New at Reason

May 8, 2007

In the rant from Reason's June issue, Tim Cavanaugh refuses to buy in to the sub-prime mortgage hysteria.

Comments

|5.8.07 @ 12:20PM|#

Obviously, some lenders and some borrowers have made mistakes. Apparently, Chris Dodd and Hillary Clinton haven't. How nice for them. We've raised, and voted for, a bunch of whiners. I'll still prefer mistakes made by individuals and institutions that pull them down without taking the rest of us down, unlike when government gets involved 9see "Iraq; War in; failed intelligence reports, etc."

fyodor|5.8.07 @ 12:26PM|#

Obviously, some lenders and some borrowers have made mistakes. Apparently, Chris Dodd and Hillary Clinton haven't.

If Hillary knows now what she'll know in the future, she's guaranteed not to make any more mistakes! :-)

|5.8.07 @ 12:33PM|#

I don't know, I can certainly believe that an increase in foreclosures and emergency sales would drive the price of housing down, or at least slow its growth.

More importantly, the performance of our economy is so fundamentally reliant on optimism that anything that might sour that optimism could lead to a recession.

Simply believing that the bottom is going to fall out of the housing market causes everyone with liquid real estate to sell, which lowers prices for real.

fyodor|5.8.07 @ 12:35PM|#

Y'know, I'm all ready to jump all over the notion that this is all a tempest in a teapot, but Tim's article doesn't give me much ammo in the debate. Pointing out that closing prices are climbing in California seems particularly unuseful when nationwide the picture is distinctly unrosy. Just in today: the National Association of Realtors forecasts the first home-price decline since it began tracking values in 1968.

|5.8.07 @ 12:42PM|#

This is the same sort of housing bubble as happens ever 10-20 years in various parts of the USA. The difference being the increased use of exotic (and ultimately unpayable) mortgages and the rise of mortgage-backed securities, which enabled lending banks to loosen underwriting standards, since they'd be selling off all of that risky paper to someone else.

Anyway, subprime is not the real issue; interest-only and "option" mortgages are, and those were given out to all classes of borrowers, include the primest of the prime. Those loans only work if you can sell your house at a substantial profit when the loan balloons to full interest/principal payments. And the fact is that housing prices got so high that even prime borrowers could only "buy" using an exotic loan on which were not acquiring any equity by paying down principal. It's a classic bubble and it's in the middle of crashing right now. I don't buy the apocalyptic scenario, but to deny the bubble is silly at this point.

|5.8.07 @ 12:43PM|#

That article wasn't really about not buying into the sub-prime fallout. Tim's right that there's no need for legislation here; lenders should be able to do what's good for business and buyers should be able to make informed decisions, even risky ones. But the intense amount of speculation leveraged through ARM style loans IS having a large effect on the housing market. Just because you don't think the government should do anything about it doesn't mean you can pretend it's not there at all. Oh, and home prices ARE falling, in a lot of western cities. It's perfectly natural for them to fall, it's simply because of an increase in inventory and a softening of demand. The use of so much high risk lending increased the size of the housing boom, and now many of those loans will fail and put homes back on the market, which increases the inventory, blah blah blah. No need for hysteria, but also no need to deny the phenomenon entirely.

|5.8.07 @ 12:46PM|#

Wow, by the time i finished typing that 4 other people had already said the same thing.

|5.8.07 @ 1:02PM|#

Tim's right that there's no need for legislation here; lenders should be able to do what's good for business and buyers should be able to make informed decisions, even risky ones.

And that is, indeed, the bottom line. Any government action will undoubtedly be to bail out certain people for making risky and foolish decisions. In other words, the people who acted in a financially responsible manner will be forced to give some of their money to the idiot speculators and their banker overlords.

|5.8.07 @ 1:06PM|#

This will get ugly for somebody, probably the lenders. All of these products geared at getting loans to people who actually couldn't afford them over the life of the loan (this is true for affluent people as well as low-income folks) coupled with a huge pricing spike caused by almost unprecedented real estate speculation means that something has to give.

Frankly, I expect that government pressure will be applied to lenders to not foreclose (most don't want to, anyway) and to take most of the hit for making these silly loans. There are more borrowers with votes, see. What that might to do the mortgage industry as a whole is anyone's guess, but I don't expect it to be a good thing.

