Myth 1
There has been no official bipartisan consensus on the causes of the financial crisis:
An official government report was produced in April 2011 by the Senate
Permanent Subcommittee on Investigations, led by Chairman Carl Levin
(D-MI) and Ranking Member Tom Coburn (R-OK), titled Wall Street and the
Financial Crisis: Anatomy of a Financial Collapse. The “Levin-Coburn
Report,” a 639-page document, including 2,849 footnotes unanimously and
unambiguously concluded that “the [2008] crisis was not a natural
disaster, but the result of high risk, complex financial products;
undisclosed conflicts of interest; and the failure of regulators, the
credit rating agencies, and the market itself to rein in the excesses of
Wall Street.”
This myth got traction in January 2011, when after conducting over
five hundred interviews and holding twelve days of hearings, the
Financial Crisis Inquiry Commission (FCIC) failed to produce a unified
report. The 545-page book the panel did publish, titled The Financial
Crisis Inquiry Report: Final Report of the National Commission on the
Causes of the Financial and Economic Crisis in the United States, had
three sections. The first part was a lengthy majority report endorsed by
the six Democratic appointees. This was followed by two much shorter
dissents. Reading the three parts together, it is clear that all ten
commissioners agreed that the collapse of the U.S. housing bubble was
the proximate cause of the crisis.
In addition, there was
substantial consensus among nine of the commissioners. For these
nine—including three of the four Republican appointees—the centerpiece
of the consensus was that poor risk management at U.S. financial
institutions was a chief contributor to the crisis. For example, all
nine agreed that risk management failures at financial institutions led
to insufficient capital and a reliance on short-term borrowing.
http://www.salon.com/2014/05/25/toxic_bankers_captive_regulators_everything_you_think_about_the_housing_market_is_wrong/
Myth 3
ReplyDeleteThe financial crisis was brought about because the Community Reinvestment Act of 1977 forced banks to lend to people with low incomes who could not afford to pay back their mortgages: The FCIC Majority and Primary Dissent roundly reject this myth, leaving the Solo Dissent as the lone proponent of this shaky story. The Community Reinvestment Act (CRA) was enacted to prevent banks from refusing to extend loans to creditworthy borrowers in particular neighborhoods, a practice known as “redlining.” The FCIC Majority notes that “the CRA requires banks and savings and loans to lend, invest, and provide services to the communities from which they take deposits, consistent with bank safety and soundness.” Further,
it states that
the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.
Similarly, the Primary Dissent explicitly states that the Community Reinvestment Act was not a “significant cause.” Many government officials and scholars have also rejected this myth. In contrast, the Solo Dissent singles out U.S. government housing policy, including the CRA, as the sine qua non of the financial crisis.
Myth 4
The giant government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, caused the financial crisis because the government pushed them to guarantee mortgage loans to people with low incomes as part of their public housing mission: Not exactly—both the FCIC Majority Report and the Primary Dissent agree that Fannie and Freddie on their own did not cause the financial crisis. They focus blame largely on the private-label mortgage market. Fannie and Freddie did not originate any loans; the “exotic” and high-risk loans were designed by and extended to borrowers through the private-label pipeline. While the Majority and the Primary Dissent concur that Fannie and Freddie’s business model was flawed, they also agree that affordable housing goals neither drove Fannie and Freddie to ruin nor caused them to create the overwhelming demand for predatory, high-risk, mortgages.
The Majority Report stated that the affordable housing goals that the Department of Housing and Urban Development (HUD) gave to the GSEs “did contribute marginally” to their purchase of risky mortgages. But it was the desire to gain market share and increase executive compensation that drove the management teams at Fannie and Freddie to fill their portfolios with high-risk private-label mortgage-backed securities. It was the growth of their portfolio business for profit coupled with a 75– 1 leverage ratio—not their public housing mission—that caused them to fail. Fannie and Freddie “had a deeply flawed business model as publicly traded corporations with the implicit backing of and subsidies from the federal government and with a public mission.”
Similarly, the Primary Dissent concluded that “Fannie Mae and Freddie Mac did not by themselves cause the crisis, but they contributed significantly in a number of ways.” It noted that U.S. housing policy does not itself explain the housing bubble. The Primary Dissent echoed the Majority in contending that “Fannie Mae and Freddie Mac’s failures were the result of policymakers using the power of government to blend public purpose with private gains and then socializing the losses.” In his Solo Dissent, Peter Wallison blamed housing policy and the GSEs for the crisis.
Myth 5
ReplyDeleteMistakes were made, but there was not widespread fraud and abuse throughout the financial system: There is evidence of widespread fraud and abuse throughout the private mortgage market. Examples exist across the mortgage supply chain, beginning with fraud in mortgage documentation and ending with the peddling of worthless synthetic mortgage-related bonds to guileless institutional investors. From borrowers, to brokers, to lenders, to bank securitizers, to credit-rating agencies, to investment bankers, the Majority Report found evidence of either fraud or corrupt and abusive behavior across each link. It describes FBI agents warning of mortgage fraud in 2004 and 2005 and housing advocates early and consistently trying to get the attention of regulators to crack down on predatory lending. As for abuse, the bipartisan Levin-Coburn Report and the FCIC Majority provided many instances of lenders making loans they clearly knew borrowers could not afford.
The Primary Dissent agreed that the industry’s conduct went well beyond mistakes and errors: “Securitizers lowered credit quality standards and Mortgage originators took advantage of this to create junk mortgages.” Although Wallison’s Solo Dissent rejected the notion that fraud was an “essential cause” of the crisis, he agreed that it was a “contributing factor and a deplorable effect of the bubble.” He acknowledged that “mortgage fraud increased substantially” beginning in the 1990s “during the housing bubble” and that “this fraud did tremendous harm.” But unlike the Majority and Primary Dissent, Wallison blamed “predatory borrowers” as the ones who “engaged in mortgage fraud.”
Myth 6
ReplyDeleteThe financial crisis was caused by too much government regulation: Deregulation and regulatory forbearance—too little regulation, rather than too much—contributed to the crisis. The entire toxic- mortgage supply chain was enabled by decades of deregulation and desupervision. The Levin-Coburn Report included more than eighty pages focused exclusively on the regulatory failure at one agency, the Office of Thrift Supervision (OTS). It also made recommendations for further reform beyond Dodd-Frank’s changes. The FCIC Majority stated that more than three decades of:
deregulation and reliance on self- regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor.
Similarly, the Primary Dissent identified “in effective regulatory regimes” for nonbank mortgage lenders as an important “causal factor.” It faulted “lenient regulatory oversight on mortgage origination” at the federally regulated bank and thrift lenders Wachovia, Washington Mutual, and Countrywide.
In the Solo Dissent, Wallison claimed the Majority had “completely ignored” solid evidence that there were not thirty years of deregulation. He pointed to the FDIC Improvement Act of 1991 (FDICIA), a law that he said “was celebrated at the time of its enactment as finally giving the regulators the power to put an end to bank crises.”
Contrary to his assertion, the Majority did discuss FDICIA; it has nothing to do with the deregulation that enabled high-risk mortgage lending and securitizing. This law requires the FDIC to shut down or sell a failing bank or thrift. This part of the law did not apply to independent investment banks like Bear Stearns and Lehman Brothers; for them the choice was bailout or bankruptcy. And, there were loopholes in FDICIA. If the regulators determined that the firm posed a “systemic risk” to the financial system, the FDIC did not have to pursue a resolution of “least cost” to the deposit insurance fund. Also, the Fed was permitted to make emergency loans to failing banks. Given these loopholes, the Majority explained that FDICIA sent a “mixed message: you are not too big to fail—until and unless you are too big to fail. So the possibility of bailouts for the biggest, most centrally placed institutions—in the commercial and shadow banking industries—remained an open question until the next crisis, 16 years later.” Indeed, the “systemic risk” exception would be invoked several times during the bailouts.
Myth 7
ReplyDeleteNobody saw it coming: Plenty of people saw it coming, and said so. The problem wasn’t seeing, it was listening. As both the Levin-Coburn Report and the FCIC Majority showed, financial sector insiders, consumer advocates, regulators, economists, and other experts saw the warning signs. They spoke out frequently about the housing bubble and the mortgage underwriting practices that fueled it. Yet most whistleblowers were ignored or ridiculed at best, and fired and blacklisted at worst.
The Primary Dissent emphasized that some players in the market saw what was ahead: “Managers of many large and midsize financial institutions in the United States and Eu rope amassed enormous concentrations of highly correlated housing risk on their balance sheets. In doing so they turned a building housing crisis into a subsequent crisis of failing financial institutions. Some did this knowingly; others, unknowingly.”
The Solo Dissent stated that the housing bubble was clearly growing but also claimed that the “number of defaults and delinquencies among these mortgages far exceeded anything that even the most sophisticated market participants expected.”
Myth 8
The financial crisis was unavoidable. And financial crises of this magnitude are inevitable: The Majority Report unequivocally stated that “this financial crisis was avoidable. . . . The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public.” The Solo Dissent contended that. “No financial system . . . could have survived the failure of large numbers of high risk mortgages once the bubble began to deflate.” However, it blamed housing policy, not bankers, for the creation of the high-risk mortgages.
This myth that we cannot avoid large-scale financial crises is particularly corrosive, as those who are in its thrall reason that since crashes are inevitable, regulation is fruitless. But this is not the necessary conclusion. There were no major financial crises between the New Deal and the S&L crisis, a span of fifty years when each type of firm was protected in its own niche and limited in their activities. Deregulation delivered the S&L debacle and the related 2008 financial crisis. This inevitability myth also distorts the view of Hyman Minsky, the economist who advanced the theory in 1986 that markets are prone to instability. The sensible reaction to this recognition is not to let the system keep running up risk and collapsing, but instead to create countercyclical buffers. This could involve doubling equity capital requirements in good times when it appears an asset bubble is inflating, so as to slow down its growth and create a better cushion on the downturn. It might also require higher capital to finance those assets the prices of which tend to rise and fall with the business cycle.
http://www.salon.com/2014/05/25/toxic_bankers_captive_regulators_everything_you_think_about_the_housing_market_is_wrong/
Myth 10
ReplyDeleteThe bankers are the victims of greedy homeowners who borrowed money and did not pay it back: Some homeowners participated in fraud, and others were simply unrealistic or were speculating that housing prices would continue to rise. But a much larger number were victims either of abusive lending practices or of the housing bubble and burst that diminished their home values and retirement savings.
Even the hopeful and the speculators were no different from some apparently naive bank executives like JPMorgan CEO Jamie Dimon, who told the FCIC: “In mortgage underwriting, somehow we just missed, you know, that home prices don’t go up forever and that it’s not sufficient to have stated income.” Even if we accept this at face value, it does not follow that bankers are victims of homeowners. Many homeowners made the same error. The difference is that the banks got trillions of dollars in bailouts and backstops, and their employees kept their billions in bonuses. Meanwhile, since the burst of the housing bubble, there have been about five million home foreclosures, with millions more underway. Ten million homes are underwater—approximately one- fifth of all mortgaged properties. Unemployment remains high and home prices low. The gains of the post-crisis recovery have been uneven. The net worth for the top 7 percent of Americans increased by 28 percent while the net worth for the bottom 93 percent declined by approximately 4 percent.
In addition, blaming subprime borrowers doesn’t hold up mathematically. According to former Goldman Sachs executive Nomi Prins, even if every single subprime mortgage defaulted, the total money lost would have been $1.4 trillion. Yet much more was committed by the Fed, Treasury, and FDIC in the financial crisis. It is not credible to blame subprime mortgage borrowers alone for the crisis.
It was additionally the desire of banks to make profitable trades and the desire of hedge funds to speculate on mortgage- backed securities that brought down the system. It was the billions upon billions of side bets that put far more at risk than the total value of all the subprime mortgages.
As for banks being the victims, this myth is typically not propagated by bankers but by service providers, those who stand to gain from maintaining friendly relationships with banks. For example, Steve Eckhaus, an attorney who negotiates executive compensation packages, is one such denier. Over his career, Eckhaus claims to have helped bankers secure more than $5 billion in pay. Among his clients were executives from Lehman Brothers, Merrill Lynch, and Morgan Stanley. Defending his clients and the financial sector in general, Eckhaus has said: “To blame Wall Street for the financial meltdown is absurd.”
