A plausible summary of the housing bubble
Here’s Megan McArdle on how the housing bubble and resultant crisis happened:
In fact, according to a new paper by Fernando Ferreira and Joseph Gyourko, subprime loans accounted for only a bare majority of defaults at the beginning of the housing crisis. Between the third quarter of 2006 and the third quarter of 2012, twice as many prime borrowers lost their homes as subprime borrowers.
This is not a phenomenon that can be simply explained by liar loans, predatory lenders, or any other narrative that neatly loads all the blame onto a few greedy and heedless lenders, or a somewhat larger number of hubristic and speculative borrowers…
Once upon a time, there was a country with a housing market that started to rise. As the market started to rise, housing defaults started to fall. They fell not because people had gotten wiser about borrowing, or better at managing their money, but because borrowers in a rising housing market virtually never need to default; they can always simply sell the house, walking away with whatever equity is left over after paying off the mortgage.
Lenders loved this. “Splendid! If default has become less likely,” the lenders said, “we do not need to worry so much about things like down payments or credit histories. Who cares if they can’t pay the mortgage each month; if they get into trouble, they’ll just sell the house and pay us.”.
McCardle goes on to explain that requiring bigger down payments could have eased the crisis somewhat when house prices started to fall (or at least stopped rising), as they inevitably would. Why did the pundits and prognosticators and people making the loans not see that they inevitably would fall some day? Well, there was money to be made in the meantime, and lots of it, so the push was on. But McArdle lists another reason:
When prices had been in a long, gentle rise for decades, high down payments looked like expensive and unnecessary insurance against something that rarely happened. They looked like a barrier keeping historically disadvantaged groups, like minorities and immigrants, from accumulating wealth the way that prosperous native white families had. They looked like something that regulators and bankers had needed to require before they got so darn smart about managing credit risks, and credit markets.
Everyone, from buyers to regulators, had reams of data telling them this. Who are you going to believe: years and years of statistics, or some crabby dude muttering about the Great Depression? The Great Depression was so long ago that men wore hats and the Beatles were not even gleams in their fathers’ eyes.
It just so happens that I had grown up hearing—not “some crabby dude muttering about the Great Depression”—but my very own mother muttering about the Great Depression. The Depression was going full bore when she was in college. For her entire life thereafter, she remained a political liberal (FDR was the greatest, in her opinion), but you’d have to look long and hard to find someone more fiscally conservative than my mother was.
Her family had had somewhat of a financial cushion, and that helped them weather the storm of the Depression without extreme hardship. My mother got a job in Manhattan as a secretary when she graduated from college, and she lived at home with her grandparents and parents all in one house. But the fiance to whom she’d gotten engaged broke up with her when he graduated from law school and could not find a job anywhere (he ended up as a career Army guy). Other people she knew had to drop out of school—sometimes high school—in order to help support their parents and siblings.
Since my mother lived most of her life in the same community in which she’d grown up and I was raised there, I knew these people, too. They were pointed out regularly to me and their tales of woe told me by my mother, who was a colorful storyteller. It wasn’t the sort of thing you’d be likely to forget, and so I didn’t.
It was about Fannie and Freddie, the Street packaging mortgages into bonds then the Street levering up to buy the bonds the Street sold. Also about non-recourse loans. We don’t have non-recourse residential loans in NE.
The loans were all mixed and resold as a Seri active and the value of them was opaque and when the market ruined south those derivatives were deemed worthless. That’s what cAused the crash. If there had been no packaged derivatives with any subprime etc. and had their value been transparent, then there would have been a dip or recession. But t these derivatives poisoned the global financial system. China may well be doing the same now, as well as each and the Fed: poisoning the global system. We ‘re nearer a bigger crash than we are to a year of good global growth.
Only proof: of abiotic oil, the falsehood of co2phobia. Nanotech, fusion, and urea for most diseases can stop the global meltdown. And global war might come first. Via Iran and China and Putin.
