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The root cause of the housing bubble

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Vic

Elite Member
Jun 12, 2001
48,187
8,735
126
Originally posted by: rchiu
It's not just the bank lowering the standards. Those brokers and lenders were eager to make the loans and they don't lose anything if the borrowers default so many unethical ones will do anything to get the loan out the door. Some of those loans can be pretty complex financial products and I don't blame many of those people for not able to understand what they were signing. Also like I said in the previous post, those brokers/lenders can help borrowers to come up with a good looking loan applications because they know the "system" well.

Unfortunately we will always have people who don't can't even read, let along understand what a jumble loan is and how interest rate work. If we don't have good enough regulations, or make sure lenders/brokers's interests tie to client's interest, we will always have unethical lenders/brokers take advantage of those people and try to make as much money as possible.
Just because you can keep repeating that over and over again won't make it true.

Brokers and lenders were confined to the saleability guidelines of the investor purchasing the loan. The investor purchasing the loan most certainly did have a vested interest in making sure the borrower didn't default.
If it was a broker that originated the loan, then a correspondent wholesale lender or the investor directly, or the investor's delegated 3rd-party mortgage insurer, would be doing the actual underwriting.
If a lender originated the loan with the intention of selling it to the secondary market, then the lender had to underwrite it to conform to the guidelines of the secondary investor who they intended to have purchase it.
In either case, if the loan defaulted or otherwise non-performed, the originating lender or broker could be held contractually liable. Most lending covenants require the originator to "buy-back" any loan that non-performs in its first 12 months regardless of the reason. Failure to make the 1st payment in a timely manner is an automatic buy-back. Fannie, Freddie, and FHA/HUD/VA will enforce their buy-back policies for the life of the loan if it can be established that the originating lender/broker made any mistake (much less any outright fraud).
That's not to say that fraud didn't take place, but fault for that goes way beyond just mortgage companies, and in case you didn't notice, most of them went out of business last year. So yeah, nothing to lose, right?...
 

Vic

Elite Member
Jun 12, 2001
48,187
8,735
126
Originally posted by: rchiu
Originally posted by: Vic
How dare those poor people and minorities dream of homeownership? Don't they know their place?

:roll:
So we give them loans they cannot afford so they loss their home later and have worse credit then they started with. And that's helping them how?
So only the rich are to be allowed to borrow money with which to invest?


edit: I just love internet quarterbacks who insist on making complex problems seem black-and-white simple...
 

1EZduzit

Lifer
Feb 4, 2002
11,834
1
0
Originally posted by: Vic
Originally posted by: rchiu
Originally posted by: Vic
How dare those poor people and minorities dream of homeownership? Don't they know their place?

:roll:
So we give them loans they cannot afford so they loss their home later and have worse credit then they started with. And that's helping them how?
So only the rich are to be allowed to borrow money with which to invest?


edit: I just love internet quarterbacks who insist on making complex problems seem black-and-white simple...
LOL, what's so complex about requiring a down payment? It keeps people from buying more then they can afford, which is exactly what happened here.
 

Vic

Elite Member
Jun 12, 2001
48,187
8,735
126
Originally posted by: 1EZduzit
Originally posted by: Vic
Originally posted by: rchiu
Originally posted by: Vic
How dare those poor people and minorities dream of homeownership? Don't they know their place?

:roll:
So we give them loans they cannot afford so they loss their home later and have worse credit then they started with. And that's helping them how?
So only the rich are to be allowed to borrow money with which to invest?


edit: I just love internet quarterbacks who insist on making complex problems seem black-and-white simple...
LOL, what's so complex about requiring a down payment? It keeps people from buying more then they can afford, which is exactly what happened here.
Tell that to the VA and FHA.
 

LegendKiller

Lifer
Mar 5, 2001
18,258
68
86
Originally posted by: Vic
Originally posted by: 1EZduzit
Originally posted by: Vic
Originally posted by: rchiu
Originally posted by: Vic
How dare those poor people and minorities dream of homeownership? Don't they know their place?

