Capital Markets

Sounds Like a Great Idea

|

Journalist Trey Garrison wades ten years into the New York Times archives and finds warnings of what was to come:

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

The action, which will begin as a pilot program involving 24 banks in 15 markets—including the New York metropolitan region—will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

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

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates—anywhere from three to four percentage points higher than conventional loans.

The moment of sanity:

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

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

Leave it to the evil free market economist to rain on the "everyone should own a home" parade.  Good thing no one listened to him!

NEXT: Why Opting Out Is No "Third Way"

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Black people! I knew it!

  2. LOL, What I want to know is WHO are the “minorities” today? Anyone know?

    JIff
    http://www.privacy.es.tc

  3. Mr. Garrison is a journalist now?

  4. Jesus Christ!

  5. The practice above is something that Bush and Rove continued.

    (Note: the material in the last article and even the material in this post may conflict with the goals of Reason’s sponsors so I suggest saving off a copy of this page into your Ayn Rand Keepsake Archive.)

  6. I’m white, so I’ll soon be a minority.
    I’m between jobs, have no money and no collateral.
    Can I still get a house, or is it too late?

  7. ed,

    I imagine a few Katrina trailers are still kicking around.

  8. ed, the got dam republicans voted down the economical rescue bill. You my friend are screwed. damnation upon the thin skinned right-wing christers.

  9. I hate to use the term – but this “minority loan” argument is a complete straw man.

    The program, as the article states, provided loans at a fixed rate for 30 years at a rate 1% ABOVE the interest rate (in this case 7.5%).

    Wachovia was just seized and “sold” to Citi because their mortgage portfolio was comprised of $120 billion of option ARM’s – the worst of the lot. The Fed took on all liability for this crap above $42 billion in defaults for Citi – who would not assume responsibility for the garbage.

    The current wingnut refrain is to blame this mess on the “coloreds” – typical batshit nuttiness I would expect from Sean Hannity and not Reason.

    Additiona

  10. I imagine a few Katrina trailers are still kicking around.

    Knock first. I sleep late.

  11. Sorry, Jamie. I had forgot that none of them were actually ever vacated.

  12. What’s the problem? If people thought that this program was worth the risk, then they should be for bailing Fannie and Freddie out, which is what we did. It sounds like everyone knew we were trying to help lower income people and that it might cost us some money some day. If everyone knew, again, what’s the problem? The loan was called in. It might not have been a wise method of trying to help low income people afford housing, but it doesn’t sound like anyone was deceived.

  13. Jamie, do you have that brand spanking new Hattori Hanzo sword that I’ve been looking for?

  14. trying to help low income people afford housing

    What’s wrong with renting? Is that now below the uppity poor people?

  15. “Mr. Garrison is a journalist now?”

    I have my doubts. As does Mr. Hand.

  16. (stole this from ylesias’ site)

    And minorities are also responsible from the cratering of the commericial real estate market.

    aka “Homeboys in Office Space”

  17. Mr Garrison, why do poor people smell?

  18. ed, I have a constitutional right (pursuit of happiness) to have the market manipulated in such a way that I can buy a big ass house with nothing down and an affordable payment even though I live on a disability income of about $13,500/year for a fambly of four.

    disclaimer: I am a white christian male. I like poetry readings, white wine spritzers and walks on the beach.

  19. I have my doubts. As does Mr. Hand.

    Mr. Twig will tell you what you want to hear.

  20. Spare me the racism crap.

    I could care less what color the buyers are. The feds were distorting the mortgage market by encouraging loans to people who couldn’t afford them, and who otherwise wouldn’t have gotten them. Now they’re asking the taxpayers to foot the bill.

    Plenty of white people took on more than they could handle, too.

  21. The current wingnut refrain is to blame this mess on the “coloreds” – typical batshit nuttiness I would expect from Sean Hannity and not Reason.

    I don’t see that. I see the article describing government interference to accomplish a perceived “noble” goal by manipulating a financial system, and a matter of fact description of the risk of doing so. Subsequent events in the current day say “Yep, that was a risk”.

    I don’t see the article blaming “coloreds”, hell, it’s the NYT, they’d have a heart attack and die if something remotely anti democrat party was published, and explode entirely if they published something blaming minorities for any problems anywhere in the world.

    Regardless of your percieved values in the intent of your governmental interference, it seems to result in more problems than it solved. It’s appropriate for Reason to point this out.

  22. I love how racist liberals are. They see “low income” and assume it is only black people. Other Matt and Radley are exactly right. This is not about race. It is about this stupid idea that everyone should own a home and home values should rise indefinitely. In every other sector of the economy that is called inflation and we try to avoid it. Somehow in the 1990s and 00s, it became a good thing when it came to real estate. You cannot have large people buying things for the sole purpose of selling it to someone else at a higher price. That is called a ponzi scheme. It can’t last.

  23. Chortles all around as shrike tries to pin racism on a NYT article and Radley Balko.

  24. If this is the case… why is everyone starting to not be able to afford payments all at once? Why no mention of credit default swaps?

  25. You cannot have large people buying things…

    I can’t believe how sizeist you and therefore Reason and all its readers are! People of impressive carriage deserve to buy houses (nay, mansions) too! 🙂

  26. The current wingnut refrain is to blame this mess on the “coloreds” – typical batshit nuttiness I would expect from Sean Hannity and not Reason.

    The fact that the word ‘minority’ appears in the paragraph has nothing to do with the larger theme. It’s the fact that fannie was extending “home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.”

    But yeah, it’s all about race.

    Try again.

  27. I’m going to post a primer on the different types of loans under discussion, since they all keep getting confused:

    1. “A” credit loans – these are the plain old vanilla conforming loans for people with verifiable incomes and decent credit histories that people have always gotten. These loans constitute the huge majority of Fannie and Freddie’s loans.

    2. “A Minus” loans – these are the types of loans described in this article. The agencies did indeed end up bringing these pilot programs national. A Minus loans were for borrowers with slightly higher debt-to-income ratios and slightly worse credit scores than agency vanilla guidelines would allow. Since they still required income verification, did not allow negative amortization, typically weren’t available for the lowest down payment amounts, and carried heavier mortgage insurance than conforming loans, these loans actually haven’t seen much higher delinquency rates than conforming loans even now.

    3. “Alt A” loans – these loans were for people with high credit scores, but with some other problem going the straight conforming route. Usually the reason they didn’t go conforming was because they wanted to go stated income, or wanted to exceed conforming LTV guidelines, or something like that. These are the types of loans that killed Indy Mac Bank, for example.

