Buchanan: Systemic Failure

[IHOPSkins]

So, how many of those loans have gone bad?

Why don't you do some leg work?

Get some info....come back and post it

But first aknowledge the "THEORY" posted at your request

[Larry]

Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

Now that looks like some support.

(Reading the article now. It's got some interesting things in it. I'll edit this post as I see them.)

-----

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

So, they're still saying that blacks made up a small portion, but a much bigger portion than before. (According to "sketchy" statistics.)

("Before" meaning "loans that, before this, still existed, but Fannie/Freddie wouldn't touch them.")

------

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Give that man a cigar.

-----

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Are they saying that all of Fannie/Freddie's loans were fixed-rate loans? That seems surprising to me. I thought that the vast majority of the problem loans were ARMs where people couldn't make the payments when the ARM, uh, "armed".

This program, OTOH, sounds to me like a program where, if the borrower can be good for two years (and the program's supposedly 8 years old), then the borrower's payments dropped.

-----

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

I was going to mention that the article didn't mention those percentages you folks were mentioning. But it looks like they're down here on the end.

Observing that it's saying "low and moderate-income borrowers", whereas I thought (but can't check from this screen) you folks were talking about minority borrowers.

IMO, I can see a better correlation between "low income borrowers" and "problem loans" than between "minority" and "problem loans".

(Even though we both know that "low income" at least implies, shall I say, a stronger representation of minorities.)

[IHOPSkins]

...Reading the article now. It's got some interesting things in it....

This One?...

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Prescient

[hokie4redskins]

This is precisely the gist of Buchanan's article.

Some people in this thread saw a portion of blame being placed on their guys or minorities and went to the trenches to defend them, missing the bigger point in the process.

I can't believe this thread has 100+ posts. If you actually READ Buchanan's article, there is not much argument.

[Larry]

Why don't you do some leg work?

Get some info....come back and post it

But first aknowledge the "THEORY" posted at your request

Haven't seen a theory.

I've asked for information about bad loans, and you've told me about how somebody didn't like discrimination.

[IHOPSkins]

.....I've asked for information about bad loans,.....

And i told you its time you did some work

"Get Some"

[Larry]

And i told you its time you did some work

Sorry, but if you want me to do research to try to find support for a theory that you won't even state, then "get used to disappointment". [/movie reference]

"Get Some"

You're not my type.

[deejaydana]

I can't believe this thread has 100+ posts. If you actually READ Buchanan's article, there is not much argument.

Amen Hokie. I wanted to believe in demons at one point in my life...when I was 10 years old.

[Larry]

Amen Hokie. I wanted to believe in demons at one point in my life...when I was 10 years old.

I wanted to believe in telepathy and things like that.

[IHOPSkins]

..Either of you for any kind of factual information about this?......

http://www.huduser.org/Datasets/GSE/gse2007.pdf

[Larry]

http://www.huduser.org/Datasets/GSE/gse2007.pdf

I'm gonna try to re-read that in the morning. It just made my brain hurt, tonight.

[deejaydana]

Larry,

Here's what's cool about you: I don't agree about basically a single thing you subscribe to but DAMMIT! you have such heart and conviction that I can't flame you back or get mad at any of your posts (well, some yes). This may be some Jedi Mind trick (or I may have had one too many Sunset Ambers tonight to sort the deck) but I can't hate you. You have too much kind-hearted conviction...you rat ****.

[Hubbs]

Show me the government "incentivizing" subprime mortgages. What, exactly, did the government do to cause, or even to promote them?

Come on, Larry, you're smart enough and keep yourself more than well-enough-informed to know that Fannie and Freddie were instructed to buy huge amounts of subprime mortgages. When the mortgage is purchased, the risk is removed for the bank. They get all their cash upfront plus a slice of profit, and if the loan defaults, the pain is felt by Fannie and Freddie, not the bank that made the loan; it's already washed its hands of the results.

[Larry]

Come on, Larry, you're smart enough and keep yourself more than well-enough-informed to know that Fannie and Freddie were instructed to buy huge amounts of subprime mortgages. When the mortgage is purchased, the risk is removed for the bank. They get all their cash upfront plus a slice of profit, and if the loan defaults, the pain is felt by Fannie and Freddie, not the bank that made the loan; it's already washed its hands of the results.

Yeah, I knew they got involved in them, but the impression I had about the chronology was that they stepped in when things started to fail, to try to prop things up.

But the dates I'm seeing on these things make it look more like they did it starting back in 2000.

I have serious problems with claiming that this crisis was caused by a law passed 30 years ago. Claiming that the problem was due to something that started 10 years ago, and which was increased for the next several years, now that's a time frame, and a theory, I can at least find believable.

