Please, Mr. Lender, Exploit Me Some More

Jacob Sullum | October 3, 2008

In last night's vice presidential debate, Sarah Palin attacked "predator lenders," which made it sound like she was opposed to the sharing of lions and tigers among zoos. Judging from the context, I'm pretty sure she meant "predatory lenders":

Moderator Gwen Ifill: The next question is...about the subprime lending meltdown. Who do you think was at fault? I start with you, Gov. Palin. Was it the greedy lenders? Was it the risky home buyers who shouldn't have been buying a home in the first place? And what should you be doing about it?

Palin: Darn right it was the predator lenders, who tried to talk Americans into thinking that it was smart to buy a $300,000 house if we could only afford a $100,000 house. There was deception there, and there was greed and there is corruption on Wall Street. And we need to stop that.

Again, John McCain and I, that commitment that we have made, and we're going to follow through on that, getting rid of that corruption.

One thing that Americans do at this time, also, though, is let's commit ourselves, just everyday American people, Joe Six Pack, hockey moms across the nation, I think we need to band together and say never again. Never will we be exploited and taken advantage of again by those who are managing our money and loaning us these dollars. We need to make sure that we demand from the federal government strict oversight of those entities in charge of our investments and our savings and we need also to not get ourselves in debt. Let's do what our parents told us before we probably even got that first credit card. Don't live outside of our means. We need to make sure that as individuals we're taking personal responsibility through all of this. It's not the American people's fault that the economy is hurting like it is, but we have an opportunity to learn a heck of a lot of good lessons through this and say never again will we be taken advantage of.

Despite the nod toward "personal responsibility" in that last paragraph, this is a very strange take on the situation, especially coming from a self-identified conservative who supposedly believes in free markets. Exactly what is a predatory lender, and how does he profit by lending money to people who can't pay him back? That sounds more like a stupid lender. What about the predatory borrower, who takes out a loan and breaks his promise to pay it back? If anyone is getting ripped off here (aside from the taxpayers who have to pay for the bailout Palin and her running mate support), isn't it the lender? Evidently not. In Palin's topsy-turvy world, you are being "exploited and taken advantage of" when you take the money and run.

Comments

|10.3.08 @ 1:22PM|#

how does he profit by lending money to people who can't pay him back?

Bundling a bunch of them and selling them as MBSs.

That's why entities that couldn't sell their loans, like CRA-covered banks, have lower default rates - because they hold those mortgages, and thus have a stronger incentive to loan responsibly.

Derrick|10.3.08 @ 1:24PM|#

We libertarians need our own cable news network, if we are to make any difference at all. I'm going to comment about it under every blog post until someone starts one.

|10.3.08 @ 1:24PM|#

Um, she's not really wrong here. I don't like placing all the blame on the lenders either, both sides were stupid. But to say the lenders couldn't possibly have been greedy and wrong here... I mean, where have you been Jacob? they didn't care if they wrote loans that couldn't be repaid by the borrower because they were always going to sell them upstream anyway. They were making money hand over fist without regard for the consequences. In many instances, they were definitely taking advantage of the borrower by talking them into a loan they couldn't afford.
I guess it should be predatory brokers, instead of lenders.

Josh|10.3.08 @ 1:26PM|#

Sounds like you're failin', Palin.

Context, people, context|10.3.08 @ 1:27PM|#

If a young nubile coed pulls her pants down on camera for fun, she's an exhibitionist. If she does it for money, she's exploited.

If a fellow borrows money he has no chance of paying back from his buddy, he's a welcher. If he does if from a bank, he's exploited.

Duh.

|10.3.08 @ 1:28PM|#

Predators need lending too.

Bingo|10.3.08 @ 1:29PM|#

If a young nubile coed pulls her pants down on camera for fun, she's an exhibitionist. If she does it for money, she's exploited.

I keep clicking on this but there's no link!

libertarian democrat|10.3.08 @ 1:30PM|#

I admit it; I have not returned the liger that I borrowed.

|10.3.08 @ 1:31PM|#

Predator lenders... are those anything like loan sharks?

|10.3.08 @ 1:31PM|#

I keep clicking on this but there's no link!

If a young nubile coed pulls her pants down on camera for fun, she's an exhibitionist. If she does it for money, she's exploited.

Fluffy|10.3.08 @ 1:34PM|#

I mean, where have you been Jacob? they didn't care if they wrote loans that couldn't be repaid by the borrower because they were always going to sell them upstream anyway. They were making money hand over fist without regard for the consequences. In many instances, they were definitely taking advantage of the borrower by talking them into a loan they couldn't afford.

Where you HAVE been, Pinette? Apparently in a leftist talking point fantasy world.

If you "sell a loan upstream" as you put it, and the loan goes into default, you have to buy it back.

The worst excesses of subprime lending took place during a time frame when foreclosures were decreasing to historical lows. A cursory glance at the data will tell you this. Arguments that rely on the premise that lenders, in the aggregate, were deliberately making loans they knew could be paid back need to account for that data point, and they can't. When a higher and higher percentage of loans are being paid back every year, lenders have every reason to think that their lending practices are sound.

Therefore, to identify the cause of the crisis, we have to identify the cause of the phenomenon of anomalous low foreclosure rates during the boom. And there's no way to construct a narrative explaining those low foreclosure rates that can avoid handing the lion's share of the blame to fed monetary policy and Bush administration fiscal policy.

libertarian democrat|10.3.08 @ 1:34PM|#

I have BtVS flashback every time I hear loan shark in reference to actual animals.

Fluffy|10.3.08 @ 1:35PM|#

That should say, "...could not be paid back need to account for..." Sorry, that changes the meaning quite a bit.

|10.3.08 @ 1:37PM|#

"What about the predatory borrower, who takes out a loan and breaks his promise to pay it back?"

He's the only one who gets to vote, and to the extent that the Democrats pressured lenders and used the balance sheet of Fannie and Freddie to buy his vote it was "predatory".

It was never about making money, it was never about credit risk, it was about awarding homes to minorities, at taxpayer expense, to insure their poitical loyalty, it was about political patronage.

If you think that you can win elections by calling potential voters crooks and liars, you're mistaken. In order to reform the system you must first win the election.

SIV|10.3.08 @ 1:38PM|#

Mortgage originators would qualify as "predatory lenders".They get paid upfront and don't have to worry if the money is ever paid back. "Predatory borrowers" would include anyone who borrowed in anticipation of equity extraction and walking away if they couldn't break even or profit on a sale.If you borrowed more than you could pay back with no anticipation of profiting you aren't predatory, just stupid.

|10.3.08 @ 1:39PM|#

If you "sell a loan upstream" as you put it, and the loan goes into default, you have to buy it back.

MBSs?

The worst excesses of subprime lending took place during a time frame when foreclosures were decreasing to historical lows. Depends on what you mean "the worse excesses." If you mean simply giving out inplausible loans to, for example, people who expected to sell their homes at twice the price after six months of paying their mortgage out of savings, sure. If you're talking about predatory lending - taking advantage of little old ladies and others who didn't understand what they're getting into - that's been going on for a long time.

Palin's problem is that she doesn't understand the difference between the two.

|10.3.08 @ 1:40PM|#

Damn minorities. I knew it was their fault.

|10.3.08 @ 1:44PM|#

Darn right it was the predator lenders, who tried to talk Americans into thinking that it was smart to buy a $300,000 house if we could only afford a $100,000 house.

See, that kind of populist/progressive crap I can do without.

joe @ 1:22 is quite correct on why banks that resold their mortgages became so indifferent to the risk of default.

If you "sell a loan upstream" as you put it, and the loan goes into default, you have to buy it back.

Is that right? Its the first I've heard of it. If that's the way it works, then I don't see why the risk of default would flow through to any loan pools or MBSs. The only risk would be the risk of the originating bank going under.

Therefore, to identify the cause of the crisis, we have to identify the cause of the phenomenon of anomalous low foreclosure rates during the boom.

Perhaps, the high-risk loans were going to people who weren't planning to keep the house for very long, and the loans were being paid off by sale of the house before they could go into default? This worked to keep high-risk loans from defaulting (much) until the bubble burst, the housing market slowed down, and the house couldn't be sold as fast/for enough to pay off the loan. I'm just guessing, really.

BakedPenguin|10.3.08 @ 1:45PM|#

Loan sharks! With lasers on their heads!

Fluffy|10.3.08 @ 1:45PM|#

Mortgage originators would qualify as "predatory lenders".They get paid upfront and don't have to worry if the money is ever paid back.

Half the broker shops in the country that have closed since late 2006 were wiped out by buyback notices from lenders.

[The other half couldn't survive without high-margin subprime shit in large quantities closing every month.]

If you mean simply giving out inplausible loans to, for example, people who expected to sell their homes at twice the price after six months of paying their mortgage out of savings, sure.

Yes, and these are the loans that have created our current crisis.

If you're talking about predatory lending - taking advantage of little old ladies and others who didn't understand what they're getting into - that's been going on for a long time.

Yes, it has. But churning and equity stripping and high-cost loans are much more restricted by regulation today than they were 15 years ago.

If these truly predatory practices became more widespread during the boom than they had been before, it was almost certainly due to the fact that dramatic increases in real estate values had placed a lot of home equity in the hands of unsophisticated borrowers. So in a sense the Fed's bubble helped worsen this problem, too, by turning little old ladies with houses into honeypots to attract bear raiding parties.

Invisible Finger|10.3.08 @ 1:46PM|#

If you "sell a loan upstream" as you put it, and the loan goes into default, you have to buy it back.

It's not that simple, fraudlent info has to be proven to have been provided, or the loan has to go bad in the first 6 months or so. Not that many bad loans ever go back to the originating broker.

|10.3.08 @ 1:47PM|#

Candy Gram...

Fluffy|10.3.08 @ 1:49PM|#

Is that right? Its the first I've heard of it. If that's the way it works, then I don't see why the risk of default would flow through to any loan pools or MBSs. The only risk would be the risk of the originating bank going under.

New Century isn't around any more to buy their loan production back. Neither are most of the brokers who sold to New Century. Just as an example.

The correspondent agreements and broker agreements that lenders and conduits use to govern loan purchases put as much risk as possible back on to the shoulders of the originator. The problem is that a lot of these originators are already gone.

They don't put 100% of the risk back - typically loan repurchase is only triggered by fraud, or if a loan becomes delinquent within its first 3-6 payments. But that's enough to make it simple untrue that lenders were incented to make truly crazy loans that could never be paid back.

|10.3.08 @ 1:51PM|#

Yes, and these are the loans that have created our current crisis.

Yes, they are. Whatever you think about low-income people and their mortgages, that is a minute segment of the market, accounting to an even more minute portion of the dollar-value in foreclosure, and can't begin to explain why the financial sector melted down.

But churning and equity stripping and high-cost loans are much more restricted by regulation today than they were 15 years ago. Among banks, I can believe that, but among Ameriquest and Countrywide and that lot? They became an ever-larger share of the mortgage market starting a decade or so ago.

Please hold the lion|10.3.08 @ 1:52PM|#

Newton's Fig Law is like joe's, only lawyer, in fact, the lawest.

|10.3.08 @ 1:52PM|#

how does he profit by lending money to people who can't pay him back?

Bundling a bunch of them and selling them as MBSs.

GSOs did that, right? Fannie and Freddie with the implicit promise of federal guarantees? The original lenders didn't. They were acting as salesmen for loans the the GSOs would take off their books without question.

I've said it before but it bears repeating. Freddi and Fannie should be taken behind the barn and shot. Everybody else should eat their own losses. That especially includes those who defaulted on their loans.

Those who committed fraud, borrowers, lenders, brokers, appraisers et al should be prosecuted.

And don't worry about the poor. People have assureds me that they are not a significant part of the default problem which is the root of this crap.

Fluffy|10.3.08 @ 1:53PM|#

It's not that simple, fraudlent info has to be proven to have been provided, or the loan has to go bad in the first 6 months or so. Not that many bad loans ever go back to the originating broker.