There's also the problem that wages don't match housing in many markets. Not good and definitely not a stable situation over the long haul. Of course, many states and localities enjoy overpriced markets, because they can gouge the citizens out of more property taxes that way. Yippee!

|5.8.07 @ 1:08PM|#

How many houses do we need? OMG, I've never seen so many condo towers and massive housing developments go up simultaneously. Who's going to buy all of these at increasingly inflated rates? Ding-dong... Hello? They're not! Duh the prices are going to go down. Once we've had our fill of second homes, time shares, and suburban money-pits, there's going to be more supply than demand, which is what we're beginning to see. No big deal. Just let the developers and banks backing the investments learn from their lessons. Similarly with subprime borrowers, if we continue to bail people out, will they ever learn? Or will they only learn that we'll continue to bail them out?

|5.8.07 @ 1:14PM|#

It's all about safety nets and consequence avoidance. Which would be fine if we were an interstellar empire with virtually unlimited energy and resources and Star Trek-style replicators.

But we're not.

|5.8.07 @ 1:18PM|#

Google "moral hazard." It will tell you everything you need to know about this.

|5.8.07 @ 1:20PM|#

But we're not.

Speak for yourself. Computer, I'd like some tea. Earl Grey.

libertreee|5.8.07 @ 1:22PM|#

No one on the thread so far has brought up the
ABC--The Austrian Business Cycle.

What are financial bubbles? Are all these sharp business folks all "making mistakes" at the same time? Or is something else going on...

Hey, libertarians, how about the central bank creating debt money out of thin air, causing malinvestment in Wall Street, and in Housing? Didn't anyone hear Ron Paul talk about the inflation tax?

|5.8.07 @ 1:25PM|#

ChrisO,

Aw, man, I'm so jealous. Do you live in the Kirkian Age (The Miniskirtilithic Era)?

highnumber|5.8.07 @ 1:31PM|#

ProGLib,

The lenders are the ones suffering.

That website came to me in an email being forwarded from mortgage company to mortgage company.

|5.8.07 @ 1:33PM|#

"or is something else going on...."

What the F are you talking about? are you saying there is some sort of jewish conspiracy to over-inflate markets then crash them?

'bubbles' are perfectly natural and even healthy for most markets in the long run.
are you anti-capitalist?

I guess your last question - directed at libertarians - is: do Keynesian economics fall in line with libertarian principles?

|5.8.07 @ 1:46PM|#

highnumber,

So far, that's true. We're not at the bail-out stage just yet, though. We'll see how this all falls out.

Could end up with a round or two of mergers. I suspect Countrywide will get eaten up, as well as Washington Mutual. Too much real estate on the books and too many ARMs.

fyodor|5.8.07 @ 1:47PM|#

Any government action will undoubtedly be to bail out certain people for making risky and foolish decisions.

Oh, the central planners are much too imaginative than to stop there! They'll likely want to inflict regulations making housing loans more difficult on the grounds that the borrowers and/or lenders are too foolish to know their own best interest and/or these deals gone bad bring the rest of us down.

I remember first hearing about all this from my then roommate, a dyed in the wool leftwing central planner who told me that companies' stock prices had sunk because of the sub-prime market and that it was all because "the system is bad"!

scr0d|5.8.07 @ 1:48PM|#

Strangely, though, homebuyers in Southern California, the epicenter of the sub-prime quake, don't seem to have heard the news. Actual closing prices continued to climb throughout the industry crash.

While I think your argument is fine as far as this being a market correction and not a need for new regulation, etc., I suspect you're indulging in the very partisan & lazy habit that says that the easiest way to argue down those who might call for regulation is to - instead of suggesting how to better solve or handle the problem - just pretend the problem doesn't exist in the first place.

This happens a lot. It's why you guys looked so dumb on global warming all those years.

You really think home prices are gonna be fine? C'mon. Just tell us why they're not, but also why we don't need billion dollar entitlement programs to get through it.

|5.8.07 @ 1:56PM|#

"Pointing out that closing prices are climbing in California seems particularly unuseful when nationwide the picture is distinctly unrosy."