Notwithstanding this pay negotiator’s assertion that Wall Street was not to blame, when put under oath, bankers do not concur. Bank of America CEO Brian Moynihan told the FCIC: “Over the course of the crisis, we, as an industry, caused a lot of damage. Never has it been clearer how poor business judgments we have made have affected Main Street.” At an FCIC hearing in January 2010, JPMorgan Chase CEO Jamie Dimon told the Commission, “I blame the management teams 100% . . . and no one else.”
http://www.salon.com/2014/05/25/toxic_bankers_captive_regulators_everything_you_think_about_the_housing_market_is_wrong/
Nobody 'forced' bankers to do anything they didn't want to do. Congress reduced regulation -- something bankers wanted. In other words, Congress deregulated, ALLOWING bankers to do things they otherwise weren't allowed. Nobody put a gun to their heads forcing them to make no income check, no asset check, loans. The banker's greed was part of the problem -- and why not? Banks used to hold mortgages to term, meaning that if the borrower defaulted, the bank was on the hook.
ReplyDeleteUnder the new financing, banks knew they were going to sell the mortgage to someone else immediately, so they took no risk if the borrower defaulted -- but they still earned all those fees and commissions. That gave the bank perverse incentives to issue mortgages to anyone that had a pulse (they made money and the risk was elsewhere.)
A large part of the failure was from areas that Congress didn't regulate at all. Bear Stern and Lehman were unregulated and nobody forced them to get into mortgage swap debentures.
ReplyDeleteEveryone was making money as long as housing prices rose. Borrowers who were making a living from swapping ever more expensive homes loved it; Mortgage brokers didn't care about the risk because they sold the loan 5 minutes after the closing; Banks didn't see a risk because housing was rising at 15-20% per year. If the borrower defaults, no problem, we sell the house for a profit; the investment bankers got rich cutting up and selling mortgage instruments as loans; The insurance companies (like AIG) loved it because they sold insurance on these bond instruments.
Everything was wonderful until housing prices couldn't be sustained.
DeleteThe banking crisis wasn't a failure of government, it was the greed of incentives that drove short-term profits to overshadow long-term risks.
Q When did the Bush Mortgage Bubble start?
ReplyDeleteA The general timeframe is it started late 2004.
From Bush’s President’s Working Group on Financial Markets October 2008
“The Presidents Working Group’s March policy statement acknowledged that turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007.”
http://www.treasury.gov/resource-cen...s%20update.pdf
"Since 1995 there has been essentially no change in the basic CRA rules or enforcement process that can be reasonably linked to the subprime lending activity. This fact weakens the link between the CRA and the current crisis since the crisis is rooted in poor performance of mortgage loans made between 2004 and 2007. "
http://www.federalreserve.gov/newsev...3_analysis.pdf
Q Why is it commonly called the “subprime bubble” ?
ReplyDeleteA Because the Bush Mortgage Bubble coincided with the explosive growth of Subprime mortgage and politics. Also the subprime MBS market was the first to collapse in late 2006. In 2003, 10 % of all mortgages were subprime. In 2006, 40 % were subprime. This is a 300 % increase in subprime lending. (and notice it coincides with the dates of the Bush Mortgage bubble that Bush and the Fed said)
“Some 80 percent of outstanding U.S. mortgages are prime, while 14 percent are subprime and 6 percent fall into the near-prime category. These numbers, however, mask the explosive growth of nonprime mortgages. Subprime and near-prime loans shot up from 9 percent of newly originated securitized mortgages in 2001 to 40 percent in 2006.[1]”
http://www.dallasfed.org/research/ec...07/el0711.html
Q. Er uh, didn’t you notice your link said the explosive growth of subprime mortgages started in 2001?
A. It did kinda say that didn’t it? However, the link below clearly states subprime was 10 % in 2003. 9% in 2001 to 10% in 2003 is only a 1% increase. A 1 % increase over 3 years is flat not explosive. 10 % in 2003 to 40% in 2006 is explosive. So the explosive growth started in 2004 which lines up pretty good but not exactly with the timeframe of the Bush Mortgage Bubble.
“In dollar terms, nonprime mortgages represented 32 percent of all mortgage originations in 2005, more than triple their 10 percent share only two years earlier
"
FRB: Finance and Economics Discussion Series: Screen Reader Version - 200899
Q Well there was a 300 % increase in subprime loans. Why not call it a “Subprime Bubble”?
ReplyDeleteA Subprime loans refers to the credit score of the borrower. It doesn’t make it a bad loan if proper underwriting standards are used. Bush’s working group said it was “triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages,”. He leaves out the part where it “quickly spread to all mortgages”. In 2004, 4.3 % of all mortgages were No Doc loans. In 2006 over 50% of all loans were No Doc loans. That’s over a 1000 % increase in loans where the borrowers income was not fully documented or documented at all. “Another form of easing” is a nice way of saying “lower lending standards”. And notice it lines up with the dates already posted. In addition to No Docs, banks allowed piggyback loans, teaser rates, I/0 and even negative amortization loans.
(from Dallas Fed link above)
"Another form of easing facilitated the rapid rise of mortgages that didn't require borrowers to fully document their incomes. In 2006, these low- or no-doc loans comprised 81 percent of near-prime, 55 percent of jumbo, 50 percent of subprime and 36 percent of prime securitized mortgages."
Q HOLY JESUS! DID YOU JUST PROVE THAT OVER 50 % OF ALL MORTGAGES IN 2006 DIDN’T REQUIRE BORROWERS TO DOCUMENT THEIR INCOME?!?!?!?
A Yes.
Q WHO THE HELL LOANS HUNDREDS OF THOUSANDS OF DOLLARS TO PEOPLE WITHOUT CHECKING THEIR INCOMES?!?!?
A Banks.
Q WHY??!?!!!?!
A Two reasons, greed and Bush's regulators let them. And then they sold the loan and risk to investors and GSEs clamoring for the loans. Actually banks, pension funds, investment banks and other investors clamored for them. Bush forced Freddie and fannie to buy an additional 440 billion in mortgages in the secondary market.
VERN, POLITIC FORUM
Q Why would Bush’s regulators let banks lower their lending standards?
ReplyDeleteA. Federal regulators at the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision work for Bush and he was pushing his “Ownership Society” programs that was a major and successful part of his re election campaign in 2004. And Bush’s regulators not only let banks do this, they attacked state regulators trying to do their jobs. Bush’s documented policies and statements in timeframe leading up to the start of the Bush Mortgage Bubble include (but not limited to)
Wanting 5.5 million more minority homeowners
Tells congress there is nothing wrong with GSEs
Pledging to use federal policy to increase home ownership
Routinely taking credit for the housing market
Forcing GSEs to buy more low income home loans by raising their Housing Goals
Lowering Invesntment bank’s capital requirements, Net Capital rule
Reversing the Clinton rule that restricted GSEs purchases of subprime loans
Lowering down payment requirements to 0%
Forcing GSEs to spend an additional 440 billion in the secondary markets
Giving away 40,000 free down payments
PREEMPTING ALL STATE LAWS AGAINST PREDATORY LENDING
But the biggest policy was regulators not enforcing lending standards.
Q My conservative friends blame policies from 1864, 1977, 1992, 1995, 1999 and 2000. Why aren’t those policies responsible for the Bush Mortgage Bubble?
ReplyDeleteA Those policies had nothing to do with banks lowering their lending standards in late 2004 and they had nothing to do with Bush’s regulators not their jobs and had nothing to do with Bush’s regulators blocking state regulators from doing their jobs.
Q I have a friend who's a realtor and she insists the Bubble started in 2000, if not a year or so before then. What about that?
A Well I cant answer for anecdotal statements that are simply not supported by any data. I can only post clear straightforward points and back them up with solid factual links. Bush's working group told you it started late 2004. The fed told you it started in the same timeframe. Subprime loans increased 300 % a little before that timeframe and No Doc loans ROCKETED UP 1000% in that exact timeframe laid out by Bush's Working Group.
How can anybody argue with that?
A no, I ask the questions.
Q sorry
Q Seriously, my conservative friends are really really adamant that the Bush Mortgage Bubble started in 1864, 1977, 1992, 1995, 1999 or 2000 or any year other than when Bush was president. How could those policies not affect the Bush Mortgage Bubble?
ReplyDeleteA The thousands of housing policies implemented before Bush was president didnt cause Banks to lower their lending standards and the thousands of housing policies implemented before Bush had nothing to do with Bush's regulators doing nothing to stop banks from lowering their lending standards.
Q Can you prove Bush’s regulators didn’t enforce lending standards.
A Yes.
From Bush's President’s Working Group on Financial Markets October 2008
“The Presidents Working Group’s March policy statement acknowledged that turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007.”
http://www.treasury.gov/resource-cen...s%20update.pdf
Bush Mortgage Bubble FAQs
ReplyDeletehttp://www.debatepolitics.com/government-spending-and-debt/192586-poor-e-warren-and-cnn-24.html
Q Some people think you saying it started in late 2004 just to lay it all at Dubya's feet is just hyper-partisanship. Is that true?
A No. First, I'm not saying it. Bush's Working Group on Financial Markets is saying it. The Federal Reserve is saying it. The actual data on No Doc Loans and subprime loans are saying it.
Q I couldn’t help but notice all caps when posting the Bush Preemption policy. Can you tell me more about this ‘preemption’ rule from the OCC?
A Yes, states noticed an increase in predatory and abusive loans in the early 2000s. more than 30 states passed laws of varying degrees restricting certain types of loans. Banks complained to the OCC and the OCC enacted its Preemption policy
“Rapid growth in subprime lending over the past decade has led to rising concerns about abusive practices by subprime lenders. By early 2004, those concerns prompted Georgia and more than 30 other states to pass laws designed to eliminate abusive or predatory lending practices by the financial services firms, including those with federal charters, operating within their boundaries. In 2003, the OCC concluded that federal law preempts the provisions of the Georgia Fair Lending Act (GFLA) that would otherwise affect national banks’ real estate lending. In early 2004, the OCC adopted a final rule providing that state laws that regulate the terms of credit are preempted. “
http://www.occ.gov/publications/publ...0/wp2004-4.pdf
Q Why would they do that?
A To increase subprime lending
(same link above)
“ In addition, clarification of the applicability of state laws to national banks should remove disincentives to subprime lending and increase the supply of credit to subprime borrowers. “
Q Wow, Bush preempted all state laws against predatory lending.
ReplyDeleteA thats not a question.
Q Sorry, er uh what did all 50 State Attorney Generals and all 50 State Banking Supervisors think of Bush's preemption?
A They didnt like it.
"The Conference of State Bank Supervisors (CSBS) along with a number of prominent organizations, including the National Governors Association (NGA), the National Association of Attorneys General (NAAG), the National Conference of State Legislatures (NCSL), and the North America Securities Administrators Association (NASAA), have voiced their opposition to the OCC's proposed rule that would effectively preempt all state laws that apply to the activities of national banks and their state-licensed subsidiaries. The groups are asking OCC to withdraw the controversial proposal."
States Unite to Fight Sweeping OCC Preemption
Q What did all 50 State Attorney Generals and all 50 State Banking Supervisors say would happen?
A Bad things
"
Concentrating regulatory control at the OCC ensures that regulatory and consumer protection problems that emerge will be solved with a one-size fits all approach," CSBS President and CEO Neil Milner wrote in his comment letter, adding that the proposed rule would concentrate regulatory power in the hands of a single individual, the Comptroller, with virtually no direct congressional oversight until problems or scandals emerge.
"
Q Did they predict in 2003 exactly what happened?
A Yes
Q I'm serious, my conservative friends are really really really adamant that policies from 1864, 1977, 1992, 1995, 1997 1999 and 2000 are to blame. What do I say to them?
ReplyDeleteA just explain the facts to them and show them the actual data that proves it didnt start until late 2004.
Q Yea, that didnt work. try again.
A Just point out to them that what they believe cannot be supported by any data whatsoever and that their empty factless rhetoric in no way changes any facts. For example, say they claim that the Bush Mortgage Bubble started in 1997 and they claim this is backed by almost every mainstream economist supported by empirical data. First ask them to back up their claims. And then ask them "how do you ignore the empirical data already posted in this thread?". Then ask them how anything from 1997 prevented Bush's regulators from enforcing proper lending standards. (of course they will do nothing but repeat their 'claims')
Q They really dont want to 'let go' of their beliefs. Why do they cling to such specious beliefs?