Buybacks put New Century out of business. And Fremont. And a lot of other names on the Implode list. Really small brokers are rarely pursued, but that's because they generally have few enough assets that they're judgment-proof.

"Loans that go delinquent in the first 6 months" includes a lot of the subprime production that is currently in foreclosure.

People are painting a picture of devil-may-care lenders to whom it didn't matter if a loan was ever repaid - but it did matter, because if the loan went delinquent in the first few payments the originator was fucked.

|10.3.08 @ 1:53PM|#

Loan shark

"Yeah, you got money to pay for fake mustaches, huh? Yeah, yeah, how much did you pay for that fake mustache?"

|10.3.08 @ 1:54PM|#

we have to identify the cause of the phenomenon of anomalous low foreclosure rates during the boom.

If you can't make your monthly payments and your house is appreciating, you can always sell it before foreclosure and pay the bank back and you might be able to make some money also. However, when the house is depreciating you don't have the option of selling the house.
Because the market value will likely be less than the principal of the loan.

That might explain it.

|10.3.08 @ 1:54PM|#

But that's enough to make it simple untrue that lenders were incented to make truly crazy loans that could never be paid back.

Well, NEVER is a big word. Especially when you type it like THIS.

I think it's safe to say that a greater cause is that lenders, like borrowers, assumed the real estate prices would rise forever, and that the borrowers could just sell if the payments were too high. Say, wouldn't that mean more frequent sales and more frequent origination and closing fees would result from giving people oversized mortgages?

|10.3.08 @ 1:55PM|#

"Therefore, to identify the cause of the crisis, we have to identify the cause of the phenomenon of anomalous low foreclosure rates during the boom."

The fed bubble definitely created a lot of "wealth". But that doesn't excuse people's stupidity. The last few years really have been a case of the country loosing its collective minds about housing. People actually thought that home prices would rise indefinitely.

What I wish someone would do is explain in one of these debates how this madness hurt ordinary people. When some jackass gets an interest only teaser loan for twice the amount he should be borrowing that that the payments are going to quadruple in four years, he artificially drives up the price of housing for everyone. Someone who is actually prudent and only intends to borrow what they can afford can't compete with people who are borrowing two and three times what they should be. Honest people were priced out of the market thanks to this crap. Yes, people benefited from their homes being worth more, but what good is that wealth? Is it not like you can sell your house and pocket the money and go without one.

|10.3.08 @ 1:56PM|#

I keep clicking on this but there's no link!

If a young nubile coed pulls her pants down on camera for fun, she's an exhibitionist. If she does it for money, she's exploited.

A much better (read: NSFW) link than Episiarch's lame link.

|10.3.08 @ 1:57PM|#

"I think it's safe to say that a greater cause is that lenders, like borrowers, assumed the real estate prices would rise forever, and that the borrowers could just sell if the payments were too high."

I agree Joe. Who would they sell to? Other people who would borrow to much on the idea that homes would rise forever. It was just a ponzi scheme. Eventually, they ran out of people to sell to and the bill came due.

Bingo|10.3.08 @ 1:58PM|#

Praise jesus, the webcam is the best invention of the past 20 years.

classwarrior|10.3.08 @ 1:59PM|#

Whenever there is a need for shallow analysis of an economic problem, you can always call on the good folks at reason to come through. Jacob, have you ever considered responsibility in these matters cuts both ways, and that financially unsophisticated people should not be aggressively targetted with loans that are chock full of hidden fees and traps? Here are two examples:

Mortgage free homes in poorer neighbourhoods are offered mortgages (buy that car you always wanted!)that the lender hopes will not be paid off so that the home can be foreclosed and then sold for a substantial profit.

Then there are the adjustable rate mortgages with the low teaser rates. Often the borrower is not aware how much the payments will go up, or is assured that "you can always refinance". Of course the lenders then took all these shakey loans and bundled them up to hide their riskiness, abetted by the rating agencies with their obvious conflicts of interest (both selling them and hoping for future business).

Do you really need more evidence that often markets can't be trusted to be self-regulating?

|10.3.08 @ 2:00PM|#

GSOs did that, right? Fannie and Freddie with the implicit promise of federal guarantees?

Implicit guarantees, and utterly inadquate standards, so they weren't cowed by risk, nor by regulation. That's a lot of the problem right there.

And don't worry about the poor. Perhaps the least necessary thing you have ever written, J sub.

|10.3.08 @ 2:00PM|#

I can't believe that many representatives switched from no to yes. Congress is completely useless.

Hope this rescue (the bill makes it a crime to use the word "bailout") at least does something to improve consumer confidence. What a bad, bad piece of legislation.

Fluffy|10.3.08 @ 2:01PM|#

If you can't make your monthly payments and your house is appreciating, you can always sell it before foreclosure and pay the bank back and you might be able to make some money also. However, when the house is depreciating you don't have the option of selling the house.
Because the market value will likely be less than the principal of the loan.

That might explain it.

Yes indeed it does.

And that means that if extreme Fed easing, along with gigantic federal deficits, creates a lot of cheap money to slosh around the system, and that money ends up rushing to real estate and creating a boom, it will create the exact situation you describe.

When some jackass gets an interest only teaser loan for twice the amount he should be borrowing that that the payments are going to quadruple in four years, he artificially drives up the price of housing for everyone.

Yes, John. This is correct. And you know what else? This is true from the perspective of lenders, too.

Someone might look at the arguments I've made and say, "Hey, even if fiscal and monetary policy had created a situation where foreclosure rates were unnaturally low, the lenders should have known this. They should have known the good times wouldn't last." But in a free market with many participants, someone will make those loans. And when the boom makes those loans pay off, the next year even more lenders will make those loans. And so on - until it falls apart.

|10.3.08 @ 2:03PM|#

I kind of have to agree somewhat with class warrior. Why the hell did people think that home prices would go up forever? Part of the reason why was that their lenders told them so. Yeah, the people were dumb to believe that, but the lenders were lying scumbags for putting that story out and making a bunch of loans that they knew would never be paid back absent a suspension of the laws of supply and demand. They didn't just do that. They bundled all of these loans up and sliced them and diced them into securities that passed the risk up the chain. The big guys then bought these securities and made huge short term money knowing all the while but not caring that the whole thing had to crash eventually.

|10.3.08 @ 2:03PM|#

You know, bad actors and poor government policies and regulation aside, one truth about bubbles is that they temporarily reward and encourage stupid behavior.

|10.3.08 @ 2:04PM|#

When some jackass gets an interest only teaser loan for twice the amount he should be borrowing that that the payments are going to quadruple in four years, he artificially drives up the price of housing for everyone.

In theory, housing construction should increase in order to bring enough additional supply on line to counter this rise in prices.

In practice, since the rise in prices wasn't caused by demand for housing, but for demand for something to speculate on, increasing the supply didn't work that way.

Matt Welch Makes Me Sleepy|10.3.08 @ 2:04PM|#

"Judging from the context, I'm pretty sure she meant "predatory lenders""

Then why even bring it up?

|10.3.08 @ 2:05PM|#

Fluffy,

That is a good point. A lot of people made a lot of money off of the mortgage markets in the 00s. I would imagine the fund managers who said, this is a ponzi scheme and can never last, were told by their bosses and investors, "hey Lehman Brothers and AIG are making billions and you guys are giving me 10%, why the hell aren't we into MBSs?"

|10.3.08 @ 2:05PM|#

Again, John McCain and I, that commitment that we have made, and we're going to follow through on that, getting rid of that corruption.

What? Not to be a pedant, but this doesn't begin to resemble a sentence in English.

Say 'corruption' again, motherfucker. Say 'corruption' one more goddamn time.

|10.3.08 @ 2:08PM|#

Why the hell did people think that home prices would go up forever? Part of the reason why was that their lenders told them so.

You don't have to be a drooing moron to think that people who lend money for a living wouldn't make loans you can't pay back. Hey, they looked at my documented, and I've been pre-approved for a $760,000 loan!

What are the monthly payments on a $760,000 loan? They didn't say, but I must be able to afford it.

|10.3.08 @ 2:09PM|#

And don't worry about the poor. Perhaps the least necessary thing you have ever written, J sub.

Completely out of context,

And don't worry about the poor. People have assureds me that they are not a significant part of the default problem which is the root of this crap.

but we've come to expect that from joe.

|10.3.08 @ 2:11PM|#

One factor to consider, too, is that the more sophisticated lenders may have known that the wheels were going to fall off but feared acting on that knowledge, because their actions might've precipitated the crash even sooner. Given that Chase and some other lenders started slowly backing out of subprime and some other dangerous areas well before the crash makes me wonder who knew what when.

Paul|10.3.08 @ 2:11PM|#

Did I not say there was a non-governmental solution to this problem? If this isn't the market taking care of itself, I don't know what is.

*ducks*

|10.3.08 @ 2:12PM|#

The discussion on these threads keeps getting better and more insightful as time goes on, and ideas get tested, found wanting, modified, or rejected.

With the exception of certain particularly bitter people whose favorite ideas didn't make the cut.

|10.3.08 @ 2:12PM|#

OK, so the craven congress passed the bailout bill.

Now what? Do we organize "toss-em-out" campaigns for all those who voted "aye"?

Actions have consequences, and those idiot reps should feel some, for a change.

|10.3.08 @ 2:15PM|#

In other words, we're going off the rails on a gravy train.

JP|10.3.08 @ 2:15PM|#

Fish. Barrel. Shoot.

Fluffy|10.3.08 @ 2:16PM|#

I realize that I beat this point into the ground in all the bailout threads, but it has to be reiterated.

Many people, even libertarians, quickly accept the conventional wisdom put out by our statist media about our macroeconomic situation. And they do so in ways that they'd never do with a foreign or historical example.

When they read in history about Bolsheviks claiming that Lenin's economic manipulations would have worked if it weren't for "greedy speculators", they laugh.

When they read in the newspaper about how Robert Mugabe says that Zimbabwe's price-fixing and currency-printing policies would have worked, if it weren't for "hoarders and greedy speculators", they laugh.

But when our own media and government says that the Fed's loose-money policies and Bush's deficits would have been just fine, if it weren't for "greedy speculators", for some reason they nod their heads and say, "Yeah! Let's go get those greedy speculators and kick their asses!" Or maybe like joe, they say something more sophisticated like, "Well, the Fed is here to stay and deficit spending is here to stay, so we need to try to devise a regulatory regime that lets us survive in that situation." Which amounts to the same thing in the end.

Paul|10.3.08 @ 2:17PM|#

I like this:

California State Treasurer Bill Lockyer issued a statement a day earlier saying because of the national financial crisis, California "has been locked out of credit markets for the past 10 days."

I want someone to look me in the goddamned eye, and tell me that you think that California would be a good credit risk.

American Structured Securities Rescue Act for a Prudent Economy.

|10.3.08 @ 2:17PM|#

I don't really care what foreclosure rates were like in 2004. If a lender, or those charged with approving loans using a lender's money, looks a borrower in the face and tells them to lie on their application, to say they make 3 times their real annual income, that they've been at their job for 3 times as long, etc., then I'm blaming the lender when that loan defaults.

|10.3.08 @ 2:18PM|#

James Anderson Merritt,

That's how I intend to vote. Even if this bailout package really were exactly the right thing to do (which, of course, it isn't), the way Congress handled this was simply ridiculous. This hastily cobbled together plan is the best we can do? My ass.

|10.3.08 @ 2:20PM|#

"Greedy speculators" is like "carnivorous lions." Yeah, no kidding. They like to make money. They're going to look for novel ways to make even more money. You're supposed to build that into the model.

Oh, my goodness, people who work the financial system to earn money are greedy! No, really!

It would have worked, too, if it weren't for those meddling kids!

Greedy speculators aren't going away any more than the Fed or deficits. If your plan can't account for any of them, it's a Pony Plan.

Don the libertarian Democrat|10.3.08 @ 2:20PM|#

Great point! Too many people have been excusing stupidity all around. Of course, if there's fraud in the lending, that's different.

