Tuesday, October 07, 2008

Causes of the Mortgage Meltdown

From the article "Anatomy of a Trainwreck," by Economics Professor Stan Liebowitz, University of Texas at Dallas

Executive Summary: Why did the mortgage market melt down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere as risky as they actually turned out to be?

This report concludes that, in an attempt to increase home ownership (see chart above), particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s. Regulators, academic specialists, GSEs, and housing activists universally praised the decline in mortgage-underwriting standards as an “innovation” in mortgage lending. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The price bubble, along with relaxed lending standards, allowed speculators to purchase homes without putting their own money at risk.

The recent rise in foreclosures is not related empirically to the distinction between subprime and prime loans since both sustained the same percentage increase of foreclosures and at the same time. Nor is it consistent with the “nasty subprime lender” hypothesis currently considered to be the cause of the mortgage meltdown. Instead, the important factor is the distinction between adjustable-rate and fi xed-rate mortgages. This evidence is consistent with speculators turning and running when housing prices stopped rising.

Conclusion: The political housing establishment, by which I mean the federal government and all the agencies involved with regulating housing and mortgages, is proud of its mortgage innovations because they increased home ownership. The housing establishment refuses, however, to take the blame for the flip side of its focus on increasing home ownership—
first, the bubble in home prices caused by lowering underwriting standards and then the bursting of the bubble with the almost catastrophic consequences to the economy as a whole and the financial difficulties being faced by some of the very homeowners the housing establishment claims to be trying to benefit.

MP: More support of the proposition that U.S. public policy turned good, responsible renters into bad, irresponsible homeowners.


At 10/08/2008 3:17 AM, Anonymous Anonymous said...

And how did U.S. policy create a situation where Iceland is on the brink of becoming the first "national bankruptcy" of the global financial meltdown?

At 10/08/2008 3:32 AM, Anonymous Anonymous said...

Another cause of the Mortage Meldown.



When the going gets tough, the tough get pedicures.

Just days after the federal government committed $85 billion of taxpayers' money to a bailout of insurance giant AIG last month, senior execs from the troubled company headed to Southern California's ultra-swanky St. Regis Resort in Monarch Beach for a week of wining and dining top salespeople.

At 10/08/2008 5:59 AM, Blogger OBloodyHell said...

> Iceland is on the brink of becoming the first "national bankruptcy" of the global financial meltdown?

Iceland was betting on its expanding continent status to provide ever-increasing plots of land!!!



At 10/08/2008 8:16 AM, Anonymous Anonymous said...

"And how did U.S. policy create a situation where Iceland is on the brink of becoming the first "national bankruptcy" of the global financial meltdown?"

U.S. policy didn't. Glad I could clear that up for you.

At 10/08/2008 5:26 PM, Anonymous Anonymous said...

Just read the whole document an weep; how politicians can be so stupid and keep their jobs is beyond belief?

At 10/08/2008 5:27 PM, Blogger juandos said...

Well it wasn't like there weren't people out there warning that something like the present day mess would happen...

In 1994 Vern McKinley writting for Cato posted the following: Community Reinvestment Act - Ensuring Credit Adequacy or Enforcing Credit Allocation?

(13 page pdf)

At 10/08/2008 5:34 PM, Blogger juandos said...

frederick davie says: "how politicians can be so stupid and keep their jobs is beyond belief?"...

Hmmm, the trillion dollar question...

Robert Higgs of The Independent Institute seems to be right with you (as am I) regarding politicos: Metaphors Reveal the Economic Ignorance of Politicians and Journalists

At 10/09/2008 2:43 PM, Blogger OBloodyHell said...

> Just read the whole document an weep; how politicians can be so stupid and keep their jobs is beyond belief?

Remember that statement on November 4th.

At 10/09/2008 2:53 PM, Anonymous Anonymous said...

> Just read the whole document an weep; how politicians can be so stupid and keep their jobs is beyond belief?

How about economists like Professor Perry? Check his blog archive and discover his biased attempts at defending the crumbling economy.

I'm glad I did the exact opposite of any of his posts.

At 12/07/2008 1:56 AM, Blogger tom paine said...

These clowns are actually pretending that questionable home loans to poor people caused the mortgage meltdown. That is absurd.

The amount of money that many of these firms burned thru far exceeded the bad home loans. The money tossed at AIG alone would have bought all of the questionable home loans.

What really caused most of the meltdown was when the clever Wall Street white shirts began to "bundle" and "package" and "resell" (and all the other clever terms the white shirts came up with) those loans so that they could borrow far more than those loans and homes were worth. A few years ago the white shirt lobby to got the amount they could "leverage" (that means lying about true worth) increased from 12:1 up to the 40:1 more than what those mortgages were really worth.

That's what the financial firms did. They used packages of the crappy loans to borrow money from other gullible (AIG) institutions. That is the only way that any company can lose billions of dollars in a short period of time.

The semi-criminals running these companies were pretending everything was fine as late as 2007 and taking hundreds of millions in salary and bonus.

Now they say they suddenly woke up one Monday morning and there were tens of billions missing or in "toxic" assets. That's bullsh!t.

Let's suppose that the dumbest home buyer in the USA wanted to pay $400K for a $300K home. And then let's suppose that the dumbest banker in the USA gave him that home loan.

And then the banker resold that loan. And then market reality set in. Would not that home still be worth $250K or at least
$200K? And yet the white shirts are telling us that those "assets" are "toxic" and worthless! Get real. The only thing toxic was the priks running those firms.

Same with the amount of money missing. Use AIG as an example. Let's suppose that the dumbest (or the most corrupt) company on the planet lost $100 million per day...every day of the year that they went to work. To equal the $152 Billion that AIG says they burned (per the government money given to AIG so far) it would take over 6 years of losing that $100 million per day!

Now we all know those guys are not that dumb so it only leaves one other possiblility and it should include jail time.

So please lose the "bad loans to people who could not afford them" as the cause of the meltdown. Was it a factor? Of course.

But most certainly not the main cause.

At 4/19/2009 3:59 PM, Anonymous Anonymous said...

Tom Paine,

When those banks bundled and repackaged those loans, you fail to mention that the main reason they did so was because they KNEW they were worthless, they KNEW that since the Feds would prosecute lenders who did not guarantee those loans to the poor and minorities (under Clinton and Reno), they KNEW that the Feds would prop those loans up. Which they did and it was called a bailout. Save the indignation for the government, for their meddling in the market caused the market to not function as it should have under true capitalism.

At 5/20/2009 10:32 PM, Anonymous refinance mortgage said...

Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness.


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