Reliapundit:
I know that the tranches and derivatives were key to the more widespread crash, and I wrote a bunch of pieces about that at the time. But I think McArdle is just talking about the housing bubble and collapse, not the entire thing. At least, that’s my impression, and that’s what I was referring to in this post.
Chris Dodd, one of the big cash out denizens and creators of this pyramid scheme, is doing rather well at the MPAA. Cooking up more Hollywood propaganda to poison the minds of youths.
Not only proof. Only preventatives. Awtoe kRectsux.
One reason why prime loan defaults occurred in large numbers was that too many people had used rising housing prices as a way to borrow against their increasing equity. When the Fed increased rates to 8.25% in June of 2006, it was the beginning of the end of the housing boom. Buyers became scarce because mortgage rates were high as it became a buyers market where prices began to decline. Jobs in construction declined and other jobs soon followed. People with big mortgages and equity loans found they were underwater. If they lost their jobs or had a hiccup in their financial situations they had to sell into a buyers market. If the could not sell, they had to default. It was like a house of cards collapsing.
Interestingly enough, the effects of the housing crash are still visible in most parts of the country. I’m shocked whenever I peruse the bank-owned houses for sale in the Puget Sound area. The crash began in 2006, but the inventory of repossessed house is still being worked off. I’m not sure how much wealth evaporated during the crash, (I know it was enormous) but IMO, until the bank-owned housing stock is completely liquidated, and job growth picks up (we are still barely skating above the 1% growth rate) deflation will be the primary force in the economy.
neo…
McArdle missed it.
The BIG THING that triggered this revision in thinking was a thought piece// White Paper cranked out late in 1992 which was made policy relevant during Clinton’s first term by the Federal Reserve Bank of Boston.
This scarcely known or acknowledged document was the ENTIRE intellectual underpinning fro the change in the Federal Reserve’s regulatory policies that permitted everything McArdle has laid out.
https://www.bostonfed.org/economic/wp/wp1992/wp92_7.pdf
It was so significant that it was vetted:
http://content.knowledgeplex.org/kp2/img/cache/kp/1231.pdf
The above documents are the foundational rationale for the radical swing in policy.
Everyone here needs to download at least the top pdf — and spread the news.
It took years for this policy paper to move through the system…
The BIG policy shift occurred in synch with Bill Clinton’s impeachment proceedings.
The President used Jamie Gorelick ( yeap ) and the rest of his tight crew to pressure the big banks into lending large into the Liberal Democrat states// big cities as a sop to get a total party line support in the Congress. Yes, House and Senate.
Lending standards changed over night as one by one the big banks were assured that ( by Rubin, BTW ) that the US Treasury and Federal Reserve would have their backs — and that they would be compensated by ‘reforms’ — namely the elimination of Glass — Steagall.
“Glass-Steagall was chipped away over the years and eventually repealed during the Clinton Administration with the Gramm-Leach-Bliley Act of 1999.” Google
This repeal went through Congress as fast as Rubin could carry it.
I hope that by now you’re putting the pieces together.
Jamie Gorelick was soon posted to Freddie Mac — to pick up $35,000,000 while bankrupting it.
The debacle that blew up during Bush’s second term was set up by the above sequence.
The Clinton machine established the predicate for a mortgage lending mania by assuring the big banks that they could off load their exposure onto the Federal government via various complex mechanisms that the general public would never comprehend. But the bankers did.
This sequence also involve massive “control fraud.”
This is when the “agency problem” permits those running the store to loot it against the interests of the true owners.
Think of this as macro-embezzlement. The damage is done first – before the victim even realizes that he’s being leached.
But, this is a macro-embezzlement — that is national in scope — is system wide.
The regulators have gone “on the pad.” ( Gangster speak )
The EXACT same phenomena is under way with BHO’s atomic policy fraud. All of the advantages are front loaded into his final days in office. All of the agony is back loaded into the next GOP administration — and that of the Israelis.
That sophisticated Jews are falling for this epic fraud informs us that smarts aren’t everything.
Group think and social cohesion override all knowledge, legacy, and logic — for at least half of any given population… the touchy-feely set.
