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The “mortgage crisis” and bailout: more complicated than just blaming the current admini - A Suburbs Boy Living a Country Life [Pete and Pam's pages (photos and some commentary)] [Pam's journal] [Our company] [My Flickr Photos] [Arisia]
September 30th, 2008
09:16 am

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The “mortgage crisis” and bailout: more complicated than just blaming the current admini

The policies that created the feeding frenzy, run-up, and crash in the mortgage market—that have now rippled into our fundamental commercial credit market—were created during the Clinton administration.  I believe that President Bush and the congress should have fixed them long before now.  Sadly, we caught ourselves in a common trap when we attempt to achieve social aims through market manipulation.  Cheap mortgages felt great; no one wanted to be seen as being against so-called "affordable" housing for all.  The Clinton administration broke down the regulatory and cultural "firewalls" between investment houses and banks.  They not only permitted, but also incentivized banks to reduce loan oversight, and encourage the securitization of mortgages.  This was all in an attempt to put more money into the mortgage market.  While it is popular to blame the incumbent--especially when he and his cronies already have a lot to answer for to the American People--we do ourselves a disservice if we allow ourselves to forget that the Clinton administration created the frenzy and run-up that has finally come to ruin in the past couple of years

Sadly, many people in foreclosure now probably could have afforded their homes if they had spent another year saving for a bigger down-payment [or any down-payment] or spent a little bit less than the “most mortgage they could afford.”  Frankly, some probably probably could not have afforded a substantial mortgage—and yet “no doc” and “low doc” rules let them get risky loans, regardless.  Underwriters don’t like “no documentation” loans:  they aren’t rational; there’s no reasonable way to price a mortgage without a basis for doing so.  Low and no-documentation loans are purely a creation of government edicts.  Regardless of whether these millions should have been offered—or accepted—the mortgages they did, all of them are now facing the personal tragedy and financial catastrophe of foreclosure.  .

In addition to blaming the current administration, as opposed to the original authors of these failed policies, people want to blame the “invisible hand” that guides our market.  The problem is that market isn’t truly free to begin with.  There are governmental strings attached to that invisible hand that pull it in sometimes conflicting, and oftimes irrational ways.  It was, in fact, artificial meddling in the market by the government in the name of a social--rather than economic--agenda that brought us to this crisis.

Hear me well on this--I don't care that Clinton was labeled a Democrat and Bush a Republican.  My point is that there are extensive phase delays, non-linearities, and "unknown unknowns" that drive complex national and global economic systems.  We meddle in them to achieve purely social aims in any direction at our peril. 

I like what I heard yesterday about what the FDIC is doing.  Instead of hand-wringing or “one-size-fits-all” politically expedient solutions, they are reportedly taking a rational, loan-by-loan review of distressed mortgages.  They are employing an empirical formula to determine—as best they can—who could afford their home if given a little help, and who is simply not going to be able to pay.

I believe that we should restrict our interference in markets to the role of an umpire or referee:  Ensure transparency and trust.  Harshly punish fraud.  Make people pay for their own choices—good or bad—as the only true way to encourage over the long term that people think—and think hard—about the choices they are making before they are committed.

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From:greendalek
Date:September 30th, 2008 01:19 pm (UTC)
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Most sensible commentary I've yet read on this. Thanks!
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From:pierceheart
Date:September 30th, 2008 02:11 pm (UTC)
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Too bad the CRA actually discouraged sub-prime lending; too bad CRA Banks were more than twice as likely as other lenders to retain originated loans in their portfolio - instead of reselling them and passing risk off to others; too bad CRA actually only applies to real banks, not investment banks or mortgage brokers - real banks, which are weathering the crisis better than the gambling banks; too bad CRA loans were less risky, lower cost and more likely to be retained by the originator. In addition, they only made up about twenty percent of the total.

Had this merely been a failure of poor black people to pay their mortgages, only they would be hurt, and the banks that lent them the money.

However, purchase mortgages make up a minority of sub-prime loans.
Most of the sub-prime loans are on refinanced mortgages - people who already owned a home, and then wanted to support their big-box store buying habits by taking out loans based on the equity of their houses.