A Sorry, I cant explain it. Mental health issues are not my field of study
Q Where to they get such factless baseless beliefs?
A the 'conservative entertainment complex' has literally put out 1000's of lying editorials about this. What proves they are lying is not one of them has ever mentioned anything I posted in this Q&A. You cant explain Bush's working group telling you it started late 2004. So dont mention it. You cant explain away "bush protecting predatory lenders" so you absolutely can never ever mention it in an editorial. You cant explain away Bush lifting restrictions Clinton placed on GSE purchases of subprime mortgages when you are crafting a narrative that "bush tried to stop the bubble"
"(In 2000) HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower's ability to repay."
How HUD Mortgage Policy Fed The Crisis
"In 2004, the 2000 rules were dropped and high‐risk loans were again counted toward affordable housing goals."
http://www.prmia.org/pdf/Case_Studie..._090911_v2.pdf
Q What about the conservative 'narrative' that Bush tried to stop the bubble?
ReplyDeleteA Its simply another false narrative created by the 'conservative entertainment complex'. That narrative is 'crafted' around the statements of Bush saying fannie and freddie needed to be regulated. Lets look at the structure of this narrative
Bush said GSEs needed to be regulated (actually true)
Barney Frank and other dems said GSEs were fine (actually true)
Democrats blocked reform (false)
GSEs caused the crisis (false)
Just another mish mosh of lies spin and half truths the 'conservative entertainment complex' relies on to push their agenda. Lets deconstruct the narrative. Yes, Bush repeatedly talked about GSE reform. The problem is reform in 2003 had nothing to do with subprime mortgages. As I've already documented, Bush lifted the restrictions Clinton placed on the GSEs to limit their purchase of abusive subprime loans. Later in 2004, Bush would increase the GSE housing goals forcing them to buy more low income home loans and get them to buy 440 billion more minority home loans in the secondary market.
"•Substantially increase by at least $440 billion, the financial commitment made by the government sponsored enterprises involved in the secondary mortgage market, specifically targeted toward the minority market;"
Homeownership Policy Book - Executive Summary
"In April, HUD proposed new federal regulations that would raise the GSEs targeted lending requirements. HUD estimates that over the next four years an additional one million low- and moderate-income families would be served as a result of the new goals."
HUD Archives: HUD DATA SHOWS FANNIE MAE AND FREDDIE MAC HAVE TRAILED THE INDUSTRY IN PROVIDING AFFORDABLE HOUSING IN 44 STATES
there goes the narrative that Bush tried to stop anything
Q What about the second part of the "bush tried to stop the bubble" narrative when "Barney Frank and other dems said GSEs were fine "? GSE's did go bankrupt
ReplyDeleteA Yes Barney Frank and other dems said there was nothing wrong with the GSEs. And they were fine in 2003. The Bush Mortgage Bubble hadn't started yet (remember we learned that it didnt start until late 2004). Once the Bush Mortgage Bubble started, any entity that bought mortgages or invested in mortgage backed securities got hammered. Of the big five investment banks, only one survived and remained independent (it did change its charter to commercial bank to qualify for TARP funds). Numerous hedge funds went under. And yes, Freddie and Fannie went bankrupt. The difference is nobody was forcing hedge funds, investment banks, pension funds, insurance companies etc. to buy mortgages and mortgage backed securities (see above).
Oh and here's the key part of about democrats saying there was nothing wrong with GSEs: They were just repeating what Bush told them. (yea, this doesnt get mentioned in any 'conservative entertainment complex' editorials does it?).
Testimony from W’s Treasury Secretary John Snow to the REPUBLICAN CONGRESS concerning the 'regulation’ of the GSE’s
“
“
Mr. Frank: ...Are we in a crisis now with these entities?
Secretary Snow. No, that is a fair characterization, Congressman Frank, of our position. We are not putting this proposal before you because of some concern over some imminent danger to the financial system for housing; far from it.
“
- THE TREASURY DEPARTMENT'S VIEWS ON THE REGULATION OF GOVERNMENT SPONSORED ENTERPRISES
Q are you serious? I've heard "Barney Frank said Freddie and Fannie were fine" a million times as if it proved something and now I find out that Bush said it too. I give up. Whats my next question?
ReplyDeleteA uh you want to ask me about "dems blocking reform"
Q fine, did dems block reform?
A Well since everything else the 'conservative entertainment complex' said was a lie, why wouldnt this be a lie? Now remembering that Bush forced GSEs to buy more low income home loans, got freddie and fannie to buy an additional 440 billion in mortgage backed securities and reversed the restrictions Clinton placed on the GSEs purchases of subprime home loans this will not be much of a shock
"Strong opposition by the Bush administration forced a top Republican congressman to delay a vote on a bill that would create a new regulator for mortgage giants Fannie Mae and Freddie Mac."
Oxley pulls Fannie, Freddie bill under heat from Bush - MarketWatch
Despite what appeared to be a broad consensus on GSE regulatory reform, efforts quickly stalled. A legislative markup scheduled for October 8, 2003, in the House of Representatives was halted because the Bush administration withdrew its support for the bill,
http://www.frbatlanta.org/filelegacy...framewhite.pdf
(fyi, broad consensus means it would have probably passed. what happened to it again? oh yea bush stopped it)
have no doubt you saw unethical or even illegal behavior before 2004. I’m just saying what you saw prior to 2004 did not constitute a bubble. States saw the same unethical and illegal behavior you saw. Its why over 30 states passed laws to crack down on this behavior. What happened to those laws again? Oh yea, the OCC preempted all state laws against predatory lending. Banks literally changed their charters to be ‘regulated’ by bush's regulators. Finance companies also sold themselves to national banks to take advantage of the ‘lax regulation’. So the unethical or even illegal behavior you saw became systemic.
ReplyDelete“As illustrated in figure 2, the share of assets divided among federally chartered and state-chartered banks remained relatively steady for a decade; between 1992 and 2003, national banks held an average of about 56 percent of all bank assets, and state banks held an average of about 44 percent. However, in 2004, the share of bank assets of banks with the federal charter increased to 67 percent, and the share of bank assets of banks with state charters decreased to 33 percent “
http://www.gao.gov/new.items/d06387.pdf
And I don’t doubt you saw home prices appreciate but rising home prices does not equal a bubble. Before 2004, home price appreciation was simply supply and demand. As the fed increased interest rates and the numbers of qualified buyers declined, home prices would have slowed their appreciation or flattened out. But they didn’t. When you stop checking borrower’s income for 50 % of all mortgages you’ve artificially increased demand everywhere.
And Maggie, its not me saying it started late 2004, it’s Bush’s working group, the fed and the actual data on subprime and No Doc loans. Why do you think Bush’s working group and the Fed have such a clear timeframe of the bubble? I’m not posting editorials or blogs. I’m posting solid factual links.
Bush Mortgage Bubble FAQs
http://www.debatepolitics.com/us-partisan-politics-and-political-platforms/156717-bush-mortgage-bubble-faqs-5.html
So you couldn't understand why bankers wanted to make lots of easy money? That's HUGE comprehension problem, no wonder you are so confused.
ReplyDeleteThe banks wrote all those "no doc" loans because they could resell them and then bet against them. It was all about the CASH. Bankers took over $160 Billion in "bonus" money during the boom.
n case you don’t know it, republicans controlled congress in 2003. Don’t be offended if you knew it. A lot of conservatives don’t.
ReplyDeleteAnyhoo, don’t equate ‘pushing home ownership’ (which everybody since FDR did) with Bush encouraging funding and protecting lower lending standards. Yes, Bush encouraged, funded and protected lower lending standards. Its why Bush’s Working Group on Financial Markets told you it started late 2004 and its why they said it was started by lower lending standards. Its why No Doc loans went from 4.3 % of all mortgages in 2004 to over 50 % in 2006. its why subprime went from 10 % in 2003 to 40 % in 2006. Go back and read what I posted.
Here's another Bush policy from 2004
BUSH ADMINISTRATION ANNOUNCES NEW HUD "ZERO DOWN PAYMENT" MORTGAGE
Initiative Aimed at Removing Major Barrier to Homeownership
Preliminary projections indicate that the new FHA mortgage product would generate about 150,000 homebuyers in the first year alone.
HUD Archives: BUSH ADMINISTRATION ANNOUNCES NEW HUD "ZERO DOWN PAYMENT" MORTGAGE
That’s funny, my ‘hyper partisan’ attacks don’t require me to create, distort or leave out any facts. Lets examine whats wrong with the “the senate tried to reign in Freddie and fannie” narrative
ReplyDeleteFirst, congratulations to Fenton for updating his false narrative. Previous versions had the magic senate bill dying in committee. When I proved that it indeed made it out of committee, he updated his false narrative. Sadly he inserted a delusion about needing 60 votes to pass a bill. He refuses to recognize that Senate Leader Frist refused to allow a vote on it. See how in fenton’s world a lack of action on the republcan’s part is magically the democrats fault.
Anyhoo, lets review the things cons have to ignore to believe Fentons new and improved false narrative
Bush stopped reform in 2003 (documented in this thread)
Bush reversed the restrictions President Clinton placed on Freddie and fannie’s subprime mortgage purchases (documented in this thread)
Bush protected predatory lenders (documented in this thread)
Bush forced GSEs to buy an additional 440 billion in minority mortgages (documented in this thread)
And of course, Fenton has to ignore that the House passed a reform bill in 2005, HR 1461, with a 331-90 vote. The was the only GSE reform bill to pass any chamber of the republican controlled congress. And it continues to ignore that Republican House Financial Services committee Chairman Mike Oxley blames bush for no bill passing.
And this is what Bush thought of HR 1461, the house version of GSE reform
STATEMENT OF ADMINISTRATION POLICY
The Administration strongly believes that the housing GSEs should be focused on their core housing mission, particularly with respect to low-income Americans and first-time homebuyers. Instead, provisions of H.R. 1461 that expand mortgage purchasing authority would lessen the housing GSEs' commitment to low-income homebuyers.
George W. Bush: Statement of Administration Policy: H.R. 1461 - Federal Housing Finance Reform Act of 2005
Q Wow, did you just prove that Bush was against reform because it “would lessen the housing GSEs' commitment to low-income homebuyers”?
ReplyDeleteA first off, welcome back Q. I know it was a lot of information to digest in one day so you earned the time off. Anyhoo, yes, I did just prove that Bush was against GSE reform because it “would lessen the housing GSEs' commitment to low-income homebuyers”.
I also mentioned that Republican Chairman of the House Financial Services Committee blames Bush and company for the Housing mess.
“"Instead, the Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.
The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq.”
“What did we get from the White House? We got a one-finger salute.”
(sorry, no direct link Financial Times is a pay site. Put 'Oxley hits back at ideologues’ into google and click on the FT site)
Here’s Bush telling you there was no bubble.
Thursday, October 27, 2005; Page D01
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households
"
Bernanke: There's No Housing Bubble to Go Bust
Bush told Barney and democrats there was nothing wrong with Freddie and Fannie in 2003 (documented in this thread)
ReplyDeleteBush stopped GSE reform in 2003 (documented in this thread)
Bush’s toxic housing and GSE policies from 2004 (documented in this thread)
Bush said there was no housing bubble in 2005 (documented in this thread)
Bush attacked the very reform you and fenton delude yourself would have prevented the Bush Mortgage Bubble (documented in this thread)
Bush attacked reform because he said it “would lessen the housing GSEs' commitment to low-income homebuyers. (documented in this thread)
The republican chairman of the House Financial Services committee Mike Oxley blames Bush for reform not passing (documented in this thread)
So I’m not posting factoids. I'm posting a clear and repeated trend by the Bush admin to encourage, protect and fund the Bush Mortgage Bubble. Let me shred one of your ‘non factoids’. Here barney is specifically referring to bush’s policy of forcing GSEs to buy more low income home loans.
“Fannie Mae and Freddie Mac would suffer financially under a Bush administration requirement that they channel more mortgage financing to people with low incomes, said the senior Democrat on a congressional panel that sets regulations for the companies.”
“Frank's comments echo concerns of executives at the government-chartered companies that the new goals will undermine profits and put new homeowners into dwellings they can't afford.”
Ouch, barney just said the Bush policy will put people into homes they cant afford. What did Bush say to that?
“Alphonso Jackson, secretary of Housing and Urban Development, said the Bush administration has no hidden motives in seeking to raise the percentage of financing for low-income homeowners.