I don't think I've been convinced "beyond a reasonable doubt" that this is the one, major, cause. But it's certainly looking plausable that it was a factor.

[Hubbs]

I have to wonder... why do you have that serious problem? Let me line up a few details for you that I promise will hit both sides of the aisle.

1970's: Nixon takes us off the Bretton-Woods system, allowing us to inflate as much as we damn well please, which also means that we apply as much leverage as we damn well please.

Later 1970's: CRA is passed under Carter.

Early 1980's: Here's where things get interesting, because this is the last time that housing prices take a significant dip, and that really is an important factor. I made this analogy in a thread a while back, so I hope you didn't read it and are now forced to do so again - you know how the occasional brush fire is considered to be a good thing because it prevents dry timber from building up to the point at which a full-on forest fire can erupt? That's how downturns in housing prices were supposed to work. If there had been a couple significant dips between then and now, they would have forced the worst of mortgages into default, which would have prevented them from building up to a level of trillions of dollars. This never happened, largely because Fannie and Freddie were prompted to provide constant artificial demand.

1990's: The Clinton administration pushes the CRA even harder. This is when you can see the bubble start to accelerate on a graph.

Early 2000's: Now things start to really get ugly. The Bush administration, in coordination with Alan Greenspan (who, by the way, is a "libertarian" in the same way that Obama is a "Communist"), try to fight to dual problem of the tech bubble popping and 9/11. So they cut interest rates to extreme lows, encouraging lenders to lend, lend, lend, which accelerates the bubble even more. At the same time, they also relax the leverage limits of certain big banks from 12:1 to 35:1 (I believe it's 35; I know that it's in the 30's), which allows them to pretend that they have literally hundreds of billions of dollars that they don't actually have. (By the way, this sounds almost criminal, but it's actually the entire basis of the fiat currency system. All banks do it, from the smallest all the way to the Fed.)

2000's: Banks are also starting to really pile into Credit Default Swaps, which essentially allow them to take out insurance policies on assets they don't own. This isn't a matter of less regulation; the CDS market has existed since about the same time as the CRA was passed (unlikely a coincidence), but has been accelerating in growth and has never really faced much regulation that could be relaxed in the first place. Literally trillions upon trillions of dollars become due if the CDS market faces a crash.

2008: After two and a half decades of unrealistic, artificially propped-up growth, the housing market finally reaches a saturation point. Supply has become so much greater than demand that rising prices can no longer be sustained, and the government and Fed have no more bullets in their chambers. Prices start to nosedive, and the forest fire has begun.

2008: Everyone who built up hundreds of billions in the CDS market start to realize that they've bought a one-way ticket on the Failroad.

2009: The Treasury and Fed try to use their Wonder Twin powers to monetize the debt and buy the banking system out of its predicament. The problem is that the subprime real estate crash was bad enough to spread its symptoms to other parts of the economy. The commercial real estate and prime ARM markets have seen the biggest drops in value in their histories, but have yet to really show the effects, because most of those mortgages aren't due to start resetting until late this summer. Once they start, more and more are going to reset on a bell curve until mid-2010, in a chunk of the real estate market that's ultimately bigger than the subprime market was.

And that's all she wrote as far as Fannie and Freddie go. Now, I could into what this all means for the dollar, but that might be a different topic for a different thread.

[Thiebear]

1)

2) Still pushing the "it was the black folks" line?.

Are you ****ing kidding me.. Minority and low income = Everyone.

You're only seeing this entire conversation from your point of view. I understand how right you feel coming from there but expand a bit.

From the first article after a Google 2004

Fannie, Freddie to expand low-income lending

http://www.bizjournals.com/washington/stories/2004/11/01/daily3.html

Fannie Mae and Freddie Mac will be required to increase financing to low- and moderate-income home buyers and to increase their commitment to underserved areas under new rules by the Department of Housing and Urban Development.

HUD is requiring the two government-sponsored enterprises to make 56 percent of their mortgage activities in loans written to low- and moderate-income borrowers by 2008, up from the current goal of 50 percent. They will have to increase mortgage activity in underserved areas from 36 to 39 percent by 2008.

To meet the new goals, Freddie Mac and Fannie Mae would have to purchased 400,000 more qualifying home loans during the four-year period, HUD said in a statement.

The new goals become effective beginning Jan. 1.

and before the 50 - 56 was:

44 - 50%

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups

[Thiebear]

http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

[JMS]

http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html

So you are quoting a 10 year old article and claiming it's prescriptive about what is happening today? Conveniently glossing over the fact that there was a decade of Republican administration in the middle there? Clinton must be the smartest man in the world to both create this crisis and time it perfectly to hit just prior to Bush's leaving office after his second term..

