen so far:
http://www.cnbc.com/id/15840232?video=857933496&play=1
There is, however, something that probably could have been done, in hindsight, to prevent the worst of the meltdown. Whether such action was forseeable, or even practical given the national mood at the time is open to debate, but saying that there was absolutely nothing that could have been done is just false.
In the end, it's not Bush's fault, not because there was nothing that could have been done, but because he simply didn't have the ability to see what needed to be done, or that there was even a problem. No one will blame him, because no one expects him to be extraordinarily capable. He was elected for his mediocrity, and so mediocrity is what we expect from him.
I agree Megan that available data doesn't support the claim. But the available data also don't reflect all of the relevant events. In the data we can see legislation and changes in regulatory rules, but we can't see changes in regulatory emphasis. And though it's anecdotal, as a risk manager in a major bank, I've been in many meetings with regulators and listened to the "fair lending" side of the regulator demand that we take action that not only wasn't sound, but directly contradicted demands coming from the "safety and soundness" side.
I suspect most people in the industry could tell similar stories, and I suspect the consensus would be that the regulators did indeed strongly emphasize lending to "underserved" groups. Most banks went merrily along of course, because they saw an opportunity to fill their coffers and appease regulators, a mighty compelling twofer if there ever was one.
If you somehow had a way to get honest and accurate to a survey of folks in the industry, the overwhelming consensus would almost certainly be that at a minimum the regulators were influential and vocal cheerleaders.
"Redlining is the practice of declining to extend credit to otherwise qualified people based on their race or the neighborhood in which the collateral is located."
The problem is that neighborhood does matter. Look at my hometown of Detroit. The average home price has fallen from over 80K a few years ago to under 20K. Homes in bad neighborhoods, for lack of a better term, tend to fall further and faster in a downturn, hence being a bad risk.The buyers may be as qualified, but that doesn't mean the properties are.
This is a redlining red herring. When I mentioned neighborhood, I did not mean collateral value. If I meant collateral value, I'd have said collateral value. If the collateral value is different, or the lender has a reasonable sense that the collateral at issue in one loan will not hold its value (but wouldn't that be reflected in the appraisal process and, therefore, the value placed in real time on the collateral?) the buyers aren't similarly situated, are they?
Redlining is what's going on when the only explanation for the differential treatment of borrowers is their geographic location or ethnicity. If there is a reasonable economic explanation for why the lender is treating prospective borrowers diffently, it's not redlining.*
Somehow, however, the notion that abandoning redlining practices is the same as a kind of "affirmative action" in lending practices has infiltrated the discourse. It's pernicious and it's racist.
*There have been programs established in many urban areas that are designed either (a) to help less-advantaged people become homeowners or (b) to encourage people to buy homes in urban or blighted areas. We have them here in Cleveland, which is where I live, and I guess you could call them a form of "affirmative action" lending. These programs, however, account for a very small part of the lending market and are usually the subject of some form of government regulation (either local, state or federal) and are either subsidized or guaranteed by some government entity. They are in no way "responsible" for the subprime lending fiasco.
The common thread that I can see in the banking crises over the last half century is:
Bankers are sheep.
Whether it's trendy lending practices, jawboning from regulators to be "fair", or pressure to help prop up foreign governments, bankers can be driven like sheep.
Megan,
You might be right. I don't know if the laws pushing lenders to make loans to non-creditworthy home buyers were the prime or only a contributory cause of the current mess.
I do know this: If Fannie Mae and Freddie Mac had only purchased/financed 30-year fixed rate mortgages with 20% down payments, the US financial markets would not today be in a meltdown.
the notion that lenders somehow were "required" to extend risky loans in order to avoid being accused of redlining. If you understand what redlining is, though, it makes no sense.
You are assuming good faith on the part of those making the accusations, which is absurd.
Again,
The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending. Subprime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.
Link
Again,
the companies were constantly under pressure to buy riskier mortgages. Once, a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.
Link
I would also like to point out that a bank does not have to be technically guilty of redlining to be sued for it. Once the lawsuits are filed the banks start bleeding legal fees, even if the eventual judgement is in their favor. Meanwhile they get tons of bad publicity.
What does a Harvard trained lawyer turned "community organizer" do, again?
There are two issues here that I think McArdle is conflating.
The first is whether the government could have done anything to stop the credit bubble or further ease its collapse, the clear answer here is yes.