“There is no administration more supportive of Fannie and Freddie than we are,'' Jackson said today in interview. “We are just actualizing what should have been done years ago.''
double ouch!
http://democrats.financialservices.h...-Bloomberg.pdf
See how the facts I post really upset conservatives? See how they cant respond to what I post? The actual facts shred their comfortable delusions and they cant handle it. They ‘just know’ the facts I post cant be true so they feel an emotional need to respond but all I’ve done is post Bush’s actual policies and statements. Not a phrase or sentence fragement or carefully constructed video. I’ve posted a seemingly unending string of toxic housing policies and statements that show everything conservatives have been spoon fed about the Bush Mortgage Bubble is a lie. Conservatives cant address the actual facts I post but they have to post something, anything no matter how foolish.
ReplyDeleteAnyhoo Arealcon, if you want to be useful, explain to Jack that I responded directly to his post and had already acknowledged and shredded the silly youtube video (talk about polished up and carefully packaged) that you cons have to cling to. I don’t really understand how that silly video makes all of Bush’s toxic housing polcies and statements go away or how it in anyway changes the dates of the Bush Mortgage Bubble but as I’ve already admitted, I’m not a mental health professional.
Since you guys enjoy my posts so much, here’s some more for your enjoyment (the unnamed ‘critics’ is really just barney frank)
Bush Ties Policy to Record Home Ownership
We want more people owning their own home in America," Bush said. His goal is to have 5.5 million minority homeowners in the country by the end of the decade….
And while Bush has emphasized promoting home ownership in his federal housing policy proposals, critics say that help for low-income renters and more affordable housing is a much more sorely needed focus.
Bush Ties Policy to Record Home Ownership | Fox News
Oh Maggie, you can point to literally thousands of housing policies but none of them explain why banks lowered their lending standards in late 2004. So no, there isn’t ‘plenty of blame to share’. As I’ve repeatedly pointed out, nothing Clinton did had anything to do with banks lowering their lending standards in late 2004 and nothing Clinton did had anything to do with Bush’s regulators not stopping banks from lowering their lending standards and nothing Clinton did had anything to do with Bush’s regulators from protecting banks lowering their lending standards.
ReplyDeleteNow let address your ‘editorial’ directly. It like all lying editorials tries to convince you that policies from Clinton fueled the mortgage bubble. Promoting home ownership is not the same as promoting lower lending standards. Bush encouraged, funded and protected lower lending standards. Your editorial points to “promoting paper thin downpayments” as proof of something. Mmmm, if “promoting paper thin downpayments” is bad in 1999, then “implementing 0% downpayments’ in the same year the Bush Mortgage Bubble started must be worse right? Or is ‘giving away 40,000 free downpayments in the same year the Bush Mortgage Bubble started worse? See how they give no specifics of the actual Bush Policies in the timeframe of the Bush Mortgage bubble?
BUSH ADMINISTRATION ANNOUNCES NEW HUD "ZERO DOWN PAYMENT" MORTGAGE
Initiative Aimed at Removing Major Barrier to Homeownership
Preliminary projections indicate that the new FHA mortgage product would generate about 150,000 homebuyers in the first year alone.
HUD Archives: BUSH ADMINISTRATION ANNOUNCES NEW HUD "ZERO DOWN PAYMENT" MORTGAGE
Late last year, Bush signed the American Dream Down Payment Act (search) to help families that can afford monthly mortgage payments but not the down payment or closing costs associated with buying a house. The legislation authorizes $200 million a year in down payment assistance to at least 40,000 low-income families.
Bush Ties Policy to Record Home Ownership | Fox News
I've posted over 20 solid factual links detailing the timeframe, the underlying housing data, Bush's policies, Bush's statements and others to make clear straightforward case about why the Bush is responsible for the Bush Mortgage Bubble that started in late 2004. (thats the first thing you and all cons have to pretend not know is when it started)
ReplyDeleteand in return you and yours have posted 5 videos and 1 editorial. And the entire conservative argument against the solid factual links has been
CONSERVATIVE ARGUMENT
you're mean Vern. Its not just Bush's fault. It cant be. I dont have to believe the solid factual links you post so I'll pretend I didnt read them
now again, I addressed your silly youtube video and you replied as if I denied it.
Yes there is plenty of blame to go around to political parties -- but the political PHILOSOPHY that failed was conservatism.
ReplyDeleteTax cuts for the wealthy and deregulation of the financial sector is a recipe for disaster. And that's what conservatism, not progressives, stand for.
The Democrats are to blame only to the extent that some of them voted to establish conservative policies. That's always a bad idea.
The U.S. subprime mortgage crisis was a set of events and conditions that led to the late-2000s financial crisis
ReplyDelete,characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securitiesbacked by said mortgages.
The percentage of new lower-quality subprime mortgage
s rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S.
A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgage
s.
These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products
After U.S. house sales prices peaked in mid-2006 and began their steep decline forthwith, refinancing
became more difficult. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms, lost most of their value
Background and timeline of events
The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006.
High default rates on "subprime" and adjustable rate mortgages (ARM), began to increase quickly thereafter.
Lenders began originating large numbers of high risk mortgages from around 2004 to 2007, and loans from
those vintage years exhibited higher default rates than loans made either before or after.
An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had
encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. Additionally, the increased market power of originators of subprime mortgages and the declining role of Government Sponsored Enterprises as gatekeepers
increased the number of subprime mortgages provided to consumers who would have otherwise qualified for
conforming loans
The worst performing loans were securitized by private investment banks, who generally lacked the GSE's
market power and influence over mortgage originators
...In the years leading up to the crisis, significant amounts of foreign money flowed into the U.S. from fast-growing
economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. interest rates from 2002–
2004 contributed to easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load
As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities
(MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial
innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing
prices declined, major global financial institutions that had borrowed and invested heavily in MBS reported
significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the
housing market to other parts of the economy
While the housing and credit bubbles were growing, a series of factors caused the financial system to become
increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions
such as investment banks and hedge funds , also known as the shadow banking system
Shadow banks were able to mask their leverage levels from investors and regulators through the use of complex, off-balance sheet derivatives and securitizations
These instruments also made it virtually impossible to reorganize financial institutions in bankruptcy, and
contributed to the need for government
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
]
ReplyDeleteThe boom in mortgage lending, including subprime lending, was also driven by a fast expansion of
non-bank independent mortgage originators which despite their smaller share (around 25 percent in 2002) in the
market have contributed to around 50 percent of the increase in mortgage credit between 2003 and 2005.
In the third quarter of 2007, subprime ARMs making up only 6.8% of USA mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter
By October 2007, approximately 16% of subprime
adjustable rate mortgages (ARM) were either 90-days delinquent or the lender had begun foreclosure
proceedings, roughly triple the rate of 2005.
By January 2008, the delinquency rate had risen to 21%
and by May 2008 it was 25%
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
Three important catalysts of the subprime crisis were the influx of money from the private sector, the banks entering
ReplyDeleteinto the mortgage bond market and the predatory lending practices of the mortgage lenders, specifically the
adjustable-rate mortgage, loan, that mortgage lenders sold directly or indirectly via mortgage brokers.
On Wall Street and in the financial industry,moral hazard
lay at the core of many of the causes
In its "Declaration of the Summit on Financial Markets and the World Economy," dated 15 November 2008, leaders
of the Group of 20 cited the following causes:
During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade,
market participants sought higher yields without an adequate appreciation of the risks and failed to exercise
proper due diligence. At the same time, weak underwriting standards, unsound risk management practices,
increasingly complex and opaque financial products, and consequent excessive leverage combined to create
vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not
adequately appreciate and address the risks building up in financial markets, keep pace with financial
innovation, or take into account the systemic ramifications of domestic regulator actions
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
During May 2010, Warren Buffett and Paul Volcker
ReplyDeleteseparately described questionable assumptions or judgments
underlying the U.S. financial and economic system that contributed to the crisis. These assumptions included:
1)Housing prices would not fall dramatically;
2) Free and open financial markets supported by sophisticated Subprime mortgage crisis
financial engineering would most effectively support market efficiency and stability, directing funds to the most
profitable and productive uses;
3) Concepts embedded in mathematics and physics could be directly adapted to markets, in the form of various financial models used to evaluate credit risk;
4) Economic imbalances, such as large trade deficits and low savings rates indicative of over-consumption, were sustainable; and
5) Stronger regulation of the shadow banking system
and derivatives markets was not needed
The U.S. Financial Crisis Inquiry Commission
reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
“
Boom and bust in the housing market
ReplyDeleteLow interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior
to the crisis, fueling a housing market boom and encouraging debt-financed consumption.
The USA home ownership rate increased from 64% in
1994 (about where it had been since 1980) to an all-time high of 69.2% in 2004.
Subprime lending was a major contributor to this increase in
home ownership rates and in the overall demand for housing, which drove prices higher.
..Household debt grew from $705 billion at yearend 1974, 60% of disposable personal income , to $7.4 trillion at yearend 2000, and finally to $14.5 trillion in midyear 2008, 134% of disposable personal income
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
Subprime mortgages amounted to $35 billion (5% of total originations) in 1994, 9% in 1996, $160 billion (13%) in
ReplyDelete1999, and $600 billion (20%) in 2006
A study by the Federal Reserve found that the average difference between subprime and prime mortgage
interest rates (the "subprime markup") declined significantly between 2001 and 2007. The combination of declining risk premiums and credit standards is common to boom and bust credit cycles
In addition to considering higher-risk borrowers, lenders had offered increasingly risky loan options and borrowing
incentives. In 2005, the median down payment
for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
The Financial Crisis Inquiry Commission reported in January 2011 that many mortgage lenders took eager
ReplyDeleteborrowers qualifications on faith, often with a "willful disregard" for a borrowers ability to pay. Nearly 25% of all
mortgages made in the first half of 2005 were "interest-only" loans. During the same year, 68% of
"option ARM” loans originated by Countrywide Financial
and Washington Mutual had low- or no-documentation requirements
So why did lending standards decline? At least one study has suggested that the decline in standards was driven by a
shift of mortgage securitization from a tightly controlled duopoly to a competitive market in which mortgage
originators held the most sway.
The worst mortgage vintage years coincided with the periods during whichGovernment Sponsored Enterprises were at their weakest, and mortgage originators and private label securitizers were at their strongest
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
Why was there a market for these low quality private label securitizations? In a Peabody Awardn winning program,
ReplyDeleteNPR correspondents argued that a "Giant Pool of Money" (represented by $70 trillion in worldwide fixed income
investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating
investments had not grown as fast.
Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) and collateralized debt obligation
(CDO), which were assigned safe ratings by the credit rating agencies.
In effect, Wall Street connected this pool of money to the mortgage market in the U.S., with enormous fees accruing
to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that
funded the brokers, to the giant investment banks behind them. By approximately 2003, the supply of mortgages
originated at traditional lending standards had been exhausted. However, continued strong demand for MBS and CDO began to drive down lending standards, as long as mortgages could still be sold along the supply chain.
Eventually, this speculative bubble proved unsustainable
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
The problem was that even though housing prices were going through the roof, people weren't making any more money. From 2000 to 2007, the median household income stayed flat. And so the more prices rose, the more tenuous the whole thing became. No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn't possibly afford, no matter what the mortgage machine tried, the people just couldn't swing it.
DeleteBy late 2006, the average home cost nearly four
times what the average family made. Historically it was between two and three times. And mortgage lenders noticed something that they'd almost never seen before. People would close on a house, sign all the mortgage
papers, and then default on their very first payment. No loss of a job, no medical emergency, they were
underwater before they even started. And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
Mortgage fraud
ReplyDeleteIn 2004, the Federal Bureau of Investigation warned of an "epidemic" in mortgage fraud, an important credit risk of
nonprime mortgage lending, which, they said, could lead to "a problem that could have as much impact as the S&L
crisis
The Financial Crisis Inquiry Commission reported in January 2011 that: "...mortgage fraud...flourished in an
environment of collapsing lending standards and lax regulation. The number of suspicious activity reports
–reports of possible financial crimes filed by depository banks and their affiliates–related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009
One study places the losses resulting from fraud on mortgage loans made between 2005 and 2007 at $112 billion. Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors to investors in mortgage securities
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf
This comment has been removed by the author.
