This was a post I put up on the day I began this chapter. (Late Oct. 2007)
The Crash ContinuesSome housing bubble news from Wall Street and Washington. Reuters, “Sales of new single-family U.S. homes were off 23.3 percent from a year ago. Across the regions, sales were mostly down although the West did see a 37.7 increase. In the Midwest, sales were off 19.5 percent and down 6.6 percent in the Northeast. Sales were up 0.5 percent in the South. There were 523,000 new homes for sale at the end of the month. It would take 8.3 months to clear that inventory at the current sales pace.”
From MarketWatch. “Sales of new homes rebounded in September from summer sales levels that were much weaker than previously reported, the Commerce Department reported Thursday. The three previous months were revised sharply lower, which means the housing market was much weaker in the middle of the year than previous believed, and no one believed it was strong.”
“‘The crash continues,’ wrote Ian Shepherdson, chief economist for High Frequency Economics. Sales fell at a 35% annualized pace in the third quarter, he said.”
“The sales figures do not account for canceled sales contracts, which have surged in recent months.”
From CNN Money. “The battered markets for real estate and home building still have farther to fall, according to a range of economists who spoke Wednesday at a forecast conference sponsored by the National Association of Home Builders.”
“Mark Zandi, chief economist of Moody’s Economy.com, estimated that the excess inventory of homes on the market is close to one million, and he added that the glut could get worse if mortgage defaults and foreclosures increase, as it now appears they will.”
“‘We’re awash in inventory,’ he said. ‘I don’t think this [credit] crisis is over.’”
From Bloomberg. “Pulte Homes Inc., the third-largest U.S. homebuilder, reported a third-quarter loss after it reduced the value of its real estate and potential buyers of its homes had difficulty obtaining mortgages.”
“Revenue fell 31 percent to $2.5 billion. The company wrote down the value of its assets by $1.18 billion in the quarter. Orders for new homes fell 37 percent to 4,582, and the company had a backlog of 12,042 homes, worth $4.1 billion, it reported.
“Ryland Group Inc, the No. 8 U.S. home builder, posted a quarterly loss on Wednesday. Ryland said revenue during the quarter fell 35.2 percent to $732.3 million as the number of homes the company sold fell 32.3 percent to 2,495. The average selling price slid to $284,000 from $291,000.”
“New orders were off 20.9 percent to 1,876 units, and the value of the orders fell 27.0 percent. Ryland’s results include charges for write-offs for inventory and property values of $128.1 million.”
The Denver Business Journal. “Denver home builder M.D.C. Holdings Inc. battled a ‘turbulent’ housing market in the third quarter of 2007. The builder suffered a net loss for the period ended Sept. 30 of $155.4 million. M.D.C. reported $249 million in inventory impairments related to 7,000 lots in 132 subdivisions.”
“Nearly half of M.D.C.’s markets saw decreases in selling prices.”
“Home builder Tousa Inc said it would exercise the right to abandon a number of home-sight option contracts in response to deteriorating market conditions in the third quarter.”
“‘As a result, the company anticipates that it will incur significant deposit write-offs and abandonment charges in the third quarter of 2007,’ Tousa said in a filing with the SEC.”
The Dallas Morning News. “Centex Corp. officials said Wednesday that they have cut the Dallas-based homebuilder’s nationwide workforce by 40 percent and plan to further reduce overhead. Centex’s sales in the most recent quarter were down in every region of the country, including Texas, which has been one of the builder’s strongest markets.”
“Overall, Centex said that its average home prices were down 8 percent during the last quarter. In some markets, prices were cut as much as 20 percent.”
“‘Unlike in previous quarters, our Texas results were weak as areas like Houston in particular were especially hard hit by the disruptions in the mortgage market,’ said Centex chief financial officer Cathy R. Smith.”
“The Bank of England said the global financial system is at risk of further instability because of ‘ongoing uncertainties’ about credit-market losses. In a worst-case scenario, U.K. banks would have to raise as much as 170 billion pounds ($348 billion) if market conditions prevented them from selling the loans on their balance sheets to other investors, the central bank said.”
“The report also said the market selloff may be welcome because investors were taking too-optimistic a view on the risks facing the global economy. ‘A return to earlier conditions would be undesirable as that involved an underpricing of risk,’ the Bank of England said.”
“Nomura Holdings Inc., Japan’s largest securities firm, reported its first loss in more than four years after U.S. mortgage investments plunged, forcing the company to close some operations, cut staff and shut its Chicago office.”
“Nomura’s U.S. arm posted a $620 million loss on subprime, prompting CEO Nobuyuki Koga to shut the unit’s residential mortgage operation. The world’s biggest financial companies have reported credit and market losses of more than $30 billion after defaults on subprime U.S. mortgages contaminated securities backed by home loans and other types of debt.”
The Sydney Morning Herald. “ANZ Bank missed forecasts as provisions for bad loans increased. ANZ’s provisions for credit impaired loans jumped 39 percent last fiscal year to $567 million.”
“Investment banking firm Friedman, Billings, Ramsey Group Inc. said Thursday its third-quarter losses widened due to the weakening of the mortgage market. FBR reported losses of $214.7 million.”
“Financial guarantor MBIA Inc. followed the trend set by its rivals in reporting a third-quarter loss due to its cutting the value of its credit derivatives portfolio.”
“Though MBIA had a big mark-to-market loss, it did not follow the lead of some other financial guarantors in pre-announcing its results to give investors some warning of the effects of falling prices for securities backed by mortgage loans. MBIA’s mark-to-market losses were ‘well above the $175 million we had expected given the recent preannouncements by its peers,’ said Morgan Stanley analyst Ken A. Zerbe”
The Associated Press. “Triad Guaranty Inc. lost money in the third quarter as soaring defaults on home loans forced the mortgage insurer to pay more claims, the company said Thursday.”
“Triad paid $28.5 million on mortgage default claims and socked away an additional $78.3 million anticipating more defaults. The company’s premiums jumped by more than a third to $72.1 million. But for each premium dollar Triad collected, it spent $1.70 administering claims.”
“‘We believe delinquency and claim trends will only deteriorate further,’ said Bear Stearns analyst Michael Nannizzi.”
“Merrill Lynch & Co., the largest brokerage firm, may have to write down another $4 billion in the fourth quarter as the value of subprime assets continues to drop, according to CIBC World Markets.”
“‘Thus far, Merrill has taken the largest writedown of its financial peers, but unfortunately, we believe in aggregate it will only get larger,’ CIBC analyst Meredith Whitney said.”
“When Stan O’Neal’s rivals started backing away from subprime lending late last year, the Merrill Lynch & Co Inc CEO plunged in.”
The Wall Street Journal. “In a conference call with investors yesterday, Merrill CEO Stan O’Neal acknowledged that the firm had fumbled the CDO business: ‘The bottom line is, we got it wrong by being overexposed to subprime.’ Mr. O’Neal added that Merrill had misjudged the risk of many CDOs. ‘It turned out that both our assessment of the potential risk and mitigation strategies were inadequate,’ he said.”
“Credit ratings agency Moody’s is poised for further subprime-related surprises from banks and expects financial markets to remain nervous about bank exposures for months to come, it said on Thursday.”
“Moody’s downgraded its ratings on Merrill Lynch on Wednesday and warned it could suffer further. The rating agency said surprise loss revelations, prompted by the difficulty banks are having in estimating losses on subprime-related assets on their books, may strike again.”
“‘Merrill Lynch was a victim of that, but we don’t believe they were the only ones,’ Moody’s senior VP Lynn Exton told a financial conference. ‘As news comes out, we will be taking ratings actions as necessary,’ said Exton, who is responsible for large UK and Benelux banks at Moody’s.”
“The collapse of confidence in Merrill Lynch & Co. after the world’s biggest brokerage lost six times more than it forecast earlier this month helps explain why Treasury Secretary Henry Paulson’s attempt to rescue SIVs is troubled.”
“Investors aren’t willing to rely on estimates by Wall Street traders to value these bonds and there’s no central trading system or exchange. Fitch Ratings says the value of SIVs, which own more than $320 billion of bonds, fell to 73 percent as of Sept. 28 from 100 percent in July.”
“‘Continuing to mask transparency by means of rearranging risk without actually offloading or recognizing the true value of that risk is not going to help anyone,’ said Joseph Mason, an associate professor of business at Drexel University and a former financial economist at the Office of the Comptroller of the Currency.”
“Many of the 30 SIVs worldwide can’t find buyers for their commercial paper, debt that comes due in 270 days or less. The concern is that without the funding, the SIVs would have to sell their investments and might have to accept fire-sale prices.”
“The largest SIV, the $52 billion Sigma Finance Corp., declined to let Fitch disclose its value. S&P reports show the value of pieces of top-rated CDOs owned by Rhinebridge slumped 15 percent or more in three days last week.”
“One of the lessons that investors seem to have to learn over and over again, and they’ll have to learn it over again in the future, is that not only can you not turn a toad into a prince by kissing it, but you also cannot turn a toad into a prince by repackaging it,’ billionaire Warren Buffett said today.”
“Real estate wealth is expected decline anywhere from $2 trillion to $4 trillion out of a previous valuation of roughly $21 trillion when the total costs of recent credit crunch are tallied, the New York Times reported on Thursday, citing economists.”
“And financial firms could face aggregate losses of some $400 billion from expanding troubles related to the subprime mortgage market fallout, the paper said.”
“That is higher than the roughly $240 billion in financial institution losses from the savings and loan crisis of the early 1990s, adjusted for inflation, the paper said.”
“The losses in real estate wealth, while large, are substantially less than what investors suffered in the stock market collapse earlier this decade, which erased more than $7 trillion, or about 40 percent of market value, the paper said.”
“Two million subprime-mortgage foreclosures are likely to occur by 2009 if home prices continue their downward spiral, a congressional report said Thursday.”