Southern California has been sort of the worst of the worst in terms of speculative building. I saw a stat once on the Commercial side that suggested that at one point there was as much construction going on in the Inland Empire than there was in the rest of the country combined. As such, it kinda makes for a canary in a coal mine.

...also, Cavanaugh is writing for the LA Times now, which maybe focuses his thinking in the same way that Young's thinking probably revolves around what's going on in Lebanon. That's probably as it should be.

Also, even if this isn't just a tempest in a teacup, rather, especially if this isn't just a tempest in a teacup, it's important to deal with the fallout rationally. ...rather than with legislation.

highnumber|5.8.07 @ 1:58PM|#

ProGLib,

Countrywide in trouble?
Oh, no, I don't see any trouble.

|5.8.07 @ 2:02PM|#

highnumber,

I have friends in the legal department there, so I hope they get saved somehow. Things look pretty dire at the moment, aside from the Hamiltonian tan of their CEO.

highnumber|5.8.07 @ 2:09PM|#

Have your friends polished their resumes?
It's never too soon.

thoreau|5.8.07 @ 2:11PM|#

Also, even if this isn't just a tempest in a teacup, rather, especially if this isn't just a tempest in a teacup, it's important to deal with the fallout rationally. ...rather than with legislation.

Amen.

|5.8.07 @ 2:12PM|#

Oh, no one in the mortgage industry can go long without being laid off, transferred, or otherwise messed with. The people I used to work with are scattered like dust in the wind. I've only managed to stay put by abandoning the industry altogether for the exciting world of television.

highnumber|5.8.07 @ 2:19PM|#

Television - much more stable.

You worked in the legal dept of a mortgage company? Bank? How long? What were your responsibilities?

|5.8.07 @ 2:22PM|#

Regulatory compliance, transactional, advertising compliance, privacy, etc. Banking and mortgage. I know subprime well, having supported a certain bank's former finance company.

highnumber|5.8.07 @ 2:29PM|#

Mortgages are a thrill a minute. I'm looking to get out. I'm going to look into becoming a PI. Any advice?

|5.8.07 @ 2:33PM|#

Aw, man, I'm so jealous. Do you live in the Kirkian Age (The Miniskirtilithic Era)?

In my 29th Century time ship, I flit between there and the later Troiancleavage Age. Depends on my mood.

|5.8.07 @ 2:37PM|#

PI? Private Investigator? Personal Injury attorney? Public Irritant? Pelvic Interrogator?

I need more data.

|5.8.07 @ 2:38PM|#

I suspect you're indulging in the very partisan & lazy habit that says that the easiest way to argue down those who might call for regulation is to - instead of suggesting how to better solve or handle the problem - just pretend the problem doesn't exist in the first place.

Well, our government is littered with programs and agencies that don't really match up well with actual problems in the real world. I think the burden of proof is on those proposing regulation. You?

This happens a lot. It's why you guys looked so dumb on global warming all those years.

I suspect that in a few years its the people who were pushing the global warming agenda who are going to look dumb. Given their history of hysterical over-reaction to ephemeral phenomena, I think this is a safe bet. Time will tell, though.

|5.8.07 @ 2:44PM|#

I think scr0d has an excellent point. Us libertarians should stick to showing people that if they stop f'ing with everything, things will turn out all right. There's no reason, as a libertarian, to refute things like global warming because it's not a necessary condition that global warming not exist for our ideology to be all that we promise it is. All refuting things like economic crises, housing bubble bursts, and global warming does is make it seem as though we need these things not to exist in order for libertarianism to be viable... Seriously, pick your battles.

highnumber|5.8.07 @ 2:45PM|#

Private Investigator. I like to research things. I'm patient (mostly). I'm good at spotting fraud.

I'm already a Public Irritant and Pelvic Interrogator, although I'm licensed as neither.

|5.8.07 @ 2:48PM|#

I think the burden of proof is on those proposing regulation. You?

Even so, it doesn't hurt to have a counter-suggestion rather than only to say "that law is stupid".

|5.8.07 @ 2:49PM|#

"I suspect you're indulging in the very partisan & lazy habit that says that the easiest way to argue down those who might call for regulation is to - instead of suggesting how to better solve or handle the problem - just pretend the problem doesn't exist in the first place."

I'd offer up some improved version of regulation, but I don't understand how regulation is supposed to improve things here.