:roll:
So we give them loans they cannot afford so they loss their home later and have worse credit then they started with. And that's helping them how?
So only the rich are to be allowed to borrow money with which to invest?


edit: I just love internet quarterbacks who insist on making complex problems seem black-and-white simple...
LOL, what's so complex about requiring a down payment? It keeps people from buying more then they can afford, which is exactly what happened here.
Tell that to the VA and FHA.
I don't think there's one person who advocates reducing the ability of less wealthy or minorities from owning a house. You know as well as I do that there's a certain credit spectrum that shouldn't own a house. They don't have the wherewithal to pay for it and we should "give" them a house, especially if the cost is borne by taxpayers, when they could have an apartment for less money and no risk of taxpayer borne default.

If we say that everybody should have access to certain things then where does it stop? Should all taxpayers and credit purchasers underwrite and pay for the losses on auto loans to guarantee the ability of all lower credit spectrum people to have a vehicle? Why should anybody in this country be denied access to their own car? Why should they have to have the massive disadvantage of having to ride a bus?

There are viable alternatives to owning a house or a car that people without the means to pay for those items can use. Owning a house is not a right, it is an earned privledge that requires sensable monetary management and the ability to uphold your agreement.

 

Slew Foot

Lifer
Sep 22, 2005
12,383
94
86
Originally posted by: Vic
Originally posted by: 1EZduzit
Originally posted by: Vic
Originally posted by: rchiu
Originally posted by: Vic
How dare those poor people and minorities dream of homeownership? Don't they know their place?

:roll:
So we give them loans they cannot afford so they loss their home later and have worse credit then they started with. And that's helping them how?
So only the rich are to be allowed to borrow money with which to invest?


edit: I just love internet quarterbacks who insist on making complex problems seem black-and-white simple...
LOL, what's so complex about requiring a down payment? It keeps people from buying more then they can afford, which is exactly what happened here.
Tell that to the VA and FHA.
Or to B of A :)
They've been giving physicians 0 down loans for a long ass time.
 

Slew Foot

Lifer
Sep 22, 2005
12,383
94
86
Originally posted by: LegendKiller


If we say that everybody should have access to certain things then where does it stop? Should all taxpayers and credit purchasers underwrite and pay for the losses on auto loans to guarantee the ability of all lower credit spectrum people to have a vehicle? Why should anybody in this country be denied access to their own car? Why should they have to have the massive disadvantage of having to ride a bus?

There are viable alternatives to owning a house or a car that people without the means to pay for those items can use. Owning a house is not a right, it is an earned privledge that requires sensable monetary management and the ability to uphold your agreement.
And not just any car, I want a Hummer! And how dare you give me food stamps for generic milk, I want the organic antibiotic-free stuff. And phone line assistance? Why do I get a landline while rich people have cell phones and broadband VOIP?
 

rchiu

Diamond Member
Jun 8, 2002
3,849
0
0
Originally posted by: Vic
Originally posted by: rchiu
It's not just the bank lowering the standards. Those brokers and lenders were eager to make the loans and they don't lose anything if the borrowers default so many unethical ones will do anything to get the loan out the door. Some of those loans can be pretty complex financial products and I don't blame many of those people for not able to understand what they were signing. Also like I said in the previous post, those brokers/lenders can help borrowers to come up with a good looking loan applications because they know the "system" well.

Unfortunately we will always have people who don't can't even read, let along understand what a jumble loan is and how interest rate work. If we don't have good enough regulations, or make sure lenders/brokers's interests tie to client's interest, we will always have unethical lenders/brokers take advantage of those people and try to make as much money as possible.
Just because you can keep repeating that over and over again won't make it true.

