Feb12
The Mortgage Meltdown
on February 12, 2013 at 2:36 pmMore evidence that is was caused by regulation, not deregulation.
More evidence that is was caused by regulation, not deregulation.
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The CRA is an example of fundamentally bad legislation. Everyone knows of the many advantages of home ownership, and the idea of the CRA was to expand those benefits to people at lower income levels. Nobel in theory, fundamentally broken in practice. The basic problem is that almost all of the advantages of home ownership are advantages of having positive equity. And a lot of the “outdated” and “discriminatory” lending policies of the past were to ensure that home owners always had positive equity. Part of the reason for requiring a substantial down payment is that it helps protect the home owner / borrower from variations in market valuations which might cause them to end up underwater in their mortgages.
And being underwater in a loan is worse than not having anything at all. But the policies of the CRA effectively encouraged huge numbers of people to get mortgages and then cause a housing bubble, resulting in many underwater loans for many people below median income.
It’s funny, there are laws designed to prevent lenders from suckering low-income folks into taking high-risk loans that are more likely to be damaging to the borrower than not, and yet the CRA was a massive government-backed attempt to encourage low-income folks into loans that were likely to be highly damaging to them.
Also, a big reason why it’s difficult for people below median income to own homes is because of government action. Taxes on the lower 4/5th of the income brackets have gone up significantly since 1970, having an obvious effect on savings rates. And regulation has made building new housing more expensive and difficult.
Glenn Reynolds, the InstaPundit, has written what some call Reynolds’ Law:
The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.
No evidence is required. Banks are a business. Leave them alone and they will only make loans when they believe it profits them. The only thing the government can do is change their behavior so it does not profit them.
It doesn’t take a genius to figure this out.
The banks made bad loans because they were profitable, at least for a while. But the banks had badly miscalculated the loans’ level of risk, and when their miscalculations caught up with them it took down the whole economy.
The government’s failure was letting bankers’ bad decisions doom the rest of the country.
No Jim, they made those loans because they were forced by law to make loans to people who had no hope of paying those loans back. Don’t you get tired of lying to excuse the Left?
If the bad loans were profitable for the banks, it was because the government backed Fanny and Freddy were buying the loans up, relieving the banks of the risk.
My understanding was also that (in parallel to Mr. Goodfellow’s points) there was the idea that “home ownership is middle-class” and thus “to make people middle-class we should make it easier to get them homes”.
Problem was, they got the causality backwards (if that was their thinking, that is) – middle-class priorities make one more likely to want to and be able to buy a home. It is not so that owning a home makes you have those priorities that make you likely to keep it.)
Sorry, I don’t buy it. What caused the mess wasn’t the bad loans; after all, if that was all that happened the chaos would have stopped with the companies that issued the bad loans.
What really caused the major problems was the practice of slicing and dicing the bad loans so many ways one couldn’t see where the bad paper was, and then selling the whole mess as “securities” (and also getting the rating agencies to tell everyone that the bad paper was good). Which meant that when the bubble burst, the chaos spread to the whole industry.
Although government certainly had a hand in it, the mustache-twirlers of the Wunch were, and are, mostly at fault.
Mr. Goodfellow – Baloney, to use somewhat of a euphemism. The purpose of requiring a downpayment is to prevent the bank making a loss. That is its only purpose. Banks don’t care about their customers – at all.
The biggest parties involved with the slicing and dicing were Freddie and Fannie, not the banks who live rent free in your mind.
What really caused the major problems was the practice of slicing and dicing the bad loans so many ways one couldn’t see where the bad paper was, and then selling the whole mess as “securities” (and also getting the rating agencies to tell everyone that the bad paper was good).
There’s your regulatory failure. Slicing and dicing is fine, politicised credit ratings are not. I do wonder which had the bigger impact: misregulation or artificially keeping interests rates low. The latter is a form of intervention, but not a form of regulation. Be that as it may, the combination was certainly disastrous.
The ratings agency issue is yet another example of regulatory capture, similar to the one with the FDA (and the MHRA in the UK), in which the people being rated pay for the process of rating. It doesn’t take a genius to see the problem with that!
The same probably applies to firms of auditors. I can’t imagine that any such firm that was excessively enthusiastic about doing its job would get to do it a second time.
Apparently, discussing mortgages sets off your spam filter. That makes it kind of difficult to discuss this topic, don’t you think?
I’ll tell you something else that I rarely see mentioned, and I’ve made this comment before, with my personal experience as my guide.
I bought a HUD house in 2010. I bought it and we basically ‘bought’ a ton of equity, because we paid about 50% of the property’s worth. In order to find this I did a ton of looking on my own, before I ever talked to a real estate agent. There was a list of these properties for every state, and I didn’t just look in the state where we were / are living.
One of the things that I found was just how many BIG, high dollar homes were on that list. And by doing some due diligence I found out that many of those high $$$ places had been bought under the SAME loan programs as the ones supposedly designed to get people into ‘middle-class homes’, for whatever that term meant then.
I found any number of $300K and $400K+ homes, that were in foreclosure.
I don’t think that’s exactly what the original program was designed to do, buy a nearly half-million dollar home for someone. But it happened, I found it and we saw it in the paperwork on those houses. So people can say that the program failed because you can’t ‘drag’ people into the middle-class by putting them in a house. But the truth is that it also failed because people who might have been fine in a $200K house if they lost one fat income, failed miserably in a $400K house under that same single income.
You have to take into consideration all the cheerleading and outside pressures that went on. Real Estate agents telling people to buy and then sell in a short period of time…who needs to pay principle? The whole farce of “you never lose money in real estate”, and the home equity loan crap.
I remember back in ’06 I wanted to buy a house. I make very good money and can afford the payment on a $400K but I was thinking “here I am in the upper bracket and it is not easy to make that kind of payment, how are all these people doing it?”. I just didn’t feel comfortable and backed out. 5 years later I bought a similar house at a 50% discount for cash. Not trying to sound smart…as I don’t know what truly stopped me before, it wasn’t like I knew or suspected the market was going to crash. Heck I was a believer in RE. The agent was even somewhat condescending that I backed out…I was a little embarrassed as there was a lot of “buy, buy, buy” pressure.
Where do you live that $300K-$400K homes are big dollar homes? Just before the bubble burst my 1200 sq ft house was “valued” at $706K. The 2400 sq ft across the street was $1.5M. Of course, I’m in Silicon Valley so maybe my perspective is warped
.
If you’re using Silicon Valley as your baseline for real estate prices, then your perspective is seriously warped. In economic hell holes like Detroit, houses are available at incredibly low prices but then you’d own a house in Detroit. In much of what is considered “fly over country”, you can buy a very nice home for under $200K.
A thorough refutation of this zombie idea that the government caused the sub-prime meltdown:
No, Marco Rubio, government did not cause the housing crisis
This is odd. The site shows there are 15 comments on this thread but only 6 are showing. Earlier, I posted 2 comments but neither are showing now. The spam filter doesn’t seem to like the word m0rt gage (yes, I know how it’s spelled) which makes commenting on this subject rather difficult.
Did you read the article,Jim? Seems the last point is government action and the rest are mere assertions or evasions of the CRA.
Houses must be cheap in the US. Here in Australia average houses in major cities are A$ 400,000 . They go up from there. This is a worry.