...we already have laws against fraud.

|5.8.07 @ 2:52PM|#

highnumber,

Just don't take divorce cases.

highnumber, PI. I call Robin Masters! VM can be TC. Rick? I'm not sure. Higgins? Kerry Howley (if they can do it with Starbuck, we can do it with Higgy Baby)?

There's money to be made in conducting background checks. For instance, small banks have to run checks on officers and directors. Most of that sort of thing can be done on-line, either for free, or through pay services. The latter are okay, because you can pass along any costs.

Heh, heh--have you ever read any of the Matthew Scudder novels? He's not licensed; he just does "favors" for people.

|5.8.07 @ 2:58PM|#

I survived the Resolution Trust Corporation (and I didn't get a T-shirt, dammit) so stories like this one produce something like PTSD flashbacks. The problem is going to be that once foreclosures reach a tipping point, the Feds will come in and bail out the lenders, in an effort to "stabilize" the market. What this means will be something like the financial equivalent of farm subsidies -- giantcorp gets a handout and everyone else get screwed. In the case of the RTC, the original problem was bad -- lots of empty buildings of a value less than the loans they secured -- but the solution -- ruthless banking consolidation, even in cases where it wasn't necessary -- was a lot worse. It's my opinion that the RTC extended the recession in Texas two years past when the rest of the country began to come out of it. My husband and I profited, in that we bought a house for $70,000 in 1992 which we sold for $135,000 in 1999, but still.

|5.8.07 @ 3:42PM|#

"It's my opinion that the RTC extended the recession in Texas two years past when the rest of the country began to come out of it. My husband and I profited, in that we bought a house for $70,000 in 1992 which we sold for $135,000 in 1999, but still."

I don't remember hearing about anybody losing money on anything they bought out of RTC. ...I'm sure it happened, but I bet it didn't happen very often.

RTC was better than the Japanese model--those guys have just recently come out of the S&L crisis! ...I don't think many people lost money on commercial property they bought from Japanese companies back in the nineties either.

And this is much smaller than RTC, I think. We're really just talking about loans made over the last three years or so... Rather, I think we're talking about loans packaged for speculators within the last couple of years.

Seeing some 20% of home buyers over the last few years become renters again really doesn't seem like such a big deal to me. ...unemployment's low. A healthy market is when the rental rates justify the sales prices, so maybe rental rates go up? It's not like the country's gonna turn into Detroit.

VM|5.8.07 @ 3:48PM|#

Higgins = Mr Steven Crane... or Rick. whichevs.

Better PI world - I call Hawk. You can be Quirk. That means that Crane can be either Susan or Belson.

(books not the tv series)

|5.8.07 @ 3:54PM|#

I liked my choice for Higgins better. We've got to appeal to the young male viewers.

Okay, then, I'll be Huggy Bear in a cross-network promotional deal.

highnumber|5.8.07 @ 3:59PM|#

I thinking more like The Big Lebowski.
Mr Steven Crane = Walter
Pro Libertate = Brandt
jimmydageek = Donny
VM = The Dude's landlord

|5.8.07 @ 4:03PM|#

Nah, there are better movies/TV shows to model your PI firm on. If not Magnum, then how about Jim Rockford?

|5.8.07 @ 4:11PM|#

All refuting things like economic crises, housing bubble bursts, and global warming does is make it seem as though we need these things not to exist in order for libertarianism to be viable.

Why concede that there is some kind of massive problem before the statists have met their burden of proof?

Trust me, Reinmoose, the libertarians aren't the ones looking like fools after the Great Ozone Hole Scare, or the Great Alar Scare, or any of their ilk. It doesn't hurt us to fight the statists on the facts as well as the law.

Even so, it doesn't hurt to have a counter-suggestion rather than only to say "that law is stupid".

Why isn't "just leave it alone, it will work itself out" a viable counter-suggestion?

|5.8.07 @ 4:15PM|#

Ken, I'm pretty much certain that no purchasers lost any money on their RTC deals, it's the sellers who mostly and unnecessarily got it in the chin. Many of those loans were performing, or capable of being refinanced at a more reasonable rate, but the RTC didn't do that. Also, it affected non-foreclosure sales pretty badly at the time. Our house in fact was not foreclosure, but it was in a neighborhood where about 15% of the other houses were RTC, so the prices tanked for everybody.