Something about using ‘feelings’ as a policy guide for highly involved and complex political-economics.
Disaster is the inevitable result.
Rubin’s reward was a no-work job that paid $1,000,000 per MONTH at Citicorp.
He didn’t even rate a secretary, though.
He never had to keep regular hours — heck — even show up.
The final payola surpassed $ 125,000,000 last I checked.
THAT’S control fraud. Rubin belongs behind bars — right next to Corzine — another super-thief.
Corzine looted New Jersey. He destroyed its finances. The juice went to his cronies.
I think the home equity loans had an impact on the collapse, similar to the impact of trading on margin and then the market drops and your loan is called.
Also, consider the influence of HGTV and all of those flip shows. I wonder how many people upgraded their homes just to keep up with what was being shown on TV, putting the expense off to the future with the home equity loans.
I agree with JJ and I think the home equity loans had an impact on the collapse, similar to the impact of trading on margin and then the market drops and your loan is called.
Also, consider the influence of HGTV and all of those flip shows. I wonder how many people upgraded their homes just to keep up with what was being shown on TV, putting the expense off to the future with the home equity loans.
Sorry for the duplicate entry….typing on tablets can be frustrating.
liz,
I remember seeing those flipping shows when I visited home. I found them disgusting, but they obviously had some effect on dumb people.
McMegan is usually pretty perceptive on finances but she’s almost always has an Underpants Gnomes view of how people decide to make mortgage payments.
1. Is my house underwater?
2.
3. Default!
She notes that negative equity is more correlated with default than down payments but never explains why that occurs. Unless you are going to make an assumption that every negative equity default is a strategic one, I would expect some kind of discussion of the mechanism by which negative equity triggers people to stop paying mortgages. Possibly negative equity makes it harder for people to weather a temporary financial bind via HELOCs, or is more likely during an economic decline that causes people to lose jobs for longer periods or be unable to find a comparable salary to their old one. One doesn’t know from any of her articles on the housing crisis.
There’s also the matter that your house has to lose a lot of value to go underwater if you had 20% equity the day that you move in. She doesn’t site the actual correlation values of negative equity vs down payment but I have a suspicion that the difference isn’t that striking. People who can put down a sizeable down payment would seem to be in a better position to weather a downturn without defaulting on their loan. They probably have better spending and saving habits, as evidenced by their being able to make the down payment.
Actually, no – not quite – or rather, this is only a smaller part of a larger story.
To frame it properly, ask yourself this: why did the US have a banking crisis in 2008? And one during the Great Depression? While our neighbors to the North did not? In fact, in both crises, not a single bank failed?
I asked a professor of finance this question after she spoke on the 2008 banking crisis – and she had no answer.
But now we do. And the answer is that the US had made the dpolitical ecision to have a more fragile by design banking “system.”
This is the compelling thesis in the detailed comparative financial and banking history of the same name: “Fragile By Design-The Political Origins of Banking Crises and Scarce Credit,” by Calomiris and Haber (2014).
And contrary to blert, these direct political origins go back earlier through the 1980s – with precedents going back to before the founding of the Federal Reserve Bank, in the populist era.
The ‘bargain’ or compromise then struck was to have a more divided banking system, on the socialist idea that local banks would be more responsive to farming and rancher’s needs than better diversified – and therefore larger – banks.
By 1920s, the US became more urban than rural. And between the 1970s and ’80s, this politically priveldged rural group was suplanted by the urban racist-hustling one that irks us so, today.
From these recent origins came the political levers designed to root out “racist” barriers or home ownership, and therefore though political regulation, FORCED banks and lending institutions into NINJA loans and other anti-fiscally conservative lending practices.
Standford University historian (and economist and poli-sci prof) and Columbia University Business School economist Habernail and Calomari, respectivly, nail their case by contrasting the US experience with Canada and Britain’s after Thatcher’s reforms in the 1980s, making London as a financial center newly competitive again against NYCs dominance, by having a banking system more resistant to political corruption.
