Private Sector loans caused housing bubble, not Fannie/Freddie

[Atreus21]

Originally posted by: BigDH01

Originally posted by: Specop 007

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: miketheidiot

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

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

Well then why did Fannie/Freddy Mae/Mac crash?

They still made poor choices. The point is that all lenders were making poor choices, not just the GSEs. The private banks were just as stupid and contributed to this mess more than the GSEs.

Perhaps, but if they made those loans in the knowledge that FM/FM were going to buy them off their hands, you have to give a pretty baleful look at the policy that led to FM/FM doing this.

I don't think private banks would've made those loans if they thought they'd have to assume the responsibility themselves.

But the CRA mandating this puts implicit pressure on a private bank. Once any private bank submits to this program, the other will follow suit just to remain competitive.

Again, this opinion is based off one microeconomics class I've taken.

Always interesting what you can find when you take the time to follow a river upstream.

And if you read the article, you'd see that when followed upstream it was private investment banks that were doing most of the buying of the subprime mortgages, not the GSEs. Don't get me wrong, the GSEs made poor decisions but this was predominantly a failure of the private sector in assessing and accounting for risk, either by ignorance or greed.

But like I said, the banks would be under implicit pressure to guarantee bad debt, in the interest of remaining competitive. If one bank does it, the others have to follow.

 

[BigDH01]

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Specop 007

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: miketheidiot

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

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

Well then why did Fannie/Freddy Mae/Mac crash?

They still made poor choices. The point is that all lenders were making poor choices, not just the GSEs. The private banks were just as stupid and contributed to this mess more than the GSEs.

Perhaps, but if they made those loans in the knowledge that FM/FM were going to buy them off their hands, you have to give a pretty baleful look at the policy that led to FM/FM doing this.

I don't think private banks would've made those loans if they thought they'd have to assume the responsibility themselves.

But the CRA mandating this puts implicit pressure on a private bank. Once any private bank submits to this program, the other will follow suit just to remain competitive.

Again, this opinion is based off one microeconomics class I've taken.

Always interesting what you can find when you take the time to follow a river upstream.

And if you read the article, you'd see that when followed upstream it was private investment banks that were doing most of the buying of the subprime mortgages, not the GSEs. Don't get me wrong, the GSEs made poor decisions but this was predominantly a failure of the private sector in assessing and accounting for risk, either by ignorance or greed.

But like I said, the banks would be under implicit pressure to guarantee bad debt, in the interest of remaining competitive. If one bank does it, the others have to follow.

Verifiably false. The fact that private banks exist today that hold mortgages and don't require a bailout proves that your hypothesis is incorrect.

Banks do not have to follow. Greed drove them to make risks they shouldn't have made. They don't need the government to push them to take risks.

 

[Atreus21]

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Specop 007

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: miketheidiot

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

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

Well then why did Fannie/Freddy Mae/Mac crash?

They still made poor choices. The point is that all lenders were making poor choices, not just the GSEs. The private banks were just as stupid and contributed to this mess more than the GSEs.

Perhaps, but if they made those loans in the knowledge that FM/FM were going to buy them off their hands, you have to give a pretty baleful look at the policy that led to FM/FM doing this.

I don't think private banks would've made those loans if they thought they'd have to assume the responsibility themselves.

But the CRA mandating this puts implicit pressure on a private bank. Once any private bank submits to this program, the other will follow suit just to remain competitive.

Again, this opinion is based off one microeconomics class I've taken.

Always interesting what you can find when you take the time to follow a river upstream.

And if you read the article, you'd see that when followed upstream it was private investment banks that were doing most of the buying of the subprime mortgages, not the GSEs. Don't get me wrong, the GSEs made poor decisions but this was predominantly a failure of the private sector in assessing and accounting for risk, either by ignorance or greed.

But like I said, the banks would be under implicit pressure to guarantee bad debt, in the interest of remaining competitive. If one bank does it, the others have to follow.

Verifiably false. The fact that private banks exist today that hold mortgages and don't require a bailout proves that your hypothesis is incorrect.

Banks do not have to follow. Greed drove them to make risks they shouldn't have made. They don't need the government to push them to take risks.

Well, then why, if the subprime market crashed, did the big dogs go down, and the private banks not?

