Thursday, November 18, 2010

How Did We Get in This Mess? "Reckless Departure"

 From an editorial by Ed Pinto (now at AEI) in the WSJ on August 17, 2010:

"In 1995, HUD announced a National Homeownership Strategy built upon the liberalization of underwriting standards nationally. It entered into a partnership with most of the private mortgage industry, announcing that "Lending institutions, secondary market investors, mortgage insurers, and other members of the partnership [including Countrywide] should work collaboratively to reduce homebuyer downpayment requirements."

The upshot? In 1990, one in 200 home purchase loans (all government insured) had a down payment of less than or equal to 3%. By 2006 an estimated 30% of all home buyers put no money down.

"The financial crisis was triggered by a reckless departure from tried and true, common-sense loan underwriting practices," Sheila Bair, chair of the Federal Deposit Insurance Corporation, noted this June. One needs to look no further than HUD's affordable housing policies for the source of this "reckless departure." If the mortgage finance industry hadn't been forced to abandon traditional underwriting standards on behalf of an affordable housing policy, the mortgage meltdown and taxpayer bailouts would not have occurred."

MP: A good summary of how the political obsession with affordable housing caused a lot of the problems in the real estate and mortgage industries, and led to the financial meltdown. 

35 Comments:

At 11/19/2010 12:34 AM, Blogger WalterB said...

I'm confused on how the mortgage industry was "forced" to abandon its standards if, as this piece states, the arrangement was a "partnership".

 
At 11/19/2010 1:50 AM, Blogger graison said...

You have brought out a very important and often forgotten fact regarding why the government itself was also responsible for creating the subprime crisis because of its continuing obsession with an "affordable housing for each and every american" policy, we always blame private companies for the subprime crisis but often forget the critical role of government policies and regulations that led to such type of risky behavior by private players in the first place.

 
At 11/19/2010 5:59 AM, Blogger juandos said...

"I'm confused on how the mortgage industry was "forced" to abandon its standards if, as this piece states, the arrangement was a "partnership""...

Consider it a partnership at gun point...

From City Journal: The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities

REMARKS OF THE HONORABLE JANET RENO, ATTORNEY GENERAL OF THE UNITED STATES, TO THE NATIONAL COMMUNITY REINVESTMENT COALITION

 
At 11/19/2010 8:00 AM, Blogger Michael Hoff said...

Walter B,

Easy. The government threatened them with discrimination lawsuits if they didn't do as they were told. And of course, when the Bush administration tried to raise the alarm, Barney Frank and the rest of the democrats started screaming "racism" and accusing republicans of wanting the poor to be homeless.

 
At 11/19/2010 8:09 AM, Blogger morganovich said...

waler-

banks who failed to comply with CRA and meet ratios it set were actually sued to force them to do so.

obama's old lawfirm successfully sued Citibank.

the irony is that all the bogus "redlining" claims made by acorn etc to benefit minorities would up decimating them.

you always hurt the ones you love i guess...

 
At 11/19/2010 8:13 AM, Blogger George Phillies said...

Between "Community Reinvestment Act" and "30% of mortgages had little down payment", these seems to be a bit of a gap.

Also, at least when I lived there 35 years ago, California had always had very low downpayment requirements with most banks, but no significant difficulties of this sort.

 
At 11/19/2010 11:28 AM, Blogger Tom said...

Those who forget history are condemned to repeat it. Read Thomas Sowell's "The Housing Boom and Bust". The worldwide financial heart attack was caused by big government housing policy. Wall Street acted as their money launderer.

Big government policies are devasting. Look at Europe and Japan. Stagnation.

Big government massive interference ruined housing prices, energy prices, food prices (through ethanol), K-12 education, medical prices, and retirement savings. All the biggest parts of the household budget.

The cost of regulations is now about 20% of GDP. Is society and business really so dangerous and unruly that we have to spend 20% of GDP to rein it in? Really?

We ought to cut government in half, both in spending and in regulations. That would almost double the income of the private sector.

