Compassionate subprime conservatism

At times like these, the bumper sticker wisdom rings true. "If you're not outraged, you're not paying attention."

As I've been saying:

Providing mortgages to low income people was not the actual problem. The actual problem is the imaginary securities market.

However, if the actual problem was 'who got loans', as Republicans seem to be insisting, the Republicans are just as guilty of that as the Democrats.

Yeah, the Democrats forced equality on loans, which only is a problem if you're, you know, a racist who thinks equally risky loans are more likely to fail if they are to people in specific zip codes.

Meanwhile, the Republicans ran around yammering about the 'ownership society' and loaning people money so they could could cover their down payment. A lot more people got loans they obviously couldn't afford because of Bush's little initiative, or because of deregulation that deliberately didn't cover down-payment loans (Which were, IIRC, supposed to be illegal.), than via the CRA's anti-redlining provision.

Of course, as I said, loan failures are not the cause of this mess, the total irresponsibility of the banks in their magical unregulated securities market is, which is entirely due to Republicans...but whatever.

Be Wary. This is very old story. Weicher hasn't been FHA commissioner since at least 2005. It's a wonder how this got into the mix.

"Yeah, the Democrats forced equality on loans, which only is a problem if you're, you know, a racist who thinks equally risky loans are more likely to fail if they are to people in specific zip codes.

No, it's that a larger percentage of non-asian minorities are loan risks. If that's racist, then Nature is racist.

Of course, as I said, loan failures are not the cause of this mess, the total irresponsibility of the banks in their magical unregulated securities market is, which is entirely due to Republicans...but whatever.

If the loans didn't fail, would the magical unregulated securities market have been a problem?

Well, just gotta say that the two mortgages I've been had so far had low down payment features that allowed me to get into home ownership at low cost.

I've never missed a mortgage payment, and I'm not even Asian.

Here's the thing with the whole "we made it too easy for those unqualified minorities to get into houses". My parents live in an almost completely white suburb. The median home price is somewhere north of 375K or so. Right now, in a town of about 15,000 there are over 500 homes in foreclosure. Almost everyone who bought or refinanced a home in the last 5 years w/out a good down payment are upside down. In the nearest major city and minority suburbs where the people who were meant to be helped by these programs live you can get a house for about $120K, often much less. Which means that 3 of these home buyers would have to go into foreclosure to match the loss caused by one person in my parent's suburb. I heard a report last year about miami-dade county where there are dozens of multi-million dollar homes that hadn't had payments made on them in over a year. Apparently those in the know realized that there was such a backlog on foreclosures in the county that it could take up to 3 years to get to them. So if they got into some financial trouble, they just stopped paying, enjoyed the amenities and hoped their fortunes reversed before the bank could get to them. You can buy quite a lot of homes in a lower-income minority neighborhood for the price of one 4 million mansion in default. So before we start hearing about all the minorities who took out bad loans, let's take a realistic look at the losses caused by those loans vs the losses caused by no small number of richer people who bought homes with nothing down as well. I'm pretty sure it's not the single mom who bought a modest home with no money down who accounts for most of the money lost.

A few thoughts:

1. Private-label securitization did contribute to the housing bubble/crash, in the sense that it a) created agency problems by allowing mortgage originators to divorce themselves from the default risk of the loans they made; b) lubricated the flow of capital to those same originators (who would otherwise have had to rely on some other, possibly less convenient, means); and c) aided & abetted the erosion of lending standards (which securitizers could've discouraged simply by refusing to buy sufficiently dodgy loans (as Frannie traditionally did.

That being said, securitization wasn't the sole cause. Housing bubbles have occurred before; ditto bank busts from mass defaults on crap loans made during said bubbles. The root cause of all this was the mass insanity of lenders, borrowers, securitizers, investors, & regulators all presuming that housing inflation would continue indefinitely. (To repeat): If one believes such insanity, then - securitization or no - even loans guaranteed to default become a rational business proposition, since the collateral seized in foreclosure will still be worth more than the money loaned out.

All that being said, I tend to prefer the Danish system of mortgage finance to our current securitization model.

2. Low/zero DP: DPs serve multiple purposes. It's a test of frugality; it suggests that a borrower possesses both the means & motivation to take on a long-term commitment like a mortgage. It also ensures that a borrower has some "skin in the game", by increasing the probability that the borrower will have something to lose from "walking away" from his mortgage. It is unsurprising, therefore, that as a borrower's equity turns negative, the probability of mortgage default increases. And the higher the DP, the lower the chances that a given episode of housing deflation (some of which _aren't_ hundred year storms like the current one) will wipe out one's home equity.