The second is whether or not it would have been reasonable to expect the Administration to do those things.
What could the government have done? First and most obviously it could have set minimum mortgage loan standards. There is a lot of focus on sub-prime but for reasons I can go into if you like, I think the true genesis of this crisis is in Alt-A.
Features like option ARMs, no-documentation loans, CLTV above 100%, and debt to income ratios of over 70%, could have been prohibited. The no-doc prohibition alone would have halted much of the speculative boom. The others would have made it more difficult for people to buy more house than they could afford.
Second, the government could have given fiduciary responsibility to the mortgage broker. A mortgage buyer would then have cause to sue a broker for suggesting a loan that was not in his or her clients best interest.
I am guessing this would have ground a lot of the bubblishous behavior to a halt.
Third, the government could have passed regulation demanding full disclosure of all MBS and securities built from MBS by publicly traded companies.
Much of the credit crisis stems from the fact that we do not know what is where. Not only are securities impacted by the probability of default but by the increased risk premium given that we there was so little information about who will default.
Lastly, the Administration could have been far more aggressive about ensuring that large financial institutions would not default. It could have assured bondholders through some period, say Jan 2009, that losses would be born by the taxpayer.
Now, would any of this have been appropriate? Probably not. I think a quasi-reasonable argument could be made for the first but I am leary of such heavy handed government intervention. However, that is the ideological question. Should the government have been more involved in a way that could stem the crisis.
My gut says not really, but it is not a completely off-base question.
I second Mike's recommendation of NPR's Giant Pool of Money. The explanation is clear, non-ideological, and pitched to the intelligent financial layman, at a level that most of Megan's readership will appreciate.
So, any prediction what the Fed will do? I predict no rate cut, and no direct help for AIG.
What does a Harvard trained lawyer turned "community organizer" do, again?
If I'm picking up the inference I think you intend, I guess he (or she) makes sotto voce threats of groundless and frivolous lawsuits in order to bully the poor helpless banks into making crappy loans to undeserving shiftless neeeeegros. How could I have been so blind as to miss that?
/snark off
Hey, BobW, I used to represent banks, and I know what kind of dog whistle you're blowing. Cut it out.
JordanT: Sure, the ratings agencies they may not ahve had very good incentives, but it's hard to see what you'd want to do about it. I don't see how gov't could suggest better ways to assess risk. And it's not like their incentives aren't transparent, so if you want to lower ratings a few notches, you're free to do so and not invest.
Thanks Jay C: Blackjack, roulette, whatever..... That's why I play Pai Gow Poker.... lowest variance game in the casino.
Nolo,
You mentioned Cleveland. We also had the city telling local banks that the needed to make loans in some of the worst-off neighborhoods in order to do business with the city.
I know what kind of dog whistle you're blowing.
So, BobW says that banks may be subject to false accusations of racism based on legitimate practices, and they you use that statement to accuse him of racism.
Indeed, you do seem very familiar with the process.
nolo:
That's not what I said.
Incentives matter. If there is lawsuit risk there is pressure to avoid it.
If there is a niche in the ecosystem something will fill it. Economics is the same subject as ecology.
Do you really think management doesn't try to avoid being sued? Do you really think nobody takes advantage of that fact?
Maybe I will wake up from the nightmare of the last thirty years to find that things are really as they were portrayed in my social studies class.
There is an advocacy, bureaucratic, and commercial complex in every policy area.
Rob, I want to see BobW prove a certain "community organizer" (and why on earth would BobW have put that phrase in quotation marks?) used "false accusations of racism based on legitimate practices," rather than simply imply it. Myself, I haven't seen any "false accusations of racism based on legitimate practices," except in the fervid imaginations of people who'd use that kind of language to sum up what BobW was implying.
Tom, I explicitly acknowledged that governments have taken steps to make credit available to urban residents, and/or to encourage the purchase of urban residential properties. But point out to me a single bank in Cleveland that's in trouble because it was forced, encouraged, or otherwise "incentivized" by the City of Cleveland to offer loans in bad neighborhoods.
I'd also add, Tom, that banks don't have to do business with Cleveland if they don't want to. If anything, Cleveland needs the banks more than the banks need Cleveland. Or are you too young to remember the default, when the banks pulled the credit rug out from under our fair city back during the Kucinich administration?