 
At 11/19/2010 12:13 PM, Blogger NormanB said...

Its ironic (but not really) that the stated goal of putting non normally qualified people into houses was done to increase the percentage of people that owned their own homes. The opposite happened. Today the percentage of people owning homes is less than it was ten years ago. Thanks, Barney Frank.

 
At 11/19/2010 12:36 PM, Blogger bix1951 said...

just owning a home does not automatically make someone responsible any more than becoming a parent automatically makes someone responsible

 
At 11/19/2010 2:35 PM, Blogger Benjamin said...

Excellent point--it is low interest rates, but poor underwriting practices that lead to real estate busts.

There is a question as to why private-sector bond rating agencies gave AAA to mortgage-backed pools. This was of their own volition, and buyers bought the pools of their own volition.

And another question is why did the private-sector originate trillions of bad commercial loans, unbidden by government?

Interesting times.

 
At 11/19/2010 4:02 PM, Blogger Bill said...

I agree that the government started the problem but I don't believe the government forced the banks to leverage MBSs 30:1. Leverage is great when prices are rising but a disaster when they fall.

 
At 11/19/2010 5:11 PM, Blogger Ron H. said...

juandos,

Good old Janet. Isn't she the one who burned alive a bunch of men women and children at a compound in Waco, shot several at Ruby Ridge including a 14 year old, and then ordered this unbelievable terrorizing of a six year old boy?

 
At 11/19/2010 7:11 PM, Blogger morganovich said...

"There is a question as to why private-sector bond rating agencies gave AAA to mortgage-backed pools"

they got AAA ratings because they had implicit government guarantees.

the GSE's preformed debt ratings arbitrage by buying up subprime, stamping it "freddy" or "fannie" and tying the US treasury's credit rating to them.

this was the real business of freddy and fannie - selling the government's credit rating to investors/lenders.

absent those 2, this debt market would have been much smaller as most of that crap could not have gotten investment grade ratings.

 
At 11/19/2010 9:39 PM, Blogger juandos said...

"Good old Janet. Isn't she the one who burned alive a bunch of men women and children at a compound in Waco"...

Yeah, Ron H on April 19, 1993 barbecued Branch Davidian was on the menu courtesy of Reno and the Clinton administration...

"unbelievable terrorizing of a six year old boy"

Ahhh yes, the adventures of the terrified tourist Elian Gonzalez...

Those were the days, eh?

We can also thank the Clinton administration and his reenforcement of the CRA for throwing some legal work Obama's way...

 
At 11/20/2010 4:39 AM, Blogger PeakTrader said...

U.S. living standards improved at a steeper rate between 1995-07. The question should be how to continue improvements in living standards, given the capacity of the U.S. economy (destroying capacity is a poor option).

 
At 11/20/2010 9:34 AM, Blogger juandos said...

"The question should be how to continue improvements in living standards, given the capacity of the U.S. economy"...

Well its obvious I think that entitlement spending has to go...

 
At 11/20/2010 10:43 AM, Blogger morganovich said...

peak-

us consumer debt also tripled during that period. the "gains" of the last decade we never going to be sustainable.

when you spend more than you earn for a decade, you are going to run into some lean times when the bills come due.

 
At 11/20/2010 11:51 AM, Blogger Hydra said...

Idiots. Zero down doesn't make it more affordable.

Want more affordable homes? Unshackle the builders, ease up on zoning and permitting, then whack building regs that are not actually related to safety.

 
At 11/20/2010 11:51 AM, Blogger Hydra said...

This comment has been removed by the author.

 
At 11/20/2010 11:56 AM, Blogger Hydra said...

They got triple a ratings through fraudulent practices. Government backing did not apply to the products being sold, and the ratings agencies knew the risk was different from what was represented.

 
At 11/20/2010 1:46 PM, Blogger Don Culo said...

"If the mortgage finance industry hadn't been forced to abandon traditional underwriting standards on behalf of an affordable housing policy, the mortgage meltdown and taxpayer bailouts would not have occurred."


