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

It all started with welfare reform and free trade. These major police shifts killed off a large portion of US manufacturing and stripped the unemployed and those working at poverty wages of benefits. With nothing in the US economy to replace the lost manufacturing, the US turned to the Fed. The Fed lowered interest rates drastically in order to turn the manufacturing workforce into a home construction/renovation workforce. Initially, this actually worked. But then, wrecklessness in the financial industry took over.

The mortgage brokering industry is 50% to blame. Big finance 30% to blame. Lax government regulators 18% to blame. Consumers 2% to blame.

The mortgage brokers pushed borrowers into sub prime, even when they could afford prime loans. They also pushed people into exotic products with the promise that they could use the appreciation of their home to come back and refinance before the end-of-the-world interest rate reset hit them. Mortgage brokers had nothing to lose when a loan defaulted because it had long been sold down the road.

The finance industry failed to understand that there was systemic risk in what they were doing. Individually, one firm could be willing to put its existence on the line to pursue big money in mortgage backed securities and CDS. But, collectively, no one understood or cared that the failure of one firm would lead to a complete collapse of the financial system.

The government failed to regulate the systemic risk and was about four years behind the fraud and abuse in the industry. The DOJ announced the first major prosecution of a mortgage brokerage (Allied in Houston, TX) for conduct in 2007!!!! And that was largely because Allied screwed their branch owners, who then narc-ed on the management.

The only blame on the consumer side is really the people who refinanced in ways that were totally irresponsible. Many who are underwater are so because they re-fi-ed by having their homes appraised at bubble prices and taking out over 80% of the equity. In Texas, refis are limited to 80% of the equity. Texas did not have a bubble or a bust as a result (chaulk another one up to regulators). But, the refis really poured gas on the fire when it came to the bubble. People with homes that they bought for 150k refied in the bubble and boosted their principal debt to 300k, taking out 100k+ in cash. Then, when the market crashed, their house went back to 150k, and they were 100k underwater. Had they been limited to 80%, they would not be in such bad shape.

joho wrote:

Giver Away Of Freedoms wrote:

....

Here is an easier analogy. You walk down the street and a bum asks you for a dollar. You give it to him under the condition that he pays it back plus interest. You don't see him again. Who's fault is that?

...

A more accurate slightly different analogy:

You walk down the street and a bum asks you for a dollar. You give it to him under the condition that he pays it back plus interest. The government (Fannie/Freddie) pays you the dollar plus interest and says they will collect from the bum.

I'd keep giving to the bum every day of the week with that arrangement

Sir Lance, you and I share a political party affiliation, but unlike you, I WILL put blame on my party when blame is due. Just because the Right says something doesn't necessarily make it untrue.But, like I said, the government just put in place the possibility for the problem to happen...the PEOPLE (and to clarify for you, by PEOPLE, I mean those taking out mortgages they couldn't afford) then took that rotten ball and ran with it...stupid of them. No matter how you decide to define the cause of the mortgage crisis, if the PEOPLE would have refused to take out loans that any reasonable thinking person could see were bad deals, the mortgage crisis would NOT have happened. It all begins and ends with the PEOPLE. We all want "power to the PEOPLE" right? Well, they had the power and made poor decisions with it.Democrats can be for personal responsibility my brother.

Seriously, read something about the crisis. The people taking out the mortgages made financial mistakes, but you've just decided to ignore everyone else for some reason. If it was JUST some bad mortgages the world's economy wouldn't have nearly collapsed.

No flaming from me brother. Good for you for taking ownership of your bad decision. Looks like you've learned a lot, and I suspect a lot of others did too. Good luck!

You have thick skin, I will give you that Flagpole. No more insults (except for the one in the post below, not written by me, but as you might realize, directed at least somewhat at you), but just some hard data to prove your CRA/Clinton assertion is waaaay off the mark. You (and Bloomberg, and others who have made this talking point) should know better-

http://www.ritholtz.com/blog/2008/12/kroszner-cra-the-mortgage-crisis/

" Some critics of the CRA contend that by encouraging banking institutions to help meet the credit needs of lower-income borrowers and areas, the law pushed banking institutions to undertake high-risk mortgage lending. We have not yet seen empirical evidence to support these claims, nor has it been our experience in implementing the law over the past 30 years that the CRA has contributed to the erosion of safe and sound lending practices. .... I will also discuss the findings of a recent analysis of mortgage-related data by Federal Reserve staff that runs counter to the charge that the CRA was at the root of, or otherwise contributed in any substantive way, to the current subprime crisis . . .

This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.”