“In the wake of the financial market turmoil that arose over the summer, there has been a remarkable lack of finger-pointing so far over the cause of the crisis. But one observer, Tom Schlesinger, the founder and executive director of a think tank that has followed the Federal Reserve closely for the past decade, believes the blame for the crisis falls squarely on the Fed and accuses the central bank of ‘regulatory foot-dragging’ that has harmed the public.”
“Schlesinger maintains the Fed’s prevailing regulatory philosophy has shifted from that of 20 or 25 years ago, which in essence was ‘here is the line between right and wrong, don’t cross it,’ to a current underlying policy that ‘anything and everything that might be called financial innovation ought to be embraced.’”
“‘This is a very faulty premise that deserves debate and reflection and ultimately, in my opinion, a changed perspective,’ Schlesinger said in an interview with MarketWatch.”
“Upon joining the Fed, former Fed chief Alan Greenspan said he had a ‘pleasant surprise’ when he found the Fed staff was not so keen on regulation either. Together, they interpreted congressional legislation with a view to ‘letting markets work,’ he wrote.”
“Schlesinger says this practice was actually ‘regulatory foot-dragging’ where the Fed had a clear obligation under law to police markets but went about it ‘with such reluctance that in some cases the supervision is difficult to detect.’”
“In an interview on ‘60 Minutes,’ Greenspan said the Fed couldn’t stop subprime mortgage originators. Schlesinger disagrees. Although the abuses came from independent originators and not banks, Schlesinger said the Fed had ‘all or most’ of the authority it needed to police the market under two laws passed by Congress.”
“‘The Fed’s unwillingness to flex the muscle that those statues granted is a real black mark on the central bank,’ he said.”
http://thehousingbubbleblog.com/?p=3637
As I type this on October of 2007, almost no one denies there is a housing bubble, at least to some degree. Even Alan Greenspan openly states it, even though he denied one could exist when he was chairman. That mankind will suffer through financial manias will probably never cease. And on this day when the media ponders how many trillions of dollars this will cost, and how many millions of homes will be foreclosed, surely we can take a pause to examine this event, what caused it and make an effort to determine if a mania in housing can be prevented from happening again, at least in our lifetimes.
Financial manias have been recorded over hundreds of years, yet they are rare. Property and housing follow well known cycles, over and over. But something extraordinary has just happened. The Economist magazine pointed out that this may be the largest asset bubble in the history of man, and I agree.
So how could this happen, in this age of financial sophistication and high tech? How could so many tried and true benchmarks fall by the wayside and become trampled in this epic era of greed? I suspect that human frailty and fear are a base cause. After all, concern about not getting in on the boom is a weakness and a fear, too.
But what I want to address are the structural elements which set the stage for this housing bubbble and kept it going. For these are the areas we can address, change and by doing so, possibly prevent this from happening again.
I must disagree with the last article in my post above on one point. When it states that there hasn't been much finger pointing. There has, on my blog and other, and elsewhere. I was asked who was to blame on the Open Source radio show I did in August 2005. Here's what I said:
insert transcript
The same has been said by editorialist at the Wall Strret Journal, the New York Times and countless other media. But what gets lost in all the fury about the Countrywide Financials and corrupt appraisers is this; they are bit players in this drama, in my opinion. The true, root cause of this debacle is unaccountability of three groups. They are the US congress, the big Wall Street investment banks and the Federal Reserve.
I posed this matter to the readership of my blog on October 27, 2007, in a post titled, "Who Opened The Gates To Dumbass Ranch?" Here are some select comments and my commentary on them.
1. Comment by Dawnal
"Greenspan will go down in history as the worst Chairman of the Federal Reserve ever. And yes, he is the culprit. The decades of depreciating the dollar led to a mindset that one would be punished if he saved and would be rewarded if he borrowed. And that is exactly what happened. Practically no one saves anymore. And practically everyone is in debt. Although the Fed is the culprit, there are an army of enablers. Congress should have repealed the Federal Reserve Act long ago. It is unconstitutional and nonsensical. Why is our government borrowing from a private bank when it is expected by the Constitution to issue currency directly, thereby avoiding the need to borrow. If that were done, we wouldn’t have a 9 trillion dollar national debt. Other enablers are the media for never reporting the reality of the Fed. Our educational system is guilty as well as no one learns what the Fed really is there. Sure there is greed in such an environment. All the front line players were driven by greed…mortgage brokers, banks, Wall Street syndicators and the poor guy who bought the overpriced home without the ability to pay for it. But none of that would have happened had not the Fed consistently and egregiously cheapened our dollar."
2. KenWPA
I think the truly wealthy people are keeping a lot of us in the dark, while enabling us all to consume ourselves into indentured servitude.
Rising home values helped a lot of people stay in denial. They have been able to Home Equity Line of Credit themselves into the illusion/Delusion that they really can afford to live a nice home, have two or three nice new cars, kids in “The Best Schools”, Plasmas in every room, Pool/Pool boy, Landscaping/landscaper and Tiffany and Joshua in every extra curricular activity known to mankind.
This country has been grabbing one vine after another, just like Tarzan, trying to keep above the jungle floor for the past three decades. But it seems as though many others across the world are sick of working day and night to put the next vine in place for all of the non-saving, over-consuming, ignorant Americans.
I admire what Ben is trying to do on this post, but I think it is a bit short-sighted. We have been swinging from one vine to another in this country for so long that we have forgotten where it is from which we came.
This is America, a country that was/is strong, independent, generous and prosporous. Well, without the artificial glow of the tech boom of the 90’s and the housing boom of the 2000’s, what do we really have to tip our hat to?
I think more desperate times call for bigger bubbles, and I don’t think there is another vine waiting for us to cling onto. I just can’t see a bubble bigger than the housing bubble popping up, at least not a bubble that will put anywhere near as many Joe6Packs to work.(I don’t see this bubble as being something that took anyone in power or banking by surprise, this was just another way to keep the good times rolling for as long as possible. It is not surprising that everyone in the housing arena instituted a sell arrangement during the bubble period was it? This was not an accidental bubble. This was a concerted effort to transfer wealth. Believe it or not, a lot was transferred back to the US, but how much was lost?
When I say we are all to blame, I go back 30 years whenever I was just a kid, and heard a lot of older guys proclaiming that shipping the manufacturing jobs overseas or to Mexico was the beginning of the downfall of this country. I think we are finally starting to see the evidence of this on a broader scale. We have fooled ourselves through one bubble or another, but the people that are footing our bill aren’t as stupid/willing as before.
I think the country as a whole is going to soon bump up with the same issue as an underwater FBer. People aren’t willing to lend on a losing cause, and more importantly they don’t have to lend to a losing cause. But they will buy your assets at a very good price.
Weak dollar, makes all of our most coveted assets even cheaper, and unlike past times we aren’t in the situation to deny them.
3. a reply Comment by CA renter
Excellent posts, Ken and dawnal! Agree 100%.
This credit bubble was created intentionally to transfer wealth from the working class to the wealthy. All the “players” (Fed, politicians, wealthy investors, and the regulators they own) are at the top of the food chain. Why would they have done anything to stop it?
We (middle class) are the fools for believing that “housing equity” is equal to cash in your pocket — that debt is wealth. Other than a handful of bloggers like Ben, nobody was out to inform the masses of their folly.
4. Home_a_Loan
Actually, manias do just happen. They’ve always been just happening. For one, Shiller discusses this at length.
5 a reply Comment by mrktMaven FL
“Actually, manias do just happen. They’ve always been just happening.”
That’s just an excuse for someone who cannot or is unwilling to explain the stimuli and assumptions that support manic behavior. People buy into a pattern of behavior with expectations and these expectations are supported by a set of assumptions. Assumptions are shaped and reshaped by a combination of internal beliefs and external stimuli. Behavior is simply a byproduct.
A lot of people assumed and expected increasing home prices. Although many could not afford fully amortizing loans, they assumed and expected additional financing would be available before resets. These assumptions and expectations led these people to believe they could become homeowners. So, they bought homes.
On the other hand, with abnormal price increases and people camping outside of subdivisions as evidence, many of us on this blog assumed we were witnessing manic behavior and expected it would end badly. Some of us even sold our homes and became renters. We did not believe it was a good time to buy or own a home. As a result, we actively limited our exposure to the mania.
Manias do not just happen. Asssumptions, expectations, and beliefs need to be shaped; in fact, expectations need to be juiced up a bit for manias to occur. If the opposite were true, advertisers would not be spending billions of dollars trying to shape our expectations.
6. Comment by measton
I disagree that Greenspan and interest rate cuts are the main problem. The two main problems are. The government that did not exercise any oversite on lending institutions , and that rating agencies were allowed to profit by giving good ratings to crap CDO’s ect.
If the loans had been rated correctly they would not have been as profitable for banks and mortgage companies. Pension funds and others would not have purchased them at high rates and the lending houses would not have pushed bad loans that they couldn’t unload.
The root of the problem is our electoral system where those with money buy our government officials and push through deregulation or defang regulators. Was it that our elected officials couldn’t recognize the risks of a system where rating agencies were paid by the very companies they rated, or was it that our elected officials campaign contributions came from companies like Citibank and Countrywide and so they looked the other way. Did the SEC sample these CDO’s to verify their value? Did they prosecute banks for non disclosure to borrowers? Did they go after borrowers and lenders who falsified info?
If these things had been done I don’t think we’d have the mess that we have. The cheap dollar didn’t help but greed crime and lac of accountability are the main culprits
7. Comment by mags57
Ben,
Good luck w/ this one. I think a big part of the ‘fix’ is to actually enforce the banking/credit regulations. There is nothing wrong with ARMs, 80/20s, IOs, etc - as a consumer I’ll always want these options available to me b/c they could be very beneficial in the proper circumstances. I don’t want the Fed or St telling me that all I can have is a 30 yr fixed w/ 20% down.