 

[BigDH01]

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: miketheidiot

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

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

Well then why did Fannie/Freddy Mae/Mac crash?

They still made poor choices. The point is that all lenders were making poor choices, not just the GSEs. The private banks were just as stupid and contributed to this mess more than the GSEs.

Perhaps, but if they made those loans in the knowledge that FM/FM were going to buy them off their hands, you have to give a pretty baleful look at the policy that led to FM/FM doing this.

I don't think private banks would've made those loans if they thought they'd have to assume the responsibility themselves.

But the CRA mandating this puts implicit pressure on a private bank. Once any private bank submits to this program, the other will follow suit just to remain competitive.

Again, this opinion is based off one microeconomics class I've taken.

Originators were making these loans knowing someone would buy them.

What the above article is addressing is the fact that private banks were also buying these loans. The originators were selling these loans to the GSEs and other private banks. It was a failure on everyone's part to properly assess the risk. Actually, in my opinion the banks and GSEs were aware of the risk, but like all irrational exuberance, they chose to ignore it.

In fact, the article claims that the GSEs only accounted for 1/3 of loans securitized in 2005 and 2006. It also claims that in 2006, the GSEs only held 24% of subprime loans on the secondary market. They were not the enablers people like to think.

I think this bubble was really driven by securitization. There was a lot of capital looking for returns and the bubble provided this, until it didn't. Yes, the GSEs certainly bought mortgages, but apparently not a rate that competes with the private investment banks.

Well, then why did securitization happen at all? Would the banks have securitized the bad debt in the absence of the CRA?

I bet they wouldn't have.

Why wouldn't they? When housing values were increasing year after year, this investment was providing an excellent return. If you could buy a home during the bubble and make a 50% return on holding a home for 3 months, would you have done it? These banks were just holding onto the hot potatoes when the bubble popped.

Securitization took off because there was a large market of buyers for MBSs. The originators didn't have to take the loss and there was a great deal of fraud. The people selling the assets paid the ratings agencies to rate them and sold them as AAA. While the market was hot, there was a good return to be made. You seem to forget that irrational exuberance has happened in the past with little government intervention. And if you got rid of the government, it would continue to happen. The government didn't help matters, but the private sector is still responsible for its actions and excessive greed.

 

[Atreus21]

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: miketheidiot

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

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

Well then why did Fannie/Freddy Mae/Mac crash?

They still made poor choices. The point is that all lenders were making poor choices, not just the GSEs. The private banks were just as stupid and contributed to this mess more than the GSEs.

Perhaps, but if they made those loans in the knowledge that FM/FM were going to buy them off their hands, you have to give a pretty baleful look at the policy that led to FM/FM doing this.

I don't think private banks would've made those loans if they thought they'd have to assume the responsibility themselves.

But the CRA mandating this puts implicit pressure on a private bank. Once any private bank submits to this program, the other will follow suit just to remain competitive.

Again, this opinion is based off one microeconomics class I've taken.

Originators were making these loans knowing someone would buy them.

What the above article is addressing is the fact that private banks were also buying these loans. The originators were selling these loans to the GSEs and other private banks. It was a failure on everyone's part to properly assess the risk. Actually, in my opinion the banks and GSEs were aware of the risk, but like all irrational exuberance, they chose to ignore it.

In fact, the article claims that the GSEs only accounted for 1/3 of loans securitized in 2005 and 2006. It also claims that in 2006, the GSEs only held 24% of subprime loans on the secondary market. They were not the enablers people like to think.

I think this bubble was really driven by securitization. There was a lot of capital looking for returns and the bubble provided this, until it didn't. Yes, the GSEs certainly bought mortgages, but apparently not a rate that competes with the private investment banks.

Well, then why did securitization happen at all? Would the banks have securitized the bad debt in the absence of the CRA?

I bet they wouldn't have.

Why wouldn't they? When housing values were increasing year after year, this investment was providing an excellent return. If you could buy a home during the bubble and make a 50% return on holding a home for 3 months, would you have done it? These banks were just holding onto the hot potatoes when the bubble popped.