---------------------------------

"Be sure to read the entire speech by the Fed Governor here. He discusses the result of an exhaustive data analysis performed by the various Fed Banks looking into the CRA issue and sub-prime

Of course, now that the election is over, the usual parade of reality challenged nitwits won’t be interested in any hard data or professional analyses. The full 233 page report is available here. "

Oh, and another strike against the CRA theory: a ton of the foreclosures came from wealthy people's vacation homes or second homes or investment homes that they simply walked away from.

http://www.nytimes.com/2010/07/09/business/economy/09rich.html

The highlight: "More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic."

The PEOPLE ALWAYS get killed whether it was their fault or not...this is one of the many reasons an individual should be VERY thoughtful about what it is they sign their name to.I don't disagree with you that banks came out of this smelling better than the people and that perhaps they should have suffered more greatly, but again, you are saying the consumers were shit on, and I'll just have to disagree...it is the GREAT responsibility of anyone who takes a loan out for anything to understand what it all means, and once again as an example, no bank has shit on me...because I don't enter into bad financial agreements. Am I more special than those who got slammed? Nope. I just did my homework and made a good financial decision before buying my house.I will also disagree with you about people taking bad loans. IF people took loans out as they SHOULD (fixed rate mortgage that was no more than 25% of their take home pay, put at least 3% down if not more, planned to be in it for 15 years minimum) then a big drop is not a big deal. So they couldn't qualify to refinance when the rates dropped. So what? They were happy initially with the terms were they not? So they can't sell without bringing a ton of money to the table and then potentially losing a lot on the deal. Well, there's never a guarantee that your house will hold its value or increase in value.A VERY small percentage of people who bought a house within their means with a fixed rate mortgage with plans to stay in it for 15+ years got themselves into trouble. Yes it happens...someone gets sick or loses a job long term...this is why you only get a mortgage that is 25% of your take home pay...so that if your pay is lessened, you could still make it work for a while on lesser income. A person COULD make it work if their mortgage were 50% of their income, but you plan for it to be less so that if bad things happen you can make it work if you had to.I saw my own house drop $60,000 in value from its peak. So what? My payment remains the same as it always was, and if I ever do decide to sell, the next house I buy likely went down in value too.

Freelove wrote:

Seriously, read something about the crisis. The people taking out the mortgages made financial mistakes, but you've just decided to ignore everyone else for some reason. If it was JUST some bad mortgages the world's economy wouldn't have nearly collapsed.

This thread is limited to the HOUSING crisis brother.

Most of you people are clueless.

Does Wall Street ever take the blame for anything with you guys?

Wall Street investment banks above all have the most to blame, no question about it. Wall Street shouldn't be lumped in with a lot of commercial banks and credit unions who recognized the mess and stayed clear of it. Ignore Flagpole that banks were forced under by the Community reinvestment act. Yes, it may have been a bad law that restrained banks somewhat. But banks weren't forced to make bad loans.

Government is next to blame. But the Federal Reserve, SEC, FDIC, and the other relevant agencies are just extensions of Wall Street. Or at least highly compromised by them. You saw that it in the bailout. The obvious answer to the financial crises was to let all the Wall Street banks go bankrupt because they really were bankrupt. At the same time have the Federal Reserve print a bunch of money to capitalize clean new banks to lend to real businesses like GE. Over time those banks could be sold off to private investors. If things got too bad well, that is the entire point of why we have a social safety net. Wall Street can get food stamps and medicaid just like the rest of us would have to do if things are so apocalyptic.

The least to blame are the people. A lot of American were actually heroes in all this. Despite a relentless sales pitch by mortgage banks and Wall Street and government dangling the mortgage interest deduction, many Americans stuck to their guns believing in real home ownership and saving to get a healthy downpayment. We should have a national holiday honoring these Americans. Meanwhile, in case you haven't noticed, a lot of those who took out the bad loans have taken punishment. They have been evicted from their homes and their credit has been severely downgraded.

Fannie Mae sort of straddles the line in all this. Also, the blame for it ultimately lies at the footstep of LBJ and the 1969 Congress. That is when it was organized into a private institution but with the implicit guarantee of the government. Which is insane and Americans have long known it was insane decades before the 08' crises.

Freelove wrote:

Oh, and another strike against the CRA theory: a ton of the foreclosures came from wealthy people's vacation homes or second homes or investment homes that they simply walked away from.

http://www.nytimes.com/2010/07/09/business/economy/09rich.html

The highlight: "More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic."

1) SOME WEALTHY people walking away from mortgages is the END RESULT of a housing market already in shambles CAUSED in part by the Clinton change to the Community Reinvestment Act. That started the problem that caused the housing to go down, and because of that, some WEALTHY people decided to let their vacation homes and second homes go.