However, IMO, the most important thing missing here was a correct valuation that was ultimately assigned to the mortgage products. Banks are heavily regulated to ensure proper reserves/lending standards - how was it possible for banks to maintain such a large % of subprime loans and still ‘pass’ all of the reserve/capital/loan standards? My guess is that the standards weren’t enforced and everyone gave a wink and a nod at Moody’s or S&Ps ‘AAA’ ratings. Imagine if the lenders had to truly maintain an overall safe level in their lending portfolio (i.e. only be able to lend out some small % of any risky loans)? This situation would never have developed. Of course, then millions of people, many in a protected class one way or another, could never have ‘bought’ homes in many high-priced areas so everyone would be crying foul (although it’s a chicken-egg problem here b/c odds are w/o the shoddy lending the prices wouldn’t have been that high to start w/).
Anyway, my 2 cents. Thanks for my favorite blog by far. Good luck.
8. a reply Comment by jerry from richardson
You blame our electoral system, but would you rather have a dictatorship? Even that doesn’t help as China is also experiencing a housing bubble. Our housing bubble is but one among dozens across the globe. It is fueled by greed, which is a common trait among mankind.
9. reply Comment by Olympiagal
Not all the FB’s I know are moronic and/or greedy wretches who deserve what’s coming to them. (Although it’ll come, and hurt just as bad when it does.)
Some are just ignorant, they wanted a house, were hopeful/delusional, believed the ‘experts’, etc. Basically normal human idjit behavior. It’s the unusual human that ISN’T a moron, in my observation.
By your terms, I estimate that about 90 percent of the race would be shirtless. Just because someone’s dumb/ignorant, that’s not an adequate excuse to take advantage of them, or to see them being taken advantage of and say ‘They deserve it, the dummy.’
10. reply Comment by CA renter
I agree with Olympiagal.
We need to decide if we value moral and ethical behavior. The less intelligent will ALWAYS be on the losing end of things if we refuse to regulate the actions of the intelligent, wealthy and powerful interests.
Also, free-market capitalism is impossible to achieve. The wealthy and powerful will always work in concert with one another, creating laws which funnel money from the workers to the wealthy. They will try to be as opaque as possible, encouraging the myths about wealthy people knowing mystical things that “regular Joes” can’t possibly understand — and that’s why they are **entitled** to make and keep more money.
IMO, great wealth disparities and the concentration of too much money/power into too few hands is what will be behind every single bubble.
A regulatory body that is **strictly prohibited** from working with or for wealthy/business interests (MUST be controlled by the public majority) is the only way to prevent these financial distortions.
11. Comment by SubKommander Dred
Ben;
I think you are spot on with this. The required regulation and oversight mechanisms are/were in place, but they they either ignored or shunted off to the side as too much money and too much greed combined to make this quite possibly the worst financial bubble in history. No one seemed to consider that indefintely increasing real estate prices and cheap money was going to last forever. Sound business and lending practices were essentially gutted by folks who should have known better than to lend out gobs of money to folks who never had any real chance at paying it back. Banks, Mortgage Brokers, Real Estate agents, Politicians of every stripe and most especially my fellow citizens (er, escuse me…comsumers) all bought into the greatest Ponzi scheme since Tulips. I feel awful about all that wasted money wasted on the mother of all scams, but I feel worse about the effect it’s going to have on our future as a country.
SubKommander Dred
12. reply to who?) Comment by diogenes (Tampa,Fl)
There is just too much to refute in this argument, but I will give it a shot. First, this is not a “free economy”. It is highly controlled.
Interest rates are not set by the market, but controlled by the FED, at least short-term.
Many government reg’s have changed recently that contributed to this madness. One was letting banks say that loans sold off did not need to have any reserve requirement. They essentially have no reserve, until loans get sent back. This made way too much additional cash available for lending.
But the biggest problem here is this “bubble” was not created with people speculating with their money, but with MARGINAL LOANS. You could buy $500,000 house with almost no money.
If credit standards had been maintained, so that you needed to put up some of your own money, this stampede to purchase Real Estate would have stopped in it’s track for LACK OF FUNDS. I had been a saver and was working to increase my downpayment when this whole pile of crap started.
When I had $20,000 to use as a down payment, i began to shop.
This was 2002. Within a year, all the houses around here had increased in price, on average, $30,000. I lost $10,000 for working all year. I got outbid by “Flippers” and “investors”.
What do you mean “investor”? They didn’t put up any money.
Where is there investment? They borrowed it all, and even got a 125% LTV on the house.
Then the fraud really started. False appraisals, fake buyers, phoney transactions. All this to rake money out of houses.
NONE OF THIS, NONE, Could have happened if regulators had investigated and arrested the fraudsters. And the whole mess would not have started if lending standards were not thrown out for the sake of higher commissions and profits of the lenders.
It was the job of the various government agencies to REGULATE and ENFORCE lending practices. They did not.
Nor will they. The Bush administration cares about other countries borders, not ours, and their “rule of law”, while completely abdicating any rule of law here.
They have destroyed our money and created mass inflation to mask the fact the real incomes are going nowhere.
They needed everyone to believe they were richer in their houses so we would keep the economy chugging along on borrowed time.
I can’t say enough about this, but I blame the current administration’s “free economy” philosophy as the main culprit.
You can’t just let criminals run free and look for ways to fix it later.
Think Enron and WorldCom. Where was the oversight?
The whole stinking mess is one big pack of lies stacked on another.
(out of breath………….will continue rant later).
13. Comment by Home_a_Loan
“If credit standards had been maintained, so that you needed to put up some of your own money, this stampede to purchase Real Estate would have stopped in it’s track for LACK OF FUNDS.”
You cannot force standards on those who loan the money. If I chose to loan you money, the government can’t tell me the terms of the loan (aside from usury concerns or fraud).
You saved your money and you were smart. The people who bid up the home prices at the time didn’t commit a crime in doing so per se. It’s up to the individual to see that prices are to high and to refuse to pay them. This is what you did, and now you are being rewarded. Simple as that.
14. Comment by CA renter
You cannot force standards on those who loan the money.
———————-
WRONG!!!
If we are expected to save those lenders (through inflation, taxation, or otherwise)…AND if we will have to deal with the ramifications of the economic collapse, you bet your a$$ we have the right to force standards on whomever we please.
If the lenders are the only ones taking the risks, you have a point. Problem is, most large-scale financial events are not experienced by only a few players. We will ALL have to pay for this; therefore, we ALL have the right to try to prevent it in the first place.
15. Comment by Austrian School
Oh oh, let me at this guy. Yes, there have always been asset bubbles and forrest fires, but it takes intervention on the scale of a goverment to build up enough bad investment and dead brush to make a REAL disaster. On their own, the asset bubbles and forrest fires would be smaller albeit more frequent and scattered across the financial and geographic landscape. The distributed and minimized nature of these corrections cause far less harm than the infrequent but catastrophic adjustments we have today.
It always kills me to hear people say, “see what your free market has wrought!?!??” and use this as an excuse for yet more intervention when in reality it was the intervention that caused the earlier malinvestment. People like HomeaLoan think that the way it is now is the way its always been because its been constant as long as he’s known about it.
The more government regulation we impose, the more we make these regulators the target of business seeking favorable treatment. These regulator people are easly co-opted by the sheer amount of money they are controlling, and the system is perverted for the special advantage these businesses.
As I understand it, in Europe, there is no such thing as “insider trading”. The investor must make his bets knowing full well that there are people that work in the company that know more than them and will act on this information. Its only when people are given a false sense of security that they do stupid thinks like ivensting pensions in subprime mortgages.
16. Comment by nhz
when answering the question please keep in mind that:
- the EU housing market was already surging long before the most recent US housing bubble started, e.g. in Netherlands price growth was already near double digits in 1990/1991 and prices have keept climbing ever since. When the US bubble started for real, many EU countries already had huge housing bubbles. So, unlike the perception of many on this blog, it is not strictly a US event.
- as far as I know all housing bubbles are in anglo-saxon countries, or in countries with a banking system with anglo-saxon dominance.
- the oldes bubbles started in/near the financial capitals of the world (I’m not sure if it applies to all, but it is quite opvious).
- housing bubbles exist in countries with very low (e.g. Netherlands, effectively 2-3%) and high (e.g. New Zealand, effectively 9-11%) interest rates, in countries with very high and very low population density, in countries with over- and underbuilding, in countries with very much and very little speculators. These factors influence the dynamics of the boom but are not the cause.
My vote for factor number one is excess money printing by central banks, and without a doubt the major culprit is the Greenspan FED from 1987. Of course the other central banks (BOJ, BOE and ECB) played along right away and are just as guilty as the FED.
Loose lending, crazy mortgages, unresponsible and downright criminal behaviour (from the RE mob, Wall Street, and many of the FB’s themselves), playing with other peoples money: they are all part of the game, but without the flood of free money it would not work.
17. reply Comment by Ben Jones
Alan Greenspan said the same thing this past week; if there are even bigger bubbles elsewhere, how can this be the Feds fault? I would point out that there are central banks in all of the bubble countries, and that these banks do cooperate.
18. Comment by nhz
also, I think if one could make a sort of timetable for all the worlds most recent housing bubbles, it would be quite clear that 1987, the first year of the Greenspan put, is when it all started.
19. Comment by Cinch
“One asked, “Ben: I’m confused by your comments on who is responsible. Ultimately, isn’t it the individual players? No has put a gun to anyone’s head and forced them to invest or buy houses. The minute blame is shifted to banks, government or Fed, doesn’t that allow all the individuals to become victims?”
I agree that all players should bear their share of responsibility, however, players only come to play if their is a game, rigged by Alan Greenspan when he lowered interest rate down to near 0%.
20. Comment by Ben Jones
The bust will probably school all the individual speculators, and as KirkH said above, and that will go a long way to preventing future housing bubbles. But to me, there must have been an underlying groundwork that allowed things to go as far as they did. Or do financial manis this large just happen?