BobW asks: "What does a Harvard trained lawyer turned "community organizer" do, again?"
Since Obama worked as a community organizer before he went to Harvard Law School, who gives a rat's ass, Bobby? You're not just blowing a Sailerite whistle, you're wrong on your facts.
You're a perfect candidate for a job with the McCain/Palin administration. How's Undersecretary of Ridiculous Lies sound?
Investor's Business Daily has an editorial that nicely sums up the arguments that the mortgage crisis is largely the responsiblility of government: IBD Editorial
Note: I'm not endorsing this view, only pointing out a good summary of it.
Simpler left wing hack:
It's all GOPers fault because they're evil capitalist pigs and we said so. Never mind all the Clinton hacks running Fannie Mae, don't pay attention...
BobW, if I overstated your position, I apologize. But I'm not all that sure I did.
I'm quite aware of the role that the possibility of litigation plays in the Way Things Work. I'm quite aware that companies would like to avoid being sued, though I consider that a feature, not a bug, of our civil justice system. The fact someone might be able to seek redress from a company if the company does something bad should act as a deterrent to bad behavior and an encouragement to best practices. Too often, though, I've had to listen to business reps claim that the mere "threat" of lawsuits is somehow forcing them to do all sorts of ludicrous things and incur all sorts of ludicrous expenses. They then claim this hyperbolic crap is a reason they should be insulated from liability -- usually to consumers or the community.
. . . interestingly, though, they seldom think they should be insulated from liability to each other, or kept from going to the courthouse to sue their competitors . . . and if you think companies don't wave the litigation stick at each other with appalling regularity, you ain't spent much time in commercial litigation. But I digress.
hey the market does what the market does. the problem is there are only just so many ways to make money. the finance guys thought they found a new one but turns out they did not.
OK. I got my timeline wrong. I apologize. That was an off-the-cuff addendum. I should not have written it.
I still think incentives matter. Local bank management has strong incentives to not close, even when business conditions are unfriendly. Even a nation wide bank has strong incentives not to close branches. If they can shuffle off the bad paper to somebody else that makes their decisions easier.
The bad mortgages are not just to poorer people. There were bad mortgages written to outwardly prosperous but overextended people. Nobody wanted to be left out of the party. Everyone wanted a piece of the action. Look at the comments with the gambling theme.
Bank management did not do its job. Whatever the incentives, they wrote bad loans.
Bob - should people like me(30 year fixed rate mortgage holder, never missed a payment) be forced to bail out all the deadbeats?
Megan, you need to be a campaign advisor for both campaigns. I am tired of their rapid response "This is my opponents fault" ads. good post thanks.
Blaine
Why do I have the feeling that somewhere Warren Buffett is smiling and getting ready to spend some money on some very cheap assets as this shakes out.
There can not be a better position to be in than a cash-heavy one like he is.
nolo writes: "I'm quite aware of the role that the possibility of litigation plays in the Way Things Work. I'm quite aware that companies would like to avoid being sued, though I consider that a feature, not a bug, of our civil justice system. The fact someone might be able to seek redress from a company if the company does something bad should act as a deterrent to bad behavior and an encouragement to best practices. Too often, though, I've had to listen to business reps claim that the mere "threat" of lawsuits is somehow forcing them to do all sorts of ludicrous things and incur all sorts of ludicrous expenses. They then claim this hyperbolic crap is a reason they should be insulated from liability -- usually to consumers or the community."
I have extensive experience in the mortgage industry going back to 1986. There simply isn't a whole lot of worry about lawsuits based on the CRA, which mainly comes up during merger approvals and the like. BobW's argument is simply garbage with a right-wing slant.
No and low doc loans weren't created to pander to low income borrowers - they were introduced way back when in order to cater to wealthy borrowers, and often to newly wealthy borrowers who had no history of maintaining high income. When they were first introduced, as I recall, they were largely confined to jumbo loans. And then the virus spread. The other major factor, collusion between appraisers and mortgage brokers/producers, was also driven by the high end of the market.
The Sailerite impulse to blame everything on the dreaded minority is not worthy of respect.
If it is the case that loans were being made to subprime borrowers, regardless of their ethnicity, go to the next obvious point and ask what kinds of loans were being made to people with good credit.