**********************

This reminds me of Flip Wilson's "The Devil Made Me Do it" defense.

 
At 11/20/2010 5:44 PM, Blogger PeakTrader said...

Morganovich, (real) assets increased faster than liabilities (or debt). Of course, it was sustainable.

Over the past two years, we've diminished the capacity of Wall Street and Main Street to generate real growth (to close the output gap). Consequently, if the economy expands at its long-run growth rate (i.e. 2 1/2% to 3% real growth), we'll likely get accelerating inflation.

Two years ago, there should've been a large tax cut (to compensate for trade deficits) and a shift from profits to wages (given the inverse relationship and increased disparity).

 
At 11/20/2010 6:53 PM, Blogger PeakTrader said...

Moreover, I may add, if you look at U.S. household net wealth, since 1952, as a percentage of GDP, you'll see two peaks in 2000 and 2007, and two troughs in 2002 and 2009.

The peaks were substantially higher than the long-term average and the troughs were roughly equal to the long-term average.

So, even at the bottom of the asset bubbles, we were at the long-term average of net wealth (between 1952-95).

 
At 11/20/2010 6:56 PM, Blogger morganovich said...

peak-

you argument doesn't make any sense.

debt to GDP rose from 25% to nearly 100% and you are calling it sustainable?

when has anyone ever sustained triple digit consumer debt to GDP?

the "real" assets you describe were paid for with borrowed money. there is nothing sustainable about that once you hit too high a debt rate. a lot of these "real" assets were overpriced new homes that are now badly underwater.

the rest of your argument is just bizarre.

what does capacity and inflation have to do with this discussion? i have no idea why you view that to be germane.

and then how to you get a shift to wages during overcapacity and how does a tax cut relate to a trade deficit? those points seem almost random.

your comments read like an economic mad lib. i have no idea what you are trying to demonstrate.

 
At 11/20/2010 7:40 PM, Blogger PeakTrader said...

Morganovich, my comments are based on economics.

If you have a firm with 300 employees and you tell 100 of them not to do anything (e.g. because of Wall Street restrictions, Main Street losing skills from extended unemployment, putting them on welfare, etc.), then you create economic strain by producing the same quantity with 200 workers that you did with 300 workers, which is inflationary (unless productivity rises 50%).

If real wages are flat and profits double, a shift of some profits to wages would increase workers incomes, and their spending and saving will increase.

Consumers exchange goods and use money as a medium of exchange. However, a consumer may decide to save and invest instead.

When a U.S. consumer buys a foreign good and the foreigner invests the dollars in Treasury bonds (rather than consume a U.S. good), then the dollars are shifted from the U.S. consumer to the U.S. government rather than from a U.S. consumer to a foreigner and then back to a U.S. producer.

Consequently, the U.S. government decides what to do with those dollars instead of a U.S. producer.

 
At 11/20/2010 9:24 PM, Blogger Hydra said...

Here we go again. Cut government in half and double our income.

Figure government is thirty % of the economy and the overall tax rate is 30%

Cut government and taxes in half and the economy drops to 85% of its former self and 15% more money is available to the private sector. Now you have cut government in half, and presumably government regulation as well, or at least enforcement of the regulations, even if they remain. That gets you ten percent more freedom to grow. It also gets everyone else 10% more freedom to cheat you.

Where can you invest that 15% new money such that it will overcome the fifteen % cut in the economy And then double your income. That sounds like an 800% ROI.

Toms argument is complete nonsense.

 
At 11/20/2010 10:26 PM, Blogger graison said...