Securitization took off because there was a large market of buyers for MBSs. The originators didn't have to take the loss and there was a great deal of fraud. The people selling the assets paid the ratings agencies to rate them and sold them as AAA. While the market was hot, there was a good return to be made. You seem to forget that irrational exuberance has happened in the past with little government intervention. And if you got rid of the government, it would continue to happen. The government didn't help matters, but the private sector is still responsible for its actions and excessive greed.

Some might argue that house values were increasing year after year because of excessive demand caused by the subprime designation.

Irrational exuberance in the past is supposed to be self-regulating. If a bank chooses to take unnecessary risk, they pay the price for it. But generally making overly risky loans is not something banks do.

I'm getting beyond my area of understanding, but I still think that, without the subprime designation created by the CRA, banks would never have started to make these greedy, overly-risky loans.

 

[BigDH01]

Originally posted by: Atreus21
Well, then why, if the subprime market crashed, did the big dogs go down, and the private banks not?

I'm not sure what you're asking here, but plenty of private banks, both large and small, have gone down. You might remember Bear Stearns, Lehman Brothers, or maybe one the local banks here. However, there are still banks out there that are healthy. Banks that didn't get caught up in the irrational lending that maintained healthy balance sheets. It is possible to survive, and now thrive, without following the leaders.

 

[Xellos2099]

So we can ALL agree on CRA caused this problem.

 

[Atreus21]

Originally posted by: BigDH01

Originally posted by: Atreus21
Well, then why, if the subprime market crashed, did the big dogs go down, and the private banks not?

I'm not sure what you're asking here, but plenty of private banks, both large and small, have gone down. You might remember Bear Stearns, Lehman Brothers, or maybe one the local banks here. However, there are still banks out there that are healthy. Banks that didn't get caught up in the irrational lending that maintained healthy balance sheets. It is possible to survive, and now thrive, without following the leaders.

I concede the follow the leader point, but I still contend that the CRA led to the irrational lending practices in the first place.

It simply seems to obvious. If suddenly an enormously valuable product, like a house, is very easy to get, demand goes up, which drives prices up. I don't think Bear Stearns would've gone under if not for subprime lending.

 

[BigDH01]

Originally posted by: Atreus21
Some might argue that house values were increasing year after year because of excessive demand caused by the subprime designation.

Irrational exuberance in the past is supposed to be self-regulating. If a bank chooses to take unnecessary risk, they pay the price for it. But generally making overly risky loans is not something banks do.

I'm getting beyond my area of understanding, but I still think that, without the subprime designation created by the CRA, banks would never have started to make these greedy, overly-risky loans.

Almost by definition, irrational exuberance is not self-regulating. It wasn't for dot-bomb just as it wasn't for tulip mania. Surely, you're aware that banks have made terrible loans and investments in the past creating a variety of panics.

And you might make that claim about subprime except that you'd have to show that subprime and CRA was the catalyst for the bubble. Was it? The CRA has been around since 1977 yet annual growth in median home prices almost immediately decreased and stabilized until recently.

Did housing prices cause more people to take subprime loans, or was it vice versa. I would claim that higher prices led to more subprime. Some interesting info here. Just on the first bullet alone you'll see that most subprimes were refinances and most of those were "cash-out." People were using their increased property values to treat their houses like ATMs. This indicates to me that housing values came first. It also indicates that more subprimes were given to first time homebuyers. This indicates that the mania was driving people into buying homes they couldn't afford, homes that started to appreciate obviously before they took their subprime.

Basically, I think there was a lot of capital looking to invest after dot-bomb. Extremely low interest rates just shifted the equity bubble to the real estate bubble. This sudden increase drove people to take risks, like using subprime loans to buy houses they couldn't afford. This was either to invest, buy before they were priced out forever, or to take a trip to the Bahamas. Regardless, I believe it has little to do with the CRA.

 

[Atreus21]

Originally posted by: BigDH01

Originally posted by: Atreus21
Some might argue that house values were increasing year after year because of excessive demand caused by the subprime designation.

Irrational exuberance in the past is supposed to be self-regulating. If a bank chooses to take unnecessary risk, they pay the price for it. But generally making overly risky loans is not something banks do.

I'm getting beyond my area of understanding, but I still think that, without the subprime designation created by the CRA, banks would never have started to make these greedy, overly-risky loans.