The people who lent them the money on the re-fi then sold the loan as an investment - passing on the risk.

Again, if this were just about poor people being unable to pay their mortgages, they, and mortgage originators, would be the only ones hurt.
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From:quietann
Date:September 30th, 2008 02:54 pm (UTC)
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Thank you. (I have this general argument but you lay it out really well. And I know that CRA banks in Boston were uber-careful about their loans, and they are doing a lot BETTER than average even though their clientele were more "risky." They were not the ones telling folks earning $20K a year that it would make sense for them to have a $250K mortgage on a three family "because you can pay the mortgage with the rental income, and hey, look, you'll be able to refinance into this other loan that will allow you to use the house as an ATM, and hey, no, don't worry about that interest rate reset, you'll be re-fi'd into a fixed rate before then!")

I absolutely hate that this whole thing is now being blamed on "the Blacks" and "the Latinos."
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From:pierceheart
Date:September 30th, 2008 03:02 pm (UTC)
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It's being regularly blamed on n----- loving democrats.

Yes, the n word.

Look at the the Obama/ranies ad, which boils down to two sinister black guys teaming up to steal an elderly white lady's nest-egg.

It's racism, pure and simple, and I say that as the beneficiary of white male privilege.

Post World War II saw a boom in home-ownership - in white families, thanks to GI housing help.

The boom towns that became suburbia often forbid developers to build if they were going to sell to blacks.

The result - the colored men who slaved for us in the war were left in indentured servitude that white GI's didn't have to face, because the white soldiers could get homes.
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From:datavortex
Date:September 30th, 2008 04:33 pm (UTC)
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The post WWII housing boom was near the start of today's problem. That's the day that Fannie and Freddie started dramatically artificially inflating home prices, leading directly to the crash we're in now. The root of our problems goes back to 1938. Eliminate Fannie and Freddie entirely and we've got the root cause halfway fixed.
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From:happypete
Date:October 3rd, 2008 02:19 am (UTC)

For the record to both of you...

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I do not blame any of this on any racial group--nor did I mention CRA's as a source of the problem.

The problem here is:

1) Securitization of risky mortgages at inappropriately high home valuations, with
2) A failure to appropriately value those assets and assess their risks on the books of major investment banks, ignited by
3) The advent of foreclosures, brought on by a combination of an economic slowdown that coincided with the exact time that the adjustment of rates and payments on earlier-issued ARMs began to cascade into the market.

I will say that these mortgages were heavily marketed to historically economically disadvantaged racial and ethnic groups. One can come up with both malicious or enlightened reasons that people might have been doing this--the net result, though, will actually likely be--when all of this settles out--a net decrease in home ownership among these populations. That is a shame. If one can prove fraudulent intent by "predatory lenders," it might even be a crime.
From:(Anonymous)
Date:September 30th, 2008 01:42 pm (UTC)
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I, and others, call bullshit
http://yglesias.thinkprogress.org/archives/2008/09/blame_the_cra.php
http://pecunium.livejournal.com/341159.html
http://www.eurotrib.com/?op=displaystory;sid=2008/9/25/102414/031
From:(Anonymous)
Date:September 30th, 2008 01:49 pm (UTC)

Community Reinvestment Act May Have Deterred Risky Mortgage Lending

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http://www.reuters.com/article/pressRelease/idUS135259+07-Jan-2008+BW20080107
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From:datavortex
Date:September 30th, 2008 02:14 pm (UTC)
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Going to have to disagree with you on the point of when this was all made inevitable. It was in 1938, under FDR, upon the creation of Fannie Mae and Freddie Max.

These two agencies, for as long as they exist, will continue to DESTROY the market, causing massive crashes like the one we are seeing today.

If you want to blame someone, blame FDR. Fannie and Freddie must die. The government must stop meddling in the market - it caused this. There are plenty of correlary problems that you note above, but the core of the problem are FHA, Fannie, and Freddie.
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From:happypete
Date:October 3rd, 2008 02:20 am (UTC)

Agreed...