21. Comment by nhz
easy money is the root of almost all historic bubbles that I know of; there are some variations on the theme but they all look very similar.
e.g. tulipmania in Netherlands happened shortly after the invention of the stockmarket, which made it possible for the general public to speculate with borrowed money. And money was flowing into the Netherlands on a huge scale in those times because of new overseas colonies, inventions etc.
The possibility to speculate with borrowed money or with other peoples money is a central element in nearly all the big historic financial manias. The other side of the story is that there are usually people who organise these manias for their own benefit. That is a part that is hardly discussed but very important. Greed and crowd behavior is a given, but I don’t think manias just fall out of the sky from time to time.
As to the benefit of education and group sanity I don’t think it will help. Isaac Newton, an excellent mathematician and scientist (he should understand compounding, parabolic trajectories etc.) and one certainly of the very brightest minds in history, lost most of his family fortune by speculating in the South Sea Bubble.
23. Comment by tj & the bear
But to me, there must have been an underlying groundwork that allowed things to go as far as they did.
The forces behind this have been building since before the Great Depression:
* The formation of the Federal Reserve
* The rise of petroleum products as the pre-eminent energy source
* The New Deal
* Bretton Woods, the USD as reserve currency, the “petrodollar”
* The rise of the boomers(!!!)
* The abandonment of the gold standard (1971)
* The Greenspan Put
* Globalization
The 20th Century — especially the latter half — was the American Century, wherein citizens came to believe that all trees grew to the sky.
Or do financial manias this large just happen?
In a manner of speaking, yes. Human nature simply doesn’t change. At some point we simply get far enough removed from the last occurrence that we forget and/or allow our collective arrogance to convince ourselves that it won’t happen again.
24. Comment by Joshua Tree
Ben, it was a confluence of many unfortunate factors - however, if I had to assign blame to one specific source, it would have to be the merchant banks and ratings agencies assigning “AAA” to packaged ABS/CDO’s.
Without this factor, there would not have been a world-wide market for the securities sewerage. In my view, the bubble would have been considerably smaller, absent the repackaging.
Follow the money!!
25. Comment by SD_suntaxed
In the past 2+ years that I have been following this, I have wanted to puke every time I have heard someone say that this whole housing and credit mess has nothing to do with them, on any level of the means by which it has fed into this ponzi scheme.
“It’s not my problem…”
If someone wants to buy a house or houses through me they can’t realistically afford.
If someone comes to me wanting stated financing without the means of actually making the payments.
If investors want to buy up all these fraud filled securities.
These parties claim that they were just offering what everyone wanted.
I more than understand the idea of informed consent, but at every stage of this game, the players have tried to wash their hands of any accountability and look the other way, while the facilitators have been collecting exorbitant fees and divesting themselves of the product to someone else as quickly as possible. Facts and the larger implications of these decisions have been largely ignored or buried in thick piles of paper.
“That’s their problem, not mine.”
“If I don’t sell it to them, someone else will.”
No snowflake in an avalanche ever feels responsible.
Responsibility and consequences in this whole matter have become a joke. Even more ridiculous, as ChillintheOC pointed out, are those who have vested interests in keeping the party going and all the fraud associated with it.
26. Comment by sm_landlord
I would like to add another point that a few posters have mentioned in the past, but bears repeating. Some form of basic financial education is required if people are going to function effectively in an advanced society like ours. We have actually been slipping backward on this in the educational system - everyone has seen the high school math test scores, and a few people have read _Innumeracy_ by John Allen Paulos. Other posters on this blog have recounted anecdotal stories about cashiers that cannot add, multiply, or make change. I think that this is actually a big problem.
If people cannot handle basic math, (and incidentally cannot read above a sixth grade level) they are perfect marks for even marginally sophisticated schemes and frauds, particularly those that are conducted under color of authority - by players such as bank, brokers, builders, etc.
I keep reading postings here about FBs who did not understand the loan documents that they were signing, didn’t know the difference between an interest rate and a percentage increase in a payment amount, etc. While we have our fun here ridiculing these fools, I contend that many of them simply did not have the necessary education to understand what they were getting themselves in to, nor even enough knowledge of financial history to recognize the same old scam in a sexy new package.
So the education system and certain cultural influences should come in for some blame as well.
27 reply Comment by AK-LA
Additionally, there was a certain faith in the system that helped the ignorance along. People didn’t read the loan docs because they thought the bank would look out for its own interest and give them a loan they could pay off.
So often when I’m reading the anecdotes about FB’s, I’m thinking, “If only they knew about sunk cost /compound interest/arithmetic /budgeting /bubbles /commissions / ….”
But as you mentioned cultural influences, I’ve seen many highly-educated people leap blindly into the housing mania and get severely burned. Emotions often trump rationality.
28. Comment by arroyogrande
I disagree…even if people are educated on economic fundamentals, that gets thrown out the windows when the psychology of greed and fear take over…the “buy now or be priced out forever” and the “hop on the gravy train and flip houses before the train leaves the station” effects. Even smart people WHO SHOULD HAVE KNOWN BETTER got caught up in the tech stock bubble and the housing bubble.
Education might go a ways to moderate bubbles, but I seriously doubt it will eliminate them.
29. Comment by nhz
indeed, as mentioned above: Isaac Newton, one of the brightest minds in history, lost a fortune speculating in the South Sea Bubble. And alongside the general uneducated public, during tulipomania many well-educated people lost a fortune (and probably didn’t understand what was wrong until after the crash). At least tulipmania had some ‘investment’ fundamentals to support it, because even rare tulip bulbs multiply underground so you have a lot more of them next year if you are lucky. Can’t say the same for houses.
30. Comment by Troy
"Yeah, but we can really fix the human nature stuff. What I am searching for are the players and institutions that we could take action on to prevent a housing bubble in the future."
We Georgists think we have both the philosophical and practical answer. There is nothing new under the sun; Georgism came in response to the boom/bust and economic injustice present in the late 19th century.
31. Comment by arroyogrande
The seeds of a bubble:
1. (Perceived) limited supply of something (tulips, stocks, houses, beanie babies, whatever).
2. Growing demand for that something.
3. Easy access to credit to speculate on that something.
4. News spreading (media, word of mouth, etc.)about 1, 2, and 3.
That seed germinates and grows into a full bubble when people start using the easy credit to buy more of that “something” than they really want or can use for their personal consumption…ie they start speculating (instead of buying for personal consumption, or for long term investment) because “it’s easy money”, and “how can you lose?”
That drives asset prices up, making it seem like even more of a sure bet, and making credit suppliers even more willing to lend money (even if it’s just mom and dad loaning money to their kid to buy yet one more beanie baby). Which drives the speculation and prices even higher, and so on and so on.
Until the price gets so high that most speculators refuse to buy, and some actually start selling en masse (so as to not be caught holding the bag). Then the whole process goes into reverse.
Positive and negative feedback loops. Set them up and watch them go.
32. Comment by Duane Lapinski
Every 35 to 40 years there is a major financial crisis, were the system breaks down. From now, back to the stagflaition of the 1970’s, The 1970’s to the Great Depresion of 1930’s. From the 1930’s to the panic’s of the 1890’s. These episode were all with 35-40 years apart. All of them had some sort of bubble before them. In the 1880’s it’s was railroad building. In the 1920 it was real estate and stock market. In the 1960’s it was conglomerts and the expanding welfare state. !n the 1990’s it was the tech boom and the housing bubble. There is some generational thing that causes bubbles.
33. Comment by reuven
The real problem is the irresponsible borrowers.
How you want to control that, in a free society, is another story.
One thing for sure, any attempt at regulating social behavior fails. So attempts for “affordable housing” including Mortgage Interest deduction (and now the obscene PMI deduction) only make things worse.
I think if we had a better tax structure, where every person were simply charged 25% and there were no deductions for anything ever (I know this is hard to implement, in practice, because what constitutes “income”, etc) then we’d be less prone to bubbles, whether stock, housing, etc.
34. reply Comment by jerry from richardson
I doubt that it would work, as many Eastern European countries have a flat tax and their RE bubble is bigger than ours.
35. Comment by nhz
I think the situation in Eastern Europe proves what reuven says. In Eastern Europe and the Baltic states most of the speculative RE money is coming from Old Europe, both from individuals spending their equity gains or trying to lower their tax base, and large companies that invest ‘cheap money’ from old Europe and have a huge advantage over local companies. The biggest share comes from countries like UK and Netherlands where the tax system is wrong just like reuven says (all kinds of tax deductions for high incomes, especially for RE related expenses, no tax on assets except savings accounts, no tax on RE related gains). The local people with their flat taxes are hardly participating and even if they did, they would probably be hit by a huge asset tax (unlike the foreign specuvestors).
36. Comment by Housing Wizard
The way I look at the housing bubble is that Wall Street had alot of money to invest and they were looking for a way to beat the bank yields (because of the low interest rates on CD’s ,ect.) The money suppy was huge ,in part because of global markets . So Wall Street came up with a way to attract investors by investing in MBS’s that payed good yields because of the way they set these investment packages up. Get a rating system to rate the loans as being sound because they were tied to real estate without any regard to the truely high risk the loans were ,was what they did . So, this Wall Street money, looking for yield, pushed the industry into making faulty loans by lack of regulations as well as loan designs that were faulty anyway (like no down ,no doc loans ).
So ,greater regulations have to be made so a source of funds ,like Wall Street, does not determine the lending standards by faulty self-serving risk models .
We know that one of the problems with the 1929 bust was the use of leverage in speculation on stock . This housing bust has alot of the same problems regarding the use of leverage that was used in real estate .Firstly ,no down ,no doc., liar loans should not be allowed . Second , lenders should have more of a penalty if a loan defaults in the first three years of a loan. Third, changes need to be made in the way that appraisals are assigned and perhaps real estate agents and loan agents should be barred from that process .Last, borrowers need more disclosures ,and commissioned salespeople need to be held to higher liability for their acts regarding such a huge purchase such as a house .
