The mortgage meltdown

[dennisw]

When trying to assess our current economic troubles and doing so as normal or average citizens it becomes troublesome as we’re constantly bombarded with the same information. With this constant deluge of data or maybe misinformation, it’s hard to ascertain the implicit reality. I believe we tend to grab the facts or theories, which line up with our inherent economic or political beliefs. Does this provide insight or greater self-delusion?

As an example, some believe the government is responsible for creating jobs. Others believe the government should get out of the way, allowing a capitalist economy to create jobs and prosperity. Accordingly when I read information and it lines up with the latter philosophy, I have a tendency to believe it.

Also, the forest of issues and information appears often to be too vast and incomprehensible. Assessing culpability has political repercussions and objectivity and truth can become a casualty. I believe it is helpful to examine some of the larger trees and in doing so we can become enlighten. Hopefully we will not miss the forest in the process.

For instance, why the mortgage meltdown? Was it the greedy bankers, the heartless brokers or Wall Street with their derivatives that put us on this slippery slope? Thomas Sowell has assisted us in our analysis by providing some much-needed revelation, and the blame in his mind should be clearly laid at the feet of the Clinton administration. It’s ironic as Clinton is now viewed as such a fiscal responsible president, a moniker I believe he owes largely to the high tech explosion and the “contract with America” republican congress. Hopefully history will properly assess him in say 50 years (although Franklin Roosevelt is still seen as many as a savior during the depression). Maybe not.


http://www.ocregister.com/opinion/le...e-lending.html




Thomas Sowell: Clinton's brass standard
He put teeth in the housing policies that created the mortgage crisis.



By THOMAS SOWELL

Syndicated columnist

Politics takes a lot of brass. And Bill Clinton is a master politician. His rousing speech at the Democrats' convention told the delegates that Republicans "want to go back to the same old policies that got us into trouble in the first place."

That is world-class brass. Bill Clinton's own administration, more than any other, promoted an unsustainable housing boom, which eventually and inevitably led to a housing bust that brought down the whole American economy.

Behind all the complex financial processes that reached to Wall Street and beyond, there is one fundamental fact: many people stopped making their mortgage payments.
Why did that happen? Because mortgage loans were made to people who did not meet the long-established qualification standards for getting a mortgage loan. And why did that happen? Because the Clinton administration threatened lawsuits against lenders who did not approve mortgage loans to minority applicants as often as to white applicants.

In other words, racial quotas replaced credit qualifications. A failure to have racial statistics on mortgage approvals that fit the government's preconceptions was equated with discrimination.
Attorney General Janet Reno said that lenders who "closely examine their lending practices and make necessary changes to eliminate discrimination" would "fare better in this department's stepped-up enforcement effort than those who do not." She said: "Do not wait for the Justice Department to come knocking."

Clinton's Department of Housing and Urban Development (HUD) had similar racial quota policies, and began taking legal actions against banks that turned down more minority applicants than HUD thought they should. HUD said that it was breaking down "racial and ethnic barriers" so as to create more "access" to home ownership. It established "goals" – political Newspeak for quotas – for Fannie Mae and Freddie Mac to buy mortgages that the original lenders had made to "the underserved population." In other words, the original lenders could pass on the increasingly risky mortgages to Fannie Mae and Freddie Mac – and, ultimately, to the taxpayers.

Other federal agencies warned mortgage lenders against having credit standards that these agencies considered too high. And these agencies had many powers to use against banks and other lenders who did not heed their warnings.

The Federal Reserve Bank of Boston, for example, issued guidelines for "non-discriminatory" lending which warned lenders against "unreasonable measures of creditworthiness." Lenders should have standards "appropriate to the economic culture of urban lower-income and nontraditional consumers" and consider "extenuating circumstances." In other words, when some people don't come up to the lending standards, then the lending standards should be brought down to them.

What was the evidence for all the lending discrimination that the government was supposedly trying to prevent? Statistics.
In the year 2000, for example, black applicants for conventional mortgage loans were turned down at twice the rate for white applicants. Case closed, as far as the media and the government were concerned. Had they bothered to look a little deeper, they would have found that whites were turned down at nearly twice the rate for Asian Americans.

Had they bothered to check out average credit scores, they would have discovered that whites had higher average credit scores than blacks, and Asian Americans had higher average credit scores than whites.
Such inconvenient facts would have undermined the whole moral melodrama, reducing it to a case of plain economics, with lenders more likely to lend to those who were more likely to pay them back. Once lending standards were lowered, to meet racial quotas, they were lowered for everybody. Deadbeats of any race could get mortgage loans, and most were probably not minorities.