Furthermore, they compare these nations with Mexico’s and Brazil’s banking systems – which do considerably worse than the US does – in depth, as well as with other systems gone over more lightly.
The result is a clear and compelling case study that these historic set-backs for American capitalism have been the products of too vulnerable political bargaining, tragically weakening the system, and eventually failing. Therefore, today, black home ownership has reversed to levels not seen since the 1970s, making the “cure”certainly worse than the purported “disease” of “racism.” But who can stand up to these race mongers?
This realization and correcting the Democrat doubling down on ‘Too Big To Fail’ – which is sure to be worse one day – now becomes one of the most Herculean challenges of a any Enlightened new presidency. One likelier to be incomplete and fail than not, given past American experience.
Yet it need no be so. And the world will be poorer for our failures – as they already are because of our out-sized world-wide dollar economy.
One of the leading US economic history textbook authors, Hugh Rockoff from Rutgers University, shares his lengthy and convinced review of “Fragile By Design,” HERE
http://eh.net/book_reviews/fragile-by-design-the-political-origins-of-banking-crises-and-scarce-credit/
For those of us that were not too sure what a non-recourse loan was.
With a recourse loan the lender can come after your other assets if the sale of the collateral put up for the loan does not cover the loan .
“A non-recourse loan does not allow the lender to pursue anything other than collateral. Non-recourse loans create the most risk for lenders. Because they can only collect the collateral – and nothing else, they want to see lower loan to value ratios to reduce their risk. These loans may have higher interest rates than recourse loans.” (But that would be red lining a particular area or group of people. And that is a NO-NO)
Speaking of Loans: I wonder what the holders of our 22 trillion in debt will be able to collect on when things get back to normal?
Here is an example to keep in the back of your mind when we the working ants are asked to dig deep and support something for the grasshoppers because it is the “right thing to do”.
Lets say we get back to a normal interest rate of 3-4% like it was when I was growing up in the 1960’s. Lets use 3%
Since there are no good numbers on the number of working ants in the US, lets look at this in terms of total population- working ants and freeloading grasshoppers. While the population of the US is estimated to be 300 million. But lets use 330 million to account for the working ants and grasshoppers. This would give us a lower cost/person to avoid being called “Chicken Little” 🙂
So 22 Trillion*.03/330 million = $2,000/yr for every person in the US, (man, woman, child, working ant, freeloading grasshopper)
Or to put it another way- in 2014 the Feds took in 3.2 Trillion $$. At 3% the interest charge/yr is $0.66 Trillion or 20% of the cash coming in would go to interest payments and this doesn’t address the 100 Trillion in unfunded liabilities that are on the books (SS payments, pension payments etc.)
So when the “boy king” wants to take in another 100k people from the “peaceful” middle east or when we spend 56 million to train 4 or 5 Syrians to fight ISIS ask yourself who is going to pay for it?
This doesn’t have anything to do with being a racist, a bigot or a Chicken Little. It has to do with simple math. 2+2 will always = 4 no matter what the people on the Left demand. And of course this assumes that Iran will not tip the chessboard over by sending the Great Satan an exploding present some time in the future. When that happens, perhaps Gary Larson of Far Side sums it up nicely
http://www.pitt.edu/~super1/lecture/lec11361/002.htm
Oh, and I happened to run across an old school picture that was taken of all the leadership in Congress and Senate, It also sumes things up nicely 🙂
http://www.ebay.com/itm/Midvale-School-For-the-Gifted-Keychain-The-Far-Side-Larson-/121516520583
I’m off to do some fishing while I still can 🙂
The bridge was rigged to collapse.
It was no accident of the wind.
2+2 will always = 4
Objectively true, but doesn’t take into account relativity or what happens when different perspectives apply.
Such as 2+2 does not equal 4 in trinary or number systems that count to 10 every time 4 is reached.
I was looking for a place (in northern CA) at the time. Some tiny condo in Vallejo was going for like $200K. Anyone, ANYONE! was crazy to pay that, but people did. I kept thinking of the tulip thing… I never did but anything put there — moved first.