Brokers and lenders were confined to the saleability guidelines of the investor purchasing the loan. The investor purchasing the loan most certainly did have a vested interest in making sure the borrower didn't default.
If it was a broker that originated the loan, then a correspondent wholesale lender or the investor directly, or the investor's delegated 3rd-party mortgage insurer, would be doing the actual underwriting.
If a lender originated the loan with the intention of selling it to the secondary market, then the lender had to underwrite it to conform to the guidelines of the secondary investor who they intended to have purchase it.
In either case, if the loan defaulted or otherwise non-performed, the originating lender or broker could be held contractually liable. Most lending covenants require the originator to "buy-back" any loan that non-performs in its first 12 months regardless of the reason. Failure to make the 1st payment in a timely manner is an automatic buy-back. Fannie, Freddie, and FHA/HUD/VA will enforce their buy-back policies for the life of the loan if it can be established that the originating lender/broker made any mistake (much less any outright fraud).
That's not to say that fraud didn't take place, but fault for that goes way beyond just mortgage companies, and in case you didn't notice, most of them went out of business last year. So yeah, nothing to lose, right?...
I already addressed this in a previous post. 1 year is nothing, it's not even long enough for variable rate on a jumbo loan to kick in. Another part of the equation is a mess too. Fannie, Freddie and other organization have a system to evaluate applicant's credit, and in the interest of approving more loans, a loan that took up to 1 week to approve now take 30 sec. You tell me no corners are cut. They too pass most of their risk by selling their loan as MBS to other investor anyway, that's why they cut corners too. It's not just the broker/lender, it's the whole system that's broken. How can Fannie and the others go back to the originators when they themselves are cutting corners.

And the reason mortgage company went into bankruptcy is easy, no one wants MBS anymore after the crisis started. Those mortgage company cannot pass the risk anymore and they have to hold on to the crap loans. Plus they were banking on the selling the loans as MBS to turn loans into cash quickly to pay for other obligation, and that business model doesn't work anymore, and they got tons of obligation and no cash. Yeah they got what they deserved, but that's because the business landscape changed, not because they took on risky loans.
 

Wheezer

Diamond Member
Nov 2, 1999
6,732
1
0
Originally posted by: Vic
Originally posted by: rchiu
Originally posted by: Vic
How dare those poor people and minorities dream of homeownership? Don't they know their place?

:roll:
So we give them loans they cannot afford so they loss their home later and have worse credit then they started with. And that's helping them how?
So only the rich are to be allowed to borrow money with which to invest?


edit: I just love internet quarterbacks who insist on making complex problems seem black-and-white simple...
yes, it is such a tough an intricate concept that you must have more money coming in than going out to survive.
 

Vic

Elite Member
Jun 12, 2001
48,187
8,735
126
Originally posted by: rchiu
I already addressed this in a previous post. 1 year is nothing, it's not even long enough for variable rate on a jumbo loan to kick in. Another part of the equation is a mess too. Fannie, Freddie and other organization have a system to evaluate applicant's credit, and in the interest of approving more loans, a loan that took up to 1 week to approve now take 30 sec. You tell me no corners are cut. They too pass most of their risk by selling their loan as MBS to other investor anyway, that's why they cut corners too. It's not just the broker/lender, it's the whole system that's broken. How can Fannie and the others go back to the originators when they themselves are cutting corners.

And the reason mortgage company went into bankruptcy is easy, no one wants MBS anymore after the crisis started. Those mortgage company cannot pass the risk anymore and they have to hold on to the crap loans. Plus they were banking on the selling the loans as MBS to turn loans into cash quickly to pay for other obligation, and that business model doesn't work anymore, and they got tons of obligation and no cash. Yeah they got what they deserved, but that's because the business landscape changed, not because they took on risky loans.
Once again, underwriting guidelines are established by the investors purchasing the loans, not the brokers/lenders.
And with the exception of some of the major guys (like Countrywide or Wamu), those mortgage companies went out of business because they couldn't originate anymore, not because they had to hold onto the loans. Your average broker or correspondent lender never had the ability to fund loans on their own. Their revenue models depended on origination -- making loans to be sold to secondary, with income derived from origination fees and YSP/SRP. Their ability to fund depended on 3rd party credit lines known as "warehouse lines." When secondary stopped buying, their warehouse lines stopped funding, and they were out of business like a grocery store with empty shelves.

Long story short: you keep blaming the middle-men. Why? I don't think anybody doubts that there are unethical lenders out there, that's not the issue. You say the system is broken, how would you have it? Wall Street and the big banks in direct control? I hope not. Or a return to the regional lending of the 70s and before with vastly different interest rates and underwriting guidelines depending on where you lived and how much money your bank had to lend? God forbid.
 

rchiu

Diamond Member
Jun 8, 2002
3,849
0
0
Originally posted by: Vic


Once again, underwriting guidelines are established by the investors purchasing the loans, not the brokers/lenders.
And with the exception of some of the major guys (like Countrywide or Wamu), those mortgage companies went out of business because they couldn't originate anymore, not because they had to hold onto the loans. Your average broker or correspondent lender never had the ability to fund loans on their own. Their revenue models depended on origination -- making loans to be sold to secondary, with income derived from origination fees and YSP/SRP. Their ability to fund depended on 3rd party credit lines known as "warehouse lines." When secondary stopped buying, their warehouse lines stopped funding, and they were out of business like a grocery store with empty shelves.