Almost by definition, irrational exuberance is not self-regulating. It wasn't for dot-bomb just as it wasn't for tulip mania. Surely, you're aware that banks have made terrible loans and investments in the past creating a variety of panics.

And you might make that claim about subprime except that you'd have to show that subprime and CRA was the catalyst for the bubble. Was it? The CRA has been around since 1977 yet annual growth in median home prices almost immediately decreased and stabilized until recently.

Did housing prices cause more people to take subprime loans, or was it vice versa. I would claim that higher prices led to more subprime. Some interesting info here. Just on the first bullet alone you'll see that most subprimes were refinances and most of those were "cash-out." People were using their increased property values to treat their houses like ATMs. This indicates to me that housing values came first. It also indicates that more subprimes were given to first time homebuyers. This indicates that the mania was driving people into buying homes they couldn't afford, homes that started to appreciate obviously before they took their subprime.

Basically, I think there was a lot of capital looking to invest after dot-bomb. Extremely low interest rates just shifted the equity bubble to the real estate bubble. This sudden increase drove people to take risks, like using subprime loans to buy houses they couldn't afford. This was either to invest, buy before they were priced out forever, or to take a trip to the Bahamas. Regardless, I believe it has little to do with the CRA.

I have a normal mortgage, and even with the current crisis, I'm refinancing and cashing out the equity so as to consolidate some other higher-interest debt. Property values here are still pretty good. With subprime loans being easy to get, it's no surprise that existing homeowners turned to it for easier cash. I'm not sure what the point is. There's a graph somewhere that shows property values jumping considerably since CRA passage.

I'm not sure about the dot-com bubble connection. Again though, without the subprime creation, people might not've been taking risks like this so extensively.

 

[shira]

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: miketheidiot

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

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

Well then why did Fannie/Freddy Mae/Mac crash?

They still made poor choices. The point is that all lenders were making poor choices, not just the GSEs. The private banks were just as stupid and contributed to this mess more than the GSEs.

Atreus is making an illogical argument, which goes something like this:

"Fannie/Freddie must be majorly responsible for the sub-prime crisis because they backed so many sub-prime loans that Fannie/Freddie became insolvent."

To see the illogic, suppose a very small bank with a $1,000,000 to lend puts out TEN sub-prime loan, which all default. And when property values go down 50%, the bank goes belly up. Would it be logical to claim that that bank was majorly responsible for the sub-prime mess?

The flaw is that although Freddie/Fannie lost many, many billions backing sub-prime loans, their "contribution" to the total loss was only about 16%. The remaining 84% of the loss was initiated by lending institutions that initiated their loans NOT subject to government lending standards because they didn't seek backing from Fannie/Freddie. Rather this great majority of loans was sold privately.

 

[Atreus21]

Originally posted by: shira

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: miketheidiot

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

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

Well then why did Fannie/Freddy Mae/Mac crash?

They still made poor choices. The point is that all lenders were making poor choices, not just the GSEs. The private banks were just as stupid and contributed to this mess more than the GSEs.

Atreus is making an illogical argument, which goes something like this:

"Fannie/Freddie must be majorly responsible for the sub-prime crisis because they backed so many sub-prime loans that Fannie/Freddie became insolvent."

To see the illogic, suppose a very small bank with a $1,000,000 to lend puts out TEN sub-prime loan, which all default. And when property values go down 50%, the bank goes belly up. Would it be logical to claim that that bank was majorly responsible for the sub-prime mess?

The flaw is that although Freddie/Fannie lost many, many billions backing sub-prime loans, their "contribution" to the total loss was only about 16%. The remaining 84% of the loss was initiated by lending institutions that initiated their loans NOT subject to government lending standards because they didn't seek backing from Fannie/Freddie. Rather this great majority of loans was sold privately.

My argument is that those loans, public or private, would not have been made in the absence of the CRA.

 

[BigDH01]

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Atreus21
Some might argue that house values were increasing year after year because of excessive demand caused by the subprime designation.

Irrational exuberance in the past is supposed to be self-regulating. If a bank chooses to take unnecessary risk, they pay the price for it. But generally making overly risky loans is not something banks do.