Pro L and highnumber, definitely go with Rockford over Magnum. Much, much better plots and more numerous repeating characters. Also better theme music. Also, to completely jack the thread, what's your favorite series-novel detective? English or American? (My favorites are, in order, Cordelia Gray, Lord Peter Wimsey, and Philip Marlowe.)

VM|5.8.07 @ 4:28PM|#

Urkobold = Karl Hungus

|5.8.07 @ 4:30PM|#

Very well, Karen, Rockford it is. I call Lance White! VM can be Angel.

As for my favorite series detective, I'm not sure that I have one. I like so many! Hammett, Chandler, etc. are all fun. I still like Mr. Holmes, too :)

highnumber|5.8.07 @ 4:35PM|#

I like Karl Hungus for Urkobold, but something about Urkobold = Jeffrey Lebowski strikes me as right, too.

|5.8.07 @ 4:36PM|#

Why concede that there is some kind of massive problem before the statists have met their burden of proof?

Trust me, Reinmoose, the libertarians aren't the ones looking like fools after the Great Ozone Hole Scare, or the Great Alar Scare, or any of their ilk. It doesn't hurt us to fight the statists on the facts as well as the law.

While much of what you say is true, what harm has LOOKING like fools done to the statists? They're the overwhelming majority of people, and when the overwhelming majority of people look like fools, they either 1. don't realize it because they're all fools, or 2. don't really care, because they don't respect the libertarians, and 3. the libertarians are in no particular position of power because we're an incredibly small minority of people, so we can't punish them for their foolishness. Additionally, when we are proven right and show them that they are completely wrong about something, do they start re-evaluating their opinions? No! So what end are we feeding, other than our own egos, if we sit here and yell at them that their crises aren't in fact crises, and we eventually are proven right? Nothing, as far as I can see.
In my opinion, we're better off making them feel like they're smart by thinking more like us than making them, the ones in power, feel dumb by thinking for themselves. Al least it might help curb the "we may be wrong, but at least we're DOING something about it" mentality.

highnumber|5.8.07 @ 4:36PM|#

Guy Montag = the Jesus.

|5.8.07 @ 4:42PM|#

The Urkobolod is Rocky, of course.

VM|5.8.07 @ 4:43PM|#

It works. But... What. About. Crane?

VM|5.8.07 @ 4:47PM|#

d'oh - sorry for double.

High#: do you still have the home movies from that day you were tagging along with G"tJ"M Dienstag, watching him notify all the neighbors?

highnumber|5.8.07 @ 5:13PM|#

I can't find it. Sorry.

edna|5.8.07 @ 5:16PM|#

If not Magnum, then how about Jim Rockford?

i wanna be beth davenport.

highnumber|5.8.07 @ 5:38PM|#

edna,

Send a photo, then we can talk.

|5.8.07 @ 5:49PM|#

What's interesting is how much the casts and guest stars of The Rockford Files, Magnum P.I., and Baa, Baa, Blacksheep overlapped.

highnumber|5.8.07 @ 6:06PM|#

ProGLib,

It always made sense to me that the guests on Love Boat and Fantasy Island overlapped. Think about it.

Thomas Paine\'s Goiter|5.8.07 @ 6:22PM|#

I really wish that just one national writer would point out that there is no housing "market". It's a collection of regional and sub-regional markets that don't act anything like each other.

Around the suburbs of Pittsburgh, there are booming communities just over the border from the county of Allegheny and their taxes -- the prices there have increased at an astouding rate in the last 15 years. Hell, the communities didn't really exist 15 years ago.

Yet just 5 miles away from those communities are dead steel towns where real-dollar housing prices have declined for a looooong time. many of these places are selling at a loss, taking into account inflation.

The same is true of many cities like Cleveland, Indianapolis, Minneapolis, Kansas City, etc.

There is no national housing market and no one seems to acknowledge this.

|5.8.07 @ 6:24PM|#

Fantasy Island was cool when Roark was quasi-evil. Friggin' TV can ruin anything.

Love Boat was cool when Captain Stubbing was Murray/Moriarty. Or during that brief period when Captain Picard was in command. With that chick from Blame it on Rio.