    4. “Subprime” loans – These were the most atrocious products. Usually they combined the worst features of A Minus and Alt A – they were for people with bad credit, and they also generally weren’t underwritten that critically, and they often allowed for stated income. This stuff killed more companies than I can remember at this point.

    5. “CRA Loans” – These are loans that depository institutions are required to make in so-called underserved markets from which they draw deposits. These loans are still around even now. Their contribution to the current crisis was minimal, because most banks hold these loans in portfolio rather than bundling and selling them, and most banks make these loans knowing they’ll lose money on them, so they aren’t a “balance sheet surprise” when they tank.

  28. ed brought something up earlier, renting instead of buying. In the market where I live, it can be cheaper to buy than to rent. But imho, a lot of poor folks that find themselves with good enough credit to buy a house also find themselves able to get some credit cards and a cell phone and a newer car or two. Suddenly they are overextended. The credit crunch, for the poor, isn’t so much a lack of available credit as it is a lack of monetary self control.

  29. 6. Option ARM’s – I guess we should include this type of product too. Option ARM’s cut across the other categories, since versions of this product that met the needs of A, A Minus, Alt A, and subprime borrowers ultimately ended up being created and marketed. These loans are distinguished not by their credit grade, but by their repayment terms. Typically they were set with a very low teaser rate of 1.000% or 1.250%, and allowed the customer to “pick a payment”, allowing people to take on huge amounts of debt and make very low payments initially. This was because these loans had negative amortization [the interest the customers weren’t paying was added to the principal balance of the loan]. They also generally carried prepayment penalties, so once customers figured out that they were getting screwed by negative amortization, if they tried to get out of the product by refinancing they were subject to stiff penalties. The guys who invented this product deserve to go to hell because it was a machine for fucking people. This product killed Wachovia. [It was supposed to kill World Savings and Loan, but stupid Wachovia bought World out and died in their place, while the former shareholders of World get to laugh in everyone’s face.]

  30. Now I’m really confused. I just saw an interview with Financial Genius and Scold? Suze Orman, and she was for the bailout. Cats sleeping with dogs! Rivers running backwards!

  31. Trying to pin racism on opponents of this socialism doesn’t work here, but it’s likely to work in other fora and on other media, regardless of the fact that libertarians tend NOT to be racists, and the NYT wrote the piece. Sigh. I’m sure it’s all because of e-gold and the Liberty Dollar.

  32. The guys who invented this product deserve to go to hell because it was a machine for fucking people

    Damn, that is one nasty loan. They must have really swindled people good because you’d have to be insane to take that loan having understood all the terms. Or really fucking stupid.

  33. Garrison,
    all you have to tell MR HAND is that what Jefferson was saying was, ‘Hey! You know, we left this England place ’cause it was bogus; so if we don’t get some cool rules ourselves — pronto — we’ll just be bogus too!’ Get it?

    now mr. hat on the other hand….

  34. Cats sleeping with dogs! Rivers running backwards!

    And Barney Frank complaining that the Republicans have abandoned the president!

  35. The current wingnut refrain is to blame this mess on the “coloreds”

    Oddly, for a “current refrain”, I haven’t heard a single person say this.

    Fluffy and his damn facts, again. I think “subprime” is being used as shorthand for “not A”. I know I use it that way.

  36. The #1 question to ask a car buyer is, “how much do you want your payment to be?” when they give a figure, you then tailor the loan with as little down and interest high enough to hit their payment. Everybody is happy.

  37. I really wish Shrike would have finished that post. I think the part after “Additiona” could have gone from Shrike’s normal insanity to a point never reached before by man.

  38. Y’all read the above and saw something about racism.

    I read the above and read that the whole housing and credit crisis is Bill Clinton’s fault.

    Hmmmm

  39. Fluffy and his damn facts, again. I think “subprime” is being used as shorthand for “not A”. I know I use it that way.

    One reason is that the word subprime fits well with any loan that had the potential to go sour when interest rates changed or principals became due. While there are many different types of loans, all in their own category, it’s understandable that people will lump them all into ‘subprime’ because, let’s face it, those loans are pretty subprime now.

  40. Shrike’s not helping by dragging race into this, but he’s right on that many conservatives are jerking their favorite knee: “Blame the poors!”

    It’s easy (and fun!) to blame poor people and those knuckle-headed, doo-gooding, market-interfering Democrats for the foreclosure mess. Fair enough, they took a big risk encouraging Fannie and other lenders to extend loans to low-income people.

    The Masters of the Universe on Wall Street — free market lovers, all — had an insatiable appetite for mortgage-backed securities and they didn’t seem too worried about whether those loans were any good or not. So the market for mortgages, no matter how questionable, grew and grew. Because they, financial wizards that they are, assumed home prices would rise for eternity.

  41. I think the part after “Additiona” could have gone from Shrike’s normal insanity to a point never reached before by man

    I think he had a seizure and just managed to get to “Submit Comment” before tipping over. It should all be over in a few minutes, but he won;t remember what he was going to say, unfortunately. Grand Mals are like that.

  42. The feds were distorting the mortgage market by encouraging loans to people who couldn’t afford them, and who otherwise wouldn’t have gotten them. Now they’re asking the taxpayers to foot the bill.

    That’s actually the most succinct explanation I’ve seen yet of this “crisis.” If Radley had only added, “And the feds in all their omniscience never anticipated that housing prices could fall,” it would have been perfect. Not that “Wall Street” is not culpable as well. By the way, what street does Fannie Mae live on? Her address is never mentioned in the Wall Street-Main Street cliche. Odd, that. It’s almost as if the government had nothing to do with this mess!

  43. I really wish Shrike would have finished that post. I think the part after “Additiona” could have gone from Shrike’s normal insanity to a point never reached before by man.

    The reason he never finished is because whatever he typed after that caused of singularity of pure crazy where not even logic could escape. The notion of “I think therefore I am” failed and he simply ceased to exist.

  44. Fluffy, the voice of reason. Too bad he’s not the voice of Reason, because he actually knows what he’s talking about.

    Uh, yeah, 30-year fixed rate loans. That’s why the financial system melted down. Because of 30-year fixed rate loans from Fannie Mae.

  45. Thanks a ton, Fluffy. So part of what you’re saying is that all the hoopla on the right about the CRA being partially responsible for this mess is complete bullshit?

  46. Now I’m really confused. I just saw an interview with Financial Genius and Scold? Suze Orman, and she was for the bailout. Cats sleeping with dogs! Rivers running backwards!