There is nothing wrong with fiscal and monetary expansion by government to fight a recession, the problem arises when people forget that this is only a short term solution and mistake it for a permanent solution. Tax cuts and increased government spending are a stop gap solution which are not a substitute to a long term solution. The recession happened because there were inefficient players in the economy who were using the factors of production in an inefficient manner(subprime mortgage, investment banks etc). These inefficiencies lead to a recession, in a free market economy these particular entities will go out of business so that new and better entities can replace them and the economy eventually emerges stronger and better than before. Now this is a slow and gradual process and people are not that patient thus there inclination for expansionary policy which just protects the inefficient entities and prevents better economic entities from emerging. The end result is that we have one recession after another until the root causes of the problem are tackled.

 
At 11/21/2010 11:29 AM, Blogger morganovich said...

peak-

your argument still sounds like nonsense.

who has 1/3 of their employees idle? i'm going to presume you mean fired.

"then you create economic strain by producing the same quantity with 200 workers that you did with 300 workers, which is inflationary (unless productivity rises 50%)."

this has so many holes in it i'm not even sure where to start.

producing the same amount with 2/3 the workers IS increased productivity. i have no idea what you mean by "economic strain". there is nothing inflationary there. firing workers is inflationary? what color is the sky on your world? how do you fire 1/3 of your workforce and get inflation?

greater productivity is disinflationary. so is higher unemployment. your argument doesn't make any sense at all. you seem to have all your causality backward.

then you talk about real wages being flat and profits doubling. how do profits double? i don't think you have any math behind you here. you need a lot more info than that.

if you are saying that if productivity and profits go up, workers can be paid more, well duh. but that's not going to happen in your example. you don't fire 1/3 of your workforce and pass out raises. you tend to do that kind of firing because your workforce is not productive enough to cover your current costs and to try and get things into line.

you are all over the place on this augment/example.

your trade example is incomplete as well as being a total non sequitor.

i have no idea why you included it at all or what you think it demonstrates, but you are completely ignoring the entire secondary bond market. if the bond is bought from your 401k or from b of a, it's a totally different situation.

i really have no idea what you are trying to demonstrate.

 
At 11/21/2010 1:50 PM, Blogger juandos said...

" It also gets everyone else 10% more freedom to cheat you"...

ROFLMAO!

You think the government is doing a good job of keeping people from being cheated?!?!

Everytime I look at the FICA extortion on my paycheck I feel cheated...

The federal government's incompetence is cheating the citizens, most especially the taxpaying citizens...

 
At 11/21/2010 3:02 PM, Blogger morganovich said...

"There is nothing wrong with fiscal and monetary expansion by government to fight a recession,"

you mean apart from the fact that it has never worked and that it just makes the next one twice as bad?

 
At 11/21/2010 7:50 PM, Blogger PeakTrader said...

Morganovich: "...what you are trying to demonstrate."

I'm trying to demonstrate an economic mess, or preventing an economic mess, requires an economic solution.

 
At 11/22/2010 10:20 AM, Blogger Hydra said...

what color is the sky on your world?

==========================

I like that.

 
At 11/22/2010 10:24 AM, Blogger Hydra said...

" It also gets everyone else 10% more freedom to cheat you"...

ROFLMAO!

You think the government is doing a good job of keeping people from being cheated?!?!

=================================

No, i do not. But my statement does not depend on that.

Government is doing some job. For example, right now I cannot be cheated by my insurance company the way I once was.

So, assuming that the government does prevent some cheating, like it did whenn it caught a Prince Georges county, Md executive with 78k$ in her bra, then reducing government by half wil reduce its rather tawdry level of protection by half, and I will have to spend more to protect myself.

 
At 11/22/2010 10:26 AM, Blogger Hydra said...

"The federal government's incompetence is cheating the citizens,..."
===========================

That was the Federal Government that caught privvate entterprise bribing local government in PG.

Undoubtedly they were assisted by some concerned citizen that blew the whistle, but that does not mean the FBI wasn't doing their job.

 
At 11/22/2010 8:11 PM, Blogger juandos said...

"...then reducing government by half wil reduce its rather tawdry level of protection by half, and I will have to spend more to protect myself"...

Well its better that you spend your money to protect yourself than have steal from your fellow citizen for this alledged protection you claim happened...

 

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