ReplyDeleteFinancial deregulation, and securitization of mortgage debt by means of exotic financial instruments such as credit-default swaps, has often been blamed for the "Crash of 2008," and undoubtedly these practices played a role. Mortgage-backed securities had also become popular in the buildup to the Great Depression of the 1930s. The thing that made these financial instruments so attractive — such an obvious thing for investors to do — was the underlying increase in land values, growing while the owners slept.[/I]
ReplyDelete[url=http://www.henrygeorge.org/bust.
The Boom/Bust Cycle
Competition and Crisis in Mortgage Securitization MICHAEL SIMKOVIC
U.S. policy makers often treat market competition as a panacea. However, in the case of mortgage securitization, policy makers’ faith in competition is misplaced. Competitive mortgage securitization has been tried three times in U.S. history— during the 1880s, the 1920s, and the 2000s—and every time it has collapsed. Most recently, competition between mortgage securitizers led to a race to the bottom on mortgage underwriting standards that ended in the late 2000s financial crisis
http://www.repository.law.indiana.edu/cgi/viewcontent.cgi?article=11040&context=ilj
SECURITIZATION, LIQUIDITY AND MARKET FAILURE
"Initially the United States subprime mortgage problem created an insolvency problem for major underwriters as the exotic financial instruments that they created as mortgage backed assets lost liquidity and market value. This problem has proved contagious as it has started to spill over to other markets such as the auction-rate securities market and the credit default swap markets that are failing. The auction rate markets, which had seen few failures in recent years, suddenly experienced over a thousand failures in the early months of 2008. What has caused this contagion to spill over and cause this tremendous increase in market failures? The answer is simple. This problem has developed as economists and market participants have forgotten Keynes’s liquidity preference theory [hereafter LPT] and have, instead swallowed hook, line, and sinker the belief that the classical efficient market theory [hereafter EMT] is a useful model for understanding the operation of real world financial markets......"
http://econ.bus.utk.edu/documents/davidsonpapers/securitizationprice%20talk10.pdf
In 2000, World Bank reported that banking bailouts cost an average of 12.8% of GDP. The report stated:
ReplyDeleteGovernments and, thus ultimately taxpayers, have largely shouldered the direct costs of banking system collapses. These costs have been large: in our sample of 40 countries governments spent on average 12.8 percent of national GDP to clean up their financial systems.
http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2000/11/04/000094946_0010200530432/Rendered/PDF/multi_page.pdf
http://en.wikipedia.org/wiki/Bailout#Reasons_against_bailouts
DeleteThe financial crisis of 2007–2008, also known as the Global Financial Crisis and 2008 financial crisis,
ReplyDeletehttp://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932012
GSE Critics Ignore Loan Performance
ReplyDeleteear after year, decade after decade, before, during and after the housing crash, GSE loan performance has consistently been two-to-six times better than that of any other segment of the market. The numbers are irrefutable, and they show that the entire case against GSE underwriting standards, and their role in the financial crisis, is based on social stereotyping, smoke and mirrors, and little else.
....Mortgage analyst Laurie Goodman estimated that private label securitizations issued during 2005-2007 incurred a loss rate of 24%, whereas the GSE loss rate for 2005-2007 vintage loans was closer to 4%.
http://www.americanbanker.com/bankthink/gse-critics-ignore-loan-performance-1059187-1.html
GSE critics also claim that Fannie and Freddie led the rest of the market in a race to the bottom. This fanciful theory is based on a series of false equivalencies, wherein low-income borrowers are considered no different from subprime borrowers, and no different from those who took out two-year teaser rates or liar loans.
This race-to-the-bottom narrative implies that GSE securitizations are the same as private label securitizations, as if concepts like, "nonrecourse," or "originate to distribute," versus "buy and hold," are not meaningful.
Since every GSE mortgage securitization benefits from a corporate guarantee, GSEs' retention of credit risk is diversified among huge portfolios of low risk loans booked before, during and after the bubble. By way of contrast, a private label securitization is a single static portfolio in liquidation. So it made no sense for private label deals to mimic GSE credit standards.
http://www.americanbanker.com/bankthink/gse-critics-ignore-loan-performance-1059187-1.html
Between 1995 and. the volume of private-label securities backed by subprime loans increased from $18 billion to. $465 billion. Meanwhile, the private-label market for “Alt–A” loans,9 virtually nonexistent in. 1995, reached $334 billion by 2005
ReplyDeleteBetween 2001 and 2006, the share of the overall mortgage market comprised by subprime and Alt–A lending increased from 10% to 39%.
Meanwhile, the market share of government-backed loans (FHA/VA) and GSE-purchased loans declined tremendously. this change in market composition is particularly notable because of the degree to which it represented a shift away from regulated underwriting and standard products to unregulated ones
http://www.hss.caltech.edu/~jlr/courses/BEM103/Readings/CRL-Mortgages.pdf
December 15, 2006
ReplyDeleteIn 2003, fewer than one in a hundred people buying a home or refinancing a mortgage in California used a neg-am loan, according to First American LoanPerformance. Last year however, one in five California borrowers relied on neg-am financing, and year-to-date in 2006, a whopping one in three borrowers have opted to take out a neg-am mortgage.
In theory, the growing popularity of neg-am mortgages testifies to the marvels of financial innovation. In practice, however, the growing popularity of neg-am mortgages testifies to the desperation of homebuyers and/or the desparation of mortgage lenders. Whatever the root causes, the growth of neg-am mortgage issuance is probably a disaster in the making.
Neg-am financing, by virtue of its very structure, contains the seeds of its own undoing.
http://freemarketcafe.com/2006/12/housing-crash-2008/
Subprime loans – of which neg-am loans are the most treacherous – are leading the charge toward rising delinquencies and foreclosures.
DeleteNot so long ago, subprime loans represented a small sliver of the overall mortgage market. But today they represent a whopping 23%
http://freemarketcafe.com/2006/12/housing-crash-2008/
“We project that one out of five (actually 19%) subprime mortgages originated during the past two years will end in foreclosure,” a just released report from the Center for Responsible Lending (CRL) predicts.
“This rate is nearly double the projected rate of subprime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the ‘Oil Patch’ disaster off the 1980s.”
http://freemarketcafe.com/2006/12/housing-crash-2008/
“Foreclosure rates will increase significantly in many markets as housing appreciation slows or reverses,” the CRL’s report continues. “As a result, we project that 2.2 million borrowers will lose their homes and up to $164 billion of wealth in the process.”
12/19/2006
DeleteThe Center for Responsible Lending has released a new report: Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners.
Report: 2.2 Million Subprime Borrowers Face Foreclosure
http://www.calculatedriskblog.com/2006/12/report-22-million-subprime-borrowers.html
Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners
http://www.responsiblelending.org/mortgage-lending/research-analysis/losing-ground-foreclosures-in-the-subprime-market-and-their-cost-to-homeowners.html
November 27, 2007
A Snapshot of the Subprime Market
Dollar amount of subprime loans outstanding:
2007 $1.3 trillion
Dollar amount of subprime loans outstanding in 2003: $332 billion
Percentage increase from 2003: 292%
Number of subprime mortgages made in 2005-2006 projected to end in foreclosure:
1 in 5
Proportion of subprime mortgages made from 2004 to 2006 that come with "exploding" adjustable interest rates: 89-93%
Proportion approved without fully documented income: 43-50%
Proportion with no escrow for taxes and insurance: 75%
Proportion of completed foreclosures attributable to adjustable rate loans out of all loans made in 2006 and bundled in subprime mortgage backed securities: 93%
Subprime share of all mortgage originations in 2006: 28%
Subprime share of all mortgage origination in 2003: 8%
Subprime share of all home loans outstanding:
14%
Subprime share of foreclosure filings in the 12 months ending June 30, 2007: 64%
he negative effects of subprime foreclosures are spreading.
Nearly 45 million homes NOT facing foreclosure will decline in value by an estimated $233 billion with most of the decline hitting in 2008 and 2009 as subprime foreclosures lower the prices of surrounding homes
Subprime foreclosures will rise even higher
http://www.responsiblelending.org/mortgage-lending/tools-resources/a-snapshot-of-the-subprime.html
Jan 2008
ReplyDeleteSubprime Spillover: Foreclosures Cost Neighbors $202 Billion;
40.6 Million Homes Lose $5,000 on Average
As shown in Chart 1 below, 24 states and 38 counties will experience declines of over $1 billion each in local hous
e prices and tax bases
http://www.responsiblelending.org/mortgage-lending/research-analysis/subprime-spillover.pdf
This shockingly high “failure rate” stems directly from the shockingly imprudent lending practices of the late-stage housing boom.
ReplyDeleteA few years ago, as home prices began escalating sharply, mortgage lenders devised ever-more-creative – and dangerous – ways for home buyers to purchase homes they could not genuinely afford. Hence, exotic loans evolved from 5-year adjustable-rate mortgages (ARMs), to one-year ARMs, to interest-only loans, to no-equity loans, to pay-option loans etc. – each variation more dangerous than the predecessor. All of these “flexible” loans provided some version of low initial payments, followed by much larger payments “down the road.”
http://freemarketcafe.com/2006/12/housing-crash-2008/
In many areas of the country, especially those areas with the highest appreciation during the bubble days, such non-standard loans went from being almost unheard of to
ReplyDeleteprevalent. Eighty percent of all mortgages initiated in San Diego County in 2004 were adjustable-rate, and 47 percent were interest-only loans.
In addition to increasingly higher-risk loan options like AR
Ms and interest-only loans, lenders increasingly offered incentives for buyers. An estimated one-third of ARMs
originated between 2004 and 2006 had “teaser” rates below 4 percent. A “teaser” rate, which is a very low but temporary introductory rate, would increase significantly after the initial period, sometimes doubling the monthly payment.
http://www.consejomexicano.org/Emails/subwprev.pdf
BofA 2012
ReplyDeleteMortgage and Housing Related Risk
We have been, and expect to continue to be, required to repurchase mortgage loans and/or reimburse the GSEs and monolines for losses due to claims related to representations and warranties made in connection with sales of RMBS and mortgage loans, and have received similar claims, and may receive additional claims, from whole loan purchasers, private-label securitization investors and private-label securitization trustees, monolines and others.
In connection with loans sold to GSEs and investors other than GSEs, we or our subsidiaries or legacy companies made various representations and warranties. Breaches of these representations and warranties may result in a requirement that we repurchase mortgage loans, or indemnify or provide other remedies to counterparties. Bank of America and legacy Countrywide sold approximately $1.1 trillion of loans originated from 2004 through 2008 to the GSEs. In addition, legacy companies and certain subsidiaries sold loans originated from 2004 through 2008 with an original principal balance of $963 billion to investors other than GSEs.
http://yahoo.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=8078521-1562095-1586207&SessionID=63x1F6k4G-7ve27
The US government wants Bank of America Corp to fork over $863.6 million in damages after a federal jury found it guilty of selling subprime mortgages, the defective securities largely responsible for triggering the Great Recession in 2008
http://rt.com/business/bank-america-mortgage-fraud-500/
Bank of America Settles With Freddie Mac for $404 Million
DeleteBank of America entered into a $10.3 billion settlement with Fannie Mae in January, covering $1.3 trillion in mortgage loans sold to Fannie through 2008.
JPMorgan Chase (JPM_) settled its owns GSE RMBS claims for $5.1 billion late in October, which was part of JPM's landmark $13 billion settlement with the Department of Justice and other government authorities announced on Nov. 19.
http://www.thestreet.com/story/12132436/1/bank-of-america-settles-with-freddie-mac-for-404-million.html
In 2003 and 2004, controversy arose concerning the Enterprises’ accounting practices. Additionally, from about 2004 through 2007, Fannie Mae and Freddie Mac embarked on aggressive strategies to purchase mortgages and mortgage assets originated under questionable underwriting standards. For example, the Enterprises purchased large volumes of Alt-A mortgages, which typically lacked full documentation of borrowers’ incomes and had higher loan-to-value or debt-to-income ratios. They also purchased private-label MBS collateralized by subprime mortgages.
ReplyDeletehttp://fhfaoig.gov/LearnMore/History
The $100 billion of subprime securities in portfolio, while astonishing in nominal terms, is roughly 2% of the combined firms’ $5 trillion credit exposure.
ReplyDeleteAnd within the guaranty business, subprime exposure is actually quite modest. At Freddie, for example, only 4% of the single-family mortgage credit book is tied to borrowers with FICO scores below 620.