    Not only that, but she has been stating publically that by taking their bad loans off their books the government (and taxpayers) will make money!!

    I’ve always hated Suze Orman. Now more than ever.

  47. The program, as the article states, provided loans at a fixed rate for 30 years at a rate 1% ABOVE the interest rate (in this case 7.5%).

    The problem is 1% ABOVE isn’t an accurate pricing for the added risk, it’s priced BELOW the appropriate risk. The more appropriate pricing for the added risk is somewhere around 3% or 4% above the conventional 30-year rate.

    And we all know what happens with price-fixing plans: it creates shortages. And shortages is exactly what we got when house prices started exploding. So builders built more and eventually house prices came down – at roughly the same time that the bad pricing of risk had reached its limit of creating additional demand.

  48. Standard loans can be problematic, too, especially if they’re subprime or were refinanced multiple times.

  49. The Masters of the Universe on Wall Street — free market lovers, all

    BS. It takes a lot more to prove support for free markets (let alone a free society) than to be a powerful figure on Wall Street and to occasionally spout off about taxes or a specific regulation that does not favor you. Bedtime reading: http://www.cato.org/research/articles/cpr28n4-1.html

  50. Uh, yeah, 30-year fixed rate loans. That’s why the financial system melted down. Because of 30-year fixed rate loans from Fannie Mae.

    Right, it wasn’t their fault, that’s why they failed first… no wait.

  51. I recall Thomas Sowell writing about this years ago. I can’t find the piece after cursory googling but the gist of it was if lenders are discriminating against minority applicants you would see lower default rates for minority mortgage customers and at that time you didn’t.

    Fannie Mae to invest $700 billion in minority housing
    Jet, Oct 28, 2002

    Fannie Mae, the nation’s largest source for financing home mortgages, plans to invest at least $700 billion through 2009 to provide financing to 4.6 million minority households.

    Only a fool would say this whole fuck story can be laid at the feet of increasing lending to minorities.

    Only another fool would claim that government attempts to increase mortgage approval for minority applicants had no part in it.

    Like most things in economic reality the causes are many. But denying that well intentioned attempts to increase minority home ownership had a significant part in the sub prime fiasco is disingenuous.


  52. And we all know what happens with price-fixing plans: it creates shortages. And shortages is exactly what we got when house prices started exploding. So builders built more and eventually house prices came down – at roughly the same time that the bad pricing of risk had reached its limit of creating additional demand.

    Don’t forget all the genius “planners” who helped to drive up prices by throwing up roadblocks to keep builders from producing housing in sufficient quantity to meet the new demand. Perfect storm, really.

    There’s this plot near me, Crown Farm in Gaithersburg, MD, which has been debating the kinds of properties to be built there for seven or eight years now. You know, all the amenities, so many square feet, setbacks, schools to be built, what-not.

    Recently, it was noted that the two developers who’d acquired the parcel, for $150 million, had apparently split town, and abandoned the LLC. I wonder if the LLC paid cash…

    /Secret upside to the foreclosures: tax revenue shortfalls and increased taxation may finally force local governments to scale back on their efforts to regulate my existence in its entirety. They’re already sort of worried at the department of checking your trash to see if you’ve recycled.

  53. Oddly enough, I don’t even see Radley blaming the poor much less bringing ethnicity into the argument. When you give someone something they otherwise could not have gotten, the person who quite understandably takes it sure the hell isn’t to blame when that decision winds up costing _you_ more than _you_ bargained for.

  54. J sub D — exactly. That’s why in several other postings on my blog I try to explain how this was just the starting point. (Actually, CRA was the real starting point.) Anyway, investors who bought mortgage-backed securities, banks like Lehman and WaMu, House Dems who refused to rein in Fannie and Freddie, Republicans who didn’t push the issue in 2003 and 2005 when they had all the cards — they all picked up the ball to help carry it down the field.

  55. J sub D,

    If discrimination and redlining caused minorities to go to sleazy lenders pushing risky loans, it would have the effect of causing their foreclosure rates to go up, not down.

  56. And we all know what happens with price-fixing plans: it creates shortages.

    There was a shortage of home loans over the past decade? No, actually, it was just the opposite.

    Don’t forget all the genius “planners” who helped to drive up prices by throwing up roadblocks to keep builders from producing housing in sufficient quantity to meet the new demand. Snob zoning – which is universally loathed by planners, who lead the charge against it – has certainly served to drive up home prices, but that really has nothing to do with the real estate bubble. By definition, a bubble is a situation that occurs when speculative investments becomes unmoored from the demand-driven price of the underlying good. If the real estate bubble was caused by a supply shortage, it wouldn’t have popped. The fact that real estate prices cratered proves that it wasn’t supply restrictions that caused the price spike. If there really was unmet demand sufficient to cause that rise in prices, the prices wouldn’t have dropped so much.

  57. Zombie Lies: they cannot be killed. You blow their head off, the rest keeps coming. You chop off their arms, the hands scuttle after you.

    The Community Reinvestment Act only covers federally-insured deposit institutions, ie, banks. Banks underwrote much smaller numbers of risky mortgages than non-bank lenders, who aren’t covered by the Act. These banks, as a result, are seeing lower rates of foreclosure in CRA-covered neighborhoods than are non-banks. These banks were also much less likely to sell their mortgages onto the secondary market, where they were turned into the MBSs that are at the heart of this meltdown.

  58. Read my post again. I called no one a racist. Misdirecting blame for this crisis does not make one a racist – it just means you are misdirecting blame.

    Second, “warnings of what was to come” implies blame for this credit crisis lies in a policy which placed low-income earners in 30-yr fixed rate loans that actually DESCEND in payment amount over time. The default rate on such loans are LOWER than any other.

    I suspect there are too many Sean Hannity fans amongst you as my only insult was directed at his type. Sorry if I pulled your mullet too hard, fellas.

    You know who you are.

  59. shrike – you’re full of shit. You know what you did and you know what you implied. Maybe you should be a man and admit you implied racism from THIS POST, which is exactly what you did.

    Grow. Up.

  60. These banks were also much less likely to sell their mortgages onto the secondary market, where they were turned into the MBSs that are at the heart of this meltdown.

    Less likely, but not entirely unlikely. I’d like to add that, even if CRA or subprime loans were only say, 10% of the bundled security, a 10% foreclosure rate is enough to have a snowball effect.

    I should mention I don’t have a dog in this fight, other than I’m agin’ the bailout and everything that caused it, whether that be subsidization of poor loan choices or monetary policy that causes asset bubbles.