Long story short: you keep blaming the middle-men. Why? I don't think anybody doubts that there are unethical lenders out there, that's not the issue. You say the system is broken, how would you have it? Wall Street and the big banks in direct control? I hope not. Or a return to the regional lending of the 70s and before with vastly different interest rates and underwriting guidelines depending on where you lived and how much money your bank had to lend? God forbid.
Let me just keep it simple. The crisis started with the subprime segment with unusually high rate of default. That triggered a confidence crisis on the securities backed by subprime loans, and then spread to securities back by higher grade loans. That led to big loss to the banks/funds that invested on those securities, and led to credit drought.

So let's start from the beginning, why were there high rate of default in subprime segment? Why did subprime loan went from 6% in 1996 to 20% in 2006. and why did subprime ARM which represented 6.8% of the total loans outstanding represents 43% of the total default? (source) I am convinced that the middle men is the reason for the large increase in those subprime ARM by not telling the whole stories to those who didn't have the knowledge and qualification to a higher grade loan, help them put out a good application, and together with a system that want to turn quick profit, triggered this crisis.

I don't have all the answers...if I do, I would be getting paid and retired. But I think there should be regulations, not just more, but smart ones, like SOX after Enron to make sure people are held accountable (like SOX holding executives accountable) for the system they are a part of.
 

ElFenix

Elite Member
Super Moderator
Mar 20, 2000
101,408
5,436
126
Originally posted by: rchiu
I don't have all the answers...if I do, I would be getting paid and retired. But I think there should be regulations, not just more, but smart ones, like SOX after Enron to make sure people are held accountable (like SOX holding executives accountable) for the system they are a part of.
SOX is contributing more to the economy of london than anything else.
 

Vic

Elite Member
Jun 12, 2001
48,187
8,735
126
Originally posted by: Moonbeam
Turn off the bubble machine.
Never happen. Nothing in nature is static, not even human behavior. The waves and the tides cannot be stopped.
 

Vic

Elite Member
Jun 12, 2001
48,187
8,735
126
Originally posted by: rchiu
Let me just keep it simple. The crisis started with the subprime segment with unusually high rate of default. That triggered a confidence crisis on the securities backed by subprime loans, and then spread to securities back by higher grade loans. That led to big loss to the banks/funds that invested on those securities, and led to credit drought.

So let's start from the beginning, why were there high rate of default in subprime segment? Why did subprime loan went from 6% in 1996 to 20% in 2006. and why did subprime ARM which represented 6.8% of the total loans outstanding represents 43% of the total default? (source) I am convinced that the middle men is the reason for the large increase in those subprime ARM by not telling the whole stories to those who didn't have the knowledge and qualification to a higher grade loan, help them put out a good application, and together with a system that want to turn quick profit, triggered this crisis.

I don't have all the answers...if I do, I would be getting paid and retired. But I think there should be regulations, not just more, but smart ones, like SOX after Enron to make sure people are held accountable (like SOX holding executives accountable) for the system they are a part of.
The crisis didn't start with subprime. That's extremely short-sighted. Home values have been going up steadily since interest rates came down from the double-digits in the early 90s.
Rate and price are closely intertwined. Almost the same thing. The lower the rate, the higher the price the borrower can afford. As rates kept going down and down, eventually prices going up began to establish their own momentum.
Otherwise, you said it yourself, subprime only represented 6.8% of the loans out there. So how can you blame them, solely, for a housing bubble that is affecting every aspect of the market? Seriously.
 

1EZduzit

Lifer
Feb 4, 2002
11,834
1
0
Originally posted by: Vic
Originally posted by: Moonbeam
Turn off the bubble machine.
Never happen. Nothing in nature is static, not even human behavior. The waves and the tides cannot be stopped.
Perhaps the machine can be adjusted to blow more, but smaller bubbles instead of those great big ones that make such a mess when they pop?
 

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