Moreover, the very worst performing GSE loans (that is, the loans where losses are the greatest multiple of original forecasts) were made to prime borrowers, not subprime. Again using Freddie as an example, both the “Alt-A” and “Interest Only” portfolios are already facing serious delinquencies of 11% and 16%, respectively, despite having solidly prime average borrower FICO scores of 722 and 720.
These were market share-driven loans made to people with good credit; they were not mission-driven loans made to people with bad credit.
Put simply, the subprime fraction of the GSEs’ credit exposure is too small, and the GSEs’ overall credit deterioration too large, to pin their woes on the affordability mission alone
Remember the GSEs charged a fee to insure these mortgages; losses aren’t bad at all unless they are larger than what they were expected to be, and the real losses greater than expectations are being driven by prime loans.
Three other things.
1. Can we stop using press releases, from either corporate or political PR offices, as statements of fact?
2. In 2005, when he was carefully spending his newfound political capital, the CRA was overhauled in a manner that financial institutions and industry trade associations applauded during comments and community organizers fought against.
3. The research, say The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis, is pointing to a story about securitization driving access to loans for low-credit borrowers. And what is going on with securitization? The latest, and most interesting, research and reporting is finding that conflicts, information problems, and mis-priced derivative credit insurance created a distorted securitization market which amplified the bubble, especially in 2005 (when the real problems really got introduced).
Those GSE Subprime Losses
http://rortybomb.wordpress.com/2010/09/21/those-gse-subprime-losses/
2/20/2008
ReplyDeleteSubprime loans defaulting even before resets
It turns out that massive interest rate spikes aren't the problem -- many borrowers couldn't afford these mortgages even at the low, introductory interest rates.
Many of these loans are defaulting well before their rates increase.
Defaults for subprime loans issued in 2007 - none of which have reset yet - hit 11.2 percent in November. That represents perhaps 300,000 households, and is twice the default rate that 2006 loans had 10 months after being issued, according to Friedman, Billings Ramsey analyst Michael Youngblood.
Defaults are spiking well before resets come into play thanks to the lax lending environment of the past few years. Many borrowers were approved for mortgages that they had little chance of affording, even at the low-interest teaser rates .
"I was rather shocked by the characteristics of the 2007 loans," said Youngblood.
For instance, in both 2006 and 2007, well over 40 percent of subprime borrowers were awarded mortgages with either little or no documentation of their ability to pay. With these so-called "liar loans," borrowers did not have to show proof of either earnings or assets.
And even when borrowers did go on the record about their earning power, it didn't bode well. Both 2006 and 2007 saw a large proportion of loans with high debt-to-income ratios (DTI), which indicates the percentage of gross income required to pay debt. In 2007 subprime originations, the DTI hit 42.1 percent, up from 41.1 percent in 2006. Borrowers were simply taking on more debt that they could afford.
What's more, many borrowers started out with low- or no-down payment loans, which left them with almost no equity in their home.
http://www.siliconinvestor.com/readmsgs.aspx?subjectid=51347&msgnum=105781&batchsize=10&batchtype=Next
By late 2006, lenders knew that the housing market was heading south. Foreclosure filings took off during the third quarter that year, up 43 percent from 12 months earlier, according to RealtyTrac, the online marketer of foreclosure properties. And home prices began to drop.
DeleteBut instead of cutting back on risky loans, lenders kept lending. Why?
"Because investors continued to buy the loans," said Doug Duncan, chief economist of the Mortgage Bankers Association.
Despite their quality, subprime mortgages were as profitable as any other for lenders like Countrywide (CFC, Fortune 500) and Wells Fargo (WFC, Fortune 500), who were able to quickly securitize the loans and sell them in the secondary market. The loans sold easily because they carried the promise of high yields.
"As long as you could sell the loan, you made the deal," Duncan said.
http://www.siliconinvestor.com/readmsgs.aspx?subjectid=51347&msgnum=105781&batchsize=10&batchtype=Next
Lenders needed the fees that these loans generated because their finances were weakening. Their cost of borrowing money was rising, while competitive pressures were keeping mortgage interest rates low.
Delete"By 2006 many lenders were running into red ink," said Youngblood.
So, they revved up lending to increase short-term profits. And, to outside analysts, there appeared to be nothing wrong with loan quality.
"There were very few overt changes in industry underwriting guidelines," said Youngblood. What did change, he said, was that lenders made more exceptions to their standard practices, approving people with poor work histories or insufficient proof of income.
"These exceptions generally amounted to no more than 5 percent [of subprime loans] before 2006," said Youngblood, "but they represented the majority of these loans issued in 2006 and 2007."
The reason for that shift: Lenders depended on independent mortgage brokers for much of their business, and brokers pushed them to approve subprime loans because they delivered big profits for the brokers.
"Lenders felt they had to take the loans to preserve their access [to the rest of the loan pool]," he said. They accepted some risky subprime loans so that the brokers would also send them safer prime and Alt-A loans.
http://www.siliconinvestor.com/readmsgs.aspx?subjectid=51347&msgnum=105781&batchsize=10&batchtype=Next
it was about tons of people making one-way spec bets on RE continuing to rise so they could do the quick flip, and who never intended on making any payments -- that's why these would-be flippers took out no doc neg am free ride loans in the first place -- it's also why so many of these houses remain vacant
ReplyDelete60 per cent of all mortgage origination between 2005 and 2007 had “reckless or toxic features”````
ReplyDeleteNouriel Roubini of New York University’s Stern School of Business,
http://www.ft.com/intl/cms/s/0/1dc47bb6-df56-11dc-91d4-0000779fd2ac.html#axzz33mcOIjQz
Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.
ReplyDeleteStep five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.
Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.
Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a “fat tail” of companies has low profitability and heavy debt. Such defaults would spread losses in “credit default swaps”, which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.
Step nine would be a meltdown in the “shadow financial system”. Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.
Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.
Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.
Step 12 would be “a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices”.
These, then, are 12 steps to meltdown. In all, argues Prof Roubini: “Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe.” This, he suggests, is the “nightmare scenario” keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.
http://www.siliconinvestor.com/readmsgs.aspx?subjectid=51347&msgnum=105831&batchsize=10&batchtype=Next
They did not purchase nontraditional mortgages in any quantity until the U.S. homeownership rate had already peaked in 2005. The bulk of nontraditional
ReplyDeletemortgages the GSEs did acquire or guarantee after 2005 were not “subprime,” but largely “Alt-A” and interest
-only mortgages that were made to borrowers with “prime” credit scores and relatively sizeable equity contributions
, on average
.
The ir losses were due to a switch to riskier loans to get back market share and to not having enough capital to survive the crash in property values.
We do not have sufficient data to assess relative importance of the two in detail , but indirect evidence suggests
both were very important
.
2007 was an especially bad origination both because of price declines, but also because loans origina
ted that year were on the order of three times more likely to default even after controlling for observable underwriting and price declines.
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
By 2003, Fannie Mae and Freddie Mac accounted for 52.3% of all residential mortgage loans outstanding (Federal Reserve and Monthly Funding Sum
Deletemaries). The following year, GSE market share of newly originated mortgages fell precipitously and remained low for the next three years: during 2001
-2003, the GSEs funded nearly 70% of all mortgages
originated; from 2004-2006, the GSE share of new mortgages was 47%, 41%, and 40%,
respectively
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
From 2003 to 2007, the growth of outstanding mortgage debt accelerated to 11.9% per year but
Deletethe volume of outstanding mortgages financed by the GSEs rose by just 7.6% per year. On a
cumulative basis, the overall mortgage market grew 31% faster than the volume of mortgages
funded by the GSEs over this period.
This shift involved two related developments:
Delete(1) the share of total outstanding mortgage debt financed by the issuance of “nonagency” or “private label” asset - backed securities (PLS) grew by 219% over this period; and
(2) the origination of non-traditional mortgage products, like subprime (generally poor credit history and other negative attributes like low downpayments and less than full documentation)
and Alt A loans (seemingly prime but with a flaw, typically low documentation) that might not
normally meet GSE underwriting criteria also grew rapidly
These factors were associated with the share of
total mortgages financed by the GSEs falling
from 52% at the end of 2002 to 44% at the end of 2006
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
In 2000, securitization vehicles (entities classified as asset
ReplyDelete-backed security issuers and finance companies by the Federal Reserve) financed $572 billion in residential mortgages, equal to nearly 12% of all household mortgage debt outstanding. By the end of 2006, the volume of
outstanding mortgages financed by PLS had grown to over $2.6 trillion, or more than 27% of all residential mortgage debt. The most explosive growth occurred in 2004 and 2005 when the outstanding mortgage debt financed by PLS increased by 49% and 44% respectively.
It is important to note that these growth rates reflect net annual changes in total mortgage debt; when refinancings of existing PLS - funded mortgages are included, the growth rates on gross PLS issuance during these years exceed 90%
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
The dramatic growth in PLS issuance was the capital markets manifestation of the increase in the origination of nontraditional mortgage products outside of the GSE channel. According to the Government Accounting Office (GAO), “nonprime” mortgage loans (subprime plus Alt-A) accounted for 34% of the overall mortgage market in 2006. From 2001 to 2005, the dollar volume of subprime mortgages increased from $100 billion to $600 billion, while Alt - A mortgages grew from $25 billion to $400 billion over roughly the same period
Deletehttp://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
As with the growth in PLS outstanding, the volume of subprime and Alt - A mortgage origination increased most dramatically in the middle of the decade. Combined annual subprime and Alt -A origination grew from an estimated $171 billion in 2002 to $877 billion in 2005, an annualized growth rate of 72%.
Deletehttp://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
"In 2003-2004, Fannie and Freddie combined to purchase an estimated $214 billion in subprime PLS, or roughly 40% of all subprime securities issued, which represents more than a three-fold increase over the amount of subprime PLS purchased in 2001-2002. GSE purchases generally hovered around 30% of the subprime market for much of the decade until the market collapsed in 2007
ReplyDeletehttp://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
While the sheer magnitude of GSE purchases would seem to provide an important source of demand for subprime loan collateral, this was unlikely the case due to the specific type of securities purchased. A typical PLS involves a “waterfall” payment struct
Deleteure. Instead of a traditional “pass - through,” the
PLS note holders are paid according to their seniority, with senior pieces or tranches
getting paid first and suffering losses from defaults on the underlying collateral, if any, last. The size of the tranches is chosen to achieve AAA ratings on the senior portion(s), with the amount of subordinated securities adjusted as necessary to provide the
overcollateralization required by rating agencies.
Fannie and Freddie bought almost nothing but AAA rated tranches According to Freddie Mac’s
2006 Annual Report, “more than 99.9 percent” of its PLS were rated AAA
Until 2007, Fannie Mae also bought exclusively AAA PLS and added only “limited amounts” of other investment grade PLS in 2007 (Fannie Mae, 2007).
The tranches were senior in the risk queue to junior
pieces, typically 20% of the pool, which absorbed first losses.
Their investments were roughly equivalent to direct investments with 20% capital cushions
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
That the GSEs invested in AAA tranches is significant because it largely undercuts claims that
Deletetheir purchases had a significant effect on subprime mortgage origination or the pricing of these securities. A common theme among research that has examined the causes of the financial crisis is the “insatiable demand” that existed for safe, dollar - denominated debt. Acharya and Richardson (2009) emphasize that securitization existed to create AAA tranches, which appealed to many classes of potential investors. As explained by Brunnermeier (2009), some of those investors were money market and pension funds limited by law or investment policy to invest only in AAA assets, while others were leveraged hedge funds attracted to AAA securities
because of their low haircuts and potential for greater leverage (Shleifer and Vishny, 2009).
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
A major source of demand for AAA assets came from foreign institutional investors. Caballero
Delete(2010, 2009) argues that global payment imbalances were the manifestation of “global excess demand” for AAA securities that placed “enormous pressure on the U.S. financial system and its incentives.” Similarly, Gourinchas (2010) argues that excess demand for AAA assets “created an irresistible profit opportunity for the U.S. financial system” to create and market “safe” asset - backed securities to the rest of the world. Diamond and Rajan (2009) find that securitization
became focused on squeezing out the most AAA paper from an underlying package of mortgages” because, according to Gorton and Metrick (2009), “there is not enough AAA debt in the world to satisfy demand.”
Hull (2009) offers the same critique.