I’m sorry that the human race needs to be controled ,but the nature of the beast is such that the dumb sheep and greedy money men will screw it up for everyone if they are allowed to practice pure capitalism .
Also ,Greenspan could of raised the rates alot quicker and higher and that would of put a damper on the frenzy that was developing .
Also ,more regulation is needed to put more duty on lenders to prevent fraud .Apparently because lenders could pass on loans to the secondary market ,the lenders breached their duty to prevent fraud or even underwrite the loans .
Alot of the people on this blog will not agree with my call for more regulations ,but I see no other way to prevent another 1929 event .If a person or Company is on the up and up ,regulations will not prevent them from their goals and would only result in a little more red tape . The stupid ,greedy ,or fearful people always screw it up for the rest of us .
37. Comment by shuzilla
You assume that those in control of regulating have altruistic motivations. Each time government seems to fail us, we seek out more government oversight. I feel like a rabbit in a python’s coil; every wiggle of struggle tightens the snake’s grip.
38. Comment by oliverks
Please be warned, this posting is a tirade against the American way of life as it is packaged and sold these days. It applies to more than just housing. I ask for 60 seconds of your time to understand how to fix America.
The middle class is getting squeezed by … the middle class. They have engaged in an arms debt race with each other. They are all desperate to measure their self-worth by how much stuff they own. Their houses, their cars, their boats, their kids colleges, they must show they can afford all this stuff. They all want to be the next billionaire.
This is symptomatic of the culture for the last 30 years. We view rich people as somehow morally superior, more intelligent, or more important than poor people. We certainly see them on TV all the time. The yardstick for determining how “interesting” or “good” you are is the money you make and show.
If people sat down and thought about it they would realise that this a beggar thy neighbour approach to living. I have friend who has an expression that describes this phenomenon. He likes to say that we have become, “A do it to yourself country.”
So how do we fix this problem? Surprisingly enough the answer is really quite simple. You, my reader, are already working on fixing the problem just by reading blogs like this. Spread the word that money is a bad yardstick to measure life by.
Don’t send your kids to $50K a year private colleges, send them to local community or state colleges, so they and you don’t need to take on debt. Does your kid want to study art? Send them to Paris for a year, which is much cheaper than paying for some private art college.
Instead of that new Toyota Camry, try a used Hyundai Sonata. If you have a little cash left over, you could buy a piece of art or funiture from a local artisan.
With a little creativity you can avoid most of the middle class trap in this country. The only price you pay for this, is that people will think you are a little weird. But when they see how much happier you are, they will start to wonder if they are making the correct choices.
Now I noted that you can avoid most of the middle class trap. The one notable exception is health care. I have asked my cat’s vet if he would treat me, but apparently the nanny state has deemed that illegal. It’s a shame as he offers much better service than any doctor I have seen at a fraction of the cost. If you have a suggestion on this one, I would love to hear it.
To conclude, just refuse to keep paying the ridiculous price of admission that the system keeps extracting, and society will change for the better.
39. Comment by Giacomo
This talk of boomers “cashing out” or “selling to each other’s children” is built on a false premise. “Boomers” are not a class, it’s just a made-up term for a section of a continuum.
“Couple that with the tendency of people over 50 to become ’self-employed’ and you have a huge increase in the number of realtors AND in the number of investor/fixer/flippers.”
Is there any evidence of this, or this just the writer’s hunch? Scapegoating “boomers” might be an appealing notion for many, but it’s too simplistic. Perhaps it’s more true to suggest that younger adults tend to resent and envy the accumulated wealth of their parents, with every generation.
40. Comment by Eric
Do any of you guys ever consider “monetary inflation”??? You do realize the “Federal” Reserve Bank is not “Federal” at all but rather 10 member banks. Our money is backed by nothing other than some very large guns. It is just paper! The days of stable value money are over. The days of gold-backed dollars are over. I have had $10k in a Utah bank since 2001. IT NOW BUYS ROUGHLY 1/2 OF WHAT IT DID WHEN I PUT IT THERE!!! And it has only earned $2k in interest.
Everything is now a rip-off, it just so happens homes are in there to. Do you really think “the good old days” of affordable housing are coming back? Come on! Be honest with yourselves…
So here’s the question, will higher interest rates drive down home prices or will it be monetary inflation??? Because historically monetary inflation always wins. And “monetary inflation” is a nice way of saying “the banking overlords who make your money ever more worthless by printing more and more money when they feel like it!”
41. Comment by joeyinCalif
Bubbles are not caused by particular banking systems, fiat money or gold, not due to credit or capitalism, nor to stock markets or anything of the sort..
They are caused by the basic human inclination to speculate.. to gamble.. in hopes of making an easy profit.
How to do it: Convince someone that an asset you hold is undervalued and is certainly a profitable investment. If you present a good enough argument, a bubble could erupt in that asset type.
More often bubbles are not due to a deliberate act.. Instead, some farmer notices a particularly beautiful tulip, never before seen in a field.. a genetic “sport” of such beauty it is fit for a King. The King pays handsomly for it and begs for more.. and the farmer’s field is suddenly paved with gold.
Bubbles have happened throughout human history under all sorts of governments and monetary systems, and always will.
42. Comment by Kime
”What I am searching for are the players and institutions that we could take action on to prevent a housing bubble in the future.””
The fallout from this bubble will be such that there will be no need to take any action to prevent another one for at least 50 years, or until most of the people who experienced this one are dead.
---------------------------------------
Let me start by addressing the last one and the fellow people who think those who need a lesson are about to get it and it serves them right. I am all for the FBs taking their lumps along with the personal responsibility of their actions. This is basically the 'what doesn't kill us makes us stronger approach. That might work on the playground, but as someone who has been in a major auto accident, I can say it just isn't true.
First, it ignores the human aspect of this mania. I try to keep an optimistic viewpoint about this matter, but I will go back to one of the biggest reasons I started this blog. That was my experience with the oil and RE bubbles in Texas in the 1980's. the aftermath was a true regional depression that took many years to recover from. Millions of people suffered greatly; families were torn apart, marriages destroyed, individuals committed suicide. Institutions were brought down.
The worst part of that era was the overall economic damage. Businesses failed for years and growth became collapse. It is hard to describe what it was like being a young business major at that time, except to say that it almost certainly dented the future for many aspiring enterprenuers and set back the careers of many.
I keep my mouth shut when I see people getting upset about bail-outs and other such injustices. For one, it doesn't do any good to worry, IMO, and two, when things got bad in Texas, nobody mcuh cared about those things. Everyone was so busy trying to keep their head above water and looking out for the little they might have that we didn't have much time for that. In short; it was painful, very painful, and I have great concern for what will happen to the lives of those around me and across this nation.
Which is why I am keenly interested in address this matter of preventing future housing bubbles. Whatever has been done has been done and we will see what comes of it. But in this age; with the high levels of regulation, financial sophistication and great wealth, I fervently expect that we can do better than to blindly stumble into such a disaster.
If the powers that be want to blow stock bubbles, etc, that is one thing. Although I am sure there are many who were devastated in that debacle. But to allow such a thing in a basic need like housing is inexcuseable, and demands rigorous effort to identify the source of the problem and try to understand what can be done in the future.
I don't doubt that the people in this country will suffer enough from this that a housing mania will not be repeated in a generation. But, surely we can do better than to willfully engage in a periodic depression, just because these institutions I have singled out refuse to do their duties and act in the best interests of the economy and the people in it.
Next: Why nothing can be done about the human element of bubbles.
"At the Indovina Bank on 39 Ham Nghi Street district 1, there were thousands shoving and jostling against one another to transfer VND200 million to Phu My Hung Corporation which is offering 300 apartments to only 1,000 'candidates.’"
"But will there be a time when the real estate bubble busts after reaching its saturation point and becoming stagnant? Meanwhile, the fever is on since it is still very profitable to buy apartments."
"A man waiting to transfer money at the scene told Sai Gon Giai Phong he earlier bought a $300,000 apartment which now costs $2 million. ‘There’s no business more profitable than this,’ another sitting nearby intervened."
HBB Nov. 2, 2007IMO, it is impossible to rid mankind of the greed and foolishness that accumpany and propel popular delusions like this housing bubble. And I see no need to address these traits as a way to prevent future housing manias from occurring. Market forces, if allowed to function, will punish the speculators and foolish lenders, and some will be wiser in the future for it. Note that many of the readers commented earlier that I was letting the speculators, ratings firms and MBS investors off the hook. Not at all, I merely suggest that we need not take any action for economic justice to be served.
Rather, what can be addressed by our governments and financial markets are the base elements that in this case layed the groundwork for this particular episode. I have narrowed it down to the three groups; congress, the Federal Reserve and the Wall Street investment banks. And I feel if we target their lack of accountability, we can will have the best chance of success at preventing another housing mania.
Our curious financial system.
Without going into the history of our currency and the central banking system, let me state what drove this crazyness. This isn't my creation and it is printed so often nowadays that it has become almost conventional knowledge: that the Federal Reserve drove down rates in an attempt to prevent of mitigate a recession in the aftermath of the stock bubble (also widely held to be created by the Fed's policys) and September 11th and the resulting economic problems.
To this I will add that it is one thing to lower rates and another to leave them there for as long as the Fed did. This prolonged period of negative rates is what caused this bubble to be so enourmous. For as soon as rates got near a reasonable level, the bubble popped.
That the Fed made a mamoth mistak with these actions is well known today. But the Feds people at the time often said it was impossible to detect asset bubbles and even so, it wasn't their job to pop them. I say balderdash. Is it not in the Feds mission statement to promote prices stability? And their defense to this was, they only target rents, which weren't rising significantly.
But with the ongoing carnage in the US economy today, I can only view this attempt to avoid the Feds responsibilty for the disaster with contempt. Of course the Fed knew something was wrong with house prices, as early as 1999.