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...and in a generation, probably less, the [ever larger] bill for this fiasco will come around to us:

http://tbm.thebigmoney.com/articles/judgments/2008/10/02/wait-until-next-bailout
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From:pierceheart
Date:September 30th, 2008 02:24 pm (UTC)
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From Bush himself:

"In June 2002, President Bush issued America's Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join the effort to close the gap that exists between the homeownership rates of minorities and non-minorities."


"A third major barrier is the complexity and difficulty of the home buying process. There's a lot of fine print on these forms. And it bothers people, it makes them nervous. And so therefore, what Mel has agreed to do, and Alphonso Jackson has agreed to do is to streamline the process, make the rules simpler, so everybody understands what they are -- makes the closing much less complicated.

We certainly don't want there to be a fine print preventing people from owning their home. We can change the print, and we've got to. We've got to be wise about how we deal with the closing documents and all the regulations, but also wise about how we help people understand what it means to own their home and the obligations and the opportunities...........(shortened here)..........And let me talk about some of the progress which we have made to date, as an example for others to follow. First of all, government sponsored corporations that help create our mortgage system -- I introduced two of the leaders here today -- they call those people Fannie May and Freddie Mac, as well as the federal home loan banks, will increase their commitment to minority markets by more than $440 billion. (Applause.) I want to thank Leland and Franklin for that commitment. It's a commitment that conforms to their charters, as well, and also conforms to their hearts."
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From:christilyn
Date:September 30th, 2008 04:54 pm (UTC)
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I do think it is important to note that it was not the Clinton Administration who pushed for the banking deregulation, but was 2 decades of work by Phil Gramm and his banking lobbiests that crafted this legislation. Clinton did sign it, but it had the full backing of both houses of Congress.
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From:sugared_redhead
Date:September 30th, 2008 06:36 pm (UTC)
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If I had built a house as big as I was told I could afford instead of what my gut told me to do I would not have a house right now. I got jerked around so much on the trail from contruction to getting my real mortgage it was not even funny. It took 5 years to get everything straight(all the snags are another story). I endured two lay offs and a year of payments over 1000 (NOT including taxes and insurance) when my construction ARM reset. I sometimes worked as many as 4 part-time jobs, but I kept my house and kept my kids fed. Everyday I said thank you to God that I had the good sense not to go for the huge loan/house they tried to talk me into. I went my own way. Now I have a real mortgage and my payments (including including taxes and insurance) are low enough that even if we have a job hiccup we'll get by. When are people going to learn there is no pie in the sky. If it sounds too good to be true......
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From:datavortex
Date:September 30th, 2008 07:28 pm (UTC)
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I will add my "ditto" to your experience - I was repeatedly offered INSANE mortgages.

Now you and I get to pay for all the other assholes that took on way more than they could afford. Bush's socialism dictates that you and I must pay for their lack of effort.

Bullshit, I say. Bullshit. I read my papers. So did you. Those who didn't should suffer alone.
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From:sugared_redhead
Date:September 30th, 2008 07:52 pm (UTC)
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And even if you are not good with papers you have to know that you can't really afford twice the house you though you could.
It gripes my cookies that people who work hard and might put a lttle help here and there to good use are punished for having a job. While many folks just work the system intead of a job. I hates it I do, where were the feds when I complained about the bank jerking me around! Nowhere that was any help to me...now they're concerned about bank practices, little bit late for that.
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From:awfief
Date:October 1st, 2008 03:09 am (UTC)
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They not only permitted, but also incentivized banks to reduce loan oversight, and encourage the securitization of mortgages. This was all in an attempt to put more money into the mortgage market.

And the reason they did *that* was because one of the indicators of economic growth/stability is how many people are homeowners. So the government wants to be able to say "look how stable our economy is, 50% of taxpayers are homeowners!" or whatever.
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From:happypete
Date:October 3rd, 2008 02:21 am (UTC)

Right...

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...and this big bailout delays the day of reckoning when we pay for this further government intervention...at least until after the election:

http://tbm.thebigmoney.com/articles/judgments/2008/10/02/wait-until-next-bailout
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From:jurex87
Date:December 10th, 2008 09:07 am (UTC)
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Great post :)
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From:happypete
Date:December 10th, 2008 11:24 am (UTC)

Thank you.

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I sincerely wish I hadn't had to write it.
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