Grandpa Whithers|10.3.08 @ 2:21PM|#

"If a young nubile coed pulls her pants down on camera for fun, she's an exhibitionist. If she does it for money, she's exploited.

If a fellow borrows money he has no chance of paying back from his buddy, he's a welcher. If he does if from a bank, he's exploited."

I choose option one. Or number two if necessary.

Fluffy|10.3.08 @ 2:21PM|#

I don't really care what foreclosure rates were like in 2004.

Right, because considering that fact would have to make you let go of the fantasy history that supports your argument.

|10.3.08 @ 2:21PM|#

This would have been a great vacation, if the stupid lions we tried to pet weren't so damn carnivorous.

Paul|10.3.08 @ 2:23PM|#

to say they make 3 times their real annual income, that they've been at their job for 3 times as long, etc., then I'm blaming the lender when that loan defaults.

Wrong. We blame them both. We blame the lender for encouraging fraud, and we blame the borrower for lying about making 3 times their annual income.

If a strange I've never met, wearing a tie tells me to lie on a loan application so I can get something I know I can clearly not afford, it's tough for me to blame the lender entirely.

Oh, but I get it, it's not about you or I, who clearly understand these complex instruments of finance, it's for other helpless* people who are clearly in the dark about consequences of action.

*insert favorite 'helpless' demographic.

|10.3.08 @ 2:23PM|#

Would a fantasy history be one where there weren't bubbles before central banking was invented?

|10.3.08 @ 2:23PM|#

" Arguments that rely on the premise that lenders, in the aggregate, were deliberately making loans they knew could be paid back need to account for that data point, and they can't. When a higher and higher percentage of loans are being paid back every year, lenders have every reason to think that their lending practices are sound."

ARM and Balloon payments cancel that argument out.

Dalton|10.3.08 @ 2:24PM|#

The bailout is going to turn into the biggest government giveaway in decades. Thanks Mr President

|10.3.08 @ 2:25PM|#

Fluffy, what the hell are you talking about? I've made two posts, both of which I stand by. You have made quite a few, some that directly contradict others.
What I'm saying is that low foreclosure rates do not explain lenders making bad loans, especially since the low foreclosure rates had a perfectly obvious explanation that had nothing to do with the borrowers being more and more reliable.

|10.3.08 @ 2:26PM|#

Wrong. We blame them both. We blame the lender for encouraging fraud, and we blame the borrower for lying about making 3 times their annual income.

We blame them both, but a reasonable person takes into account the different levels of knowledge at play here, and grades on a curve.

The demongraphic that knows less than mortgage originators about mortgage orignination is called "everyone else." It's not unheardof for people to think that industry experts are more familar with what crosses the line.

|10.3.08 @ 2:28PM|#

Say 'corruption' again, motherfucker. Say 'corruption' one more goddamn time.

Whoa, that's pretty hostile. I like it.

In other words, we're going off the rails on a gravy train.

Genius.

A much better (read: NSFW) link than Episiarch's lame link.

Look, I do my exploiting in person, not over the internet.

Paul|10.3.08 @ 2:31PM|#

Oh, to be a Congressman now.

If it were me, I'd bear my bare, broad buttocks across the C-Span screen and declare "I honor thee highly, Wall Street" and cast my "No" vote while waving my genitalia in the general direction of Nancy Pelosi.

We blame them both, but a reasonable person takes into account the different levels of knowledge at play here, and grades on a curve.

Which begets more fraud:

To get your Federal Mortgage Relief, check the following box and sign the bottom of the form:

[ ] I didn't understand the terms of my mortgage, or my lender didn't clearly explain the terms to me.

X_____________________________________

|10.3.08 @ 2:32PM|#

The speed limit is 55. You can get a ticket for going over 55. Yes, you can. Yes, you can. That's the law.

But everybody drives over the speed limit. How much over the speed limit can you get away with driving? How do you figure that out?

You look at what everyone else drives, and maybe someone who drives that highway every day tells you.

But you can get a ticket for going 56. Yes, you can. Yes, you can.

|10.3.08 @ 2:33PM|#

Yes, Paul, the speed limit is 55. Got it.

|10.3.08 @ 2:33PM|#

joe,

Except that this example is one of the borrower knowingly lying. There has to be some accountability left with borrowers, after all.

Not to excuse what a number of lenders did--fraud is fraud, after all. To the extent that lenders encouraged or were complicit in fraud, I don't think they should be bailed out or otherwise helped. I just don't want their borrower cohorts benefiting, either.

Oh, wait, we're all getting saved. Yippeee! On to the next consequence-free bubble!

Paul|10.3.08 @ 2:34PM|#

I'm not sure what your point is here, joe.

The speed limit is 55, and if I get a ticket for going 70 because the guy in the other lane was going 70 as well, I don't demand a bailout from Congress to help me pay the ticket.

Well, I don't, but I'm discovering I'm a bit old-fashioned, that way.

Fluffy|10.3.08 @ 2:35PM|#

Would a fantasy history be one where there weren't bubbles before central banking was invented?

Actually, joe, virtually every bubble with which I am familiar is closely associated with state manipulation of banking.

The Mississippi Company bubble in France was created by John Law's manipulation of the Royal Bank. The Dutch government facilitated access to credit for tulip trading, and [in a Paulsonesque move] banned short selling in the market. The South Seas Company used a royal charter to back a government-debt trading scheme - sound familiar?

There's a Spanish bubble of sorts associated with the influx of gold from the New World following the conquests of Pizarro and Cortes that I would hesitate to associate with the state's role in banking, but that's a "once in world history" scale event, and banking was so primitive then that its primary business was servicing the Spanish royal debt, so the lines get fuzzy on that one.

|10.3.08 @ 2:35PM|#

""Predatory borrowers""

In my city, that would have been gang members. They get a loan under their grandma's name (who has bad credit) planning to never make a single payment. They were even paid $2k up-front. So for Grandma's signature, they get a house and $2K. It takes nearly a year to foreclose and boot them out and since this is a northern city, there are laws that say they can't have their heat and electricity shut off from October 1 - April 15.

So they get a mortgage-free dwelling, $2K in cash and never have to pay a utility bill. While they're living there, they launder money via used cars, or make it through drug dealing, prostitution, illegal gun sales, bootleg joints, etc. When they finally have to leave, they trash the dwelling by ripping out all of the copper pipes, wire, appliances, etc. Sometimes they torch the place as a final good bye. This happened to two three houses on my block alone. Then they move on and do it again.

Thank goodness the sub-prime crash put an end to all of that.

Guy Montag|10.3.08 @ 2:36PM|#

So, can we lower taxes yet? We are entering a depression so can we now lower taxes on all income so the poor people won't starve?

Guy Montag|10.3.08 @ 2:38PM|#

When they finally have to leave, they trash the dwelling by ripping out all of the copper pipes, wire, appliances, etc.

That is not trashing, that is recycling.

You should be greatful to have environmentally concious thugs as neighbors.

|10.3.08 @ 2:39PM|#

Pro Libertate,

Massachusetts requires taxpayers to pay sales tax on items bought in New Hampshire. The way this works is that you fill in a figure on your annual filing, indicating the dollar value of the purchases you made in New Hampshire.

Would you like me to relate the conversation I had with my tax preparer?

Why wouldn't I take his word on what's appropriate? Well, because I'm joe, and filled in a more realistic number than he advised anyway.

Paul|10.3.08 @ 2:39PM|#

That is not trashing, that is recycling.

Ah-ah! Not Carbon Neutral(tm), though. Ten points off, go to the back of the line.

|10.3.08 @ 2:40PM|#

Whoa, that's pretty hostile. I like it.

But in a hostility-lite, Samuel L. Jackson, "I've had it with these motherfucking snakes" kind of way. Which I feel is more meaningful.

Paul|10.3.08 @ 2:40PM|#

Why wouldn't I take his word on what's appropriate? Well, because I'm joe, and filled in a more realistic number than he advised anyway.

So we don't grade on a curve here? I'm confrused.

|10.3.08 @ 2:41PM|#

Paul,

I'm not sure what your point is here, joe.

Really? I think you do.

I think there is a point that comes before discussing policy. One related to human behavior, experience, knowledge, and responsibility.

|10.3.08 @ 2:43PM|#

It's hard to blame the Fed for the meteoric rise and fall of beanie baby prices.

Economic bubbles, which are just Ponzi Schemes on a greater level, will always be with us. The statists' folly is in thinking the correct regulation will prevent them.

|10.3.08 @ 2:43PM|#

You're not remotely confused, Paul. You're playing dumb, which is generally a sign of not being able to hold up one's end of an argument.

|10.3.08 @ 2:44PM|#

The statists' folly is in thinking the correct regulation will prevent them.

Not prevent. Contain.

Bingo|10.3.08 @ 2:44PM|#

So what are you going to do joe, legislate responsibility? How the fuck do you propose making people take responsibility?

Fluffy|10.3.08 @ 2:44PM|#

What I'm saying is that low foreclosure rates do not explain lenders making bad loans

What you fail to understand is that low foreclosure rates mean the loans aren't bad.

There is no iron law of economics that tells you how to underwrite loans, or what your standards for credit quality should be.

If you make loans of a given type and those loans are paid back, those were not "bad" loans. Those were good loans.

In fact, if those loans carried a premium rate, they're "great" loans.

Traditional mortgage loans had guidelines that took into account the customer's income, other debts, assets, credit history, etc. But all of those guidelines weren't ends in themselves. They were proxies, designed to give you the best possible chance of predicting that the loans would be paid back.

That means that if a huge mass of data suddenly appears showing you that loans with less strict guidelines were also being paid back, but paid a higher premium to the lender, it's unreasonable to expect that more of those loans won't be made. If the data say, "Loans of type X have record low foreclosure rates", those loans will be made. And it doesn't matter if you or I or your uncle Ed think the loans don't make intuitive sense.

especially since the low foreclosure rates had a perfectly obvious explanation that had nothing to do with the borrowers being more and more reliable.

If it was "perfectly obvious", why did the Fed allow it to happen? Why weren't rates dramatically raised sooner? Why didn't the Congress balance the budget, or take other steps to cool the macroeconomy down?

Answer: Because it wasn't "perfectly obvious", and because the same people who are now saying that the lenders were greedy speculators who should have known it was all just a bubble are the very same people who denied it was a bubble while we were actually in it.

Guy Montag|10.3.08 @ 2:44PM|#

YEAAAA!!!!!!

Jimmy Duncan (R-TN) voted Nay AGAIN!!!!

My Congresscritter ROX!

|10.3.08 @ 2:45PM|#

If a lender, or those charged with approving loans using a lender's money, looks a borrower in the face and tells them to lie on their application, to say they make 3 times their real annual income, that they've been at their job for 3 times as long, etc., then I'm blaming the lender when that loan defaults.

If a D.A. tells somebody to commit perjury it's a crime. The crime of perjury is not erased by that. If the military recruiter tells you to lie about your criminal record to get into the service, it's a crime. The crime of lying about it (false official statements) is not erased by that. If the loan officer (certainly less of an authority figure than the D.A. or first sergeant) encourages you to lie on your application, it's fraud. And if you do, you are also guilty of fraud.

Sentencing would hopefully mete out a lesser punishment in cases where the above happened, but the crime is still the same.

|10.3.08 @ 2:45PM|#

Okay, THAT counts as predtory borrowing. Damn, never saw that.

|10.3.08 @ 2:46PM|#

There's Fluffy and his damn facts, again.

You don't have to be a drooing moron to think that people who lend money for a living wouldn't make loans you can't pay back. Hey, they looked at my documented, and I've been pre-approved for a $760,000 loan!

A joe'z law violation by joe himself is just that little bit sweeter, no?

What are the monthly payments on a $760,000 loan? They didn't say, but I must be able to afford it.

You would have to be a drooling moron, in my opinion, to take someone else's word on what you can afford and what you can't.