  61. Snob zoning – which is universally loathed by planners, who lead the charge against it – has certainly served to drive up home prices, but that really has nothing to do with the real estate bubble.

    Way to cop out. And nonsense. It was “planning commissions,” staffed by “planners,” that “led the charge” to dramatically decrease available units, and, inevitably, increase prices, given demand.

  62. Did the govt encourage these disastrous loans, or didn’t it? Apparently the CRA loans don’t count because bankers knew in advance they would lose money, so they factored these expected losses into their plans. So the problem is with the loans on which the bankers *expected* to make money, but didn’t. Is this what I’m hearing?

    So if the CRA isn’t to blame, are there other government incentives which prompted the risky loans, or did the bankers do it all by themselves? If the former, then maybe the govt could say – “oops, it’s our fault, so let’s compensate you poor bankers for taking our bad advice.” That wouldn’t be enough justification for a bailout, imho, but it’s an argument, isn’t it?

    If the banks did all this risky and disastrous stuff *without* govt encouragement, then the case for govt bailout is less, not greater.

    In any event, socking taxpayers (and potentially bondholders) is not the answer, even if the govt was encouraging the irresponsible behavior.

  63. Quote:
    shrike | September 29, 2008, 6:32pm | #

    Second, “warnings of what was to come” implies blame for this credit crisis lies in a policy which placed low-income earners in 30-yr fixed rate loans that actually DESCEND in payment amount over time. The default rate on such loans are LOWER than any other.”

    Wow, Shrike. So, tell me – where can I get a 30 year fixed where my payments go down over time?

    Either you mistyped or are REALLY ignorant.

    No Name Guy – payin on a 30 fixed for the last 12 years (during which, my payment has never gone down – didn’t either for my folks, or my 2 brothers, or anyone else…….)

  64. Uh, yeah, 30-year fixed rate loans. That’s why the financial system melted down. Because of 30-year fixed rate loans from Fannie Mae.

    Firstly, Fannie and Freddie failed. Secondly, they commoditized traditional mortgages, which makes them less profitable. Banks had to either compete on volume or move to a different product if they wanted to make a lot. (Okay, Wells is interesting because they used mortgages for cheap funding through escrow deposits.) So yes, I would say these regulations in the mortgage had a hand in exacerbating the problems we’re experiencing, and the sum of idiotic regulations and lending practices are greater than their individual parts.

    They also generally carried prepayment penalties, so once customers figured out that they were getting screwed by negative amortization, if they tried to get out of the product by refinancing they were subject to stiff penalties.

    They had prepayment penalties because a lot of the loans were brokered, so brokers would call up clients whenever rates went down to refinance them and win commissions. Several banks had no prepayment penalties for in-house refis and most penalties were designed to offset the cost of mortgage brokers. The loans that had prepayment penalties even after the reset were pure evil, but as far as I’ve seen they were in the minority. Personally, I hesitate to blame things on prepayment penalties for the above reasons, and even resets have for the past year tended to make payments pretty reasonable. Guys like Countrywide used the 12-month average of 3-month treasuries (MTA).

    What’s really killing is negative equity, a good part through negative amortization and a great part from home price depreciation.

    The guys who invented this product deserve to go to hell because it was a machine for fucking people.

    Nah, the Sandlers (who ran the Golden West operation) were huge on community, so I think it was more shortsightedness and arrogance than wanting to screw the little guy. To them, it was all part of the grand vision of helping people get into homes. Their contributions to ACORN confirm this. As for the former GDW shareholders, unless they took cash they got screwed too.

  65. TAO,

    The point is, if loans made under the CRA are less likely than other sorts of loans to have been packaged into MBSs or to have been risky, irresponsible loans – ie, if the activity carried out under CRA was less likely to be of the sort that caused the problem – then the CRA cannot be said to have caused the problem.

    dmoynihan,

    It was “planning commissions,” staffed by “planners,” See, there’s your problem. You don’t know what the word “planner” means; you don’t know how planning commissions are staffed; and you don’t know how zoning ordinances are written.

  66. “Wow, Shrike. So, tell me – where can I get a 30 year fixed where my payments go down over time?”

    From the NY Times article–

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

    Drop that point then run the amort table.

  67. The point is, if loans made under the CRA are less likely than other sorts of loans to have been packaged into MBSs or to have been risky, irresponsible loans – ie, if the activity carried out under CRA was less likely to be of the sort that caused the problem – then the CRA cannot be said to have caused the problem.

    Not causative, but contributive. Like I said before, even if only 5 or 10% of the CRA loans were bundled in the security, that can trigger a snowball that makes the whole security worthless.

    There are certainly other causes, but government policy (in many areas, not just CRA) can be pointed to for much of the problem.

  68. joe, I take it you would disagree with Randall O’Toole (and possibly 2005-Krugman?) then…

    “The housing bubble was not universal. It almost exclusively struck states and regions that were heavily regulating land and housing. In fast-growing places with no such regulation, such as Dallas, Houston, and Raleigh, housing prices did not bubble and they are not declining today.”
    http://www.cato-at-liberty.org/2008/09/22/blame-urban-planning/

  69. J sub D,

    If discrimination and redlining caused minorities to go to sleazy lenders pushing risky loans, it would have the effect of causing their foreclosure rates to go up, not down.

    No joe, Thomas Sowell, award winning economist, would never have factored that in by comparing loans from the same institutions. Send hinm am e-mail and I’m sure he’ll thank you for your insight and wisdom.

  70. TAO,

    If CRA loans were less risky and less likely to be turned into MBSs than the loans they replaced, then the CRA cannot be said to have played any role in this problem. If not for the CRA, there would have been MORE defaults and MORE mortgages bundled into MSBs. The CRA did not contribute even a little, tiny bit to the meltdown. If anything, it ameliorated the problem. If I sell a tire that blows out at a rate of only 1 incident for 100,000 miles driven, rather than 3, I haven’t contributed to car accidents caused by tires blowing out. I’ve reduced that problem.

    Mad Max,

    There’s a good case to be made that government activity encouraged more risk, in myriad ways. The CRA, however, was not among them.

  71. See, there’s your problem. You don’t know what the word “planner” means; you don’t know how planning commissions are staffed; and you don’t know how zoning ordinances are written.

    Let’s see, for “planner,” I’d go with, “someone otherwise unemployable,” as you’ve shown.

    For how they’re “staffed:” “with otherwise unemployable flunkies, some having bogus degrees or other fringy certifications,” as you no doubt have.