Bottom line, Clinton did advocate relaxing the mortgage regulations, just as his republican dominated senate and congress did. Just as Bush continued to do throughout his eight years in office both with a republican congress and senate and a democratic one. Why? because the banks lobbied for the changes. There was tons of money which was seeking investment vehicles, and the regular home mortgage market was saturated. So they were trying to create new investment vehicles so the banks could continue to profit from financing high return investments.

The skin color of the folks receiving the loans is really irrelevant. But even if it was relevant your own article states both that the races benefiting from the policy were "inconclusive", and that the only study on the subject claims less than 20% of the loans went to minorities.... So Pat laying the entire fiasco on minorities seems to be pretty misplaced.

It's like you didn't even live through the last decade. Who do you think wrote the industry's regulations during the Bush years? THE INDUSTRIES DID!! From energy, to airlines, pharmaceuticals, to finance.

[Larry]

I have to wonder... why do you have that serious problem? Let me line up a few details for you that I promise will hit both sides of the aisle.

1970's: Nixon takes us off the Bretton-Woods system, allowing us to inflate as much as we damn well please, which also means that we apply as much leverage as we damn well please.

No attempt made to explain how this affects anything, but what the heck?

Later 1970's: CRA is passed under Carter.

No attempt made to explain how this affects anything, but what the heck?

Early 1980's: Here's where things get interesting, because this is the last time that housing prices take a significant dip, and that really is an important factor. I made this analogy in a thread a while back, so I hope you didn't read it and are now forced to do so again - you know how the occasional brush fire is considered to be a good thing because it prevents dry timber from building up to the point at which a full-on forest fire can erupt? That's how downturns in housing prices were supposed to work. If there had been a couple significant dips between then and now, they would have forced the worst of mortgages into default, which would have prevented them from building up to a level of trillions of dollars. This never happened, largely because Fannie and Freddie were prompted to provide constant artificial demand.

:secret: housing prices going down don't cause mortgages to default. In fact, housing prices have nothing to do with defaults. (Unless you count the fact that people who are "under water" lose the ability to "solve" the fact that they can't make their payments, by "refinancing" (and going further into debt.))

1990's: The Clinton administration pushes the CRA even harder. This is when you can see the bubble start to accelerate on a graph.

No attempt made to explain how this affects anything, but what the heck?

Early 2000's: Now things start to really get ugly. The Bush administration, in coordination with Alan Greenspan (who, by the way, is a "libertarian" in the same way that Obama is a "Communist"), try to fight to dual problem of the tech bubble popping and 9/11. So they cut interest rates to extreme lows, encouraging lenders to lend, lend, lend, which accelerates the bubble even more. At the same time, they also relax the leverage limits of certain big banks from 12:1 to 35:1 (I believe it's 35; I know that it's in the 30's), which allows them to pretend that they have literally hundreds of billions of dollars that they don't actually have. (By the way, this sounds almost criminal, but it's actually the entire basis of the fiat currency system. All banks do it, from the smallest all the way to the Fed.)

I notice that you haven't attempted to explain how this led to the current problem, but at least in this case, I think you've mentioned something that did lead to this mess (without actually attempting to explain how it did).

IMO:

1) The problem we've got isn't that some folks can't make their payments. That's their problem, but it isn't my problem.

The problem we've got is that people not making their payments threatens our entire banking system. That is everybody's problem.

And, IMO, the #1 reason why the system became vulnerable to this, is because of how heavily leveraged it was.

I'll freely admit that I'm not exactly a rocket scientist on this subject. But I do remember being told back in High School that the reason for the stock market crash that triggered the Great Depression was . . . leveraging.

2000's: Banks are also starting to really pile into Credit Default Swaps, which essentially allow them to take out insurance policies on assets they don't own. This isn't a matter of less regulation; the CDS market has existed since about the same time as the CRA was passed (unlikely a coincidence), but has been accelerating in growth and has never really faced much regulation that could be relaxed in the first place. Literally trillions upon trillions of dollars become due if the CDS market faces a crash.

Admitting that I don't know much about these things. But it at least looks like you're attempting to make an argument.

2008: After two and a half decades of unrealistic, artificially propped-up growth, the housing market finally reaches a saturation point. Supply has become so much greater than demand that rising prices can no longer be sustained, and the government and Fed have no more bullets in their chambers. Prices start to nosedive, and the forest fire has begun.

Again, though. Wondering why dropping home prices are a threat to our national security.

2008: Everyone who built up hundreds of billions in the CDS market start to realize that they've bought a one-way ticket on the Failroad.

If you can explain these CDS thingies to me, I might be able to understand you. (And may agree with you.)