Paul|10.3.08 @ 2:46PM|#

One related to human behavior, experience, knowledge, and responsibility.

Whose responsibility? I'm not sure that word means what you think it means.

Responsibility of lenders? Yeah. Borrowers? Hell yeah. Wall Street bankers and financiers? Hell yeah with highly polished knobs on. All of this lack of responsibility amongst all these players is why this bailout... [BAILOUT NPR!!! Do you hear me?] is such a horrible idea.

But I understand. It's going to hurt us pensioners much worse than it'll hurt a few errant CEO's.

|10.3.08 @ 2:46PM|#

Paul, Pro Lib, now Bingo.

Why are you all jumping to policy and trying to change the subject from the human-behavior/reasonableness conversation we were having?

Isn't that an interesting topic anymore?

Fluffy|10.3.08 @ 2:47PM|#

It's hard to blame the Fed for the meteoric rise and fall of beanie baby prices.

I'm sorry, I thought we were talking about serious events that had an economic impact on the world at large, and not Ebay message board nonsense the impact of which didn't go far beyond the world of garage sales.

Paul|10.3.08 @ 2:48PM|#

You would have to be a drooling moron, in my opinion, to take someone else's word on what you can afford and what you can't.

Shhhhh... you're messing up my Fannie Mae Approved American Dream.

|10.3.08 @ 2:49PM|#

Fluffy, thanks for the lecture.
Low foreclosure rates do not mean all the loans are good. It means they are all in good standing at that time.
you are an idiot. Keep on arguing that the lenders were making perfectly smart choices. Go ahead. Say that the loans were good, despite the evidence today.

|10.3.08 @ 2:50PM|#

Fluffy,

If you make loans of a given type and those loans are paid back, those were not "bad" loans. Those were good loans.

Well, in a sense, Fluffy, but if more and more loans were being "paid back" via people selling in an ever-rising market, then they weren't making loans people could afford to pay. They were loaning people money to speculate with.

Does this make a difference?

|10.3.08 @ 2:50PM|#

Ah, but joe, your tax preparer owes you a fiduciary duty. Someone selling you something, including a loan, does not. It's interesting that you should bring this point up, because some of the more radical consumer groups were pushing for something akin to a fiduciary duty for lenders and brokers back when all of the anti-predatory lending legislation was in vogue.

The big problem with going down that road is that if a lender owed a borrower a fiduciary duty, then he'd be compelled to tell the borrower that he really should go get a loan at the credit union on Broad, 'cause they have lower rates. There may be some attraction to that concept, but, of course, it wouldn't work much in practice. Caveat emptor.

I wonder if liberalizing the rules about legal counsel for mortgages wouldn't be a good idea? That is, allowing paralegals to hold themselves out as being able to help deal with loan documents and the like (with attorney back up, I suppose). Some states require attorneys for closings for high-cost loans--I wonder if that helped in any way?

|10.3.08 @ 2:51PM|#

joe,

OK, fine, contain. The problem with bubbles is that it is not clear they were bubbles until after they burst. In retrospect, it seems obvious. But expecting our congress to have that kind of forward vision is, as you say, a Pony Plan.

Kolohe|10.3.08 @ 2:51PM|#

If it was "perfectly obvious", why did the Fed allow it to happen? Why weren't rates dramatically raised sooner?

You want my (slightly conspiratorial) answer?

Because keeping the rates low for all that time in '03 and '04 guaranteed enough juice in the economy so that everyone (congress and prez) could ride the wave to re-election that november.

|10.3.08 @ 2:52PM|#

Very reasonable, J sub D.

Sentencing would hopefully mete out a lesser punishment in cases where the above happened, but the crime is still the same.

It's not a yes/no question; or rather, they yes/no question is not the only question. If you are doing what a DA or recruiter tells you is acceptable and common, your responsibility is attenuated.

|10.3.08 @ 2:53PM|#

It's the putting of political expediency--and short-term political expediency, at that--ahead of economic and other national interests that makes governmental meddling in the economy so dangerous.

Matt Welch Makes Me Sleepy|10.3.08 @ 2:53PM|#

"Judging from the context, I'm pretty sure she meant "predatory lenders""

You know Biden said "Barack al Boma" last night during the debate. Where's your thread about Obama's true religion?

|10.3.08 @ 2:54PM|#

If a lender tricks a borrower into aiding in fraud, shame on the lender. If the lender and borrower walk hand in hand down Fraud Street together, shame on them both.

Guy Montag|10.3.08 @ 2:54PM|#

So, we have just entered a legeslative speculation market bubble. When do Senators start leaping from windows?

|10.3.08 @ 2:57PM|#

RC,

I'm going to ask you to do something that some people find difficult: put yourself in another person's shoes.

You would have to be a drooling moron, in my opinion, to take someone else's word on what you can afford and what you can't. You've never had a mortgage. You don't know how a capital amount converts to a payment amount. Neither have your parents. Maybe you just move here, and no speaka da English so good. You don't really know how this whole thing works.

Somebody who does know how this whole thing works, who actually does it for a living, and who presumably doesn't want to stroke a six digit check they won't be able to recover, assures you the loan amount is fine. He even explains why it's fine, really fast, but you don't follow entirely.

Is it that hard to admit that other people could go into these things with less ability to know and protect their interest than you or me?

Kolohe|10.3.08 @ 2:57PM|#

The less conspiratorial answer is that as Greenspan wrote in his last book, is that they actually thought it was working. They were not seeing the usual inflation numbers that are normally associated by keeping interest rates so low for so long. So their error was two fold.

1) Not looking in the right place (duh, the inflation was in housing)

2) Thinking that 'things were different this time' (which is really dumb, because the crash comes about 5 minutes after people start saying this, like it did already once this decade)

|10.3.08 @ 3:00PM|#

Pro Liberate wrote, "This hastily cobbled together plan is the best we can do?"

Nobody says it is the best "we" can do. But the prevailing idea in DC is that "we" have to so something, anything. And this is the FIRST that "we" could get away with, after an initial feigning of resistance so that the opposition would let their guard down and the railroading wouldn't seem too obvious.

After this, I hope that people will seriously consider tossing out the incumbents and voting for the Libertarians on their ballots. The old canard that Libertarians aren't "ready to govern" is now demolished. Anyone who can string a coherent sentence together -- even that genius parrot and Koko the Gorilla -- will be able to do as well as the "experienced" bozos who are on the hill today. So give the new guys a chance. And at least the Libertarians know enough to quit digging when you're in a hole, and to turn around and go back the other way when you're heading over a cliff.

Unbelievable.

Fluffy|10.3.08 @ 3:00PM|#

Low foreclosure rates do not mean all the loans are good. It means they are all in good standing at that time.
you are an idiot. Keep on arguing that the lenders were making perfectly smart choices. Go ahead. Say that the loans were good, despite the evidence today.

Pinette, you still aren't listening.

I acknowledge that the loans only appeared to be good because of macroeconomic conditions at the time they were made.

My argument has been that if the state creates macroeconomic conditions that temporarily make unsound loans appear to be sound, the resulting credit bubble is the fault of the state, and not the fault of "greedy speculators".

I submit to you that if the state manipulation of credit, and massive Keynesian stimulus by the state, creates an asset price bubble, it is the fault of the state when that goes awry. It is not the fault of people who bought the assets that were appreciating in value, and it is not the fault of people who made loans to facilitate the purchase of assets that were appreciating in value.

It is simply not reasonable for the state to create an asset price bubble and then expect citizens not to try to profit from it. If you are a non-state observer watching the asset price bubble develop, it is not an unreasonable act to attempt to speculate on it. For any individual economic actor, it is reasonable to accept the risk that you are buying at the end of the bubble, to take a chance on a reward if you are buying near the beginning or middle. Of course, in the aggregate, these millions of individual choices have the potential to become a collective irrationality - but that is the state's fault.

It's just comical to me that you seem to seriously expect that in the face of record low foreclosure rates, lenders would stop and say, "You know, I think our practices are fundamentally unsound. Let's stop making all these loans that keep paying off. The loans are being repaid and we're making money, but we 'know' that the loans are bad because Pinette thinks so. Let's stop." That is not reasonable. If you don't like bubble lending, try to avoid creating bubbles.

Reformed Republican|10.3.08 @ 3:02PM|#

In theory, housing construction should increase in order to bring enough additional supply on line to counter this rise in prices.

In practice, since the rise in prices wasn't caused by demand for housing, but for demand for something to speculate on, increasing the supply didn't work that way.

Housing construction did increase, it just takes time for houses to be built. Also, pricing did start coming down. That is one of the reasons people are in trouble. Their house is worth less than their mortgage. There are also a lot of new houses sitting empty, or even unfinished, because the housing prices came down.

|10.3.08 @ 3:03PM|#

Someone wrote: But in a free market with many participants, someone will make those loans. And when the boom makes those loans pay off, the next year even more lenders will make those loans. And so on - until it falls apart.

which is why i do NOT understand free market worship.

|10.3.08 @ 3:04PM|#

Pro Lib,

Pro Libertate | October 3, 2008, 2:50pm | #

Ah, but joe, your tax preparer owes you a fiduciary duty. Someone selling you something, including a loan, does not.

An important distinction, but in the real world, is it one that's widely understood? Oh, I'm sorry, did I say the real world? I mean the real estate world.

Gimme Back My Dog,

I didn't mean "contain" as in "contain the scope of the bubble," but "contain" as in "contain the damage from it bursting." I'm thinking more of the MBSs spread through the economy, and less about real estate prices not spiking - although as we've seen, if there hadn't been the accounting tricks keeping risk from being apparent through creative investment products and their grading, that probably would have smoothed off the real estate spike, too.

Seitz|10.3.08 @ 3:04PM|#

Massachusetts requires taxpayers to pay sales tax on items bought in New Hampshire.

I'm going to be pedantic here and tell you this isn't true. Massachusetts doesn't require you to pay sales tax, and it's not just on items bought in New Hampshire. They require you to pay use tax on anything you buy without tax, including things from New Hampshire, Montana, Oregon, Delaware, and Alaska. It also includes internet or catalog or similar purchases where you didn't pay tax due to the vendor lacking nexus with Massachusetts (or vendor negligence). This is true in pretty much every state except for those five NOMAD states.

In practice, you're not going to get nailed unless you're buying a shitload of high ticket taxable items. The state doesn't have the money to audit regular individuals for use tax (by putting the line on your income tax return, though, they can tack a use tax audit onto an income audit). But they do audit business. Helping companies defend those audits is one of the things that keeps food in my refrigerator.

Kolohe|10.3.08 @ 3:04PM|#

you don't follow entirely.

and this is where I call bulls***

If you're not 'following something' and get in over your head, that is *your* fault. Especially if it's the single biggest purchase of your life. Especially if you can rent a perfectly fine apartment so you can take the time and learn to 'follow it'

I tried to catch a falling knife with Wachovia stock about two weeks ago, and got burned because in the end, I couldn't follow it. But that is my fault. I'm taking the loss and moving on. But I sure as hell ain't blaming Jim Kramer for my actions.

|10.3.08 @ 3:05PM|#

Having some knowledge about how subprime lending works (or worked, anyway), the whole key to understanding that world is understanding that subprime borrowers are payment sensitive. They tend not to worry about whether the fees or rates are high, just that they can afford that monthly payment.

Lenders are/were aware of this and some probably took advantage of it to some degree. We see the same thing in credit cards--regardless of the borrower's credit status. However, one thing to remember is that the borrowers drove this model--they wanted a lender to helped them get the payment in line with their cash flow. They wanted lenders who would refinance, offer deferred payments, etc. Banks haven't been willing to do such things, so consumer finance companies and other subprime mortgage lenders became more and more common, particularly as the government exerted more and more pressure to make mortgages more widely available.

I think the move towards risk-based pricing might've helped forestall this crisis to some extent if it had happened sooner. It also would've been a fairer option for both sides--lenders would've covered their risk realistically, and borrowers who didn't belong in the market wouldn't have been able to afford loans and wouldn't have received them.