    For “how zoning ordinances are written,” I’ll say, judging by local experience, either, “behind closed-doors with ‘experts’ on hand,” or, “following numerous public hearings, garnering input from the citizenry, final matters to be settled, behind closed doors with ‘experts’ on hand.”

    The only real qualification to be a planner, one suspects, is the ability to shrink totally from any responsibility from actions taken or lives ruined from said actions. And yeah, near me (I bought by transit), the “planners” have done three things:

    1. Encouraged “infill” building, but so complicated the process you have a handful of tract mansions on tiny lots that are vacant due to prices too high for the area, even during the bubble.

    2. Decided we get more low-income housing, in addition to our existing low-income housing, and of course the half-dozen “group homes” in my community which house five or six autistics, one of whom kicked my dog.

    3. So screwed up the “Neo-Urbanist New Downtown” thing, it’s years late, only half-complete, most of the condos state “rent to own,” and there is no grocery store.

    I’m sure it’ll be a while for the other half to get done. Like a decade. And the “planners” responsible have long since left for greener places to con the citizenry there.

    /Of course, the old urban downtown in my community was ripped up by “planners,” in the ’60s, to make it more urban-renewalie.

    //We’d be really screwed here if it wasn’t for the Asians living 10 to a house and boosting test scores at the elementary school.

  72. voxpo,

    I do disagree, because the alleged mechanism of causation – a restriction on supply – doesn’t exist is many of those “heavily-regulated areas.” Look at the housing boom in California – regulated as all hell, but no real shortage to speak of.

    This is very simple. A rise in prices caused by a restriction in supply doesn’t suddenly reverse itself and plummet. Next you’ll be telling me that there was a restriction in the supply of tech stocks and tulip bulbs.

  73. J sub D,

    As impressive as it is for you to make an appeal to authority based on an article you can neither find nor remember clearly, I’m afraid that it still doesn’t refute my point.

  74. dmoynihan,

    Your tears are so yummy and sweet.

    Your argument makes no sense, you can’t defend it, so now you’re just flinging poo, like mommy and daddy chimp taught you.

    I must saw, that lad shows great judgement for an autistic kid.

    Lemme give you a little heads up: if you want to make an argument that X caused problem Y, responding to logic and evidence refuting that argument by bellowing about how much you hate X isn’t going to get you very far. Chump.

  75. regardless, we’re asking for a high standard of “causation” here where none exists. But ’tis folly to argue that government pressure on lenders didn’t trigger this mess, and CRA helped that process along.

    It certainly didn’t take it all the way, but Mr. Garrison’s point @ 6:18 is spot-on, despite joe’s handwaving.

  76. Ohnoes! The magical word “handwaving!”

    Look, all of those more-solvent-than average CRA loans have suddenly gone delinquent! As if by divine intervention, reducing the rate of foreclosures and the proportion of loans sold and turned into derivatives helped exacerbate a problem caused by foreclosures and the proliferation of derivatives.

    All by invoking the H-word!

    Lol.

  77. joe, for god’s sake, go learn something about the CRA and the way it morphed into a neighborhood-destroying shakedown operation:

    Russell Roberts on the CRA.

  78. oh, and here’s that Thomas Sowell article as well:

    Sowell on the CRA.

  79. A study on the CRA and risky loans:

    http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf

    CRA-covered entities made 23% of all home loans, but 9% of all high-risk loans, in the 15 most populous MSAs in the country.

  80. Ha ha ha ha ha ha ha ha ha ha.

    I notice that your study, TAO, is rather light on numbers, and rather heavy on phrases like “left wing,” “activist groups,” and “teach them that the financial system is their enemy.

    I’m talking about reality, hard evidence, and your linking to opinion pieces.

    lol.

  81. And as fascinating as that National Review article is, I couldn’t help but notice that the only number in the whole damn piece is the copyright date.

    Are you kidding me? Don’t push this crap, just because you can’t find any plausible evidence to back up your assertion.

    You’re just wrong, and the numbers prove it.

  82. Joe, re: yummy, sweet, poo.

    No, Joe, as was pointed out above:

    “The housing bubble was not universal. It almost exclusively struck states and regions that were heavily regulating land and housing. In fast-growing places with no such regulation, such as Dallas, Houston, and Raleigh, housing prices did not bubble and they are not declining today.”

    I gave a linkie, ‘cuz maybe HTML was too hard for you.

    But you do serve, quite well, to prove that your position/career has no standard for competence, and attracts those who shrink from all responsibility in life.

    To follow the level you’ve allowed the conversation to decline to: your parents won’t pay you to sit for your little brother any more, so you’ve got to have government coughing up to the bucks to tell others what to do.

    Neener.

  83. As impressive as it is for you to make an appeal to authority based on an article you can neither find nor remember clearly, I’m afraid that it still doesn’t refute my point.

    The one you pulled out of your ass? Without even a personal memory claim to back up. I merely alluded to someboduy’s acknowledged professionalism and relied on my own fairly decent memory. Unlike some regular commenters on this board, I provide links when available and admit upfroont when I can’t. I don’t post things like “I won’t do your research for you” when challenged on a point or asked for evidence.

  84. Correlation is not causation, and as explained above, the causal relationship doesn’t make any sense.

    Thank you for opening the door for me to explain this again, because it’s an important point.

    A bubble is, by definition, a situation in which the speculative value of something – housing, tulip bulbs, tech stocks – becomes unmoored from the demand-based value of the underlying good. That’s why they are bubbles – because they can pop, and the price plummet. If high housing demand relative to supply was the cause of the price at the top of the bubble, then we wouldn’t see that price drop precipitously absent a similarly-huge decline in demand. So it is not possible that the housing bubble could be caused by any alleged restriction on supply.

    The history of snob zoning vs. housing prices proves this. There was no great restriction on the supply of housing units suddenly adopted in 2001. As a matter of fact, housing starts shot up that year, and in the next five years. So, the theory that a restriction on housing supply caused the real estate bubble is nonsense.

  85. The one you pulled out of your ass? Without even a personal memory claim to back up. I merely alluded to someboduy’s acknowledged professionalism and relied on my own fairly decent memory. Unlike some regular commenters on this board, I provide links when available and admit upfroont when I can’t. I don’t post things like “I won’t do your research for you” when challenged on a point or asked for evidence.

    What a fine little speech, old man.

    Too bad I linked to a study proving my point – not explaining the theory behind it, but actually proving it in hard numbers – sixteen minutes before you made it.

  86. Ha ha!

    Lookie here, a footnote from the study I linked to:

    “Gunther, “Should CRA Stand for ‘Community Redundancy Act’?,” Regulation (The Cato Review of
    Business and Government) Vol. 23, No. 3, 2000.