Insert 1999 AG Fed minutes here.
And if Greenspan could see the disconnect in 1999, how could he continue to deny the even greater disparity between rents and prices by 2004 and 2005. But by the time he realized what was happening in 2005 and started warning in earnest, it was of course, too late.
And it isn't just interest rate policy that contributed to the housing bubble. The Fed has strong regulatory function which weren't applied. Recall the slow-motion 'guidance' that really wasn't even begun to be implemented until the bubble was swiftly losing air. And there are other sanctions that were left unused as well. Clearly the Fed failed in its duty to oversee the lending process as a whole and I believe history is already being experienced to clearly prove that, despite the Fed employees denials.
And then there is the issue of those Feds denials, often saying that the US couldn't possibly even have a national housing bubble. It was all local, you see. And now even AG now openly calls it a housing bubble and says that's what he meant by 'froth.' The RE industry took great glee in repeating his denials at every mention of a HB. So certainly, the various Fed talking heads gave cover and comfort to this speculative mania, even when it was at its most dangerous levels.
The question is then, for those who would like to see a system more proactive in keeping home prices stable and healthy, why didn't the Fed act?
As with the other partys I have targeted, IMO it is the lack of accountability at the Fed that best explains their failure. As on the famous 60 minute interview, AG can simply brush aside critisism with his words and no one can apparently challenge that. How can such a wealthy and financially savvy nation have the system on autopilot on the matter of asset bubbles? Surely it is someones 'job' to be on the watch, and if the Fed doesn't want the job, perhaps we need to trust that duty to someone else, and hand them the power that is needed to perform that function. Because with the developing train-wreck we now see in the housing market, it will be clear soon enough that something should have been done much sooner than the Feds anemic quarter point rate increases and limp regulatory actions.
If the Fed was simply required to have included the most basic of needs, housing, in its inflation targets, it would have been forced to raise rates sooner, and most likely would have taken real regulatory action sooner as well. But is tinkering with the models good enough? Can we really trust this organization to do what is right when it has failed so miserably and even now disavows any responsibility? I say no, they have enable the largest asset bubble in the history of man to form, and in an asset that will almost certainly result in more damage to the economy than any other.
So what am I proposing? Real reform. I don't think I am especially qualified to make the hard proposals for our firing of the Fed. But I am qualified to call for it. Think about what the Fed does; set rates, provides liquidity to the markets, gives boring speeches to congress. We can't organize some other aspect of the government to do that? And it should be one that can't hide behind its secrecy and 'quasi-governmental' status when it screws up. Make whoever is in charge of these duties accountable to the people, and we will have gone a long way to having found a prevention of any future housing bubble.
Final Fed link:
http://thehousingbubbleblog.com/?p=4029
From Reuters. “Former Federal Reserve Chairman Paul Volcker thinks the U.S. central bank is to blame for allowing bubbles to inflate asset markets, and says that current Fed chief Ben Bernanke is in a tough spot.”
“Critics blame the ultra-low interest rate policies of the final Greenspan years — when the U.S. central bank steered overnight federal funds rates to 1 percent and held them there for a prolonged period of time — for fueling the housing bubble.”
“‘Too many bubbles have been going on for too long…The Fed is not really in control of the situation,’ the Times quoted Volcker as saying, in clear criticism of both Bernanke and his predecessor Alan Greenspan.”
Begin Wall Street section:
From a post I did on November 12, 2007, titled "A Different Kind Of Demand"
http://thehousingbubbleblog.com/?p=3714#comments
The St Petersburg Times. “Mark Kowalick always knew that if he didn’t like where he was working, he could drive down the street near his New Port Richey neighborhood and find another job. At 39, he has been pouring concrete about half his life. It’s what he does.”
“Or used to do. He has been laid off for nearly a year, a victim of the housing slump. And there’s nothing down the street anymore.”
“It’s so bad, Kowalick said, that pawn shops have stopped buying the tools contractors use because they’re overstocked, and some of his friends have been forced to sell their most prized possession: their pickup trucks.”
“‘Nobody talks about what’s happening to us,’ he said. ‘It’s unbelievable that I’m reduced to this. I used to own my own concrete business.’”
“On Wednesday, Kowalick applied for a job that is housing-related, sort of, as a cook at a local International House of Pancakes.”
“‘This is the first time since I was 12 that I haven’t worked,’ he said. ‘Five years ago I could quit this morning and have job this afternoon. Now I don’t even know anybody who’s pouring concrete.’”
This is what I posted in the comments:
Comment by Ben Jones
2007-11-12 07:21:09
‘On Wednesday, Kowalick applied for a job that is housing-related, sort of, as a cook at a local International House of Pancakes.’
One of the reasons I started this blog (never even thinking the public would see it) was the memory of what happened in the Texas RE bust. Grown men with families were reduced to fighting for newspaper delivery jobs (yes, 5 applicants to each job that had been done by 12 year olds before) to try and bring in $20 a day. And to those out there who post how ‘we got this coming’ and how great this will be, try looking these people without a job in the eye and say that.
And for the main-street media here today, consider that as Mr Kowalick tries to find a way to feed his family this morning, Alan Greenspan is sitting down to his breakfest feast, waited on, limo outside to take him to his $75,000 speaking engagement. The housing bubble is not an academic issue. I wonder what you should report on today?
A quote found on the Press Democrat site:
Press Democrathttp://www1.pressdemocrat.com/article/20071111/NEWS/71109008/-1/SPECIAL&THEMES=MORTGAGE
"A long list of novel mortgage products are seen as vehicles that enable marginally qualified, highly leveraged borrowers to purchase homes at inflated prices. In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses." -Federal Reserve Chairman Alan Greenspan speaking to the American Bankers Association annual convention, September 26, 2005
The Investment Bankers aka Wall Street
The BBC"The scale of the losses that will hit Wall Street banks could approach half a trillion dollars as large numbers of sub-prime home loans go bad. And the carnage in the financial markets could cause a credit squeeze that will dampen economic growth for years to come."
"The US sub-prime crisis is leading to a wave of foreclosures across the US that is having a devastating effect on the US housing market, and is likely to lead to the halving of the US economic growth rate in the next six months."
"At the root of the problem is the breakdown of the new model of mortgage lending, when instead of giving mortgages directly to their customers, banks borrowed money from credit markets to fund a growing volume of mortgages."
"The big Wall Street banks and investment houses who are most exposed could find their profits, and much of their capital base, wiped out. To restore their profits, and indeed in some cases to remain solvent, they will be forced to sell off many assets and lay off many workers, as well as cutting the bonuses of their remaining staff and limiting their future lending."
"Meanwhile, fear has led the bond markets - through derivative trading - to cut the value of sub-prime mortgage bonds by an even larger amount. Since the beginning of the year, sub-prime mortgage bonds issued in early 2007 have dropped in value by between 20% and 80%, depending on their bond rating."
"Changes in US accounting rules which come into force on 15 November, known as FASB 157, may force the big Wall Street banks to come clean on the scale of their losses. In particular, it may force them to reveal some of the hidden losses which they have concealed through the use of off-balance-sheet funds (such as structured investment vehicles, or SIVs.) These are bank-sponsored financial funds which buy up mortgages - using money borrowed from the short-term commercial paper markets - bundle them up and then sell them to the bond markets."
"Thus the banks charge two fees - one at each side of the transaction - and officially have no risk, as they never owned the mortgages. But in practice, when these funds go bad, the banks are liable either to continue to fund them, or to repurchase the underlying mortgages."
"But why did it take so long for the banks and the mortgage bond market to realise the scale of the problem that sub-prime lending would cause? The main reason was that the new system broke the link between the lender and the borrower. The institutions who owned the loans - the people who bought bonds - had too little information about how dangerous they were."
"They relied on the ratings agencies to reassure them that the complex mortgage bonds they were buying were indeed investment-grade. But those ratings agencies did not understand how, under conditions of "stress," i.e., falling house prices, those bonds would fall in value. And since most pension funds are managed by several different fund managers who all compete with each other to get the best quarterly rate of return, there was a strong incentive to buy as much as they could of these supposedly safe yet high-yielding bonds."
"According to David Pitt-Watson, who manages the pension fund business at Hermes, the pension funds failed to exercise their rights to find out enough about what they were buying - or question the way the banks were run. And he says the system did not give the right financial incentives to encourage lenders to be careful."
"The system created challenges at the other end as well. 'Gone are the days when a homebuyer only went to the corner bank to take out a mortgage,' says US Treasury Secretary Hank Paulson. 'Today the mortgage system is disaggregated and less personal... a homeowner having trouble making payments does not know who to turn to for assistance.'"
"In addition, the new system of mortgage finance did not give the right financial incentives to ensure that proper checks were made on the individuals who applied for sub-prime mortgages. The banks who offered mortgages and sold them on did not care as much whether the loans went into foreclosure. They were paid a fee for selling the mortgage on, and another fee for servicing (collecting the loan payments), and even got additional fees if they had to foreclose."
"And there is evidence that the poorly-regulated mortgage brokers - whose job it was to check the income of potential mortgagees - and the home appraisers, who had to value the property - began to exaggerate both the income of their clients and the value of the homes, thus getting higher fees themselves. The sub-prime mortgage market in recent years was also accompanied by a deterioration in underwriting standards, says Fed governor Randall Kroszner. 'In some cases, abusive or fraudulent lending practices resulted in homeowners taking on mortgage obligations they could not afford, with terms they may not have fully understood.'"
"It is now up to the regulators and policy makers in Washington to correct the broken mortgage system - before the damage to home owners, banks and the US economy becomes too great. But whatever is done, it is bound to be painful."
MarketWatch Nov. 15, 2007"Securitization, hailed as the greatest financial innovation of the 20th century, isn't getting such rave reviews anymore after this summer's subprime mortgage crisis exposed some weaknesses. With global credit markets still in crisis, experts have already begun debating the benefits and the drawbacks of the process."