Reformed Republican|10.3.08 @ 3:07PM|#

Some states require attorneys for closings for high-cost loans--I wonder if that helped in any way?

I am sure it helped the attorneys.

|10.3.08 @ 3:08PM|#

RR,

Housing construction did increase, it just takes time for houses to be built.

Sure, sure, no doubt, that was going on. Prices did come down somewhat. No one was repealed supply and demand.

But the underlying demand for shelter cannot explain the suddent spike in housing costs over the past decade. That's all I'm saying.

|10.3.08 @ 3:08PM|#

joe,

If you mean, do some borrowers view a mortgage broker as a fiduciary and trust them that way? I'm sure some do. It's a dumb position, but maybe one that's understandably taken by the unsophisticated.

I liked the move in the early Oughts to educating borrowers--don't trust your lender, look at APR and some other figures, etc., etc. Savvier borrowers could've helped in the prime world, too. As could savvier lenders.

Reformed Republican,

No kidding--that was my reaction to those laws--an attorney works program. Won't you give?

|10.3.08 @ 3:08PM|#

...nor can a reducation in the demand for shelter explain the dramtic drop in prices.

|10.3.08 @ 3:10PM|#

Speaking of the supply, we sure are going to have lots of empty houses in some markets for a while. I told Naga Sadow that he should move to Florida and just move from vacant house to vacant house.

Kolohe|10.3.08 @ 3:11PM|#

But the underlying demand for shelter cannot explain the suddent spike in housing costs over the past decade.

Just to be clear, the spike was *solely* in the costs to purchase houses. 'shelter' costs, i.e. rent levels, did not increase all that much, and were very flat in most bubble areas.

|10.3.08 @ 3:11PM|#

Kolohe,

If you're not 'following something' and get in over your head, that is *your* fault.

If you're RATIONAL ECONOMIC MAN, anyway.

You think there aren't any meaningful differences between you picking stock and somebody out there getting a house? C'mon, put down the textbook.

Kolohe|10.3.08 @ 3:11PM|#

ah which is what you were saying, nevermind

Paul|10.3.08 @ 3:12PM|#

Maybe you just move here, and no speaka da English so good. You don't really know how this whole thing works.

You know, joe, if there was any evidence that these people were the lionshare of the problem, I might...might be inclined to have an ounce of sympathy. Although I'd also like to point out that I still maintain this is Wall Street's problem, and Wall Street would ultimately pay if we'd just ALLOW them to do so. Anyhoo, I don't see or haven't been given any indication that poor E.S.L. immigrants are the black hole sucking in the entire banking and finance system.*

I believe that Congress could simply write those people a check, and we'd be out of this cheaper than this bailout (BAILOUT NPR, DO YOU HEAR ME?!!) plan and minus the irrevocable damage to market fundamentals that it will ring in.

*I mean, c'mon dude, if the Seattle Times can't find these sob-stories, and instead has to print stories about middle class yuppies losing the Amurrican Dream... you know they're few and far between.

Reformed Republican|10.3.08 @ 3:13PM|#

Also, someone way up in the thread asked what honest people do when they cannot take out a reasonable loan to compete with the people taking out unreasonable loans they cannot afford.

The answer is, we rent, and buy from a distressed seller or from a bank selling homes obtained from foreclosure.

|10.3.08 @ 3:14PM|#

I liked the move in the early Oughts to educating borrowers--don't trust your lender, look at APR and some other figures, etc., etc. Savvier borrowers could've helped in the prime world, too. As could savvier lenders.

Can anyone name the bill that encouraged banks to fund and promote efforts like this?

First hint: 1977.

Second hint: You've been hearing a lot about it lately.

Third hint: Three letters.

|10.3.08 @ 3:14PM|#

RR,

. . .we adversely possess.

Kolohe|10.3.08 @ 3:16PM|#

You think there aren't any meaningful differences between you picking stock and somebody out there getting a house?

Yes, I bought the stock on a lark, and put up about 1000 bucks.

I've been looking at houses (techincally condos) all frickin year. And renting in the meantime. It doesn't take 'rational economic man' to figure out that houses cost a lot of money. And that money needs to be paid somehow. And so it pays to do your frickin homework.

Look, if you want to make the argument that some people are simply not capable of operating in modern society, you have very little argument from me; I have no problem being an elitist (it helps when you are better than most everyone else).

Paul|10.3.08 @ 3:17PM|#

"contain the damage from it bursting."

All for that joe. I'm seeing a moderate release of air- which means people still lose money, just not as "fast". How do you propose that happen when Henry Paulson declares that any loss of money is a market failure?

|10.3.08 @ 3:17PM|#

Paul,

I agree, the low-income borrower I stereotyped is a flea on the ass of this crisis. Absolutely.

I was just defending the point that there actually is something called predatory lending, not that it explains this crisis, or that the term applies to people who thought they could live the high life off a HELOC.

|10.3.08 @ 3:17PM|#

joe,

I'm not going to say that I like government-mandated education. Gosh, just saying that creates visions of borrower-re-education camps. A lot of what happened in the past decade was education funded by consumer-advocacy groups, which I approve of. It got entangled with government rules--especially for high-cost loans--but nothing is pure in this world, is it?

Maybe we need a UL certification for lenders.

|10.3.08 @ 3:18PM|#

buy from a distressed seller or from a bank selling homes obtained from foreclosure.

You vulture!

|10.3.08 @ 3:19PM|#

Hell yeah, there's such a thing as predatory lending. There's also predatory jewelry selling--I know, trust me.

|10.3.08 @ 3:21PM|#

RR,

That is what I have done my entire adult life. I had student loans to pay off and didn't make big money out of law school. As a result, I now after years of hard work, have paid down my loans and make better money than most people. Thanks to the housing bubble I still can't afford a house unless I want to live in the far burbs. It is either a condo or a two hour commute if I want to buy. But pumping up the money supply and handing out easy credit to people who couldn't afford it was supposed to bring the miracle of home ownership to everyone.

|10.3.08 @ 3:21PM|#

Kolohe,

Look, if you want to make the argument that some people are simply not capable of operating in modern society,

Don't be so high and mighty. If you came into a planning office and asked me what you could build on your lot, I could have you walking out believing anything from nothing to Disneyworld if I wanted to, no matter what the zoning bylaw says. Maybe you'd make me tapdance a little more than some other people. As I'm sure you could do to me in your area of expertise.

Knowledge imbalances are real.

Paul,

I dunno. Diffusing a bomb is a lot harder than regulating the sale of detonators.

Paul|10.3.08 @ 3:22PM|#

The answer is, we rent, and buy from a distressed seller or from a bank selling homes obtained from foreclosure.

Reformed Repub: There won't be any distressed sellers if Congress has their way. They're burning the midnight oil trying to find a way to prop up dropping housing prices. You know, prices which are dropping enough for those poor, esl, 'we no speaka english so good' people to actually afford without a crazy sub-prime mortgage?

|10.3.08 @ 3:22PM|#

Mortgage free homes in poorer neighbourhoods are offered mortgages (buy that car you always wanted!)that the lender hopes will not be paid off so that the home can be foreclosed and then sold for a substantial profit.

You obviously don't understand how foreclosure works. Any overage at the foreclosure auction goes to the owner, not the lender. If the balance is small relative to the value of the house (~80% or less) bidding is generally equal to or greater than than the loan balance. The only way the bank gets the house is if the loan balance is high, but in that case the bank's profit, if any, is small. When the lender is in the property for 85+% of its value, the more likely result is a loss once the costs of sale are considered.

|10.3.08 @ 3:26PM|#

Heh, defusing a bomb.

Diffusing a bomb is what MBSs did. Aaaay-ooooohhhhhh!!!!

|10.3.08 @ 3:26PM|#

Dunno who said it and am too lazy to climb upthread to find out. The government will never be able to recognize a bubble while it's growing better than investors do. The government is far more likely to ascribe bubble to new industries that actually create wealth.

The internet bubble is a great example. In the unlikely event that the political class had forseen it, they would have discouraged (tax code or something) people investing in it.

But in retrospect, the internet and the volume of wealth it creates is still growing. Not as fast as envisioned by the overly optimistic, not exactly in the business models most of us thought. But it's still growing and government intervention to stop pension fund managers from investing in Pets.com would have been counterproductive in the long run.

'Cause in the long run, more and more commerce is conducted via the tubes.

In the earlty 20th century there was an auto manufacturing bubble. Lot's of people got in on the ground floor with a wealth of business experience and proceeded to lose their fucking shirts. I'm grateful there was no government there to protect them.

Kolohe|10.3.08 @ 3:28PM|#

joe-
but i'm not talking about arcane stuff here. I'm talking junior high school math; that's all you need to see that paying $500/month on a $350K loan is insufficient. There's got to be a catch. There is no free lunch. If a person was unable to see that, they need to be protected from most of the modern world. If they were unwilling to see that, they got what they deserved.

Paul|10.3.08 @ 3:28PM|#

I have no problem being an elitist (it helps when you are better than most everyone else).

Weird, I've tried to be one for years, but I keep getting kicked out of the party, or asked to clean up a spill on the veranda.

Paul|10.3.08 @ 3:30PM|#

The internet bubble is a great example. In the unlikely event that the political class had forseen it, they would have discouraged (tax code or something) people investing in it.

JSUb, in ten years, we're going to look at the internet bubble as a short 'over-rev' of the engine. Hell, we look at it that way, now.

Kolohe|10.3.08 @ 3:31PM|#

just as an aside from your orignal example.

You know who most often 'took advantage' of people who couldn't speak english so well?

Other hispanic-owned or run businesses who could speak spanish just fine. (there was an article to this effect in the washington post by way of calcuated risk, can't find it at present)

|10.3.08 @ 3:31PM|#

Fluffy, I completely agree that most of the ultimate blame falls on the fed. That still does not mean that lenders were being honest, responsible, fair ethical, etc. You have jumped on me each time I placed any blame with the lenders. I never said nobody else screwed up, or that their irresponsible lending practices would have happened regardless of fed policy. We agree on everything else, expect for the fact that lenders seriously fucked up, and had predatory practices and were being undeniably short-sighted.

|10.3.08 @ 3:32PM|#

Thomas Franks had an interesting comment on this in that liberal rag, the WSJ:

There is no way to measure the number of people who took out mortgages they knew they couldn't afford, of course, but for what it's worth, a 2007 report by the Mortgage Bankers Association reports that the FBI estimates "80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders." That means the lenders, not the borrowers.

Just imagine the flights of fancy that the theory of borrower malevolence and Wall Street victimization requires conservatives to take: All these no-account folks, you see, got together and forced investment banks to engineer subprime mortgages into highly leveraged securities. Then they tricked all manner of hedge funds and pension funds and financial institutions into buying these lousy products. Just for good measure, these struggling homeowners then persuaded bond-rating agencies to misrepresent the risk associated with these securities.

Now imagine what such a fantastic scheme, if true, would mean for capitalism itself. This economic system, glorified by all, dominates the globe today, bidding prices up and down, forcing entire nations to change their ways to better suit its needs, and yet it is so fragile that when challenged by the weakest members of society and a handful of community organizers it simply crumbles. Thank goodness the Soviets never figured this out.

Guy Montag|10.3.08 @ 3:32PM|#

Humm, if this crazy Congress plot backfires then there will be a glut of unemployed mortgage brokers, who are really just sales folks, like used classic car sales folk . . .

If only I could engineer a muscle car bubble dramatic rise in muscle car appreciation . . .

YES! The mortgage broker unemployment crisis can be solved! Solved at Montag's MOPARs!

|10.3.08 @ 3:32PM|#

This whole thing is just a preview to the electricity bust that is going to hit in a few years. We are going to start having blackouts and brownouts during the summer in the next few years. When that happens we will hear all about the greedy electricity speculators and the evils of global warming (even though the world will continue to cool) but we will hear nothing about the fact that we haven't built any power plants over the last few decades. Congress will pass a two or three hundred billion dollar pork laiden "emergency energy bill that will build just enough power plants to turn the lights back on and also provide ample opportunity to steal from the government in the form of pork.