Orson …
Talk about inverting everything.
The crisis was solely concentrated in the Big Banks not the small ones.
It goes STRAIGHT back to the drastic policy shift mentioned above — that White Paper.
IT changed policy.
It was constantly referred to when the new standards were drafted — in the Clinton years.
Clinton — and Gorelick — totally changed the program that had been initiated in the Carter administration. In financial terms, the old act barely moved the needle.
Leave Canada out of it. She’s headed for her own hyper-collapse — dead ahead.
Recourse loan structure will NOT stop the Canadian implosion.
Bubbles just don’t work that way. They implode no matter what the paper work says.
c.f. Red China. Yes, its implosion is ‘illegal’ — too. Even arresting every big player in the game is not stopping the implosion in their stock markets.
Heh.
Canada didn’t even have the super boom in the twenties that America had — because Canada was not a major expanding manufacturing power… which was where the boom was.
She was at all times strictly a resource export driven economy — and a branch plant for Detroit.
THAT’S why Canada didn’t have the default rate of Americans. It never experienced the super credit expansion. No banker would extend super leverage to a Canadian farmer — with commodity prices getting softer year by year.
If you really want to know where the extra money came from that made the Roaring Twenties — roaring — it was Ford Acceptance Corporation — which was cloned by GM, Chrysler and every major American corporation. FAC was founded circa 1920.
The typical financial historian utterly misses the significance of this entirely new financing scheme and its effect on the national money supply. De facto, these outfits became national banks — without any retail deposits. This had never, ever, been seen before.
The Federal Reserve, at that time, was clueless as to the significance of these credit granting machines. Whereas their impact was epic for all the ages.
They’ve figured it out by now. Hence the pressure to keep rock bottom lending rates and credit standards for auto loans at this very hour. The Fed does NOT want to see GM and Ford tightening credit. The pressure is on.
Back in the Roaring Twenties, the Federal Reserve System had absolutely no legal ambit to cover these huge financing engines, BTW. They were non-bank banks.
Read the pdf from Boston.
Then open your mind.
Until this White Paper, hyper liberal credit standards didn’t have a leg to stand on. Afterwards — well we all know how that worked out.
Bigger down payments would not have helped in many scenarios. If we are going back to the original ‘rule’ when I was a young adult: you put 20% down before you buy a house. Many homes lost much more than 20% of their value…and many people who had quite a bit of equity in addition to the down payment lost their homes.
The biggest problem was that banks did not do their due diligence when courting borrowers. They lent money in a risky fashion…because they thought the couldn’t lose (with home prices escalating so rapidly). There were no-doc loans, no down payment loans, interest-only loans, etc.
I used to trust that when you heard the bank underwriter approved you for a loan, that meant they did their research and decided you were not a risky borrower. Instead, underwriters approved loans that should NEVER have been approved. Know of several instances when this happened.
“Smart Jews.” The general impression is that Jews are smart, and I have had quite a few Jewish friends who neither said nor did anything to dispel that impression. The good-natured ribbing “insufferable” has been known to pass my lips. However, in the days when the Jewish community in Austin was rather small, there was one guy, Morey ____ whose stupidity was legendary. All the merchants on Congress Avenue, Jewish and Gentile, had a rich fund of Morey stories. Forty/fifty years later, it was my rare privilege to care for several of these folk in the hospital. They made my day quite a bit brighter with their fund of Morey stories. Morey’s more intelligent relatives picked up the slack from Morey’s brain, so he nor his kids never suffered greatly. However, it is noteworthy that none of his descendants are currently in business nor a profession in Austin. If he had lived, I have no doubt that Morey would have bought a Tranche- bond. (AKA tranche bomb)
Do not divulge your credit card or debit card details
over a phone call, even if the person claims to
be from your bank or a reputable company with whom you have done business.
This could be a sure sign that someone else has applied for credit in your name.
The statements that most apply to you are typically
hidden within confusing words and phrases.