Democrats like to blame the "greed" of business, rather than the policies of government, for problems. But lenders don't make money by lending to individuals who don't pay them back.
That is what government forced lenders to do, beginning under the Clinton administration. And the eventual collapse took down the economy.

It takes brass to defy the facts. And Bill Clinton has brass.

[Paragrouper]

This topic has been discussed quite a bit, both on this forum and many, many others. You can find a slew of experts that put forth their well documented arguments that lay the blame at someones feet--inept or corrupt politicians (democrats or republicans), greedy banks and corporations, too much regulation, too little regulation--this list goes on.

I blame us. We repeatedly elect the inept or corrupt politicians and we took the money. Everyone could argue all they want about how it's someone elses fault, but we--the american people--signed for the bad loan. We need to redevelop a sense of personal responsibility.

[Paslode]

Based on a close relative, the mortgage crisis has much to do with morals and ethics.

He and his bank knew that over 60% of the mortgages they processed would fail. All he was interested in was his commission. It wasn't his money they were lending and what he was doing was legal and SOP within the industry.

[dennisw]

Originally Posted by Paragrouper

This topic has been discussed quite a bit, both on this forum and many, many others. You can find a slew of experts that put forth their well documented arguments that lay the blame at someones feet--inept or corrupt politicians (democrats or republicans), greedy banks and corporations, too much regulation, too little regulation--this list goes on.

I blame us. We repeatedly elect the inept or corrupt politicians and we took the money. Everyone could argue all they want about how it's someone elses fault, [COLOR="rgb(255, 140, 0)"]but we--the american people--signed for the bad loan.[/COLOR] We need to redevelop a sense of personal responsibility.

Although this subject has been discussed in the past, I don't remember reading before how the active participation by the Clinton administration affected the situation. When you say "I blame us" I'm assuming you mean us as the voters. Ultimately we are the blame for everything. However, we need to know the reason behind the mortgage meltdown if we want to avoid it in the future.

Paslode talks about how greedy bankers adversely affected the situation. No one can deny their culpability and the culpability of others. However, if there are no subprime loans or the mechanisms which promoted subprime loans, the landscape changes dramatically.

If there are no subprime loans the issue of derivatives becomes a moot point. Additionally, the media and the democrats have place the bulk of the blame for the recession squarely in Bush's court, and if the truth were know, Obama is not president now. IMO it changes the political landscape dramatically.

Then again the truth is known and it makes very little difference.

[Sigaba]

Originally Posted by Paragrouper

This topic has been discussed quite a bit, both on this forum and many, many others. You can find a slew of experts that put forth their well documented arguments that lay the blame at someones feet--inept or corrupt politicians (democrats or republicans), greedy banks and corporations, too much regulation, too little regulation--this list goes on.

I blame us. We repeatedly elect the inept or corrupt politicians and we took the money. Everyone could argue all they want about how it's someone elses fault, but we--the american people--signed for the bad loan. We need to redevelop a sense of personal responsibility.

MOO, a contributing factor to the confused discussion of the recession is that Americans often prefer tidy answers to exceptionally complex questions. We want to know if it was A or B, C or D, E or F, when the answer is more likely "all of the above and then some."

I also think we're not very good at differentiating between making an accounting of the past and holding people, groups, and institutions accountable. By this, I mean in our haste to assess credit and blame for what went wrong, we lose focus on answering the most basic of questions: what actually happened?

Originally Posted by Paslode

Based on a close relative, the mortgage crisis has much to do with morals and ethics.

He and his bank knew that over 60% of the mortgages they processed would fail. All he was interested in was his commission. It wasn't his money they were lending and what he was doing was legal and SOP within the industry.

On a similar note, at the time the SHTF, I was working for an employee-owned consultancy that centered its practices around the construction industry--both commercial and residential. Historically, this company, had centered its plans for growth around conservative and balanced projections of economic growth and trends within the industry.

However, as the housing bubble grew, the Powers That Be abandoned its core principles and based its growth plans on the assumption that the economy would continue to expand at a blistering pace. On the plus side, these plans led to the firm doing more hiring and that not only accounted for the slot I was hired to fill but other slots as well so that the work load became more manageable for the consultants handling larger projects.

Yet, it was very unsettling to sit through briefings with .PPT slides with graphs and tables that did not make sense unless one was looking through lenses tinted the color of money. One of the dissenting voices was eventually told to STFU and was among the first to get thrown over the side when things went sideways. But he's not the least bit bitter about it. At all.

[MR2]

Greed is a powerful thing.