    There’s your CATO geniuses, arguing that because there were so many (high-risk, high-cost) loans being made in CRA-covered neighborhoods, there was no reason for the CRA to continue to exist.

    How much do you want to bet that the author specifically identifies that fact that bank loans made under the CRA were competing with, oh I don’t know, exploding ARMs from Countrywide in these neighborhoods as a reason to do away with the CRA?

    There is just nothing to back up the argument that the CRA played any role whatsoever in causing this crisis. The CRA reduced loan delinquency, reduced the number of loans bundled into MBSs, and ameliorated the problem. I only wish it had done more.

  87. Way to cop out. And nonsense. It was “planning commissions,” staffed by “planners,” that “led the charge” to dramatically decrease available units, and, inevitably, increase prices, given demand.

    Right now, planners are, as a group, broadly in favor of higher-density housing than the typical US town has. They are also, as a group, generally not at the levers of power in those regards. Planners do not usually get to enact policy: that’s generally in the hands of a mayor, or a city council, or the voting public.

    Planners are bureaucrats. They no more get to tell you how dense your city is than IRS auditors get to set tax rates. They do get to make some judgment calls in terms of how to apply the building codes, but they don’t get to override or write the building codes. If you’re a member of the the public and you feel that a planner is not following the codes, you can appeal the decision to a planning commission.

    Planning Commissions — at least hereabouts — are oversight boards the handle disputes raised by the members of the public. They are not usually made up of planners, and they certainly do not include the city’s planners among their members, since they are set up to overrule the planners when necessary.

  88. joe, from my first post in this thread, which had a 2002 link about increased minority lending support from Fannie Mae,

    Only a fool would say this whole fuck story can be laid at the feet of increasing lending to minorities.

    Only another fool would claim that government attempts to increase mortgage approval for minority applicants had no part in it.

    Recognize anybody?

  89. This is the GREATEST thing ever! This is the nail in the coffin that convinces me that Fannie and Freddie and Government intervention caused this entire thing! Excellent find. THis is why i love reason!!!!!!!

  90. If high housing demand relative to supply was the cause of the price at the top of the bubble, then we wouldn’t see that price drop precipitously absent a similarly-huge decline in demand. So it is not possible that the housing bubble could be caused by any alleged restriction on supply.

    … There was no great restriction on the supply of housing units suddenly adopted in 2001….

    I’m assuming that’s for me, and further that you mean 2002…. something happened in 2001 and 2000 was a recession year, funny thing, those selective endpoints.

    I do admire the denial of your earlier conduct. Typical, again, of the lack of responsibility and expectation of short memory by planners. What was your degree in, anyway? Is there like an association? Does the state send you to meetings?

    Anyway, Joe, demand for housing increased ‘cuz of a couple of factors. Immigration, baby boomlet, etc. “Planners,” rather than meet this demand, and letting land be used for 80-house parcels at $200,000 per home, decided, cool, let’s make it a 30-house parcel, for $600,000 apiece. There’ll be a greater amount of tax revenues, but fewer services to provide. And we can use the extra dough to regulate smoking outdoors! Win!

    Those extra starts tended to be in the exurbs, away from the crazy planners, in towns like Frederick, MD (45 miles from DC), Hagerstown (90 miles from DC), even Cumberland, MD (150 miles from DC), which a year or two ago had the fastest-rising prices in the country.

    Then gas went to $4, and we all know what happened. No one thing bursts a bubble, but a planner, rational adult, would know those 50 lost families have to live somewhere, and of course, 10 of the $600,000 houses on that tract would be vacant.

  91. J sub D,

    I recognize a lot of things. For example, I recognize this comment I made upthread:

    Mad Max,

    There’s a good case to be made that government activity encouraged more risk, in myriad ways. The CRA, however, was not among them.

    What’s so complicated here, that you can’t figure out the difference between the specific law known as the Community Reinvestment Act, which I’ve explained at length has nothing to do with this crisis, and the general concept “government attempts to increase lending?”

    What. Is. The. Problem?

  92. CRA-covered entities made 23% of all home loans, but 9% of all high-risk loans, in the 15 most populous MSAs in the country.

    And like I said before, contributory, but not causative. And you ignored that.

    you want to absolve the CRA of all responsibility, and everyone’s laughing at you for it.

    Big surprise. Never would have seen you defending the CRA…no siree. And you wonder why people say you’re a hack.

  93. Planning Commissions — at least hereabouts — are oversight boards the handle disputes raised by the members of the public. They are not usually made up of planners, and they certainly do not include the city’s planners among their members, since they are set up to overrule the planners when necessary.

    Hereabout, and most places, I’d expect, planning commissions are staffed with cronies of the pols… who make a big deal of listening to the citizens, then doing as they’re told by management…

  94. Police, help, joe is spanking that poor optimist!

    I love his evolution throughout the thread:

    6:38 “I should mention I don’t have a dog in this fight, other than I’m agin’ the bailout and everything that caused it, whether that be subsidization of poor loan choices or monetary policy that causes asset bubbles.”

    Of course to only as the possible causes of the mess be government subsidization or government monetary you’ve got a rather large pit bull in an argument about whether government policy caused this meltdown…

    6:50 “Not causative, but contributive.”

    Now backing off the claim that it was all the “guberment’s” fault, it was “contributive”

    7:21 “regardless, we’re asking for a high standard of “causation” here where none exists.”

    Suddenly causation not such an easily stated thing for a guy who less than an hour before was throwing it around rather casually…

    Great stuff!

  95. MNG – when I said “not causative, contributive”, I meant CRA. For a strong causative argument, I’d look at government policy as a whole.

    All that being said, it’s accurate to say I don’t have a dog in the fight of whether we should bail out problems that were caused by government or whether we should let it burn and start over.

  96. TAO
    joe has explained the logic of his argument and given empirical evidence indicating it is correct. You’re not attempting to refute either, just re-asserting “you’re crazy to think this was not a cause of all this, you’re really crazy if you think that.”

  97. What empirical evidence? That report from Traiger and Hinckley LLP, who have built their firm around CRA and its enforcement?

    ho-kay.

  98. I’m assuming that’s for me, and further that you mean 2002…. something happened in 2001 and 2000 was a recession year, funny thing, those selective endpoints.

    I haven’t the foggiest what you’re babbling about. I picked 2001 because it was the year that investment capital went into the housing market and its derivatives in a big way, after fleeing the stock market, resulting in the housing bubble. There was no great increase in snob zoning or other land use restrictions that came into play and cause the sharp jump; just movement of speculative capital.