"Some say upheaval shows that the securitization concept has failed its first major test because it fueled excesses in subprime lending."
"Easy access to cheap money can encourage people and companies to borrow more than they should, exacerbating the usual ups and downs of credit cycles, explained Mark Adelson, co-founder of consulting firm Adelson & Jacob Consulting LLC."
"Adelson and other experts have also highlighted a major flaw in the securitization process that's been exposed by this year's subprime crisis. Mortgage lenders have been making riskier loans because they know that after they securitize, or sell the assets on to other investors in a securitization, it's no longer their problem."
"The 'originate and distribute' strategy may lead, and indeed probably has led, to reduced incentives for banks to undertake adequate assessment of credit risk at the time of origination, since the risk is to be offloaded later,' Malcolm Knight, general manager of the Bank for International Settlements, said in a September speech."
"Janet Yellen, a senior Federal Reserve official, said in September that innovations such as mortgage-backed securities may not 'spread risk as transparently or effectively as once thought.'"
"Even an industry group that promotes securitization admitted recently that the process has flaws. 'Occasionally, some of these techniques do not work as well as they are intended,' the American Securitization Forum said in a letter to U.S. legislators last week."
Reuters Nov. 15, 2007"A wave of recent ratings cuts may mark the start of nearly half a trillion dollars in losses for banks and pension funds, as complex securities bring the U.S. subprime mortgage crisis crashing back to Wall Street."
"Derivatives once heralded for spreading risk and underpinning the resilience of financial institutions are rapidly deteriorating, threatening to choke lending and driving up the risk of a U.S. recession."
"The latest concerns come from collateralized debt obligations, essentially giant bonds that can be backed by subprime mortgages, which are now seeing a trickle of technical defaults."
"In the past two weeks ago, more than a dozen such CDOs have suffered a technical default, triggered when the underlying collateral pool falls below a certain ratio, according rating agencies. Now there's increasing worry that default notices may lead to liquidations, pushing down prices of underlying assets and unleashing a cascade of losses."
"The figures alone are staggering, and increasingly hard to track. Losses to banks and investors from the subprime mortgage crisis may rise to $480 billion in coming years from souring mortgages, according to UBS AG."
From
my post on November 28, 2007. The Sweet Deals Are Turning Sour.
The Detroit News reports from Michigan. “Danny Stokes used to sell drugs, before he discovered it was safer and more lucrative to sell mortgages. ‘We are seeing people who two years ago were involved in drug trafficking,’ said Mark Bowling, supervisor of the FBI’s regional office in Macomb County. They slide into mortgage fraud, he said, ‘because it’s easier, it’s safer and the amount of profit is incredibly high. Once they’re in the mortgage fraud business, they see how easy it is.’”
“Inflated appraisals are so common that it’s almost impossible to accurately value properties in some parts of Metro Detroit, said Liza Manzella, a Shelby Township appraiser. Things are particularly bad, she said, in parts of Detroit. ‘You can’t find any in a whole neighborhood that aren’t fraudulent,’ she said.”
“Mortgage fraud was easy for Hani Mortada. From 2002-04, the Lebanese citizen went from a struggling part-time college student in Dearborn to a mortgage loan officer with $25,000 in the bank and a Cadillac Escalade in his garage. In those heady days, money came fast and the chances of getting caught were slim.”
“‘I knew (lenders) would not call to verify (loan information),’ Mortada told a federal jury in Detroit. His group of scam artists had ‘the best underwriters and the best banks — you would not even believe what they would do.’”
“Derek Brown knew Detroit had a problem when a grocery clerk he knew quit his job to become a mortgage loan officer.”
“‘Everyone was selling mortgages. There were mortgage offices on every block,’ said Brown, past president of the Detroit Real Estate Brokers Association. ‘One day bagging groceries and the next day selling my mother a mortgage? What the hell is that?’”
“Today, many of those sweet deals are turning sour. In August alone, there were 3,900 new foreclosure notices in Detroit.”
“‘There were people who couldn’t read or define a loan application who were selling $300,000 loans,’ said Emil Izrailov, who started his career selling subprime mortgages and is now chief operations officer of Kaye Financial Corp. in Bloomfield Hills.”
“On the other side of the table, home buyers were asking for loans that would have seemed outrageous a few years earlier. In Shelby Township, John Karpinki got a $650,000 no-money-down mortgage just 22 months after he was released from prison, where he spent 12 years. The home is now in foreclosure.”
“‘People would come in and tell me what kind of loan they wanted,’ said Nicole Jackson, who worked in the subprime market in Detroit for years. ‘If I didn’t sell them a loan, the person down the street would.’”
“In effect, mortgage lenders today act less like banks than like car dealers: Once a mortgage is sold, their interaction with the homeowner is done. Instead of making money on 30 years of interest, lenders make their money on closing fees. As lenders became further separated from the risk of bad loans, their goal changed: Quality didn’t matter; quantity did.”
“A lot of people made money on Ethel Cochran’s home during the years. After buying her home for $8,000 in 1987, Cochran now owes 14 times that amount — multiple refinancings larded with commissions have left her with a $116,000 mortgage she can’t repay.”
“Her latest lender took a $30,000 loss on the house. Her neighbors are losing money, too: Foreclosures drop the value of nearby homes.”
Hartford Business, Nov. 12, 2007"Connecticut’s perceived immunity to the nation’s housing market slump and credit crunch is over. Reports published last week by Boston-based Warren Group reveal that the tide is turning in the Nutmeg State. A double-digit decrease in home sales along with an alarming number of foreclosures — at 2,948 — in Hartford County alone, reflect the state’s fractured housing market. Statewide, there have been 12,575 foreclosures, with New Haven County hardest hit with 3,914 foreclosures."
"'We’re concerned because this is not a typical situation,' said Howard Pitkin, commissioner of the state’s Department of Banking. 'This is not something that has happened frequently in the state, and we need to address it.'"
"Back in April, Gov. M. Jodi Rell convened the Subprime Mortgage Task Force to specifically examine why the number of subprime loans increased so dramatically. The state stepped up its role in August with the creation of the Mortgage Foreclosure Assistance Hotline, which puts homeowners in touch with a housing advocacy agency or an attorney in an attempt to find a solution."
"The issue is clearly a top priority for Pitkin, who said that it is a 'lot easier to deal with a banking crisis than people losing their homes.' There are an estimated 71,000 subprime mortgages in Connecticut worth approximately $15 billion, and it is possible that up to 8 percent of those loans are delinquent, he said."
"The seeds that started the current financing fiasco were created during the fiscal climate that followed the Sept. 11 terrorist attacks, Pitkin said. 'It happened because the Federal Reserve brought about a credit scenario that had been unheard of,' he explained. 'Wall Street showed a willingness to buy pooled obligations, and mortgage brokers could borrow money cheap.'"
"Another contributing factor, according to Dagata, is that buyers also borrowed their closing costs, resulting in a mortgage that she describes as a '103-percent loan.' 'These are people who saw their mortgage payment go from $1,200 to more than $2,000,' she said. 'This has happened in Farmington, New Britain and Berlin. It’s not just isolated in the big cities.'"
"However, region’s urban centers have been hit the hardest. Pitkin points out that the largest number of foreclosures is concentrated where the greatest numbers of mortgages were granted."
HBB Dec. 2, 2007The Denver Post. "Housing-industry experts say there is plenty of blame to go around. Everyone collected fees, creating what Jonathan Tiemann, a California investment adviser, describes as a pyramid of little golden crumbs.”
“‘The machinery had been set up so the mortgage would be sold to other parties. At every step of the way, somebody got a fee and then figured they would be able to pass the risk on to someone else,’ he said. ‘Greed was a very important factor. All the players were pursuing an opportunity to profit from an ever-increasing volume of transactions. The game just had to keep going.’”
“A decade ago, these lenders occupied a tiny corner of the mortgage market. Jim Spray, a veteran Colorado mortgage broker, remembers that the first emissaries of this new industry showed up about 1995, seeking his rejects.”
“‘You don’t need to throw those loans in the trash can anymore,’ they advised. ‘Send them over to us. We’ll get them approved and funded.’”
“As the subprime business mushroomed, the loan quality ‘just got worse, progressively worse, until it imploded,’ Spray said. ‘I should have tried to get my cat a mortgage. I’m sure I could have.’”
“In 2000, subprime mortgages represented 2.4 percent, or $115 billion, of the $4.8 trillion in residential mortgages outstanding in the U.S. By mid-2007, they accounted for 14 percent, or $1.5 trillion, of a $10.75 trillion market.”
“Starting in the early 1980s, mortgages were increasingly combined and sold as bonds backed by house payments, said Sue Allon, founder of Denver-based credit-risk manager Murrayhill Co. A financial innovation in the early 1990s — structured finance — changed everything, Allon said.”
“Wall Street ingenuity repackaged subprime loans to attract investors by slicing them into securities with different levels of risk. The genius of this strategy was that it opened a giant cash box to the mortgage market by allowing mutual funds, pension funds, insurance companies and university endowments to buy the highest-rated bonds.”
“‘Securitization became a driver for new mortgage-product development, which increased homeownership and home prices,’ said Joseph Mason, an associate professor of finance at Drexel University who has studied risk in mortgage markets.”
“The subprime models, however, didn’t account for the day when home prices would stall and then fall, leaving subprime borrowers trapped with rising payments, said Sam Khater, a senior economist with First American CoreLogic.”
“‘The environment has always been very strong price appreciation. They never had the test of a tough market,’ Khater said.”
“For one lender that went out of business, ‘we were doing 100 percent loans for a wage earner with a 600 (credit) score and stated income,’ said Account executive Susan Mann, whose last employer was Option One.”
Begins:
Wall Streets' unaccountability and the housing bubble.