What I think you'll find is that those folks were all too often buying a lot more house than they would have in a normal (as opposed to loose) credit market; that they were buying second or third residences they otherwise could not have afforded; that they were speculating and got caught out when the market dropped and they couldn't sell at the price they paid; that they took ARMS assuming the equity in their house would grow enough in two or three years to cover it AND that interest rates would stay level or drop further...etc...
I teach in a small city (17K) where a developer decided just before the bubble burst to build apartment style condos on the river that flows through here. This is a city of detached houses with big lawns where the majority of apartment dwellers are students, recent immigrants or single young adults.
The biggest unit in this development was 1500 sq. ft. and cost 495K. For that money you could buy any house in town and a nice car to park in the driveway. Very few units sold, the building is mostly empty but two of the most expensive units are occupied. I don't know if those folks are upside down. They may have paid cash for all I know. But a three story well kept house on a corner lot in the most desirable part of town sold at 289K at the same time, so they are NEVER going to get their money back in their lifetimes.
That and all the semi-empty condos and developments in cities and suburbs all over the country are as much the story of what we're going through as anything else
Or put another way, there weren't enough poor folks buying houses to cause all this.
davido writes: "Or put another way, there weren't enough poor folks buying houses to cause all this."
Of course not - not even close. But Sailerites don't want to hear that. They always know who the villains are.
MLJ, I cut my little baby lawyer teeth handling commercial foreclosures back in the early '90s, and a lot of what I was cleaning up was detritus from the insanity that led to the S&L crisis. Commercial real estate loans that never should have been made, secured by property that wasn't worth a damn. I bet you know the type I'm talking about. What amazes me right now is that the mess we're in now would never have happened if the fear that the S&L crisis should have inspired in lenders (and regulators) hadn't been completely overridden by shortsightedness and greed.
There are nuggets of horseshit hidden in the bullshit about "Democrats" and "poor people". I am white and very middle class (so, by the way, were most of the people in Vegas and California and the other foreclosure hotbeds). In 2004 I was shopping for a mortgage and was told over and over again about all the new "products" that were available. No money down, adjustable rates, piggyback mortgages, no doc mortgages. I could afford to take about $300,000. I was made to feel like a sucker not to take one of these new mortgages that would allow me to buy a house for "$500,000, $700,000, whatever you want!" I took out a traditional mortgage for the 300k that I could afford.
But the brokers weren't pushing me into these other mortgages because of "Democratic" policies helping me because I was either poor or a minority. They were doing it because they were unregulated and could get away with whatever they wanted and wouldn't be around when the bills came due.
"But point out to me a single bank in Cleveland that's in trouble because it was forced, encouraged, or otherwise "incentivized" by the City of Cleveland to offer loans in bad neighborhoods."
That was from our dear Mayor Jackson, when/after running for office. He said we had a program in place, but had not used it enough. Banks were not forced to participate, but city business was lucrative. If you want a piece of that business, you will comply. He did not mention specific banks.
Whether this caused any banks major problems, I do not know. But that is not relevant. They should bid on Cleveland's business on its own merits, and lend to Clevelanders on their own merits.
Re: Impact of anti-redlining regulations Anti-redlining regulations (and related "community investment" requirements) affect business decisions in three primary ways: First, these rules prohibit business practices that some viewed to be discriminatory or discriminatory in impact. Up thread, someone said that anti-redlining rules did not prevent a bank from taking into account the greater likelihood homes in a particular neighborhood would decline in value in deciding not to make mortgage loans on homes in that neighborhood. It was said that legitimate differences in collateral could be taken into account in making mortgage decisions. Yes and no. Anti-redlining rules said some facts, such as a property's address, could NOT be considered. Thus, even if homes in a given neighborhood were objectively less attractive as collateral than were the homes in another neighborhood, that fact could not enter into the mortgage approval process. By design, this led loans to be made that would not otherwise have been made. In most cases, this meant more risky loans were made than otherwise would have been the case.
Second, the potential for a law suit or enforcement action "forced" banks to adopt rules that were more liberal than the law actually may have required. By design, this results in more loans in blighted areas.