I'm getting beyond my area of understanding, but I still think that, without the subprime designation created by the CRA, banks would never have started to make these greedy, overly-risky loans.

Almost by definition, irrational exuberance is not self-regulating. It wasn't for dot-bomb just as it wasn't for tulip mania. Surely, you're aware that banks have made terrible loans and investments in the past creating a variety of panics.

And you might make that claim about subprime except that you'd have to show that subprime and CRA was the catalyst for the bubble. Was it? The CRA has been around since 1977 yet annual growth in median home prices almost immediately decreased and stabilized until recently.

Did housing prices cause more people to take subprime loans, or was it vice versa. I would claim that higher prices led to more subprime. Some interesting info here. Just on the first bullet alone you'll see that most subprimes were refinances and most of those were "cash-out." People were using their increased property values to treat their houses like ATMs. This indicates to me that housing values came first. It also indicates that more subprimes were given to first time homebuyers. This indicates that the mania was driving people into buying homes they couldn't afford, homes that started to appreciate obviously before they took their subprime.

Basically, I think there was a lot of capital looking to invest after dot-bomb. Extremely low interest rates just shifted the equity bubble to the real estate bubble. This sudden increase drove people to take risks, like using subprime loans to buy houses they couldn't afford. This was either to invest, buy before they were priced out forever, or to take a trip to the Bahamas. Regardless, I believe it has little to do with the CRA.

I have a normal mortgage, and even with the current crisis, I'm refinancing and cashing out the equity so as to consolidate some other higher-interest debt. Property values here are still pretty good. With subprime loans being easy to get, it's no surprise that existing homeowners turned to it for easier cash. I'm not sure what the point is. There's a graph somewhere that shows property values jumping considerably since CRA passage.

I'm not sure about the dot-com bubble connection. Again though, without the subprime creation, people might not've been taking risks like this so extensively.

I just posted a link that showed that since the original act passed in 1977, housing price growth has been down from the years prior to 1977. That is, until recently when massive amounts of capital was looking to purchase MBSs.

The point I was making was a causation point. If most subprimes during the peak bubble years were to withdraw equity, then how did subprimes cause the bubble? You have to have equity before you can withdraw it.

Also, just because a mortgage is subprime does not mean it is linked to CRA. Here's a paper by the Fed Reserve Bank of New York According to them, in 2003, less than 10% of loans in some metropolitan areas was subject to intensive review under CRA. This was really at the start of the bubble and it appeared the CRA was having little effect. There were plenty of unqualified people of all races and backgrounds getting loans, with or without the CRA. An interesting quote from that article:

Banking organizations operating out of their assessment
areas have expanded rapidly and today constitute the
fastest growing segment of the residential mortgage
market. As a result, between 1993 and 2000, the
number of home purchase loans made by CRAregulated
institutions in their assessment areas as a
share of all home purchase loans fell from 36.1 percent
to 29.5 percent

The impact of CRA was actually weakening heading into the bubble.

 

[Vic]

The true face of the people who caused housing bubble Text (scroll 2/3rd's down)

Upside down
High on a slope in Happy Valley [an affluent suburb of mostly new mcmansions outside of Portland, OR], Will and Diane Vernon know firsthand that foreclosures can hit any neighborhood these days.

In 2006, the Vernons found a home they thought would be a good fit for Will's elderly mother and offer a nice profit when they sold it in a few years. They paid $625,855 for a new six-bedroom, four-bathroom, 4,000-square-foot house in February 2006.

The Vernons didn't understand they had one of the most toxic loans available.

The couple's trust deed shows they made no down payment, leaving them at risk if home values dropped. Their first loan, for $500,708, carried a 6.7 percent interest rate that would rise after just two years. The loan became so notorious it got its own nickname: the exploding ARM.

Two years after he took out the loan, Will learned his monthly payment would rise by $500 to about $4,900.

He started calling the company that handles his mortgage payments to seek a fixed-rate mortgage.

A year later, he's still waiting, but not for a lack of trying. When he calls for help, "you never get the same person twice," Will said.

"Or the same answer. Or the same requirements. Or the same anything," Diane says.

Now, they're in a bind.