[Flagg]

Originally Posted by Paragrouper

This topic has been discussed quite a bit, both on this forum and many, many others. You can find a slew of experts that put forth their well documented arguments that lay the blame at someones feet--inept or corrupt politicians (democrats or republicans), greedy banks and corporations, too much regulation, too little regulation--this list goes on.

I blame us. We repeatedly elect the inept or corrupt politicians and we took the money. Everyone could argue all they want about how it's someone elses fault, but we--the american people--signed for the bad loan. We need to redevelop a sense of personal responsibility.

I would agree.

The focus of my wrath is non-partisan...yup...quite convincing sounding arguments could be made to argue over which side has a more blame than the other, but does that 5-10% of blame really matter? Aren't both sides pretty culpable in this mess?

I'm with you, and think it's everyone......I blame folks for not protecting their political process from becoming so polluted with special interest money possessing excessive influence and control over the direction of the country and leading to things like the mortgage meltdown.

The guy who has helped me to better understand what has happened, is happening, and is likely to continue happening is Eric Janszen the owner of iTulip.com.

He's a pretty non-partisan guy. Big brain, serial successful entrepreneur, he's made some scary accurate predictions the last decade+, and he has been able to break down the enormity and complexity of what's been going on so a moron like me can better understand parts of it.

[Paslode]

Originally Posted by Sigaba

But he's not the least bit bitter about it. At all.

Naaaaw....Not the least bit....but I think they may be appreciated than they realize.

Originally Posted by Sigaba

the color of money

I remember a particular soccer parent telling 'It's raining money' and 'They are just giving it away'.

[dennisw]

Sigaba said:

On a similar note, at the time the SHTF, I was working for an employee-owned consultancy that centered its practices around the construction industry--both commercial and residential. Historically, this company, had centered its plans for growth around conservative and balanced projections of economic growth and trends within the industry.

However, as the housing bubble grew, the Powers That Be abandoned its core principles and based its growth plans on the assumption that the economy would continue to expand at a blistering pace. On the plus side, these plans led to the firm doing more hiring and that not only accounted for the slot I was hired to fill but other slots as well so that the work load became more manageable for the consultants handling larger projects.

Yet, it was very unsettling to sit through briefings with .PPT slides with graphs and tables that did not make sense unless one was looking through lenses tinted the color of money. One of the dissenting voices was eventually told to STFU and was among the first to get thrown over the side when things went sideways. But he's not the least bit bitter about it. At all.

So what happened to the company?

Flagg said:

but does that 5-10% of blame really matter? Aren't both sides pretty culpable in this mess?

Is the 5 - 10% number arbitrary?

I think it may feel more comfortable to sit on the sidelines with non-partisan wrath. Personally I don't see the point. What if the percentage was 95%, would you feel differently?

I think to a degree we're missing the threshold point. Where were the shitty loans and all the greed before the credit rules were changed? Before the rules were changed, you couldn't make shitty loans. Changing the rules was the pivotal event. Without it, there is no mortgage meltdown.

I guess the real question is why didn't someone in either party try and change it.


http://online.wsj.com/article/SB123137220550562585.html

When Republican Richard Shelby of Alabama, then chairman of the Senate Banking Committee, pushed for comprehensive GSE reform in 2005, Democrat Sen. Chris Dodd of Connecticut successfully threatened a filibuster. Later, after Fannie and Freddie collapsed, Mr. Dodd asked, "Why weren't we doing more?" He then voted for the Bush reforms that he once called "ill-advised."

So after Fannie and Freddie collapsed, Dodd votes for reforms. What if the rules had been changed?

Just a side note, when Rahm Emanuel was kicked out of White House by Clinton guess what plum job was waiting for him? Board member at Fannie Mae. Big deal. What do Board Members make? $300,000 per year.

[Sigaba]

Originally Posted by dennisw

So what happened to the company?

Here's what is publicly known/obvious:

It panicked. The halls ran red during multiple rounds of layoffs that had two themes in common: stockholders were spared and worker bees in the home office were kept on in disproportionate numbers when compared to their counterparts at regional offices. (Again, the guy mentioned above isn't bitter.)

Those who survived the purges have been shouldered with incredible workloads, pay cuts, and furloughs. Leadership is making decisions that, from the outside, seem absent of any plan for the future. R&D has fallen to a crawl. Some of the most experienced and valuable hands have left for other jobs. A titan in the industry was cashiered in an act of long-delayed payback--only to be invited back when the Powers That Be realized that the guy was, in fact, a titan. He declined.

How about that.

[Flagg]

Originally Posted by dennisw

Is the 5 - 10% number arbitrary?