Indirect evidence of strong demand can be found in the market for synthetic securities that mimicked the returns of actual ones, because there were not enough actual ones to sell.
Given this context and the apparently elastic demand for seemingly homogeneous AAA
securities, it is difficult to believe GSE purchases of AAA tranches of subprime PLS had any
material impact on pricing or issuance volume.
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
To acquire AAA subprime PLS, the GSEs issued
Deleteagency debt, another AAA instrument. Thus, the net effect of these acquisitions was to leave the global supply of AAA rated securities unchanged.
It is also important to note that the duration of the top tranches of these securities was exceptionally short. As Gorton (2008) explains, the expectation was for the underlying mortgage collateral to be refinanced in two years with any amortization of principal prior to the refinancing generally directed to the AAA tranches purchased by the GSEs. Although Fannie and Freddie
ReplyDeletecombined to purchase nearly $600 billion of subprime PLS between 2000 and 2007, their combined holdings of subprime PLS DIS NOT LIKELY EXCEED $200 billion at any given time.
At the end of 2008, the GSEs reported combined subprime PLS holdings of $154.6 billion, another $62.5 billion of Alt
- A PLS, and $19 billion of residential mortgage PLS not otherwise classified.
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
The other major source of funding for these tranches came from collateralized debt obligations (CDOs), which sought ABS collateral because of the discount to like -rated corporate bonds (Moody’s, 2000).
DeleteMore significantly, CDOs provided a mechanism to transform junior tranches of PLS into additional AAA securities to meet “insatiable” global demand.
The data show that the share of junior tranches sold directly to investors declined over the period, suggesting that more of these tranches were purchased by CDO managers (Thomson Reuters, 2010).
Neither GSE acquired junior pieces of securitizations or had any exposure to CDOs (Fannie Mae, 2007, p. 97;8 Lockhart, 2008).
Fannie and Freddie could not use CDOs for goals credit. On the importance of the CDO market to the completion of PLS deals see Mason and Rosner (2007)
Both GSEs have written up the value of their investment portfolios by a combined $62 billion in
Delete2009-2010. By the estimates of the FHFA, losses on PLS investments and derivatives have
accounted for $21 billion or just 9% of total GSE losses (net of income from the securities) since
the end of 2007 ; losses on subprime PLS (not
net of income from the securities) were $18
billion, or about 10% of overall portfolio credit losses This suggests that the subprime PLS
business has (net) accounted for around 5% of their losses. Losses on all subprime PLS will
probably be a few hundred billion dollars
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
Affordable Housing Goals
ReplyDeleteWhile the GSEs were likely attracted to the same extra yield on “safe” securities that made AAA PLS tranches attractive for other classes of investors, it seems reasonable to believe that affordable housing goals motivated these purchases
.
As explained by FHFA, PLSs were a major channel through which the GSEs fulfilled their affordable housing goals.
They had high ratings and were seemingly
well protected by subordination.
They were goals intensive, and they were short term. Because the goals were set in terms of the flow purchases, rather the stock held, they could get credit for housing goals by what was essentially rolling over of the existing stock of what were essentially bridge loans
As a result they could buy 30% to 40% of the amount issued, but only hold around 15% of the outstanding stock
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
Would the housing market have developed differently had these goals been less stringent?
DeleteOf course, counterfactuals are tough, but it is
unlikely. This is not only because demand for AAA
securities would have continued to provide an incentive to securitize subprime mortgages, but
also because the market’s development was endogenous to the affordable housing goals
themselves.
That is, Fannie and Freddie were not leaders in share of low income lending. The growth of the subprime market caused the GSEs’ mortgage portfolio to lag the market with respect to loans made to lower income borrowers, minorities, as well as loans made in underserved areas targeted by HUD (Case, Gillen, & Wachter, 2002).
The purpose of HUD’s 2004 affordable housing goals was to close the gap “so that by 2008 [GSE purchases] would equal the projected shares of goal
- qualifying units financed in the primary mortgage market.”
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
The 2004 affordable housing goals rule makes repeated reference to the GSEs’ low market share for loans made to “affordable and low - and moderate - income borrowers and underserved neighborhoods” and also references a Congressional Budget Office (CBO) report estimating that the “funding advantage” created b
Deletey the implicit guarantee and explicit advantages of GSE status “resulted in a $19.6 billion annual combined subsidy for both GSEs” in 2003.
The message sent by the rule is that the GSEs do not deserve the special privileges afforded by
Deletetheir charter if they badly lag the “private market” with respect to funding affordable mortgages.
Attributing the housing bubble to an exogenous shock introduced by overzealous regulators is
simply wrong. The affordable housing goals clearly reflect a presumption that e
ntities sponsored by the government should do as much to meet social goals as “purely private” purchasers and, in some cases, lead the market.
To a large extent the goals were set to catch up with rest of the market. One can certainly argue that the goals were bad policy (an ineffective and inefficient way of providing a subsidy), but they were not the driver of the market.
Had the subprime market not already developed, the goals would have been lower
Further evidence of the relative unimportance of the goals is Jaffee (2010), who points out that:
incentives were weak because when Fannie and Freddie fell short of their goals nothing
happened, the goals prohibited many subprime products and Fannie and Freddie appeared to
“cherry pick” among the set of eligible loans (Jaffee and Quigley (2007)). Jaffee too comes to
the conclusion that the goals had little to do with losses
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
Fannie and Freddie did ramp up risk - taking, but mostly not for “goals- related” reasons. Their
Deleteincreased risk - taking was in “nontraditional,” especially Alt -A, loans that were not especially
goals rich. Alt- A loans were generally
less able to qualify for income -based affordable housing goals because they were often made to relatively affluent borrowers and typically lack
ed information on the borrower’s income, the documentation of which is necessary to receive credit towards the goals.
As explained in Weicher (2010), the lack of income and (in the case of rental units) rent
documentation and HUD rules governing the inclusion of Alt-A mortgages in the goals calculations meant that the more Alt- A loans the GSEs acquired, the more difficult it became to meet the Low - and Moderate -Income Goal and the Special Affordable Goal
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
What explains the surge in risky loans if it was not the goals? Most likely, according to their
Deleteregulator and testimony before the Crisis Commission, it was a decision to follow the market and buy back market share lost to private
label securitization of both subprime and Alt
-A loans from 2003 to 2005, when the Fannie/Freddie share of mortgage originations went from almost 60% to less than 40%.
That surge was the main problem, and it was enabled by their guarantee, which allowed them to continue borrowing at low rates despite ramping up risk.
http://business.gwu.edu/creua/research-papers/files/fannie-freddie.pdf
Subprime loans originated in late 2005 and 2006 are playing a major role in recent defaults and foreclosures.
ReplyDeleteThe market for mortgages in the U.S. increased from $458 billion in 1990 to nearly $4 trillion at its peak in 2003.
Most of these mortgages were packaged into MBS, and although most MBS were still sponsored by the GSEs,
commercial or investment banks played an increasingly prominent role putting these packages together and helping the government sell them. More important, after 2003 the big private banks created a massive market segment for those unconventional mortgages which the GSEs would not
back, especially after 2003
....The American mortgage market was about $500 billion in 1990. During the 1990s, it went up to nearly $1 trillion in 1993, peaked in 1998 at around $1.5 trillion. In 2000, it
stood at $1 trillion a year. The real surge in the mortgage market began in 2001 (the year of the stock market crash). From 2000 -2004, residential originations the U.S. climbed from about $1trillion to almost $4 trillion.
About 70% of this rise was accounted for by people refinancing their conventional mortgages at lower interest rates
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
After r 2003, the major banks' strategies pointed increasingly toward subprime and other non-conventional mortgage segments. Figure
Delete6 highlights the remarkable degree and rapidity with which firms gravitated toward nonprime lending (we discuss thereasons for this shift further below).
At the bottom of the graph are home loans originated by the Federal Housing Administration (FHA) and the Veteran’s Administration (VA). These were never a large part of the total originated loans although they did increase slightly after 2001.
The largest parts of the market were conventional or “conforming” mortgages. These are prime-rate mortgages for people who put down 20% for their house and whose loan value does not exceed the size limitations imposed by the government for inclusion in GSE pools. The loans were generally securitized into agency -backed MBS, which was insured against default and thus paid relatively lower rates of return.
We can see that the bulk of the mortgage market from 1990 until 2003 consisted of these two categories of loans
But beginning in 2003, we begin to see rapid compositional shift toward non-conventional
loans. In contrast to conventional loans, securitization of these types of mortgages was centered on private - sector banks rather than GSEs.
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
Predatory origination practices were especially prevalent
ReplyDeletewithin the HEL segment. Alt-A and subprime mortgages (sometimes called “B/C” mortgages to denote their lower credit quality) were sold to people with impaired credit history, or people who lacked the ability to make a large down payment, or people who did not have verification of their income. Alt-A is not strictly defined but is generally viewed as an intermediate category that encompasses borrowers with FICO scores to qualify for prime but who lack some other qualification.
The term subprime actually has a set of formal definitions. To qualify for a prime or conventional mortgage, a person needed 20% down and a credit FICO score of 660 or above (the average score is 710 on a scale from 450-900). Mortgagees who did not have these qualifications
were not eligible for prime or conventional mortgages
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
In 2004, for the first time, these four categories of loans exceeded the prime market or conventional market. In 2001, the largest conventional (prime, government-insured) originator did 91% of its origination business in the conventional market, and only 9% in the non-prime market.
DeleteBy 2005 the largest conventional originator was doing less than half of its origination business
within the conventional sector (Inside Mortgage Finance 2009). In the peak of the mortgage craze in
2006, fully 70% of all loans that were made were unconventional mortgages.
This meant in a very short period of time, banks reoriented housing finance–one of the largest industries in the economy–around securitizations of highly risky loans. This astounding change in the character of the mortgage market was noticed by regulators and Congress. But, the Federal Reserve chose to ignore what was going on
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
Alan Greenspan has famously testified before Congress that the reason he did nothing to stop this rapid growth in unconventional mortgages is that he believed banks would not have made these loans if they thought they were too risky.
DeleteThere were two main reasons banks pursued these risky subprime loans so aggressively. The first, which we discuss at greater length below, is that there were fewer and fewer loans left to sell in the saturated prime market. The other reason is that subprime origination and securitization turned out to be enormously profitable
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
According to a study by the consulting firm Mercer Oliver Wyman, nonconventional lending accounted for approximately half of originations in 2005, but over 85% of profits
DeleteOnce lenders figured this out they would
Deleteoften try to sell subprime loans even to persons who qualified for a cheaper prime loan. The
repackaging of nonconventional mortgages into bonds also became the largest fee generation
business for many investment banks including Lehman Bros., Bear Stearns, Merrill Lynch, Morgan Stanley, and Goldman Sachs. Commercial banks and bank holding companies like Bank of America, Wells Fargo, Citibank, and Countrywide Financial also became deeply involved in all stages of the market, from origination to packaging, to servicing.
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
The major firms employed strategies to profit from MBS in multiple ways simultaneously,
Deleteearning money both from fees and from income on retained MBS assets. Bank originators could
either use their own capital or cheap borrowed capital to make loans to home buyers (Ashcroft and Scheuermann, 2008 take up this story). Then, they could turn around and sell those loans to
conduits. If they used someone else’s money (borrowed at say 1-2%), then they could essentially do the entire transaction with very low cost and relatively high fees
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
Conduit banks could also borrow money cheaply. They would then buy up the mortgages, package them, and sell them to investors.
DeleteBut, beginning sometime around 2002, both
commercial banks and investment banks began to
realize that they could borrow money for 1-2%, create MBS, and hold onto the MBS which might
pay as much as 6-7% in interest. This allowed them to make a profit using other people’s money
and without risking their own capital. The low interest rates in the U.S. and the world encouraged
banks of all kinds to make as many subprime loans as they could, earns fees from packaging them into MBS, and then also hold onto a portion of the securities as investments. The massive amounts of money banks borrowed to fund this strategy are the reason they were so highly leveraged when the liquidity crisis hit in 2008.
Unlike investment banks and private mortgage
ReplyDeletecompanies, firm-level data on commercial bank and thrift holdings is publicly available. Each of these firms was amongst the top 15 private -label MBS issuers at the pea
k of the market. Each was also amongst the top 15
non-prime originators (Inside Mortgage Finance 2009).