Franklin Raines and Jim Johnso|10.3.08 @ 3:33PM|#

Exactly what is a predatory lender, and how does he profit by lending money to people who can't pay him back?

Well, let's see: first we lobbied Barney Frank and other Dems to let us back loans to people that couldn't afford them, then we cooked the books to give ourselves huge bonuses, and finally we were tapped as Obama advisers.

And of course now we Dems say all this is because of "failed Bush policies" and "dangerous free market absolutism" and "deregulation" (never mind we were the ones demanding this particular deregulation!).

Snicker.

Suckers.

|10.3.08 @ 3:34PM|#

When the housing bubble was still going strong here in Tampa, I kept telling my wife that it couldn't continue, because wages weren't keeping up. Forget about everything else--too many people in the area could not afford to buy a house. Plain and simple. That factor alone meant that there would be a crash, sooner or later. Now the government comes in--again--with the desire to prop up the bubble.

Fluffy|10.3.08 @ 3:35PM|#

OK, Pinette, I'm sorry.

I was berating you because John McCain and Barack Obama aren't in this thread right now.

|10.3.08 @ 3:36PM|#

Don't forget Jamie Gorlich in that list. The woman was first responsible for building the intel wall higher than legally required at Justice that contributed to our failure to stop 9-11. Then moved on to Freddie Mac/Fannie May and helped cook the books to make millions and is now defending Duke in the Lacross litigation. I am not sure one person has ever contributed to so many disasters.

|10.3.08 @ 3:37PM|#

More from the Franks piece quoted above:

There is no doubt that Fannie and Freddie enabled the subprime neurosis, but for certain conservatives they are virtually the only malefactors worth noting. The dirge goes like this: Fannie and Freddie were buying up subprime mortgages, and they were doing it for (liberal) political reasons. Mortgage originators thus had no choice but to hand out mortgages like candy. Had market forces been in charge, loans would, no doubt, have been administered with a rigor and sternness to make John Calvin blanch.

I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn't originate any of the bad loans -- that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck.

Most of the mistakes for which we are paying now, Mr. Black told me, were actually made "by four entities that under conservative economic theory should have exercised effective market discipline -- the appraisers, the originators of the mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage-backed securities." Instead of "disciplining" the markets, these private actors "served as the four horsemen of the financial apocalypse, aiding the accounting fraud and inflating the housing bubble." It is they, Mr. Black says, who "turned a crisis into a catastrophe."

|10.3.08 @ 3:37PM|#

"*I mean, c'mon dude, if the Seattle Times can't find these sob-stories, and instead has to print stories about middle class yuppies losing the Amurrican Dream... you know they're few and far between."

Welcome to Minneapolis!

Foreclosure: 'They were preyed upon'

http://www.startribune.com/business/29844484.html?elr=KArksUUUU

TallDave|10.3.08 @ 3:37PM|#

and how does he profit by lending money to people who can't pay him back? That sounds more like a stupid lender.

No, he's a stupid lender if he holds onto the debt. If he can sell it to FNMA, which then fails when the loan isn't repaid, then he's a very smart lender.

|10.3.08 @ 3:38PM|#

Kolohe,

You know who most often 'took advantage' of people who couldn't speak english so well?

Other hispanic-owned or run businesses who could speak spanish just fine. Oh, yeah, heard about that. Entire business models were based on the understanding that there were unsophisticated people who looked to lenders for their information about what was and was not in their range.

Tell you what: if I'm acknowledge that some predatory lenders were minorities, will that give some of you the cover you need to admit that it exists?

|10.3.08 @ 3:39PM|#

"He pointed out that, for all their failings, Fannie and Freddie didn't originate any of the bad loans -- that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck."

And the fact that Fannie and Freddie were willing to back those loans with government gaurentees had nothing to do with the people making the loans? No nothing at all. They would have made those loans anyway. The government gaurentees against risk did nothing to encourage risky behavior.

Franks is as dumb as a post Tom. You would do well not to cite him in support of your positions. There are smart liberals out there but Franks is not one of them.

|10.3.08 @ 3:40PM|#

Kolohe,

You write "Hispanic-owned or -run businesses." Let's not leave out the Hispanic salesmen hired by lily-white corporations to bring in the Latino pigeons.

|10.3.08 @ 3:41PM|#

"Thanks to the housing bubble I still can't afford a house unless I want to live in the far burbs. It is either a condo or a two hour commute if I want to buy."

Haven't you said you live in Atlanta? My sister lives in NE Atlanta and houses are surprizingly affordable now. She just bought one.

There are some nice affordable bungalows in Druid Hills

Kolohe|10.3.08 @ 3:43PM|#

Let's not leave out the Hispanic salesmen hired by lily-white corporations to bring in the Latino pigeons.

fair enough

|10.3.08 @ 3:43PM|#

And the fact that Fannie and Freddie were willing to back those loans with government gaurentees had nothing to do with the people making the loans?

Given that 82% of MBSs are owned by private firms who paid good money for them, it seems the moral hazard explanation can be taken too far. Obviously, given the ferocity with which those bonds were being snapped up, the private sector wasn't expecting them to fail like they did.

|10.3.08 @ 3:43PM|#

"Haven't you said you live in Atlanta? My sister lives in NE Atlanta and houses are surprizingly affordable now. She just bought one."

I used to. I live in Washington DC now. You are right about Druid Hills. I lived in Virginia Highland and loved it and could afford one hell of a house there now if only I could tranplant my job down there.

Kolohe|10.3.08 @ 3:44PM|#

Tell you what: if I'm acknowledge that some predatory lenders were minorities, will that give some of you the cover you need to admit that it exists?

I never said they didn't exist. I'm saying that at the retail housing level, 'you can't cheat an honest man'.

|10.3.08 @ 3:44PM|#

There are some nice affordable bungalows in Druid Hills

Heh heh heh. Can you give John a census tract number? There's something he needs to look up.

|10.3.08 @ 3:44PM|#

And the fact that Fannie and Freddie were willing to back those loans with government gaurentees had nothing to do with the people making the loans?

So let me get this straight....
The guy who makes the bad loans is no at fault at all because someone else is willing to guarantee the loan?

I'm not gonna say that Fannie and Freddie are innocent, but it takes a lot of balls to pretend that just because a moral hazard exists, the guy who takes advantage of the moral hazard is not at fault.

Following this line of thinking then, the borrowers can't be at fault because the lenders were willing to give them money knowing they were a bad risk, right?

You can't have it both ways.

|10.3.08 @ 3:47PM|#

"Given that 82% of MBSs are owned by private firms who paid good money for them, it seems the moral hazard explanation can be taken too far. Obviously, given the ferocity with which those bonds were being snapped up, the private sector wasn't expecting them to fail like they did."

There was lots of insanity to go around. I think two things happened. The ease of credit priced borrowers out of the market or forced them into unaffordable loans if they wanted to buy. The returns on the lending were so high during the run up of the bubble that banks were forced to buy them to keep their returns competetive with investors. Like I said above, I would guess that at least few fund managers knew and said the whole thing was a ponzi scheme but were ignored because there was so much money being made.

|10.3.08 @ 3:47PM|#

"This whole thing is just a preview to the electricity bust that is going to hit in a few years. We are going to start having blackouts and brownouts during the summer in the next few years. When that happens we will hear all about the greedy electricity speculators and the evils of global warming (even though the world will continue to cool) but we will hear nothing about the fact that we haven't built any power plants over the last few decades. Congress will pass a two or three hundred billion dollar pork laiden "emergency energy bill that will build just enough power plants to turn the lights back on and also provide ample opportunity to steal from the government in the form of pork."

I work for a very, very large electric utility. Millions of customers. You're talking shit here.

http://www.eei.org

http://www.nrel.gov

http://www.awea.org

|10.3.08 @ 3:51PM|#

"The guy who makes the bad loans is no at fault at all because someone else is willing to guarantee the loan?"

Anyone who doesn't know that if you go out and gaurentee loans to banks, the banks are not going to care who they lend to is a moron. Congress enabled Freddie and Fannie to do what they did because their buddies like Raines were getting rich and they could tell voters that they supported "home ownership". People tried to tell Frank and Dodd and their ilk that the whole thing was headed for failure all the way back in the 1990s and they did everything they could to stop reform.

Yeah, I guess the lenders who didn't out of the goodness of their hearts try to make only super safe loans to save the tax payer money deserve some blame. But they kind of pale in comparison to the people in Congress who set the whole thing up and then did nothing to stop it from collapsing.

|10.3.08 @ 3:51PM|#

"I used to. I live in Washington DC now. You are right about Druid Hills. I lived in Virginia Highland and loved it and could afford one hell of a house there now if only I could tranplant my job down there."

Me two! Just off of Briarclif and N. Decatur Rd. Damn, I miss Doc Chey's!

Take care, folks. Gotta go.

|10.3.08 @ 3:52PM|#

Really EAP?

http://www.nextgenenergy.org/nextgen+blackout+study.aspx

I hope you are right.

|10.3.08 @ 3:54PM|#

There was lots of insanity to go around.

Yes, there was. These lenders and MBS-buyers included - which is why you are wrong to blast Frank for pointing out that the lenders bear a lot of the blame. At some margin, Fannie and Freddie might have encouraged some additional risk taking, but that's only going to get you so far. By far, the largest factor at play here was a belief by lenders that they were going to make a giant pile of money off these loans.

It's like arguing that there would be fewer murders if we executed people in gruesome ways. Probably not, since the people committing murders don't think they'll get caught and punished.

|10.3.08 @ 3:54PM|#

"Me two! Just off of Briarclif and N. Decatur Rd. Damn, I miss Doc Chey's!"

So do I. I also miss the Mellow Mushroom Pizza, The Flying Biscuit, Atkins Park and Limmerick Junction.

|10.3.08 @ 3:56PM|#

:"These lenders and MBS-buyers included - which is why you are wrong to blast Frank for pointing out that the lenders bear a lot of the blame."

Frank is not wrong for pointing that out. Frank is wrong for not also pointing out the government. He is making the same mistake he is accusing his critics of making. Yes, people are wrong to say it was all the government and the people and not the lenders, but Franks is equally wrong to act like the Government does not also share the blame.

|10.3.08 @ 3:59PM|#

Yeah, I guess the lenders who didn't out of the goodness of their hearts try to make only super safe loans to save the tax payer money deserve some blame. But they kind of pale in comparison to the people in Congress who set the whole thing up and then did nothing to stop it from collapsing.

82% of MBSs. If Chris Dodd and Barney Frank weren't Democrats, you wouldn't be writing any of this.

Besides the "reforms" people were pushing for Freddie and Fannie would have done little to prevent the problem. Their books were mess, no doubt about that, but fixing their books wouldn't have made much of a different to the problem of the risk not being priced correctly for mortgages and MBEs, and that 82% figure proves pretty conclusively that this particular error can't be laid entirely, or even mostly, at the government's feet. Everybody thought they were safer than they were.

|10.3.08 @ 4:02PM|#

Anyone who doesn't know that if you go out and gaurentee loans to banks, the banks are not going to care who they lend to is a moron.

So lenders who didn't care whether the loans they wrote are completely not to blame at all because of Fannie and Freddie? That is your position? Really?

Then you must also believe that borrowers are not at all to blame cuz well if someone is stupid enough to give them too much credit, it just makes good business sense to take advantage of that. Right?

So then you agree that borrowers who had people

a 2007 report by the Mortgage Bankers Association reports that the FBI estimates "80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders." That means the lenders, not the borrowers.

And these guys did partake in fraud -- they shouldn't be held accountable because they just made a smart business decision, since they know Freddie and Fannie would take on the bad debt.


I think I get it. The problem isn't that actors may take advantage of the system, the only problem it's that the system exists and tempts people with the opportunity to take advantage of it.