At this stage of the bust, I don't think anyone in the media or elsewhere questions the major role that the WS investment banks played in fostering the environment that produced the housing bubble, so I am going to move on to some details and how it must be fixed. But I will point out that it is in the high levels of finance that all three responsible groups converged to bring us the 'crisis' that is now a daily part of the worlds news.
The Fed, enabled by congress, has given these IB's a straight draw on the nations currency via the many 'windows' at bargain basement prices. They, in turn then fund various activities, including mortgages, related derivatives and other securites that have become the vocabulary of the housing bust. It was this money funnel that laid the groundwork for the increasingly insane lending that drove home prices beyond rational limits, and put these loans on the backs of so many who never had a remote possiblity of paying them back.
This was done out of pure greed. And despite the supposed altruistic organizations such as Fannie Mae and Freddie Mac, it was all done for profit. And WS's imagined invincibility and the false 'guarantees' of the government sponsored enterprises' as Fannie and Freddie are called, is at the heart of the unaccountablity that caused this disaster to happen.
FIrst. let me say, I believe the markets should determine the future of these bodies role in the housing market and that includes the securitivation of mortgagess. Given the freedom to determine winners and losers, the markets are perfectly capable of establishing a system that will function to the betterment of all.
But being the game-riggers that they are, the parties involved attempted to setup a system where they only profited with no or little possibility of suffering the inevitable fallout of their poor decisions.
All my life I have been told that the IBs and the GSEs are 'too-big-to-fail.' This disasterous notion is foremost in the reckless behavior we have witnessed. With their layers of corporations and multinational structure, the average citizen can only wonder at how the system really works or if any checks and balances are actually in place. A secretive Fed, purposeful over-complication and lack of transparency are the hallmarks of Wall Street and their environs.
So any solution muct involve a public and legal refutation of this to big to fail sillyness if we are to remove the possiblity of a recurring housing mania. And it would have the added benefit of preventing episodes like the stock bubbles as well.
How would this be accomplished? Congress must publically and by law make it clear that there are no taxpayer guarantees of a bail-out or other support should these financial behemoths lose theri shirt. It is only by the threat of failure that we can expect them to act as the rest of us act. Responsibly and with the knowledge that we will suffer the consequences should we be foolhardy.
This possiblity of failure also must be extended to the GSE's, because they give another layer of false 'guarantee' to the mortgage securitization process via the implicit versus explicit game the ratings agencies and WS have played with the worlds investors. There is no guarantee, yet it is repeated so often in corporate communications and in the press it is taken as a given. That must stop and on an official and statutory level.
If this seems simple, it's because it is. We need only return to a system of finance that places responsibility back on the shoulders of the decision makers in order to prevent the financing of a future housing bubble.
Congress, unaccountability and the housing bubble.
From
Further Reduction In Prices May Be Required
December 31, 2007
http://thehousingbubbleblog.com/?p=3949
The Wall Street Journal. “During the housing boom, the subprime industry succeeded at more than just writing mortgages. It also shot down efforts by some states to curtail risky lending to borrowers with spotty credit.”
“Ameriquest Mortgage Co., until recently one of the nation’s largest subprime lenders, was at the center of those battles. Working with a husband-and-wife team of Washington lobbyists, it handed out more than $20 million in political donations and played a big role in persuading legislators in New Jersey and Georgia to relax tough new laws.”
“Those victories, in turn, helped blunt efforts by other states to crack down on reckless lending, critics of the industry contend.”
“Executives at Ameriquest, based in Orange, Calif., acknowledge that the company lobbied heavily against state lending restrictions, but say that other subprime lenders did so as well. In fact, a host of subprime lenders and banking trade groups, including Citigroup Inc., Wells Fargo & Co., Countrywide Financial Corp. and the Mortgage Bankers Association, spent heavily on lobbying and political giving.”
“Federal lawmakers didn’t pose much of a threat to the subprime industry in recent years. Members of Congress received at least $645,000 in donations from Ameriquest and large sums from other big subprime lenders, Federal Election Commission records indicate. They debated new oversight of the industry, but took no action.”
The failure to oversee the subprime disaster is really only a small part of the shortcomings of the US congress regarding this financial mania. In actuality, it was this body who set up and allowed the various partys to conitinue to do the most egregious acts that we now know have caused so much havoc in the economy. And for this reason, I believe these public servants are the most to blame. And also, where most of the corrective measures need to be taken.
Consider this: the US congress is actually the enabler for the two groups which were the primary drivers of the HB. Wall Street and the Fed. Wall Streets unaccountability springs from the idea that these corporations are too big to fail and otherwise lax bureacratic oversight by the SEC, for example. The Fed is largely the body which would not allow these firms to fail, and is directly under the supervision of congress.
Who does Wall Street report to? Their boards of directors and shareholders. Who does the Fed report to? Congress. Obviously it is congress who is charged with being the watchdog of the other two, yet why then have they failed so miserably? Because they themselves are largely unaccountable.
And it is this circular nature of unaccountability that explains how such a large mistake could have been made. Everyone was supposed to fall under some system of checks and balances, yet in fact all were asleep at the switch.
Who is responsible for Fannie Mae and Freddie Mac? The OFHEO? The SEC? The FBI? The Office of the Comptroller of the Currency? I could go on. All of these organizations have failed to do their part and now are doing catch-up in the wake of the bust. It is clear to me that the primary failure leading up to the housing disaster was political one.
And look at the response during the presidential campaign of 2080. Candidates are falling over themselves to find way to keep prices from falling! Even as they ignored the real crisis, soaring house prices, while it happened. In fact, every single government program designed to make housing 'affordable' has actually worked to the exact opposite.
I could make a long case for getting the government out of the housing market altogether. But suffice it to say that to prevent a future housing bubble, one need only make it clear to our politicians that if they insist in meddling, they will be held responsible for the outcome. Make Washington accountable for housing prices and there will be no future bubbles.
Congress links:
http://thehousingbubbleblog.com/?p=4051
The Plain Dealer. “For almost a century, politicians from the White House to City Hall have pushed and prodded us to own a home. The result: Nearly seven in 10 families own rather than rent.”
“But now, as foreclosures throw tens of thousands of people in Greater Cleveland out of their homes, the question arises: Did government go too far?”
“Here are some of the ways government has promoted homeownership: The Federal Reserve Bank, which influences credit by setting the interest rate that banks charge each other, let mortgage rates remain at historic lows this decade, even as analysts warned that housing prices would flatten.”
“When the prices did flatten, many borrowers were left unable to sell because their houses were worth less than what they owed.”
“‘It was a bubble that had to burst,’ says Stuart Feldstein, head of SMR Research, a company that studies mortgages and other lending. ‘Nobody was paying attention.’”
“The federal government gives homeowners $150 billion a year in income-tax deductions and other tax breaks, says George McCarthy, who analyzes homeownership campaigns for the Ford Foundation.”
“That’s 4½ times the annual budget of the Department of Housing and Urban Development, the main government sponsor of low-income rental housing.”
“The income-tax deduction for mortgage interest gained luster in 1986, when Congress scrapped deductions for credit card and other consumer debt. Homeowners also were allowed to continue claiming credit for property taxes.”
“Mortgage guarantees, through the Federal Housing Administration and the Department of Veterans Affairs, let borrowers get by with little or no down payment.”
“The VA’s guarantee of zero-down loans for World War II veterans began the mortgage industry’s long slide into looser standards, says Tom Bier, a housing researcher at Cleveland State University.”
“Fannie Mae and Freddie Mac, federally chartered corporations, buy mortgages. That gives lenders cash to make more home loans.”
“Researchers say the pair served as models for the Wall Street-led secondary market that emerged in the 1990s and crashed a decade later under the weight of high-interest loans made to people with bad credit.”
“The federal Community Reinvestment Act requires banks to lend money in neighborhoods where they have branches.”
“Under pressure from regulators, banks grudgingly lent money in low-income and minority neighborhoods in the 1990s, and discovered an untapped market. In Cleveland, unregulated mortgage companies joined in and became dominant in neighborhoods where foreclosures now rage.”
http://thehousingbubbleblog.com/?p=4093
From Fortune. “The mortgage industry has officially replaced Big Oil as Washington’s favorite political punching bag.”
“But before our elected officials in Congress get too preachy about the lousy lending practices that led to today’s mortgage mess, first they ought to consider Congress’s own role in laying the groundwork.”
“The fact is, neither the expansion of the subprime market nor the proliferation of exotic interest-only or option-ARM mortgages would have been possible without federal laws passed in the 1980s.”
“Says Patricia McCoy, a law professor at the University of Connecticut: ‘Congress never likes to blame themselves, but in this case there’s no question they bear some of the responsibility.’”
“McCoy points to two key pieces of legislation that are at the root of the current mortgage crisis: the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Alternative Mortgage Transactions Parity Act of 1982 (AMTPA).”
“The former abolished state usury caps that had limited the interest rates banks could charge on primary mortgages, and, in the process, gave banks more incentive to make home loans to folks with less-than-perfect credit.”
“It is AMTPA, the 1982 law, that McCoy sees as most problematic.”
“Prior to the passage of AMTPA, banks were barred from making anything but the conventional fixed-rate, amortizing mortgages. AMPTA lifted those restrictions, giving birth to all the new and exotic mortgages that have so many borrowers in hot water today.”
“‘One of the problems was that there were no substitute regulations to make sure these new mortgages didn’t turn out to be exploitative,’ says McCoy.”
“Much of the grief being visited upon borrowers and lenders right now could have been avoided, she contends, if Congress had required that the underwriting standards on the new, adjustable-rate loans be applied not to the teaser rates but to the maximum rates.”
“All the problems that are rampant today existed on a smaller scale in the 1990s, which is why McCoy faults the 1990s Congress for not acting at that time.”
“‘Certainly by the late 1990s, Congress knew of the problems,’ says McCoy. ‘It had plenty of time over the past 10 years to do something, and it did nothing.’”