Third, local, state, and federal governments used these rules as levers to "force" banks to adopt more liberal lending practices. Banks are highly regulated and interact with one or more regulatory agencies on an almost daily basis. Even routine business decisions often must be approved in advance by some government agency. These agencies are subject to pressure from local, state, and federal elected representatives. Frequently, in response to this pressure, routine matters are held up until banks make concessions (concessions that are often unrelated to the matter at hand). For example, if a bank wants to open a branch in growing part of the city, permission may be withheld until the bank agrees to open (or keep open) a branch in another part of the city. If two banks wish to merge, the merger may be held up until the banks agree to continue, expand, or create a community reinvestment program. Again, the net result of this interference in a bank's operations is more loans made to less credit worthy customers.
Whether this caused any banks major problems, I do not know. But that is not relevant.
Well, I'm glad we had this meaningless discussion then.
after reading all of this I would love to see a post from megan entitled "If I ruled the world I would do this...." i want some ideas. more regulation, less regulation, federal loan standards, federal licensing for mortgage lenders, better consumer education, higher interest rates, something...we're not hearing anything from the campaigns that is of substance but i am not really hearing anything from any of the billion blogs and pundits and talking heads.
Why won't Megan address Andrew Sullivan's increasing mental illness?
What everyone seems to miss here is that all this bears the hallmarks of a typical speculative bubble that everyone wanted to get in on. The rapid rise in the real estate market over a decade or so looked like the proverbial pot of gold at the end of the rainbow. Everyone wanted in on it. Congress wanted to help poor people get in on it too, so there was no need for them to regulate any of this. What risk? There was no risk -- the trend was upwards, and would continue! In that environment, who cares if people can't make their payments. When they can't, we just sell and recover, no big deal.
And that means that securitizing the risk (what risk? the trend was UP UP UP!) was a good idea too. If there is only an upside, what's the downside? So all the people in the world buy into the rising market, and hope to get rich on rapidly rising real estate values.
What would Congress or anyone else have regulated? Hope? Inane trend extrapolations? Yeah, try that.
Then, when the bubble burst, we discover some really bad regulation -- like mark-to-market. When the market falls, the financial value of assets drop -- even though the houses are exactly the same, none has been lost or destroyed -- and portfolios have to be reevaluated immediately. That's *bad* regulation, and it has compounded the crisis. Not just paper fortunes but real wealth disappeared through dumb accounting rules. It makes no sense at all.
The good news is that no real values have been lost. The houses still stand (except for hurricanes, but that's a different problem). There will be some short term effects of a real kind. Some people in speculative institutions will lose their jobs. Some pension funds will lose assets, forcing some people to work longer than they planned. Some people who would like to buy houses now can't get a mortgage. Some businesses can't get loans. All that's bad, but it's mostly due to the mark-to-market rule that has needlessly made even solvent lenders unable to lend and destroyed some financial institutions that otherwise could have ridden out the storm.
When a speculative bubble bursts, there is little loss of real values -- but, in this case, huge reevaluations of asset values. Enormous wealth transfers have taken place. For example, the falling house prices are good for a lot of people -- the buyers, if they can only find a mortgage. That will come. Don't lose hope, the market will adjust.
So, the story is that Congress and the regulators happily joined the frantic masses who could only see increasing wealth in real estate -- that unbroken trend into the future -- and happily made it easier for lenders to lend to unqualified buyers. Then when the rainy day came, the regulators had stuck us with bad accounting rules, so the fall became much deeper than it had to be.
And now you want these clowns to regulate the market further? Like they know how? Next time they see a free lunch come around, they'll be happy to accommodate again.
But what is it those dismal economists always say? Yeah, right, there is no such thing as a free lunch. Not in speculative investing, not in regulation. Sigh.
Crusader writes: "Why won't Megan address Andrew Sullivan's increasing mental illness?"
Why is it symptomatic of mental illness to want to keep a lying, warmongering geezer and an inept, lying mother of high school dropouts from succeeding the worst president in US history?
Sullivan's worth a million Christianist Crusaders.
"Whether this caused any banks major problems, I do not know. But that is not relevant.
Well, I'm glad we had this meaningless discussion then."
I guess I should have stated I don't know the exact amount of the damage done, but then I also don't care. It's wrong to tie these two things together. Sorry if that line was slightly off topic.
Actually, I was refuting "But point out to me a single bank in Cleveland that's in trouble because it was forced, encouraged, or otherwise "incentivized" by the City of Cleveland to offer loans in bad neighborhoods."
So I guess I had no need to show harm was done to the banks.
So I guess I had no need to show harm was done to the banks.
