Whose fault is housing crisis? People/banks/gov't?

honest wrote:

Probably going to get flamed for this.

No, you won't get flamed. As Flagpole said, you are responsible. The problem is deeper than that, though. See, you got financially ruined (hopefully you had a safety net like family, etc). The banks made money off of your financial ruin, though. They get the money back interest free, then they will probably lend it back to you at 25% when you take out a line of credit to pay your debts. You go deeper into debt and they profit.

Is that fair? Hell no. They took a bet on you, too. They lost, but wait... they didn't lose b/c the system is rigged.

Does it make sense now?

I am not saying you should get your house back. I am not advocating entitlements at all. I am saying that the bank should suffer too. They knew you were a huge risk.

If it is a win/win for the banks, how is that a free market? It isn't. It is not capitalism. It is a damn oligarchy.

Flagpole, you are a smart man, you have to see this... It is right in front of you.

agreed...if you look at the timing of the collapse its impossible to see how the CRA had any effect what so ever but it's a nice talking point (gov't bad, banks good) so it gets repeated despite being debunked

agip, it's a complex problem with no easy answer, but the net of culpability can be cast far and wide. The Federal Reserve is one of the main culprits, because of their constant tinkering with the price and availability of credit, thereby obfuscating transparency. The GSEs get their fair share, because, even as they didn't necessarily hold sup-prime mortgages per se, they also distorted the availability and price of credit and were levered at 50-1, compared to the banks at 30-1.

What's ironic is that, as much blame as Greenspan (and Bernanke) deserve for creating bubbles that pop by not restricting margin and then having to reinflate them, Greenspan was the only one pounding the table for Congress to rein in Fannie and Freddie and to get its own fiscal house in order, including entitlement restructuring. Go back and read the semi-annual testimony from those days. It's all in there. I knew when Fannie had to restate four years of earnings circa 2000, costing Franklin Raines his job, that that was only the first cockroach and more would be coming.

The government also chartered only three "legitimate" ratings agencies, with S&P being the primary caretaker, thereby creating a ratings cartel and eliminating competition to rate debt accurately, setting up conditions ripe for nepotism. Then there's the good old SEC that missed all of this, despite the fact that Sarbanes-Oxley was supposed to prevent a massive crisis like this in the wake of Enron, especially after Clinton repealed Glass-Steagall. The government also made a huge mistake in finding a suitor for Bear, creating moral hazard for Lehman, and picking winners and losers.

While, no doubt, predatory lending existed, very few people are really "victims" here. Most either were reaching for too much house they knew they couldn't afford or buying rentals on the cheap, hoping to become real estate tycoons. Again, if credit wasn't so widely available and cheap or loan-to-value ratios were required to have a basis in reality, we wouldn't be here. I can recall a piece in the L.A. Times interviewing people who were purchasing 600,000 houses on very low income. When asked why, the typical response was because the homes would appreciate $200,000 over the next year. Again, simple greed. Not everyone can afford a home, and social engineering will never change that simple fact, only exacerbate problems in the long run.

I would even go so far as to say that the mortgage interest deduction added to price inflation in the housing market, though it took decades to build up. We need serious tax reform in so many ways. This push for the "American Dream" that's led to suburban blight has made us susceptible to the perfect economic storm and created many of the social ills prevalent today rooted in jealousy, the ego, me-first, keep-up-with-the-Joneses attitude, divorce, cultural depravity, etc. "Dream" is and always was the operative word. Even our poor, which need some kind of a safety net insomuch as it doesn't foster total disincentive, live better than 90% of the world, which is rapidly trying to catch up and achieve our "lifestyle."

Now, while financial engineering and CDS aren't evil in and amongst themselves, there's no doubt that many of these banksters spliced, diced, and repackaged crap, sold it off, and took the other side of the bet. On the other hand, those buying specific tranches of the debt knew or should have known the risk involved when buying a specific, risky tranche, such as a Z-tranche. Again, they were reaching for yield. I have friends who worked for some firms repackaging debt and not taking the other side, working under the assumption that the credit agencies had rated the loans properly. The biggest problem is that these CDS were never traded on a third-party exchange with a transparent clearing house, not the CDS themselves. And while I understand why some in the industry would adequately oppose just such an exchange, I think it is necessary.

At the end of the day, I liken it to a campfire. The government set up the firepit and kindling, complete with lighter fluid, greed amongst individuals and predatory lenders lit the match, and the big banks poured gasoline all over it, starting a forest fire. Fannie and Freddie are paying exorbitant bonuses, but still have their hands out for more taxpayer money. They should've been nationalized and/or shuttered. The big banks should've been allowed to fail or take massive haircuts and the debt should've been restructured properly, but it still exists in the form of Enronesque off-balance sheet entities. And Ginnie is still subsidizing FHA loans. The circus plays on.