    You know, speculative capital – the stuff that causes bubbles.

    Anyway, Joe, demand for housing increased ‘cuz of a couple of factors. Immigration, baby boomlet, etc. There was no sharp increase in these factors in 2001 that can explain why a price spike happened, and supply expanded greatly, with record numbers of housing starts over the next few years. Nice try, but sorry, no.

    “Planners,” rather than meet this demand, and letting land be used for 80-house parcels at $200,000 per home, decided, cool, let’s make it a 30-house parcel, for $600,000 apiece. Really? In 2001 they did this? In 2001, there was a sharp increase in land use regulation that hadn’t previously existed, sufficient to cause a sharp change in the market. You sure about that? Because I think you’re full of shit, monkey.

    Oh, and see Michael B Sullivan’s comment above about planners and our awe-inspiring power to dictate local land use regulation based on our own preferences.

    There’ll be a greater amount of tax revenues, but fewer services to provide. Planners despise this argument, and while we are quick to point out its flaws, sadly, the policymakers rarely listen to us.

    Those extra starts tended to be in the exurbs, away from the crazy planners, in towns like Frederick, MD (45 miles from DC), Hagerstown (90 miles from DC), even Cumberland, MD (150 miles from DC), which a year or two ago had the fastest-rising prices in the country. So, you’re telling me that the fastest rise in prices were happening in exurbs that (you think) didn’t have any zoning. First of all, you’re wrong about Frederick, Hagerstown, and Cumberland not having zoning; and second, even if your assertion were true, it would refute your point.

    You have very strong feelings, monkey, but you don’t know what you’re talking about, and you’re making arguments that don’t make any sense.

  99. Hereabout, and most places, I’d expect, planning commissions are staffed with cronies of the pols… who make a big deal of listening to the citizens, then doing as they’re told by management…

    Well, possibly true. But in that case, their “management” are the politicians, not the planners. Again, the planners are beneath the planning commission. And politicians aren’t planners, either.

  100. There’s a specific argument: how much the CRA contributed to this.

    And a more general one: how much of this mess is the cause of government policy and how much occurred because of non-government (even, gasp!) market-driven decisions of private actors seeking their self-interest.

    I’d say folks like you who seem to be arguing that no more than 0% of the blame can correctly be laid on the latter have one hell of a bit of arguing to do. I’m guessing joe nor me nor any liberal is arguing that no government policy is in part to blame for this. But libertarians who ascribe all the blame to government seem to me to have lost already by setting such a goofy bar.

  101. I notice that your study, TAO,

    You’ll note it wasn’t a study.

    joe, numbers are supposed to be used in conjunction with other decent arguments, not as the end-all be-all of discussion.

  102. And like I said before, contributory, but not causative. And you ignored that.

    I did not ignore it, dipshit, I refuted it. Then I walked you through it again. Then I did it again.

    Look, I’ll try one last time. There were fewer risky loans made under the CRA than would have been made without it. There were fewer MBSs issued than would have been issued without it. You’re claiming that the CRA helped cause the mortgage crisis because instead of solving all of the problem, it only solved some of it. It’s like saying that I burned down a house because I was only able to put out some of the fire. Yes, there was still fire damage after I sprayed the house with the hose. No, my efforts didn’t cause the fire damage. They reduced that damage. Noting that the house suffered fire damage doesn’t change that.

    Get it? Why is this so hard?

  103. I’m guessing joe nor me nor any liberal is arguing that no government policy is in part to blame for this

    I’m willing to cop to the fact that (in the short term) there certainly was “greed” (OH NOES NOT GREED) that caused part of this problem.

    The question was, did government policy provide a “moral hazard” (oh, damn, there are those two words again) for people to “get greedy” where they normally would not have?

    Answer: Yes.

    The second part of the issue (more directly speaking) is government-pressure on banks to make loans to untrustworthy individuals.

  104. What empirical evidence? That report from Traiger and Hinckley LLP, who have built their firm around CRA and its enforcement?

    Any time you want to point out anything wrong with the empirical evidence they provided, we’d all love to hear it.

    BTW, your (number-free) links went to Cafe Hayek and National Review.

  105. I think joe’s argument, as I understand it, was summed when he said:
    “The CRA reduced loan delinquency, reduced the number of loans bundled into MBSs, and ameliorated the problem.”

    He then gave empirical figures supporting at least claim one.

    A bit more extended version of his argument: “The Community Reinvestment Act only covers federally-insured deposit institutions, ie, banks. Banks underwrote much smaller numbers of risky mortgages than non-bank lenders, who aren’t covered by the Act. These banks, as a result, are seeing lower rates of foreclosure in CRA-covered neighborhoods than are non-banks. These banks were also much less likely to sell their mortgages onto the secondary market, where they were turned into the MBSs that are at the heart of this meltdown.”

  106. BTW, your (number-free) links went to Cafe Hayek and National Review.

    No, joe, those were the sites they went to. They went to Russell Roberts (GMU Econ Professor) and Thomas Sowell, who needs no introduction.

    Yours went to rent-seekers and their representatives.

  107. TAO
    How did government provide a moral hazard for people to get greedy where they otherwise would not?

    It strikes me that without any government nudging whatsoever I’ve seen and read about quite a bit of foolish behavior based on people whose decisions were driven too much by short-sighted greed.

  108. I recognize a lot of things.

    Your own idiocy is not among them.

    Good day, sir.

  109. It’s quite simple:

    If the CRA caused lenders to make riskier loans, then federally-insured deposit institutions would have a higher % of risky loans. In fact, they have a lower % of risky loans.

    If the CRA increased the rate of delinquency and foreclosure, then federally-insured deposit institutions would have higher rates of foreclosure in CRA-covered neighborhoods than other lenders in those neighborhoods. In fact, they have lower rates.

  110. Joe, I ain’t a monkey, I was born year of the rat. But you are clearly a parasite.

    So, parasite. For housing starts, I looked here. It said ’01 was a recovery year, looka like ’03 to me is when it really get… started.

    Parasite, 2001, developers near me took Crown Farm, in G-Burg. There was a shiat-load of regulation. My first link. So much so, they still ain’t decided what to do with it. Planners have been employed throughout this process. Though the fact that the developers fled end of ’06, early ’07, was only recently noticed…

    Whether it’s written “regulation” or “held up ‘cuz it’s being studied for a decade,”–and planners are always employed in the “study” process, ain’t they, parasite?–I leave to you to determine.