2009: The Treasury and Fed try to use their Wonder Twin powers to monetize the debt and buy the banking system out of its predicament. The problem is that the subprime real estate crash was bad enough to spread its symptoms to other parts of the economy. The commercial real estate and prime ARM markets have seen the biggest drops in value in their histories, but have yet to really show the effects, because most of those mortgages aren't due to start resetting until late this summer. Once they start, more and more are going to reset on a bell curve until mid-2010, in a chunk of the real estate market that's ultimately bigger than the subprime market was.

Now this is something I can understand. As I said, dropping housing prices don't cause loans to default. But having the payments suddenly double, now that can cause people to be unable to make payments.

My gut feeling is that the letters "ARM" are going to be a danger signal for a generation to come (just like they should have been a danger signal to the people who signed the things in the first place.)

-----

Seriously, folks

If you wanna try to claim that the CRA had something to do with this, you need to do more than

1980s: The CRA passed.

1990s: Something else happened.

. . . . .

2008: The banking crisis happened.

I can add the Apollo moon landings, the Redskins Super Bowls, The 2000 Florida recount, and the day my Grandmother died to that chronology, too. And it won't even imply that they had anything to do with the other events.

[Hubbs]

Come on, Larry. To borrow from Andy Dufresne, are you being deliberately obtuse? I've seen you make smarter posts about these things that involve understanding how they work, and now you're responding to everything I say with a version of, "I don't see how this has anything to do with anything."

First of all, this whole crisis is a problem of de-leveraging. Hence the Bretton-Woods reference (and the other mentions of absurdly easy lending). Bretton-Woods strictly limited how much money we could print and how much credit the Fed could lend out. If we had still be on that system this whole time, even if banks had wanted to hand out bunches and bunches of subprime loans, they would have been much more limited in how many they actually could have agreed to.

If you actually need an explanation as to why the Clinton administration pushing the CRA upon Fannie and Freddie even more was part of this... I mean, what's left to explain? The CRA (and bills that were tied to it) was about Fannie and Freddie buying up subprime loans from the original lending banks. It removed the risk of handing out those loans, so the banks just looked to give out more and more of them. That's called artificial demand. I literally don't know how to further explain it.

(Unless you count the fact that people who are "under water" lose the ability to "solve" the fact that they can't make their payments, by "refinancing" (and going further into debt.))

Erm... yes, that would pretty much be the problem.

As for Credit Default Swaps, they're insurance policies that investors can take out on things they don't actually own. It'd be like me taking out a life insurance policy on you. A bank would offer it if they thought that they'd ultimately make a profit because I'd make more in payments than they would dole out when you ultimately bit the dust. Banks (and AIG) literally lent out trillions in these things on subprime mortgages at absurd leveraging numbers.

I'm happy to get into further details of all this, but please don't tell me that I'm making up an explanation out of thin air because of... hell, I don't know, whatever motivation you're assuming I have. It's more than a little bit insulting to be told that I might as well be claiming that the Apollo landings had something to do with this.

[Larry]

If you actually need an explanation as to why the Clinton administration pushing the CRA upon Fannie and Freddie even more was part of this... I mean, what's left to explain? The CRA (and bills that were tied to it) was about Fannie and Freddie buying up subprime loans from the original lending banks. It removed the risk of handing out those loans, so the banks just looked to give out more and more of them. That's called artificial demand. I literally don't know how to further explain it.

Uh, the CRA, which was passed in the 70s, (see your own chronology), prohibited banks from refusing to make any loans whatsoever, to qualified buyers, if they were purchasing property in minority neighborhoods.

According to the posters I've seen who are actually in the mortgage business, it, among other things, required fixed-rate loans and 20% down payment.

I'm happy to get into further details of all this, but please don't tell me that I'm making up an explanation out of thin air because of... hell, I don't know, whatever motivation you're assuming I have.

I've said nothing of the kind.

It's more than a little bit insulting to be told that I might as well be claiming that the Apollo landings had something to do with this.

What I've pointed out, accurately, is that you've provided exactly as much of a linkage between Carter signing the CRA and this crisis as I've provided linking the Moon landings to it. Neither of us has attempted to show one.

It's theoretically possible that there is some kind of a link between a 40 year old law that prohibits racial discrimination against qualified buyers, seeking fixed rate loans, with 20% down, in minority neighborhoods; and unqualified buyers, seeking ARMs, with 0% down, in high priced neighborhoods.

But not one person has even attempted to propose such a linkage.

The closest they (and you) have come is simply declaring that the law was passed, then moving on to some other topic, and eventually mentioning the mortgage crisis.

The fact that it's possible to mention the CRA and the mortgage crisis somewhere in the same post (or in the same editorial) does absolutely nothing to show any kind of link whatsoever.

Any more than mentioning the Moon landing and the mortgage crisis in the same post would.