Note: we're talking probabilities here. It's quite possible that someone - e.g., John E., above - could take out a low/zero-DP loan, and never default.

This observation applies to lending standards in general, BTW: while it's nowhere written that someone taking out a NINJA loan is guaranteed to default; but it is more likely than with a conforming loan.

BTW, it is possible to do subprime right. See, e.g.,

slate.com/id/2204583/?from=rss

calculatedrisk.blogspot.com/2007/11/what-is-subprime.html

3. Interest rates: I suspect the Fed's rate cuts contributed to the bubble, but (again) they were not the only factor. There's also the enormous flows of foreign capital that we imported over the past decade, which pushed down long-term interest rates & encouraged domestic economic actors to seek out more risky assets. More here:

blogs.cfr.org/setser/2008/10/21/the-end-of-bretton-woods-2/

meh
If the loans didn't fail, would the magical unregulated securities market have been a problem?

Yes, damn it! Warren Buffet's been warning about it this entire time, calling them weapons of mass destruction!

In fact, it's a problem now and failing loans aren't one. (Except for people who have lost their house.) Anyone who thinks this problem is due to home owners defaulting on mortgages is entirely, utterly, wrong.

The problem is that banks created a house of cards by trading imaginary money for imaginary money and securing it with yet more imaginary money that no one understood, and AIG insured that with money that in theory existed but not actually, but luckily it was insuring money that didn't exist too.

Oh, and their actual money ended up in there, too. No one can find it or knows whose it is now, though.

If a few mortgages now failing hadn't toppled it, it would have been mortgages next week, or a slight recession the week after that, or declining house prices in general, or a shift in the international markets, or any of a billion different things.

Blaming the mortgage crisis, which is a crisis in its own right, but not the one we're having to bail out banks for, for that crisis, is like blaming the guy who walked by a house of cards for knocking it over because he was 'too heavy'. Yeah, his shaking took it down, but it was a damn house of cards! It was going to fall over!

In the real world, when housing prices decline, banks get injured. Injured, not killed. Multibillion dollar banks do not crumble when a tiny fraction of their loans go bad. Credit markets do not freeze up.

In a world without this imaginary securities market, we might have had to bail out Freddie and Fannie, and a bank or two would have gone under, bank stocks would have tumbled, and...that would be it. It would have ended months ago.

No, this collapse is due entirely to what banks invented in the last decade to make money out of thin air.

Kristen M wants to blame it on the Fed and their low interest rate. That, obviously, was an incredibly bad idea, and they do deserve some blame too, but mostly it was completely unregulated banks.

David TC - not entirely sure what you mean by "imaginary money". If you're referring to CDS, well, I'm not sure how much they contributed to this crisis. Certainly they brought down AIG, but as I understand it, they were the exception rather than the rule (*); e.g., note that - to the surprise of many (myself included) - CDS on Lehman & Frannie were settled largely without incident. I suspect CDS might be an issue in the future, but AFAIK, most of the trouble to date has come from other sources.

If you're referring to private-label MBS, CDOs, & other structured securities...I tend to agree that these did much to complicate this crisis. They did distribute risk away from originators...and onto God knows who else (appears to be mainly I-banks & various foreign banks). This redistribution of risk, plus the opaque nature of these securities, has led to the loss of market confidence in bank balance sheets, and hence to the ongoing credit crunch.

That being said, crap loans (**) were still an issue. Even in an alternate history without securitization & CDS, but still featuring the housing bubble & enormous volume of crap loans (subprime, Alt-A, stated income, etc) of OTL, we'd still be facing a financial crisis. Only difference is, the casualties would be mainly commercial banks insured by FDIC. Think the S&L debacle, writ large.

(*) portfolio.com/views/blogs/market-movers/2008/10/19/why-the-cds-market-didnt-fail

(**) The loans were crap not necessarily because of _who_ got them. While many borrowers of subprime, Alt-A, stated income, low/no-doc loans may indeed have been non-creditworthy - in the sense of lacking adequate income, assets, and/or financial discipline to make them good credit risks - others were probably quite capable of handling a loan with a lower rate and/or smaller balance than they ended up with. And even a mortgage to someone with good capacity & creditworthiness can still end up dodgy if made against inflated collateral.

I'm still trying to figure out what the point of this is.

To re-hash the business of subprimes? To what end? To blame Bush? To blame Bush, after all that had gone before and after him, his bit in this is miniscule, so... again, what would that be for?