Will, 69, was laid off from his sales management job, and he and his wife can't afford the mortgage payment, which has risen to over $6,000. They haven't made a payment since last spring and figure they owe about $200,000 more on the home than it's worth. They are so far underwater on their home that they may not qualify for help through Obama's plan.

They still have three cars in the driveway, including a Cadillac Escalade, and own their previous home, a four-bedroom place in Milwaukie [a lower middle class suburb], where Diane houses her accounting business. Will said they still need the cars.

"We're still obligated to show up for work or whatever," he said. "Can't go any less."

Will said he's hoping the lender will forgive part of their loan, especially since the major banks are already getting federal taxpayer support. But Diane just wants a lower interest rate.

"If we made bad decisions and are upside down on this house, I don't expect you to bail me out," Diane said.

Relevant parts bolded. Brackets are my comments.
THESE are the people who caused the housing bust. In 2006, they bought a large expensive house they couldn't afford in an affluent new housing development, with no money down, no understanding of the financial documents they were signing, and yet with the expectation the home would continue appreciating and they'd sell it for a tidy profit in a quick few years. Then, when the slightest setback came along, they had no savings, stopped making their mortgage payments, have been living in a big expensive house rent-free for the past year, and they still expect some kind of handout, either with principal reduction of their debt or with modification of the loan terms they should have understood before they bought the house. And these people are legion all across the country right now.

So anyone who thinks this was CRA is a frackin moron. Blame the govt, I don't care. It did play a part, but the CRA did not. Talk radio drooling neocons need to take their thinly-veiled racism and shove it up their ass.

 

[LegendKiller]

So anyone who thinks this was CRA is a frackin moron. Blame the govt, I don't care. It did play a part, but the CRA did not. Talk radio drooling neocons need to take their thinly-veiled racism and shove it up their ass.

A ton of truth there.


Here is my anecdote...


My wife had a good friend from college (wife and I met sophomore year). The woman had always been a hippie chick, had fun, drank and lived in the moment, but she was always very smart. She completed her undergrad in education in 2001, when we did, but we moved down to FL to go to grad school, she stayed in MN to get a near-masters degree (school put her 1 credit away from an Ed MS so she could get a 1st year teacher job).

In 2004 she moved down to Naples FL for a job with the school district. She was very disciplined and saved up for a down payment. She bought a $150K condo in Naples. Then she got pregnant from a guy who beat her (she then broke up with him and dated his best friend). Her Naples condo was renovated, then appraised at $290K 9 months after she bought it.

Within 6 months she was living high, buying new cars, spending $100 on sneakers for her 2 year old, buying TVs and renovating her pretty modest (read crappy) condo with the highest-end of everything.

She called us up to mention she is going to buy a $500k house in Punta Gorda (just after it was wiped out by a hurricane) using her original home's equity to put a $50K down payment and using the remainder to pay off $75K in credit cards and other bills she racked up in remodeling. I told her it was a horrible idea, that she would end up losing everything and her kids (now she has two, one with beater, other with nice guy) would end up bearing the brunt. Her new babydaddy was an electrician, she persuaded him to work 90hrs/wk for her. We heard that the she thought I was jealous of her being able to buy a $500K place and said I was "bitching" at her. I broke down her finances, month by month, and explained to her she'd be -300/mo after the tax-adjuster re-adjusted the taxes up on the new place (she thought she was going to be assessed the original taxes on the $500K home, which was 300K when the owner bought it before).

After finding out that even under an Option ARM, she couldn't afford a 500K place, she bought a $400K place. But not before she thought that her Golden Ticket was to sell her female eggs for $20K each every few months to pay her $500K mortgage. That idea failed.

She quit her job and became a daycare owner. Her moron BF paid for everything since she had to start a biz. She bought DSLR cameras, new cars, jewelery and nice clothes for her two kids.

Fast-forward to now. She hasn't paid on either place in 8 months. She owes more than $700K in mortgages and another 50K in credit card bills. Her homes are now worth $320K. Now she's all philosophical about it "God will find me a way out of this" and all that trash. She refuses to take personal responsibility for being a greedy bitch.

You see, she lived in Naples and saw the rich people. She saw us slowly building income and being successful, so she wanted a get-rich quick scheme. She thought that she would make millions doing it like the "pros". She knew what mortgages she got, she knew the houses were too much for her to afford in any normal situation, but she went all-in.