There are several things worth noting here. First, the graph shows that the firms issuing MBS were holding onto a
significant portion of the bonds. Second, they were rapidly increasing their positions even as the bubble grew
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
The massive growth of nonconventional mortgage securitization had spread at least $3.8 trillion of assets directly linked to these mortgages to financial institutions around the world by the beginning of 2007. Nonetheless it is clear that the markets, the credit ratings agencies, regulators,and most of the large banks all registered comparatively little response when housing prices started
ReplyDeleteto stall out and mortgage default rates began to rise in late 2006. Several large banks such as Merrill Lynch and Citibank continued expanding their non-prime businesses aggressively during the first two quarters of 2007. In March of 2007 Fed chairman Ben Bernanke stated in congressional
testimony that “at this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” The credit ratings agencies also continued to maintain an implausibly upbeat outlook through the first two quarters of 2007.
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
Only after they faced widespread mocking on the financial blogosphere, congressional questioning, and an overall crisis of legitimacy did the agencies take serious steps to adjust MBS bond ratings to reflect the deteriorating conditions in the mortgage market. Their reasons for reticence were clear. First, they had a vested interest in hoping the situation would improve since their reputations and significant portion of the revenues rested on a strong MBS market. Second, they knew what downgrades would mean
Deletehttp://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
Based on the preceding discussion, we would argue that the proximate causes of the crisis can be found in two shifts in the structure of the mortgage finance field. First, the easy credit available to all forms of financial investors after 2000 meant that money could be made by borrowing money at a low interest rate and then turning around and buying MBS.
ReplyDeleteThis process of leveraging was the core strategy of banks and many other financial institutions. Investors worldwide
who were not leveraged were also searching for higher, but safe returns and American mortgages looked good to them. These strategies brough t all of the major banks aggressively into mortgage securitization, and brought mortgage securitization to the center of the financial sector. It also made the financial position of these firms especially sensitive to the credit markets that would become
negatively impacted by the core of the market, along with millions of households and the rest of the American economy.
The steep decline in mortgage originations after 2003 reflected neither weakness in the housing market nor slackening demand from the secondary market. Rather, a saturated prime market and an interest rate hike led to a significant drop off in the refinancing activity that had driven the 2003 boom
The second cause (which is not well understood) is as important as the first. By 2004, there were simply not enough prime or conventional mortgages left in the U.S. to package into MBS
So, while those who had money to buy MBS were looking for product, those who were originating and packaging MBS lacked enough to sell them. This meant that there wa
s a huge incentive to increase the number of mortgages. This incentive sent loan originators looking for new mortgage markets to feed the securitization machine and led to the rapid growth of the subprime and Alt-A markets.
The aggressive pursuit of those markets by banks of all kinds has led us to the current situation. The main role that regulators played was to refuse to intervene into these markets
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
Banks used cheap capital to create a bubble. Their lending strategies fueled and fed off the housing bubble, and they did so using mortgage products whose performance was premised on continued growth of that bubble.
ReplyDeleteAfter 2004, the financial industry coalesced around high
-risk mortgage lending as their primary cash crop. Subprime mortgages, which had been an effective if
sometimes shady means of extending credit availability to under-served borrowers, suddenly became a foundation of 21st century financial capitalism. The complete collapse of the financial system and resulting recession have shown the folly of that strategy. What has saved the financial
sector is the government takeover of the GSEs and the bailout of the rest of the banking system
Regulators and policymakers enabled this process at virtually every turn. Part of the reason they failed to understand the housing bubble was willful ignorance: they bought into the argument that the market would equilibrate itself. In particular, financial actors and regulatory officials both believed that secondary and tertiary markets could effectively control risk through pricing.
ReplyDeletehttp://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst%20of%20Disaster_0.pdf
The basic structure of the adjustable-rate mortgages that lenders used to grow the subprime market was premised on continued house appreciation. Once the housing bubble peaked subprime ARM loans suddenly became extremely prone to default.
ReplyDeleteNOT THE FED
ReplyDeleteI noted earlier that the most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates. Moreover, regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices without necessarily having had to make a judgment about the sustainability of house price increases.
http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm
Did the Fed Cause the housing Bubble?
DeleteAccording to research by Ambrogio Cesa-Bianchi and Alessandro Rebucci, the housing bubble was caused by "regulatory rather than monetary-policy failures":
http://economistsview.typepad.com/economistsview/2013/04/did-the-fed-cause-the-housing-bubble.html
Was it easy money or easy regulation that caused the housing bubble?
… after the Fed started to tighten its monetary-policy stance and the prime segment of the mortgage market promptly turned around, the subprime segment of the mortgage market continued to boom, with increased perceived risk of loans portfolios and declining lending standards. Despite this evidence, the first regulatory action to rein in those financial excesses was undertaken only in late 2006, after almost two years of steady increases in the federal funds rate. …
When regulators finally decided to act, it was too late:
http://www.aei-ideas.org/2013/04/was-it-easy-money-or-easy-regulation-that-caused-the-housing-bubble/
As a matter of fact, the share of non-prime mortgage over total mortgage originations went from about 20% in 2001 to more than 50% in 2006 (Panel a), experiencing the largest increase in 2004, while the Fed was already tightening its monetary policy stance. A similar pattern emerges in issuance of mortgage-backed securities (MBS), whose share sharply increased in the 2003-06 period (Panel b). Moreover, the share of high-LTV ratio mortgages in the US spiked in 2005 (Panel c), two years after the beginning of monetary-policy tightening. Finally, while the level of perceived risk increased sharply starting in 2004, banks began to ease their lending standards in 2003 and did so even more in the 2004-05 period (Panel d
ReplyDeleteIn the context of our model and according to this evidence, regulatory rather than monetary-policy failures are largely to blame for the occurrence and the severity of the Great Recession. Only by assuming that the Fed was the sole institutional guardian of financial stability, or at least the main one, is it possible to contend that monetary policy is to blame for the 2007-09 financial crisis and the ensuing Great Recession.
http://www.voxeu.org/article/federal-reserve-breeding-next-financial-crisis
You can point to thousands of housing and financial policies and laws prior to Bush but none of them explain why banks lowered their lending standards in late 2004 and none of them explain why Bush’s regulators did nothing to stop it. Bush’s agressive and toxic housing policies do explain why bush’s regulators did nothing. No bad mortgages, no housing bubble.
ReplyDeleteIn case you don’t know it, republicans controlled congress in 2003. Don’t be offended if you knew it. A lot of conservatives don’t.
Anyhoo, don’t equate ‘pushing home ownership’ (which everybody since FDR did) with Bush encouraging funding and protecting lower lending standards. Yes, Bush encouraged, funded and protected lower lending standards. Its why Bush’s Working Group on Financial Markets told you it started late 2004 and its why they said it was started by lower lending standards. Its why No Doc loans went from 4.3 % of all mortgages in 2004 to over 50 % in 2006. its why subprime went from 10 % in 2003 to 40 % in 2006. Go back and read what I posted.
Here's another Bush policy from 2004
BUSH ADMINISTRATION ANNOUNCES NEW HUD "ZERO DOWN PAYMENT" MORTGAGE
Initiative Aimed at Removing Major Barrier to Homeownership
Preliminary projections indicate that the new FHA mortgage product would generate about 150,000 homebuyers in the first year alone.
http://archives.hud.gov/news/2004/pr04-006.cfm
Bush stopped reform in 2003
ReplyDeleteBush reversed the restrictions President Clinton placed on Freddie and fannie’s subprime mortgage purchases
Bush protected predatory lenders
Bush forced GSEs to buy an additional $440 billion in minority mortgages
House passed a reform bill in 2005, HR 1461, with a 331-90 vote. The was the only GSE reform bill to pass any chamber of the republican controlled congress. And it continues to ignore that Republican House Financial Services committee Chairman Mike Oxley blames bush for no bill passing.
And this is what Bush thought of HR 1461, the house version of GSE reform
STATEMENT OF ADMINISTRATION POLICY
The Administration strongly believes that the housing GSEs should be focused on their core housing mission, particularly with respect to low-income Americans and first-time homebuyers. Instead, provisions of H.R. 1461 that expand mortgage purchasing authority would lessen the housing GSEs' commitment to low-income homebuyers.
Tell the Republicans to stop blocking the [House-passed] bill" in the Senate.
Republican obstruction ended in July 2008. So after 12 years in which the Republican Congress had not passed a reform bill, the Democratic Congress gave the Bush administration all that it asked for in 19 months. Who blocked reform?
Q Wow, did you just prove that Bush was against reform because it “would lessen the housing GSEs' commitment to low-income homebuyers”?
ReplyDeleteA first off, welcome back Q. I know it was a lot of information to digest in one day so you earned the time off. Anyhoo, yes, I did just prove that Bush was against GSE reform because it “would lessen the housing GSEs' commitment to low-income homebuyers”.
I also mentioned that Republican Chairman of the House Financial Services Committee blames Bush and company for the Housing mess.
“"Instead, the Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.
The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq.”
“What did we get from the White House? We got a one-finger salute.”
Bush told Barney and democrats there was nothing wrong with Freddie and Fannie in 2003
ReplyDeleteBush stopped GSE reform in 2003
Bush’s toxic housing and GSE policies from 2004
Bush said there was no housing bubble in 2005 ( Bernanke, Bush ' guy , currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee)
http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255.html
Bush attacked the very reform that would have prevented the Bush Mortgage Bubble
Bush attacked reform because he said it “would lessen the housing GSEs' commitment to low-income homebuyers
The republican chairman of the House Financial Services committee Mike Oxley blames Bush for reform not passing
Here barney is specifically referring to bush’s policy of forcing GSEs to buy more low income home loans.
“Fannie Mae and Freddie Mac would suffer financially under a Bush administration requirement that they channel more mortgage financing to people with low incomes, said the senior Democrat on a congressional panel that sets regulations for the companies.”
“Frank's comments echo concerns of executives at the government-chartered companies that the new goals will undermine profits and put new homeowners into dwellings they can't afford.”
Ouch, barney just said the Bush policy will put people into homes they cant afford. What did Bush say to that?
“Alphonso Jackson, secretary of Housing and Urban Development, said the Bush administration has no hidden motives in seeking to raise the percentage of financing for low-income homeowners.
“There is no administration more supportive of Fannie and Freddie than we are,'' Jackson said today in interview. “We are just actualizing what should have been done years ago.''
double ouch!
http://democrats.financialservices.house.gov/FinancialSvcsDemMedia/file/press/112/06-17-04-new-Fannie-goals-Bloomberg.pdf
Q What about the conservative 'narrative' that Bush tried to stop the bubble?
ReplyDeleteA Its simply another false narrative created by the 'conservative entertainment complex'. That narrative is 'crafted' around the statements of Bush saying fannie and freddie needed to be regulated. Lets look at the structure of this narrative
Bush said GSEs needed to be regulated (actually true)
Barney Frank and other dems said GSEs were fine (actually true)
Democrats blocked reform (false)
GSEs caused the crisis (false)
I've dealt dirrectly with the false narrative created by that youtube video in this thread several times. They spoke the words but those words had nothing to do with the Bush Mortgage Bubble. And I hope you realize that Dems were the minority party in video
ReplyDeleteWhat a laugh, you're blaming Barney Frank? Do you realize that the Republicans had control of the House from Jan 1995 until 2007? So they could have made any changes they wanted in those years. Now watch president Bush:
ReplyDeletehttps://www.youtube.com/watch?feature=player_embedded&v=QYvtvcBKgIQ
ot a phrase or sentence fragement or carefully constructed video. I’ve posted a seemingly unending string of toxic housing policies and statements that show everything conservatives have been spoon fed about the Bush Mortgage Bubble is a lie. Conservatives cant address the actual facts I post but they have to post something, anything no matter how foolish.
ReplyDeleteYes govt failed us. Are who was in charge of that govt? Can you say republicans? (I've found conservatives wont even state obvious facts)
ReplyDeleteHow is there more than enough blame to go around. Republicans were in charge and implementing their policies and they were in charge of the regulators. Oh yea, that’s right, you blame democrats for not pounding their chest
Yes there is plenty of blame to go around to political parties -- but the political PHILOSOPHY that failed was conservatism.
ReplyDeleteTax cuts for the wealthy and deregulation of the financial sector is a recipe for disaster. And that's what conservatism, not progressives, stand for.
The Democrats are to blame only to the extent that some of them voted to establish conservative policies. That's always a bad idea.