Here's a decent take on why Wall Street doesn't deserve all of thge vilification it's getting and, as a I said before, we have strange bedfellows in Washington. That's where much of the protesting should be. Just look at the pie chart, if nothing else, but it's a short article.

http://news.investors.com/Article/588856/201110201854/Wall-Street-Did-It-.htm

and it's happening again:

The Los Angeles Times today noted that investors are pouring money into car dealerships that provide high-cost loans to those with poor credit. The dealers are assembling these loans — about one in four of which defaults — into securities, selling them off much like subprime mortgage securities were sold around the world. In fact, “in the last two years, investors have bought more than $15 billion in subprime auto securities.” The Times noted that “although they’re backed mainly by installment contracts signed by people who can’t even qualify for a credit card, most of these bonds have been rated investment grade.

The subprime auto securities are receiving AAA ratings and being sold in the same manner as the mortgage-backed securities that lead to the 2008 financial crisis.

I also want to point out that I am not anti-business. I own a business. This corruption is BAD for business. Smaller banks are suffering. Smaller banks cannot lend b/c their credit isn't backed by Obama and the Republican Congress.

If you are lending money to someone, are you going to choose the industrious little guy (and by "little guy," I mean big banks spanning entire regions) who poses somewhat of a risk despite his good decision making, or the huge, international powerhouse that acts like a clown but is unable to fail due to the backing of a government with an "endless" stream of money that will ALWAYS pay you back despite the negative economic effects?

X-Runner wrote:

Interest rates are lower now than during the bubble but it isn't causing housing to go up.

That's because now, they are validating income and making sure that the borrower has the ability to pay back the loan.

Now, the risk is greater because they can't profit from a foreclosure.

Even if people wanted to overspend right now, they can't.

The banks won't let them.

The banks have controlled this the whole time.

Correction, the Federal Reserve and OFHEO have controlled this the entire time, with the GSEs a nice off-balance sheet entity to trinagulate off of. We're not blowing another housing bubble, just like were not blowing another technology bubble because of deleveraging and a lack of demand/too much supply, but we are blowing a sovereign debt bubble.

Damn you people! It isn't government vs. banks.

They are gottdamn bedfellows. They are in it together.

The reason protesters are in NYC and not Washington is because protesting in Washington does nothing.

via McClatchy (a fairly conservative pub)

• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions not subject to CRA

• Private firms not subject to CRA made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

• Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004

Yep. makes sense. I've certainly been tuned in to the bigger picture since the moment I had skin in the game. I was just taking my own share of personal responsibility.

We didn't really have a safety net, but I did my research and we lived rent/mortgage free for a year. We got current on our bills, saved a rainy day fund, and prepared for living w/ bad credit for the near future. Like I said, it's been a tough education, but we've learned to live more responsibly.

people were allowed to gamble, and Americans (at all levels) LOVE to take risk. Look at las vegas, it had an incredible boom 1990-2007 because people LOVE to gamble. If you allow them to take risks on their house loans, they will, as wiht anything else. All the elitists have to stop saying that the general population is ignorant and did not know the risk---90% knew the risk, they just hoped the RE market would continue to go up so they could refi, but they bet wrong. The only complex aspect was in the mortgaged-backed securities, but that had nothing to do with the borrowers. So the only question is, do we get more paternalistic and have the government not let "regular people" gamble in vegas, not let them invest in stocks (no 401Ks--you're too dumb), not let them run up credit card charges more than $500, not let them decide if they want to take a risky mortgage (fixed 3 year going variable, etc)? It's all the same.

Well said. People like to place the blame for this stuff on the simplest things they can find, which means "the government" or "personal responsibility", but the reality is that many players are culpable. Mortgage lenders stopped even pretending to do due diligence (even encouraging people to sign "liar loans"), Freddie and Fannie bought up huge amounts of financial instruments they didn't even begin to understand, some people on Wall Street engineered securities to receive a good credit rating despite being junk and also endeavored to make it difficult to tell what was in a security, and so on. When politicians oversimplify the disaster into just one or two players, they ensure that we'll never actually deal with the causes of the crash.

I wonder what the next big bubble will be? Gold? Internet companies again?

student loans

Freelove wrote:

Well said. People like to place the blame for this stuff on the simplest things they can find, which means "the government" or "personal responsibility", but the reality is that many players are culpable. Mortgage lenders stopped even pretending to do due diligence (even encouraging people to sign "liar loans"), Freddie and Fannie bought up huge amounts of financial instruments they didn't even begin to understand, some people on Wall Street engineered securities to receive a good credit rating despite being junk and also endeavored to make it difficult to tell what was in a security, and so on. When politicians oversimplify the disaster into just one or two players, they ensure that we'll never actually deal with the causes of the crash.

I wonder what the next big bubble will be? Gold? Internet companies again?

No, see I agree with you.

The issue is larger than that. The issue is that banks are allowed to gamble, yet when they do, they cannot lose. In fact, if they "lose," they actually win BIGGER than if they win.