Well, if it didn't do any harm to the banks, why the hell should anyone care? Clients and customers often want things that don't really matter much, but who are you to say they can't ask for them, or that businesses can't do them? Like I said before, if the banks don't want to do what the city wants them to do, they've really got a lot more power to say no than you're giving them credit for. If they didn't say no and it didn't hurt any bank to do it, bfd then.
Compare the length of this post to the one three posts earlier and rethink that thing I said about you focusing on conservative awesomeness/liberal crappiness.
Also, for Christ's sake woman, START PROOFREADING. You get sic'ed more than a dog trainer.
Nutella, if John McCain claims that redlining was the primary cause of this crisis, I promise you to write an extensive post refuting him. As for the proofreading, sorry; I'm a rotten typist.
Megan and the leftist trolls, are missing the point about redlining. It's not the actual redlining, it's the efforts of ACORN et al.
The false accusations of racism and the threats to business with governments and even business licenses were the most damaging weapon against the imposition of reasonable lending practices. The evil lie of "disparate impact" would be trotted out against people trying to make conservative loans.
Megan correctly mentions that banks and regulators would not be allowed to go back to rational standards at the appropriate time. Megan fails to understand that one of the biggest reasons was the many false accusations of racism. The heat might have been manageable (though atrocious) for not letting Nurse Sue get her house, but the threat of being called Bank of KKK by a Representative or Senator was just too much.
Governments should have NO community lending standards. Regulators must require that loans be extended only on the prospects of the individual loan with felonies for submitting to any standard other than that. Leave finance to the capitalists and hang the left for their 100M murders in the 20th century.
Hey McCains: "Megan and the leftist trolls, are missing the point about redlining. It's not the actual redlining, it's the efforts of ACORN et al."
In 20 + years in the mortgage industry I have never yet heard a single person bitch about the ACORNs of the world. No one cares about them. Hey is living in Rush Limbaugh's cigar-stenched Oxycontin-blurred reactionary fantasyland.
Hey concluded: "Leave finance to the capitalists and hang the left for their 100M murders in the 20th century."
That ripe turd deserves a post of its own.
"Sorry, the house isn't worth that much" was never said to anyone from '99-'07; that was the fundamental problem"
That's a load of crap.
Real estate is market driven, appraisers do not "make" the market. Its based on something called substitution. Simply put, the sales of properties similar to the subject are analyzed and the sale prices adjusted to account for differences in the comparable to the subject to determine the value of the subject. They substitute a "comp" for your home.
Do some appraisers hit numbers, yes. Are some bad. Yes.
However keep in mind, lenders use what is called a AVM. Automated valuation. Its a computer driven appraisal. Most lenders like to see the actual human provided appraisal vary no more than5-10% of the computer model. This is due diligence on the part of the lender. Are you saying that not only was the appraiser an "idiot" but the sophisticated computer model was in somebodies pocket as well? Isn't it the lenders job to make decisions whom will get a loan?
Don't they have a responsibily to not use the crappy appraisers? Let me clue you in, brokers, loan agents and real estate agents LOVE crappy appraisers. But the lender had/have tools to find the bad reports. They can and should have an in-house appraisal department to eyeball every report. They don't. Because borrowers wan't a loan in 7 days with no paperwork.
Bottom line, the lenders blew it. They gave money to people who could not qualify. They did not do due dilgence. They make the decisions to give money away, it is on them. If you were loaning money, would you make sure you were protected?
We learn this lesson when we are about 10 years old...Grow up.
"What everyone seems to miss here is that all this bears the hallmarks of a typical speculative bubble that everyone wanted to get in on. "
Yeah and speculative bubbles are generally preceeded by and caused by increases in the money supply. Alan Greenspan, thank you.
As a conservative, I keep waiting for a crash so I can finally afford to buy a house. I'm damned near close to 6 figures in income, but since I live in CA, I can't afford anything except a double-wide trailer. Unless I expect a Dem led government to buy me out if I foreclose.
I looked at condos 3 years ago, and saw that a condo in CA cost what a house with a 3/4 acre lot cost in the Midwest - and would've put me at the limit of what the bank would lend me.... I didn't buy it - cause I couldn't afford it. Why am I now, as a taxpayer, bailing out the people who got themselves into this trouble?
And proofreading is the thing you do AFTER your bad typing has made an even bigger mess of things. My god, you just can't respond to what people actually accuse you of, can you? That'd be like me asking you to close the door when you go to the bathroom and you saying "Sorry, but I was REALLY hungry."