This is why I share blame among all parties. I know utter succubuses like this hose-bitch sucked the life out of this country in a get-rich quick scheme and now blame everybody else. I know Wall Street whores did the same thing (and I have told many of them in the industry the same).

This problem wasn't caused by CRA, or people who wanted a HOME. It was caused by people who wanted an INVESTMENT without risking any of their own money. It was caused by GREED, not desire to own. It was caused by get-rich-quick TLC/HGTV/Discovery "Flip this/that" house, not by "I want to own my own home, the American Dream".

 

[Genx87]

Heh my dad said people will hold onto their boats, cars, and toys and let their home go. I went to see a pre-foreclosed home last summer. Sure enough the home is trashed but his boat and ATV's are in pristine condition ready to be driven off the lot.

 

[eleison]

Originally posted by: LegendKiller

So anyone who thinks this was CRA is a frackin moron. Blame the govt, I don't care. It did play a part, but the CRA did not. Talk radio drooling neocons need to take their thinly-veiled racism and shove it up their ass.

A ton of truth there.


Here is my anecdote...


.....

Minorities Hit Hard By Subprime Crisis

Subprime loans were more prevalent among blacks in 98.5% of the metropolitan areas, while Hispanics were more apt to hold a subprime mortgage or refinance loan in nearly 89.1%, according to the National Community Reinvestment Coalition (NCRC), a non-profit focused on lending and community- development issues.

-Usatoday

Subprime Mortgages Concentrated in City?s Minority Neighborhoods
http://cityroom.blogs.nytimes....inority-neighborhoods/

Yea, there were flippers.. but most subprime were minorities/poor people. However, as we move to a bigger recession / depression phase, I'm sure more "regular" folks will be insnared in this crisis.... Wouldn't be surprised if "regular" folks start looking arround and seeing how other folks aren't paying for their mortages and decide to join the charade.. Bailout!!!!

 

[her209]

If institution one is making record profits and institution two isn't, who are investors going to pick?

 

[cwjerome]

Originally posted by: Vic
So anyone who thinks this was CRA is a frackin moron. Blame the govt, I don't care. It did play a part, but the CRA did not. Talk radio drooling neocons need to take their thinly-veiled racism and shove it up their ass.

I'm not sure who is saying all fault lies with the CRA and I have no idea what talk radio is saying, but there's no point getting off into the weeds. The topic is "Private Sector loans caused housing bubble, not Fannie/Freddie" and to me this is as dumb as placing all the blame on the CRA (or any one entity for that matter).

People like the OP and I guess those drooling talk radio neocons are posturing and spinning things to validate their own political dogma, when the truth is, it's not so simple or one-sided. A lot of various factors grew into a perfect storm... as someone said earlier, no one's hands are clean here.

 

[Craig234]

Originally posted by: eleison
Yea, there were flippers.. but most subprime were minorities/poor people. However, as we move to a bigger recession / depression phase, I'm sure more "regular" folks will be insnared in this crisis.... Wouldn't be surprised if "regular" folks start looking arround and seeing how other folks aren't paying for their mortages and decide to join the charade.. Bailout!!!!

Uh, minorities and poor people are "regular" folks. If you mean middle-class buyers, say that.

There's absolutely nothing wrong with attempting to reduce the inequities caused by the legacy of racism for a century, when done sensibly.

The efforts to do so sensibly are not what made the lending system, the financial system that created derivatives out of most mortgages and dangerous practies, happen.

It was ultmately a political failure of our democracy, the few who stood to gain by 'extra freedom to get short-term profits' getting their way with the government.

That's one damned expensive beer the people who voted for the guy they'd like to have a beer with (but who wouldn't want to have a beer with them) bought.

 

[Nemesis 1]

You guys spook the hell out of me. From my perspective the worst is yet to come. In the flow of things. The private sector (Housing meltdown) was path of least resistance. That obsticle has been overcome . threw downward pressures. That pressure is mounting , The next obsticle in the flow of things is the commercial sector. With business closing. Whos going to fill those vacancies. The commercial sector is leveraged way higher. The shit has even hit the fan yet. But its coming.