These poor lenders just couldn't help themselves you see.

|10.3.08 @ 4:02PM|#

If anything I've said makes it sound like I'm exonerating lenders, let it be known that I have personally suffered and seek divine vengeance on at least one lender. Bastards!

John,

I have a Mellow Mushroom in walking distance of my house. Mmmmmm, Kosmic Karma--sun-dried tomatoes, spinach, feta cheese, fresh tomatoes, and pesto.

joe,

I agree that no one in government really proposed to fix Fannie and Freddie. Nothing could be allowed to stop the gravy train--nothing! The GOP and the Democrats are complicit in this thing.

|10.3.08 @ 4:02PM|#

John, Frank writes, There is no doubt that Fannie and Freddie enabled the subprime neurosis... How is that not pointing out the government? You aren't complaining about what he didn't say, but about what he did say.

Is it ok if pretty please a writer accurately places blame on targets other than the ones that fit best into your politically-driven narrative? As long as he makes sure to mention your hobby-horse, too?

Sheesh.

|10.3.08 @ 4:03PM|#

This sentence:
So then you agree that borrowers who had people

Should not be there. Sorry

|10.3.08 @ 4:09PM|#

Kolohe wrote, "If you're not 'following something' and get in over your head, that is *your* fault. Especially if it's the single biggest purchase of your life."

Remember these words, everyone, when, as with the PATRIOT Act before it, senators and members of congress whine in later years about the speed with which the bailout passed in the heat of the moment; how they were, along with everyone else, too frightened to think straight and didn't really understand the implications and necessary consequences of what they did.

The bailout is right up there with the single biggest purchases of our lives. Will we, someday, forgive our public servants for their rash action and simply push forward to clean up their mess, as they are today presuming to clean up the mess of the rash actions of others? If history teaches us anything, the answer will be "yes," unless the country collapses before the question is even asked. History teaches us about THAT possibility, too.

|10.3.08 @ 4:11PM|#

Tom,

Fannie and Freddie set up a system by which they absorded all of the risk and did nothing to ensure that the lenders didn't make stupid loans. If I send in my life savings to one of those "please help me I am the Grand Vizier of Nigeria" e-mails, I am an idiot. Yes, the Grand Vizier is a crook, but I am an idiot. If I send your tax money out in response to one of those e-mails, I am criminally negligent.

I am all for sending the fraudulent lenders to jail. But I want Chuck Heigal, Barney Frank, Chris Dodd and Franklin Raines to go with them.

|10.3.08 @ 4:14PM|#

I agree with John. Today, we settle all family business, so don't tell me you're innocent, you executives and Congresspersons.

Take out the heads of the Five Families.

|10.3.08 @ 4:20PM|#

Fannie and Freddie set up a system by which they absorded all of the risk and did nothing to ensure that the lenders didn't make stupid loans.

Frannie and Freddie absorbed all the risk?

I guess those 82% of MBSs aren't really owned by the private sector.

Shall we put all the corporate officers who also bought MBSs in jail? Or did they just make innocent mistakes because they didn't appreciate the risk?

|10.3.08 @ 4:24PM|#

You've never had a mortgage. You don't know how a capital amount converts to a payment amount. Neither have your parents. Maybe you just move here, and no speaka da English so good. You don't really know how this whole thing works.

Fine. Whatever. Most of that is irrelevant to what you can afford.

All you need to know to make a decision on whether you can afford the loan are what the monthly payments are. I still submit that, if you take out a loan without knowing what the payments are, you have only yourself to blame. And, if you do know what the payments are, and can't figure out how much is too much for you to afford, you have only yourself to blame.

Somebody who does know how this whole thing works, who actually does it for a living, and who presumably doesn't want to stroke a six digit check they won't be able to recover, assures you the loan amount is fine.

Trusting some fast-talking guy to tell you what you can and can't afford: nobody to blame but yourself.

|10.3.08 @ 4:28PM|#

Joe,

The absored all the risk on hundreds of billions of dollars of loans that the government is now on the hook for. Yes, that is not the entire problem but it is still a huge amount of money that the tax payers are stuck paying out. In a just world Franks, Dodd and company who killed reform efforts' careers would be over and Raines and Gorelich would be going to jail for lying about the financial state of Fannie and Freddie in order to get bonuses.

Instead, Franks and Dodd are writing the rescue bill. It is disgraceful.

|10.3.08 @ 4:32PM|#

joe, of the 82%* owned by the private sector, how many were purchased from the FMs?

*If you provided a link for that number, I missed it.

|10.3.08 @ 4:37PM|#

http://www.foxnews.com/story/0,2933,432501,00.html

Franks boyfriend was a top exec at Fannie Mae. Franks ought to go to jail over this, and instead he wrote the bailout. It is just unbelievable.

|10.3.08 @ 4:49PM|#

John,

1. Fannie and Freddie did buy a lot of loand and MBSs that went south. That makes them responsible for the losses to the taxpayers from those buys, but that is a consequence of the meltdown, not the cause.

2. Find me one reform effort that would have stopped this problem. One proposal that was put before the Congress that would have prevented Fannie and Freddie from either issuing or buying MBSs. You can look all day, you won't find any. The reform efforts were about cleaning up the their accounting, which was a legitimate cause, but would have done nothing to prevent this crisis. In the case of the bill John McCain signed onto three years ago, it would have required Fannie and Freddie to buy MORE MBSs, while getting them out of the primary mortgage business - again, not solving or even addressing the actual problem.

|10.3.08 @ 4:52PM|#

Barney Frank should go to jail for having a boyfriend?

|10.3.08 @ 4:53PM|#

Joe,

I think admitted the truth that we had a problem in 2003 would have helped. Go seach Yourtube and look at the hearings in 2003. You see Franks and Dodd up there saying that there wasn't a problem and no reason to change anything when they knew the whole thing was going to go belly up. You can't defend that. They lied to protect their rich buddies like Raines and Gorelich. It is the lowest of the low in public service. Franks ought to be resigning in shame right now.

|10.3.08 @ 4:54PM|#

J sub D,

I don't know. That really has nothing to do with my point, which is that the purchase of MBSs by the private corporations demonstrates that they misjudged the risk and thought real estate financing was going to be profitable.

|10.3.08 @ 4:54PM|#

No Joe,

He should go to jail for having a boyfriend who made millions off of the crooked entity that he helped protect in Congress. It is called conflict of interest. Franks didn't care about cleaning up Fannie and Freddie because he was getting rich off of it.

|10.3.08 @ 4:55PM|#

Oh, are you just having a "government/private sector" slapfight with yourself, J sub D?

I'll pass, thanks.

|10.3.08 @ 4:57PM|#

Perhaps identifying those who are not responsible for this mess and horrid legislation would be the simpler course of action. I know that I'm not. So that's one.

|10.3.08 @ 4:59PM|#

So let me get this straight, John.

The private sector - thousands of different, independent actors - bought hundreds of billions of dollars worth of MBEs because they didn't realize they were junk bonds.

But when the two Democratic Congressmen you've decided to single out also said that the investments were sound, they actually knew - as opposed to the professional accounting and financial wizards in the private sector - that they were going to collapse, and were big fat liars who need to go to jail.

OK. That's not laughably partisan or paranoid.

|10.3.08 @ 5:02PM|#

My wife and kids are innocent, too. So that's a total of six.

|10.3.08 @ 5:03PM|#

It is called conflict of interest.

You don't go to jail for conflict of interest. You go do jail for wrongdoing. You have shown no wrongdoing whatsoever, just agreement with the prevailing opinion about the security of MBEs.

The hearings you're talking about weren't even about the safety of those loans and bonds. They were about reforming reporting and accounting procedures, which might or might not have been a good idea, but would have done nothing to stop the provision of crappy loans, nor the bundling, rating, sale, and purchase of securities based on those loans.

|10.3.08 @ 5:05PM|#

I keep calling them "MBEs." MBSs.

|10.3.08 @ 5:05PM|#

Ah, so if Pro Lbiertate's got six and I, coincidentally, also have six, that makes twelve people who are not responsible.

|10.3.08 @ 5:05PM|#

MBS - Mighty Big Screwups

Paul|10.3.08 @ 5:07PM|#

Barney Frank should go to jail for having a boyfriend?

No, they should go to jail for those drapes, girlfriend.

|10.3.08 @ 5:11PM|#

Forget about everything else--too many people in the area could not afford to buy a house. Plain and simple.

My experience in California suggests that unaffordable housing is permanently sustainable. Florida's infatuation with Smart Growth regulation that mirror's California's has come home to roost.

|10.3.08 @ 5:18PM|#

I don't know. That really has nothing to do with my point, which is that the purchase of MBSs by the private corporations demonstrates that they misjudged the risk and thought real estate financing was going to be profitable.

So true. They, and everyone else, should bear the costs of their misjudgements. But don't you think United States Government Backed Enterprises marketing crap as diamonds might have had some small effect on the purchasers decisions? Purchasers who were not exclusively Wall Street investment firms. The holders of this crap, packaged and repackaged, are spread all over the world.

The originators of all this crap are politicians from the times of FDR, LBJ and Nixon.

But we agree. Fuck everybody involved.

|10.3.08 @ 5:21PM|#

Not only marketing crap as diamonds, but operating under the implicit and widespread belief that the federal government would make the crap into diamonds in the event of, I dunno, a crash or something.

|10.3.08 @ 5:28PM|#

The crap appeared to be diamonds becasue of the ratings given to the securities.

John is trying to make the case that Fannie Mae and Barney Frank and everyone else he doesn't like knew that these diamonds were crap, and that's just not the case.

This particular load of crap was, as far as I can tell, honestly believed to be diamonds by everyone involved - public sector, private sector, sellers, buyers, regulators, policymakers - because they were rated as diamonds. The idea that somebody secretly knew that theoy were crap but conspired to keep it a secret is nonsense.

|10.3.08 @ 5:32PM|#

It's like the wise men feeling the elephant. Except that the elephant was crap. Each one felt a different part of the crap and thought it was diamonds.

Oh, and the wise men weren't wise men, either. They were crap as well.

Neu Mejican|10.3.08 @ 5:41PM|#

He should go to jail for having a boyfriend who made millions off of the crooked entity that he helped protect in Congress. It is called conflict of interest. Franks didn't care about cleaning up Fannie and Freddie because he was getting rich off of it.

But but, it's not like they're married.
They can't legally merge their assets like married folks. Franks doesn't have any claims to his boyfriends profits.

Yadda yadda...

KULTURE WARZ

Crap|10.3.08 @ 5:41PM|#

Hey, leave me out of this. When I get spread around, stuff grows.

jaydee|10.3.08 @ 5:43PM|#

We need to make sure that as individuals we're taking personal responsibility through all of this. It's not the American people's fault that the economy is hurting like it is...

So we have to take personal responsibility even though it's not our fault? WTF?

|10.3.08 @ 5:45PM|#

Congress is crapulent. That word doesn't mean what it sounds like it means, but what it actually means works very well.

|10.3.08 @ 5:45PM|#

Here's how I would envision a libertarian party candidate would have answered the question. Heck even if Palin would have answered this way she probably could have won the election for McCain in one question.

Ms. Ifill, you left out the worst culprit: The government. This was a colossal failure of big government. The gov't was the one through laws such as the CRA act and pushing Fannie and Freddie to loan money to less than credit-worthy borrowers that helped create the housing bubble. Congress was the one that pushed for even lower regulations on Fannie and Freddie then the banks had and chastised the regulators of Fannie and Freddie when they said that Fannie and Freddie had problems back in 2005. The government is to blame for the easy money policy of the Fed which led to lower interest rates and combined with the willingness of Fannie and Freddie to buy low quality MBS's we had a flood of money into housing which caused prices to explode. In addition, regulations such as government imposed mark-to-market rules and community planning/zoning laws helped fuel this fire.