Some actual arguments in support of your thesis would have been nice.
Housing is starting to drop in price here in the UK too. The Democrats policies don't apply here. The consensus is that mortgages were too easily available to buyers. Now, with the credit crunch and big rises in the cost of fuel, food, etc, buyers have much less money to play with. As a result they have less money to spend on paying mortgages.
As I understand it, there were many more houses built in the US during the housing boom, increasing supply and making the crash worse than over here.
Homercles has got to the real source of the problem. It was the destruction of the underwriting standards that created the problem. Those underwriting standards were destroyed in the name of "fairness" as defined by the Dems. Lenders had to comply or get socked with the huge Federal penalties, after suffering through the investigations and bad press asociated with being cast as being engaged in discrimination.
Once one poorly qualified borrower is deemed eligible, then an otherwise better qualified borrower can become qualified for a larger loan.
Simply untrue Ms. McArdle.
The affect that large securities offerings of bundled sub-prime loans has had in this fiasco cannot be overlooked. A housing slowdown should not have caused the crashes we have seen. They are, instead, almost completely attributable to poor investment decisions in purchasing these bundled loans.
The question then is where is the root, the start, of these securities instruments that proved to be so risky? That would be with Fannie Mae and Jaime Gorelick. In order to raise more cash to fund more CRA loans and feed the demand that lower underwriting criteria created, Fannie Mae started selling these bundles which they proclaimed to be great investments. Other large lenders soon followed suit.
And why shouldn't they? Look at the claims that Fannie Mae was making regarding profitability from 2001 until the truth was finally revealed in 2006. Perhaps teh Bush Administration should have acted sooner; but how can you when Fannie Mae is cooking the books and a heavily lobbied Congress fails to do it's oversight job?
But the sad fact is, stuff goes wrong. All the time. And there is usually no villain behind it.
[snark] Of course there is, and Pelosi's gonna hold a show trial to prove that it's all Bush's fault! [/snark]
Seriously, Megan - "the data may not track," but there's no question that forcing Fannie Mae and Freddie Mac to purchase so-called Alt-A loans was a significant factor in their demise. One factor was the .
The Village Voice - not exactly a hotbed of conservatism - points out that among the players was HUD Secretary Andrew Cuomo:
And when Pelosi holds her show trial, there will be no mention of Cuomo, nor will they speak of Rangel, or Dodd, or Schumer. And I will bet real money on that. Any takers?
[Let's try that again, please]
But the sad fact is, stuff goes wrong. All the time. And there is usually no villain behind it.
[snark] Of course there is, and Pelosi's gonna hold a show trial to prove that it's all Bush's fault! [/snark]
But seriously, Megan - "the data may not track," but there's no question that forcing Fannie Mae and Freddie Mac to purchase so-called Alt-A loans was a significant factor in their demise. Congress strengthened the Community Reinvestment Act as a means of upping homeownership rates, which meant lowering lending standards.
The Village Voice - not exactly a hotbed of conservatism - points out that among the players was HUD Secretary Andrew Cuomo:
And when Pelosi holds her show trial, there will be no mention of Cuomo, nor will they speak of Rangel, or Dodd, or Schumer. And I will bet real money on that. Any takers?
Hi -
Actually, those involved do indeed think that the requirement to make loans to low-income (AND high-risk) individuals is the fundamental reason for the subprime crisis:
see this:
http://21stcenturyschizoidman.blogspot.com/2008/09/from-guys-who-were-there.html
for more.
Basically, the chaps who were actually doing the risk analysis before Richard Syron came aboard and started the political manipulation of the system directly state that the requirement to make loans to low-income areas...
I agree with DBL that "if Fannie Mae and Freddie Mac had only purchased/financed 30-year fixed rate mortgages with 20% down payments, the US financial markets would not today be in a meltdown."
Also, economist Stan Leibowitz argues that the Feds invited the mortgage mess which he sees as a "direct result" of an intentional loosening of standards:
http://www.independent.org/newsroom/article.asp?id=2114
Not being an economist, I'm in no position to evaluate Liebowitz's claims, but I thought I should pass the above along.
You don't play much blackjack, do you? Just a guess.
Or he simply left out "in roulette" in his comment. Thats how I read it... "when my bet on red in roulette turns out badly".