I think it may feel more comfortable to sit on the sidelines with non-partisan wrath. Personally I don't see the point. What if the percentage was 95%, would you feel differently?

Absolutely...but I don't think the yin/yang partisan blame goes THAT far to justify a one party only stomping

I think to a degree we're missing the threshold point. Where were the shitty loans and all the greed before the credit rules were changed? Before the rules were changed, you couldn't make shitty loans. Changing the rules was the pivotal event. Without it, there is no mortgage meltdown.

I'd agree......I've done a LOT of loans way down here, middle 8 figures worth for my company and 10 figures worth within the entire finance co-op.

The only reason why we never did and never will make silly loans is because we are full-recourse on all of them. If any of my loans fell over, I am compelled to pay up. So we simply don't make silly loans.

If our business model was such that I could loan to pretty much anyone and just pass that financial hand grenade on to the public without recourse......I'd be visiting my local zoo and signing up all the spider monkeys to big ole' no deposit loans.....humans, dogs, cats, monkeys.....I'd loan to them all...it's not rocket surgery...it's human nature....doing something wrong should hurt......instead doing wrong things resulted in free liquer & strippers.

I guess the real question is why didn't someone in either party try and change it.


http://online.wsj.com/article/SB123137220550562585.html



So after Fannie and Freddie collapsed, Dodd votes for reforms. What if the rules had been changed?

Just a side note, when Rahm Emanuel was kicked out of White House by Clinton guess what plum job was waiting for him? Board member at Fannie Mae. Big deal. What do Board Members make? $300,000 per year.

It's absolutely disgusting.....but when you talk to people about it from the other side of the partisan aisle(I'm fiscally right, and a little bit hippy on some social stuff) all they hear is "blah, blah, blah IT's YOUR Team's fault, blah , blah blah."

It's incredibly frustrating.......as it's not shaping opinions in a truly positive direction.

So I try to keep the partisan stuff out of it(even though I have my personal feelings that the blame isn't equally shared).

Don't even get me started on the likes of John Corzine...and again...when that name comes up anyone on the left hand side of the spectrum sees it as a personal attack on "their team" instead of a disgusting example of what is happening on both sides of the aisle.

[Sigaba]

Originally Posted by dennisw

I think to a degree we're missing the threshold point. Where were the shitty loans and all the greed before the credit rules were changed? Before the rules were changed, you couldn't make shitty loans. Changing the rules was the pivotal event. Without it, there is no mortgage meltdown.

D--

I think that you're making a counterfactual argument that may do as much to confuse our understanding of the financial crisis as it does to clarify it.

IIRC, for years before the housing bubble burst, The Economist was sounding the alarm about other issues. To me, the big picture was one of capitalism in service of the public good tilting towards predatory capitalism being used by those who were exploiting the rules of the game and bringing 'products' to market so they could make as much money as they could, consequences be damned. Concurrently, there were widespread examples of wishful thinking in which expanding markets would continue to spark growth and people would ride the wave to where ever they wanted to go.

Insofar as the rules themselves being responsible for one or more aspects of the meltdown, I'm not convinced. Somewhere along the line, the choices of individuals and institutions matter. Nothing stopped people from using their administrative discretion to follow the rules in ways that balanced the requirements of the rules, the goals of an institution, and the interests of clients. In short, I'm saying that too many Americans made the choice to behave like used car salesmen working for commissions than like consultants working to build long term relationships.

[Dad]

The link below takes you to the full report of the Financisl Crisis Investment Commitment. It was a bipartisan committee which all seemed to agree to until it came time to sign it--Wall St pressure seemed to weigh heavily om certain members



fcic.law.stanford.edu

[mark46th]

The Federal Reserve at their September 2012 meeting has reinstated the same policies that caused the financial melt down which put us in the recession we are still in today...

http://www.mortgageorb.com/e107_plug...?content.12386

The Federal Reserve, citing economic concerns, has announced a new round of stimulus efforts, including a new policy to purchase agency mortgage-backed securities (MBS) at a pace of $40 billion per month.

The new policy, which was made following a meeting of the central bank's Federal Open Market Committee, will be supplemented by a continuation of the Fed's program to extend the average maturity of its holdings of securities and reinvest principal payments from its holdings of agency debt and agency MBS back into its MBS purchasing.

"These actions, which together will increase the committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative," said the Fed in a press statement.

The Fed has also announced that it would keep the target range for the federal funds rate at 0% to 0.25%, adding that "exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015."

The Fed stated that although economic activity has "continued to expand at a moderate pace in recent months" and that the housing market has displayed "further signs of improvement, albeit from a depressed level," problems still remain in the general economy.

"Without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the Fed said. "Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."