What we need to do about this is start electing people that will put the American taxpayer first, before irresponsible lenders, before irresponsible borrowers, before special interest groups and pork. What we need is limited government. Instead of money flowing into Washington from taxpayers and then being redistributed to mainly irresponsible people the money should stay with the responsible taxpayer and they should be the ones making decisions on what to do with the money such as saving or investing it, giving some to charity, or even spending it…….

Or something along these lines.

Neu Mejican|10.3.08 @ 5:46PM|#

This particular load of crap was, as far as I can tell, honestly believed to be diamonds by everyone involved - public sector, private sector, sellers, buyers, regulators, policymakers - because they were rated as diamonds. The idea that somebody secretly knew that theoy were crap but conspired to keep it a secret is nonsense.

I think the original sell on the crisis was that these things were too complex for anyone to even understand, let alone judge for diamondness. The discussion above about acting without a full understanding of the implications of the deal applies to many of the industry insiders as well. They were told by someone that "this is a good deal" and trusted them without understanding the real risk. Remember part of the problem is that there is a large chain of lenders who are also borrowers who are borrowing from lenders who are also borrowers mixed in with speculators and investors. Some of the players were manipulating things for short term profit at the expense of those that were looking for long-term growth. A lot of people got hoodwinked. Some of them innocently. Some, not so much, some hoodwinked others knowing what they were doing.

|10.3.08 @ 5:50PM|#

Not only marketing crap as diamonds, but operating under the implicit and widespread belief that the federal government would make the crap into diamonds in the event of, I dunno, a crash or something.

And today they were proven right. Which is why Dr. J sub D prescribes taking Fannie and Freddie behind the barn and doing an Old Yeller. And letting everybody else eat their losses. The original lenders will get off scot-free that way, but such is life in the big city.

|10.3.08 @ 6:25PM|#

Tell you what: if I'm acknowledge that some predatory lenders were minorities, will that give some of you the cover you need to admit that it exists?

Of course predatory lending exists. There are also auto mechanics who sell people repairs they don't need, and guys who smooth talk women into having sex with them when doing so is not a good idea. None of these things require government intervention--they just require a modest degree of self-preservation instinct to avoid. Such as:

1. Don't sign a contract you don't understand.

2. Don't blindly trust someone who has a vested interest in you signing that contract.

Seriously, if you've lived 18 years on this earth and don't understand those two things, it's probably better that you learn them the hard way. There are much more dangerous predators in human society than fucking lenders.

Paul|10.3.08 @ 7:13PM|#

They can't legally merge their assets like married folks. Franks doesn't have any claims to his boyfriends profits.

Domestic partner.... aaaawww never mind.

Sea of Liberty|10.3.08 @ 7:15PM|#

Ya - what was Palin thinking when she tried to appeal to the voters with the whole "predatory lender" take? She should just stick to her principles - look how far that got Ron Paul.

Paul|10.3.08 @ 7:21PM|#

Which is why Dr. J sub D prescribes taking Fannie and Freddie behind the barn and doing an Old Yeller.

The patient just left AMA in a getaway car driven by Congressional Democrats.

|10.3.08 @ 8:28PM|#

Jacob wrote: " Exactly what is a predatory lender, and how does he profit by lending money to people who can't pay him back? "

Jacob, you're writing from a stance of dire ignorance here.

Someone (a mortgage broker) profits in such a situation by writing the mortgage and then selling it on to the actual lenders, or to a mortgage bundler who combines mortgages into securitized lumps that it can proclaim 'safe investments'.

You need to learn more about the business before shooting your mouth off. This isn't Mr. McGillicuddy at the local bank we're talking about.

|10.3.08 @ 8:30PM|#

Fluffy wrote: "If you "sell a loan upstream" as you put it, and the loan goes into default, you have to buy it back."

Who says you'll still be in business when that happens?

|10.3.08 @ 8:33PM|#

Fluffy wrote: "People are painting a picture of devil-may-care lenders to whom it didn't matter if a loan was ever repaid - but it did matter, because if the loan went delinquent in the first few payments the originator was fucked."

Fucked is a relative concept.

The guys who ran the fly-by-night shitty mortgage brokers are going to be just fine, and remain wealthy. You think they really care that they've had to fire all the employees?

In fact, some of the worst producers of toxic loans are now running "credit counseling" businesses.

|10.3.08 @ 8:35PM|#

Fluffy wrote "Half the broker shops in the country that have closed since late 2006 were wiped out by buyback notices from lenders."

So?

Show me that the people who profited were bankrupted. Who cares if a boiler room mortgage broker closes?

They churned out the bad loans, sold them on, cashed the checks, and then declared bankruptcy. The people involved kept the profit (unless they blew it all on Cristal and whores).

|10.3.08 @ 8:41PM|#

RC Dean wrote: "All you need to know to make a decision on whether you can afford the loan are what the monthly payments are."

What if the payments look ridiculously cheap, and the borrower is told repeatedly that the loan is fixed-rate?

Hell, in Ohio 23 mortgages were made to dead people.

|10.3.08 @ 8:51PM|#

TallDave wrote: " If he can sell it to FNMA, which then fails when the loan isn't repaid, then he's a very smart lender."

Or Bear Stearns. Or Lehman. Or hedge funds. Or China.

Oh yes, all those brilliant corporate quants got stupid too.

|10.3.08 @ 8:54PM|#

John wrote: " Like I said above, I would guess that at least few fund managers knew and said the whole thing was a ponzi scheme but were ignored because there was so much money being made."

And because there was such an giant-huge-enormous amount of institutional money seeking MBSs to invest in.

|10.4.08 @ 12:49AM|#

Jacob wrote: " Exactly what is a predatory lender, and how does he profit by lending money to people who can't pay him back? "

Jacob, you're writing from a stance of dire ignorance here.

Someone (a mortgage broker) profits in such a situation by writing the mortgage and then selling it on to the actual lenders, or to a mortgage bundler who combines mortgages into securitized lumps that it can proclaim 'safe investments'.

True, but that only screws the bondholders. Traditional "predatory lending" rhetoric claims that it screws the borrower, something which I see no evidence of. The lender, after all, disclosed the payment and terms as required. If the terms of the loan didn't match the disclosure, that's not predatory lending, that's outright fraud, which is already illegal and doesn't require "predatory lending" legislation to prosecute. If the disclosure says your payment is $1500, and you can't afford $1500, that's your fault not the lender's.

|10.4.08 @ 10:55AM|#

" If the disclosure says your payment is $1500, and you can't afford $1500, that's your fault not the lender's."

I gather the problem is with adjustable rate mortgages. If the disclosure notes the monthly payment at the starting rate, but not the rates after adjustment, it may not be clear what the payment is going to be later.

Since the adjustment is likely to be based in part on a varying external rate such as LIBOR, it's probably easy to understate or obscure what the payment will be. "Rates have been low, so if we assume a LIBOR of 1%..."

Also, a predatory mortgage broker might use a hard sell to steer borrowers to subprime loans that are more profitable for the broker and disastrous when the rate adjusts, rather than to fixed rate prime loans that are better for the borrower.

Nirvana|10.4.08 @ 12:21PM|#

Exploit me,
Exploit me, my friend
Exploit me
Exploit me again

I'm not the only one
no no no no
I'm not the only one

economist|10.4.08 @ 12:32PM|#

Jon H,
You're making a lot of claims without citing facts or figures that actually back them e.g. "Some of the worst sellers of toxic loans are now running 'credit counseling' businesses".
Examples please. A link, possibly. If you can't back up a claim that is not common knowledge, then don't expect people to believe it.

The Wine Commonsewer|10.4.08 @ 12:56PM|#

John is trying to make the case that Fannie Mae and Barney Frank and everyone else he doesn't like knew that these diamonds were crap, and that's just not the case.

Sorry Joe, those loans were shit and everybody involved knew it. The reforms you disdain would have required that borrowers be, well, actually credit worthy.

|10.4.08 @ 1:29PM|#

economist,

I can't find it now but there was a real estate blog post a month or two back showing some scammy mortgage broker's new ad for their new credit repair business, featuring the same cheesy Hummer H2 they used in their mortgage ads. ( I think they were in Phoenix)


Judging by the following two links, credit repair has been marketed to mortgage brokers looking for additional income:

See: http://www.pr.com/press-release/19076

"Mortgage Brokers Can Now Offer Credit Repair as a New Profit Center"

http://ezinearticles.com/?Mortgage-Brokers,-Need-Extra-Income?-Credit-Repair-Sells-Itself!-Earn-Affliliate-Revenue-Income-Too!&id=738609

|10.4.08 @ 2:36PM|#

It amuses me that the consensus here seems to be:

1. If the lender falsifies or conceals the loan details, putting the borrower in an untenable loan, and the borrower fails to catch it, it's the borrowers fault.

2. If the lender fails to verify the borrower's ability to pay, and doesn't check that the borrower's stated income is correct, it's STILL the borrower's fault.

ie, the lender bears no responsibility. Never mind that an irresponsible lender produces vastly more shitty debt than a given borrower.

If you're a lender, and stated-income loans are making up an increasing share of your business, the bad loans are *your* fault.

|10.4.08 @ 5:00PM|#

If the lender falsifies or conceals the loan details, putting the borrower in an untenable loan, and the borrower fails to catch it, it's the borrowers fault

False. That's fraud. Not giving a borrower a doomsay scenario for their ARM isn't fraud. At most, they should be required to disclose the current fully indexed rate and the matching payment. The tenability of the loan, however, is the borrower's fault. You're an adult, it's not the lender's job to do your budgeting for you.

If the lender fails to verify the borrower's ability to pay, and doesn't check that the borrower's stated income is correct, it's STILL the borrower's fault.

True. The latter is fraud on the lender, the former is irrelevant. If the borrower can't pay the disclosed monthly payment, it's the borrower's fault, always. What the lender does or does not verify matters only to the lender.

Never mind that an irresponsible lender produces vastly more shitty debt than a given borrower.

The number of money-losing loans a lender produces is of no import with respect to the borrower.

If you're a lender, and stated-income loans are making up an increasing share of your business, the bad loans are *your* fault.

They are certainly the lender's responsibility, inasmuch as the officers owe a duty to the lender's shareholders to conduct profitable business. They are not the lender's fault when said stated income turns out to be fraudulent.

|10.4.08 @ 9:40PM|#

Sorry Joe, those loans were shit and everybody involved knew it. The reforms you disdain would have required that borrowers be, well, actually credit worthy.

Bullshit, TWC. Not a one of the Wicked Awesome Report bills - the 2003 bill, or the 2005 bill John McCain signed onto, would have implemented national mortgage standards for lenders.

Such a move reform would have met with my full approval. That was what I was saying should have been done on threads about this six months ago - and I was universally derided for it.

This is a habit among conservatives - they don't know what was in any of the reforms proposed by Republicans, so they just assume that the Republican daddies in nice suits who say they warning about the problem years ago were actually working for, in real time, what now look good in hindsight.

|10.5.08 @ 3:38PM|#

Barry Ritholtz: "The most significant element were the 2/28 APRs, and their put back provision. Just about all of these gave the securitizer/repackager the right to return the loans within 6 (or 12) months if they went into default. Hence, our proposition that the 2002-07 period was unique in the history of finance. If any of these mortgages went bad within 6 months, the undewriter was on the hook.

HOW DIFFERENT WERE LENDING STANDARDS IF YOU ONLY NEED TO ENSURE THE BORROWER WOULDN'T DEFAULT FOR 6 MONTHS VERSUS FINDING BORROWERS WHO WOULDN'T DEFAULT FOR 30 YEARS.

In a rising price environment, 99% of the mortgages were not returned by the securitizers to the originator. From 2001 to 2005, the mortgage firms thrived. However, once prices peaked and reversed, things changed. From 2006-08, Wal Street began putting back mortgages to originators in greater numbers. This led to nearly 300 mortgage firms imploding."

|10.5.08 @ 9:51PM|#

I want someone to look me in the goddamned eye, and tell me that you think that California would be a good credit risk.

California is a good credit risk. It always borrows short-term money this time of year, to tide it over until income tax receipts start to come in.