The same cannot be said for consumers.

I am not advocating any entitlements. I am not relieving the blame from consumers for stupid loans. I am pissed that when a contract exists and two parties bet on an identical outcome, only one side gets shit on when the outcome is negative.

That is not capitalism.

Now, add into the smoothie the FACT that banks knew exactly what they were doing and you have a damn conspiracy.

Old Banker wrote:

Lets also not forget that most of the consumers didn't take bad loans. They took normal loans on homes were the value tanked hard at a very fast rate. The tank was related to the bad behavior of the banks. This is crystal clear.

I appreciate your hat tip to consumer responsibility. I am right there with you, but the problem is MUCH bigger than that. Many responsible consumers were shit on over the past 3 years while banks got paid big time.

The housing bust had little to do with the overall economy initially. The gas prices were the cause of the recession. If you look at housing from a bigger perspective, that wealth was merely being transferred within the U.S. The wealth from oil was LEAVING the country and crippled our economy. If you don't believe this, what happened when the economy started rolling this last spring and gas almost went back to $4.00 a gallon? The economy (and housing) went right back in the tank. You have to add the speculation and resultant spikes in oil as another cause of the housing crisis.

Once the crisis started though, bankers either had to be among the stupidest people on earth with how they handled it (and are still handling it) or they knew they were in the pockets of the politicians enough that they would be bailed out.

Flagpole wrote:

2) Banks don't control people. Are we robots?

Banks control who gets approved for a loan.

Today you are less exposed to an ill-informed potential home buyer making a bad purchase then you were before because banks have done a better job with credit checks.

Banks absolutely control people with their approvals and denials.

Whether it's government or private these are all business entities incentivized by money and risk.

The loans made money and risk was minimized by rising values.

The risk has changed, so the game has changed.

I'm glad you brought this up. This is the forgotten piece of the puzzle. As oil approached $150/barrel, that's what tipped us over. And it's going to happen again. Which is why it blows my mind that we could be creating millions of white/blue collar jobs right now and severing ties with the Middle East cartel by developing a scalable, domestic energy policy right here at home... NOW. Natural gas and oil are plentiful and viable at these prices, fissionable thorium would make a helluva lot of sense versus "clean coal," though it would require a massive government subsidy to jump-start, and geothermal could work. Most of our oil and gas is located in sparsely populated areas.

Lacking the political will to do anything, sell or lease Alaska and Hawaii. Keep the lower 48 intact (unfortunately, we have to keep California for its ports and intellectual capital). Invest the trillions in said domestic infrastructure.

X-Runner wrote:

Banks control who gets approved for a loan.

Today you are less exposed to an ill-informed potential home buyer making a bad purchase then you were before because banks have done a better job with credit checks.

Banks absolutely control people with their approvals and denials.

Whether it's government or private these are all business entities incentivized by money and risk.

The loans made money and risk was minimized by rising values.

The risk has changed, so the game has changed.

I will say this much... While I don't agree with policy suggestions that we allow houses to just simply be "re-priced" at fair value, and I think it's terribly unethical that people can stay in their homes that they don't deserve without making a payment for five years simply by setting off a chain of legal events challenging whether title was transferred properly, I do think that people who are making their payments on houses that are otherwise underwater SHOULD be allowed to refinance. They should not be precluded from doing so simply because their L-to-V ratios don't meet an arbitrary certain set of parameters. After all, many of these people did have at least 20% equity at one point, enough to avoid paying PMI. It's not like they're now being forced to pay PMI because they only have 5% equity. It's a double standard. They're making the cash flows, but can't refinance to a better rate, which would jump-start the economy.

As for those who deserve to lose their houses, so be it, and the bank takes the hit on the foreclosure, as well it should as lender of last resort. No way should those of us who did it right, didn't stretch for too much house, and pay our property taxes and mortgages on time be on the hook for those who got greedy. Moral hazard. I'm afraid the government's going to create more of it though.

I agree that underwater borrowers that have been making payments should be able to refinance. It's a less riskier loan than the one they have.

And you can't have tons of people squatting in houses without making payments.

The foreclosures have to be fully processed at some point and that, unfortunately means evictions.

But that's reality. I do believe in reality.

As the foreclosures move through and these house go on the market, home values will go down further still.

Don't forget. Many people took 10 year interest only loans in 2006. So in 2016 we are going to see another shockwave with those people.

It may take another 10 years to unwind this mess no matter whom you blame.

Yes

agip wrote:

Maybe one of you can help me clear up my thinking:

Millions of Americans took out mortgages that were too large. Usually when people spend unwisely, they take the blame personally. Why this time are 'predatory lenders' and 'banks' being blamed?

Put another way - people blame themselves when their credit card spending is too high - they don't blame Target - how is this different?

I suspect the answer has something to do with the large size and high sophistication of mortgages. But help me out.