TPG,

There is no national housing market. Mrs. Libertate and I could sell our house and buy a mansion in Montana.

Thomas Paine\'s Goiter|5.8.07 @ 6:25PM|#

There is no national housing market. Mrs. Libertate and I could sell our house and buy a mansion in Montana.

Now, can I make you a national writer? :)

|5.8.07 @ 6:30PM|#

How am I not national? I'm posting from Tampa, on a blog hosted in California, about a home in Montana, to readers in Pittsburgh and beyond.

Heck, I'm sure that space aliens are reading this, so I'm an interstellar writer. In fact, I believe that I am the most popular writer on several different worlds.

Does that help?

Thomas Paine\'s Goiter|5.8.07 @ 6:32PM|#

Okay cool - syndicate yourself.

|5.8.07 @ 6:35PM|#

Nick will be eating his words by this time next year, or I will. This is going to be huge! We'll be in a deep recession by this time next year. After the dot.com crash, GreenScam sold us out with ridiculously cheap money. The Tech Bubble became the Housing Bubble. What's next? Tulip bulbs? I hate fiat money.

highnumber|5.8.07 @ 6:37PM|#

TPG,

Stop encouraging ProGLib.
He'll just go off his meds again and end up back at the home. We're close to that already. He thinks he's married to an expectant mother with stepdaughters. Really, he overinflated the Noam Chomsky blowup doll (Don't tell VM) and he has a rodent infestation.

|5.8.07 @ 6:42PM|#

Infestation is a strong word. The hamster remains caged, except when it runs amok in its blue sphere of amok-running.

TPG,

In all seriousness, news reporters are among the most ignorant fucks on Earth (present company excepted, of course). And when they aren't actually ignorant, they willfully behave so as to sell a danged story to the LCD. Reading about science, law, statistics, etc. in most popular publications is a pointless endeavor if you seek actual knowledge. Thank Prometheus for the Internet!

Thomas Paine\'s Goiter|5.8.07 @ 7:15PM|#

Yeah, PL, I understand that, but it's simply maddening to hear time and time again about the "housing market" all time highs when I can go to a depressed (not bad mind you) neighborhood in Cincinnati and get a 4 BR, 2 bath place with a garage for $130,000, the same price with inflation that it was 15 years ago.

highnumber|5.8.07 @ 7:24PM|#

It drives me nuts to hear loan officers a few feet away from me on the phone with clients telling them how their home is sure to appreciate even if not at the rate homes have recently. The loan officers believe it, so they're not shady, they're just dumb.
Never depend on your home's value appreciating. Assume it will keep pace with the economy and that it will cost you money to maintain. Pay your mortgage down to build equity.

|5.9.07 @ 1:32AM|#

Part of the problem is that people received loans that were wildly out of synch with the actual amount of risk involved.

Like Japan and Japanese banks back in the '80s and early '90s. They were throwing money at anything that moved (and a lot that didn't--golf courses in Thailand?). No decent risk analysis at all.

Here in the US, with the slicing and dicing of the financial wizards and the commodification of risk, it all became Somebody Else's Problem and nobody ever bothered to check to see if anyone was minding the store. EVERYONE was making money off the racket--the buyers didn't care because the values were going up, the realtors didn't care because they were getting their cut, the local authorities didn't care because ever increasing property taxes meant a much higher stream of cash, and the banks didn't care because people were paying their mortgages and thay had sold off the riskier bits--or so they assumed--to some bigger fool.

Classic bubble. I was in Japan during that roller coaster and will point out that yes indeed, it is possible for real estate to drop 40% in value. I've seen it.

|5.9.07 @ 1:54AM|#

The Real Bill | May 8, 2007, 6:35pm | #

Nick will be eating his words by this time next year, or I will.

Oops! I mean Tim, not Nick! Sorry Nick!

|5.9.07 @ 12:17PM|#

Wow, that straw man with the "Poor people's access to debt is the problem" sign around its neck didn't stand a chance.

OK, class, can anyone tell Mr. Cavanaugh the difference between the "access to debt" provided by New Deal programs and a fifteen year ARM with a low introductory rate and no income-verification requirements?

highnumber|5.9.07 @ 12:55PM|#

Gov't involvement?