2) Also, knowing that wealthy people don't ALWAYS make the right decisions, you can bet that some of those mortgages were interest-only and so on and that the owners were hoping for the house to increase in value, so they were thinking of it as an investment...that's another no-no as far as I'm concerned. Buy a house to live in or enjoy as a vacation home and to ultimately own outright to limit outgo in retirement, but don't think of it as an investment.

Point #1 though is really the pertinent point here in this discussion.

The housing crisis is inextricable from the financial crisis. They're the same thing.

1) Yes, the Community Reinvestment Act forced banks to offer loans to high-risk borrowers. I don't accept the spin that paints that differently. Philosophically not a horrible idea...I mean housing should be available to everyone, but in practice in this way was wrong.2) How can the people be the least to blame? Why are you removing responsibility from those who agreed to these loans? Just because the government and lenders said it was ok? We are allowed to drink ourselves into oblivion every day and load up on only ice cream and Doritos all day if we want to too, but that would be the fault of the individual would it not? How is taking a bad mortgage any different?3) Good that those who took bad loans have been punished...evict them, damage their credit so they can't do this again in the near term. Fine...that's what happens when you try to buy something you can't afford. My children are aware of this already. Why weren't these adults aware?

Azaleas wrote:

The housing crisis is inextricable from the financial crisis. They're the same thing.

Disagree.

I don't know how you can't blame the individual procuring a loan. How would this have happened if the underlying security (mortgage) was paid off as per their loan agreement? Here is a very brief explanation as to how it's done. Bank makes a loan. Bank packages loan sets up an SPE and transfers title to SPE, SPE sells security to investors. Cash works like this: mortgage payment to bank, that cash to SPE that cash to investor. Of course it goes the other way, how else would the bank get paid? They take their spread and closing fee.

The fault with the banks and credit agencies is they wrongfully repackaged loans (mortgage backed securities) as a diversified portfolio expecting that with diversification the MBS's were still investment grade. Of course there came a point when banks knew they were peddling garbage. Then banks and insurance companies were selling CDS's for spreads on notional amounts that were astronomical.

The Gov't messed up 1. Fed Reserve keeping rates low and 2. Community Reinvestment Act. The joint center for housing at Harvard did a study, "Subprime mortgages rose from only 8 percent of originations in 2003 to 20 percent in 2005 and 2006, while the interest-only and payment-option share shot up from just 2 percent in 2003 to 20 percent in 2005." And the Fed Reserve, "Mortgage defaults and delinquencies are particularly concentrated among borrowers whose mortgages are classified as “subprime” or “near-prime.”" There are a bunch of other examples. Look at page 126.

http://www.kansascityfed.org/publicat/econrev/pdf/4q07Edmiston.pdf

"

Basically we all f*cked up, but if you were to pick any one entity it comes down to looking at yourself in the mirror. That's my opinion.

Precious Roy wrote:

Many who are underwater are so because they re-fi-ed by having their homes appraised at bubble prices and taking out over 80% of the equity. In Texas, refis are limited to 80% of the equity. Texas did not have a bubble or a bust as a result (chaulk another one up to regulators). But, the refis really poured gas on the fire when it came to the bubble. People with homes that they bought for 150k refied in the bubble and boosted their principal debt to 300k, taking out 100k+ in cash. Then, when the market crashed, their house went back to 150k, and they were 100k underwater. Had they been limited to 80%, they would not be in such bad shape.

You could see this coming since the middle 90s when the required down payments were relaxed from 20%. Another problem occurred when it became acceptable for the seller to pay costs for the buyer. The end result of these practices is that the seller raises the price of the house to first cover his expenses and second because the demand is now much higher. That inflated the true value of the houses. The buyer also has VERY LITTLE invested and has no incentive to keep up on payments to keep from being foreclosed on.

A good portion of these foreclosures are NOT because the homeowner couldn't afford the payments. They simply chose to spend money on other things and let the bank have the house after they have been told their house is worth far less than what is owed on it.

To clarify before someone wants to rip my as5hole apart, point was that credit agencies, whose roll is to provide credit analysis and ratings on different types of securities, wrongfully claimed investment grade paper based on diversification and banks also claimed the same.

Only person responsible for taking out a loan they could not afford is the person who took out the loan. Yes - then Pres Clinton wanted everyone to own a home and forced fannie and freddie into doing things they should not have, but no one held a gun to someones head and forced them to take out a loan they ultimately could not afford.

homer jay simpson wrote:

The Gov't messed up 1. Fed Reserve keeping rates low

Then wouldn't today's lower rates extend the problem?

I haven't seen home values go up with today's historically low rates.