 

[soccerballtux]

Originally posted by: Fear No Evil

Originally posted by: Atreus21

Originally posted by: BigDH01

Originally posted by: Atreus21

Originally posted by: miketheidiot

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

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

Well then why did Fannie/Freddy Mae/Mac crash?

They still made poor choices. The point is that all lenders were making poor choices, not just the GSEs. The private banks were just as stupid and contributed to this mess more than the GSEs.

Perhaps, but if they made those loans in the knowledge that FM/FM were going to buy them off their hands, you have to give a pretty baleful look at the policy that led to FM/FM doing this.

I don't think private banks would've made those loans if they thought they'd have to assume the responsibility themselves.

But the CRA mandating this puts implicit pressure on a private bank. Once any private bank submits to this program, the other will follow suit just to remain competitive.

Again, this opinion is based off one microeconomics class I've taken.

Exactly.. banks would not have made these loans if they new FM/FM were not going to buy them and they weren't mandated to do so. Government at worst forced private banks to do this and at best HIGHLY encouraged them to do it. Yet we now look to government for the solution.

Yep, They were just following the market.

 

[Jhhnn]

Meh. Fannie and Freddie did their best to avoid the more toxic mortgage products, which stayed in the private sector, despite demands from the Bush Admin that they buy more and more to promote the whole "ownership society" meme. And it didn't help that Bush appointed regulators thought it was their job to cut red tape and promote lending on any basis, even as the obviously repub head of the FRB held interest rates at rock bottom, enticing borrowers who were otherwise solvent to refi/cashout, buy it now, "stimulate the economy" by trading in tomorrow for today...

Tomorrow is here, and guess what? Yeh, it's starting to look like the aftermath of the Vandals visit to Rome in 455... except it wasn't done with sword strokes, but rather with pen strokes...

 

[PaperclipGod]

Originally posted by: shira
Atreus is making an illogical argument, which goes something like this:

"Fannie/Freddie must be majorly responsible for the sub-prime crisis because they backed so many sub-prime loans that Fannie/Freddie became insolvent."

To see the illogic, suppose a very small bank with a $1,000,000 to lend puts out TEN sub-prime loan, which all default. And when property values go down 50%, the bank goes belly up. Would it be logical to claim that that bank was majorly responsible for the sub-prime mess?

The flaw is that although Freddie/Fannie lost many, many billions backing sub-prime loans, their "contribution" to the total loss was only about 16%. The remaining 84% of the loss was initiated by lending institutions that initiated their loans NOT subject to government lending standards because they didn't seek backing from Fannie/Freddie. Rather this great majority of loans was sold privately.

I haven't followed this too much, but this is what I'm reading from your post:

The government, through Fannie/Freddie, backed loans at rates more competitive than the private sector could in an attempt to get more people into homes. So the banks, whose bread and butter is loans, had no choice but to offer the same rates, else they'd lose all of their business. Hence, the problem lies with the federal government initially tampering with the markets and creating artificially low prices. Right...?

 

[heyheybooboo]

Originally posted by: Nemesis 1
You guys spook the hell out of me. From my perspective the worst is yet to come. In the flow of things. The private sector (Housing meltdown) was path of least resistance. That obsticle has been overcome . threw downward pressures. That pressure is mounting , The next obsticle in the flow of things is the commercial sector. With business closing. Whos going to fill those vacancies. The commercial sector is leveraged way higher. The shit has even hit the fan yet. But its coming.

Reading (I know it's a dangerous thing ) this week I came across an article in a business journal that pretty much cited this summer as a prime candidate for the beginning of the commercial meltdown.

Apparently a bunch of commercial loans are resetting - and they are wondering how their 'financial models' will react when project values drop as vacancy rates are rising.

What was a $20 million project may be valued at $17 million and banks may be hesitant to refinance existing loans, leading of course, to an increase in defaults ....

Originally posted by: PaperclipGod

The government, through Fannie/Freddie, backed loans at rates more competitive than the private sector could in an attempt to get more people into homes. So the banks, whose bread and butter is loans, had no choice but to offer the same rates, else they'd lose all of their business. Hence, the problem lies with the federal government initially tampering with the markets and creating artificially low prices. Right...?

The banks were not necessarily the loan originators ...