    If you’re still going to argue that lack of housing in an available area (when so much of it is being held up by “planning phases”), had nothing to do with the rise in prices, the responsibility vortex for individuals in your parasitic “profession” may destroy the universe in a manner that the Large Hadron Collider never could. But I’d glad to know that it’s never the fault of people who “plan” when “plans” go wrong.

    And as to quality or depth of regulation, compared to Montgomery, County, MD, parasite, Fredneck is West Texas. (They did put a moratorium on building a while back, during a drought, when it was discovered the county would soon be out of water…)

  111. joe’s specific claims upon which his argument that the CRA was not part of the problem are:

    1. The CRA reduced the number of bad loans
    2. The CRA reduced the bundling of these loans into MBS’s

    That’s what you have to refute.

  112. Yours went to rent-seekers and their representatives.

    Curses! What are facts, documentary evidence, and qualitative studies compared to the observation that a commenter on a blog thread doesn’t like the politics of the people providing them?

  113. How did government provide a moral hazard for people to get greedy where they otherwise would not?

    You don’t even know what “moral hazard” means, do you?

    Wow.

  114. Steelers game starting, check back later for the answers (btw-TAO et al., I’m not saying you’re wrong and joe is right, I honestly don’t know much about this stuff and would like nothing better than for you guys who obviously do to slug it out so that I can make more sense of it).

  115. Now, now TAO I do know what that means. You think all this was done by people who felt their risks were being insured by the government? If so, then you’ll have to detail that a bit because that ain’t obvious to a lot of folks…

  116. Here, let’s parse this:

    It said ’01 was a recovery year, looka like ’03 to me is when it really get… started.

    Parasite, 2001, developers near me took Crown Farm, in G-Burg. There was a shiat-load of regulation. My first link. So much so, they still ain’t decided what to do with it. Planners have been employed throughout this process. Though the fact that the developers fled end of ’06, early ’07, was only recently noticed…

    So what you’re telling me is 1) housing starts are delayed by regulation and 2) housing starts started to peak two years after capital fled the stock market.

    OK. You know what that would suggest to someone who doesn’t have his back against a wall?

    If you’re still going to argue that lack of housing in an available area (when so much of it is being held up by “planning phases”), had nothing to do with the rise in prices.. That is not my argument. Restrictions on housing supply do increase prices – that’s the major argument against snob zoning.

    My argument is different – that restrictions in supply don’t explain the particular phenomenon called a housing bubble. Restrictions on new housing starts, and increases in the per-unit cost of those starts, do indeed cause prices to be higher. They do not cause bubbles, for the reasons I’ve already explained.

  117. MNG – something to ponder while the Stillers (I hope!) win that game:

    If lenders are just so gosh-darned greedy, why did we need to pass (and then beef up, under Clinton) the CRA in the first place?

  118. You don’t even know what “moral hazard” means, do you?

    I don’t think the guy who used the formulation “moral hazard to get greedy” needs to be talking down to anyone.

  119. If lenders are just so gosh-darned greedy, why did we need to pass (and then beef up, under Clinton) the CRA in the first place?

    Ooh! Ooh!

    Because the greedy lenders could make more money lending in the burbs than in the hood.

  120. 2. The CRA reduced the bundling of these loans into MBS

    Ask yourself what the default rate is on subprime loans.

    As early as 2000, as many as 25% of CRA-made loans were called “not-profitable” by the Cleveland Division of the Fed. All of the bad debt was covered over by the housing bubble…but guess what happened? And guess which loans are defaulting faster?

  121. I don’t think the guy who used the formulation “moral hazard to get greedy” needs to be talking down to anyone.

    WTF are you talking about?

    Moral hazard – the idea that parties act differently when they are insulated from risk, as opposed to how they would act if they were fully accountable to that risk.

  122. Those extra starts tended to be in the exurbs, away from the crazy planners, in towns like Frederick, MD (45 miles from DC), Hagerstown (90 miles from DC), even Cumberland, MD (150 miles from DC), which a year or two ago had the fastest-rising prices in the country.

    I have a client in Hagerstown who is a homebuilder. While there has been zoning there for quite a while, it was not very strict until a few years ago. New developments started popping up faster than the county government could add water/sewer capacity, and so a building moratorium was put in place for the longest time. It was *killing* my client because they had orders for a lot of new homes, but they had to idle their workers because it was illegal to build them.

  123. As early as 2000, as many as 25% of CRA-made loans were called “not-profitable” by the Cleveland Division of the Fed. All of the bad debt was covered over by the housing bubble…but guess what happened? And guess which loans are defaulting faster?

    Ah, but the proper comparison isn’t between CRA loans in CRA neighborhoods and loans in other neighborhoods.

    It’s between loans in Low-Mod income neighborhoods made by federally insured deposit institutions vs. those made in those neighborhoods by non-banks.

    Given that that latter have even higher default rates, and given what we know about how mortgage lenders have been operating in regards to risk, it is wholly implausible that the people who got bank loans through the CRA would have been unable to get loans from Countrywide and its ilk.

  124. Because the greedy lenders could make more money lending in the burbs than in the hood.

    Not “more”, joe. You mean “actually MAKE money in the burbs, as opposed to losing it in ‘the hood'”

  125. WTF are you talking about?

    I’m talking about the fact you used even sloppier language than MNG, language that suggested even more strongly than his formulation that greed was caused by “moral hazard.”

    You jumped down the guy’s throat for using language that was no worse than your own, accusing him of ignorance for word choice that was, if anything, less misleading than yours.

  126. alright, fine, the moral hazard “allowed” or incentivized individuals to take risks where they normally would not take them. This manifests itself to people who do not understand the concept as “THOSE GREEDY JERKS!”

    You’ll note I put “get greedy” in scare quotes because I don’t really think that. Perhaps you missed them?

  127. And as to quality or depth of regulation, compared to Montgomery, County, MD, parasite, Fredneck is West Texas.

    Oh, ok. You’re saying that the places in your region with the highest jump in housing prices are also those that had the least regulations. I can buy that.

    The effect of land use regulations on housing prices is, after all, a regional phenomenon, and housing markets themselves operate as regions.

    Not so much help with your point, though.

    And still, none of this has to do with the housing bubble, which like all bubbles was driven by speculative pricing unmoored from the supply-demand curve for the underlying good.

  128. I missed Trey’s first Reason party!

    *weeps*

  129. Not “more”, joe. You mean “actually MAKE money in the burbs, as opposed to losing it in ‘the hood'”

    You’re simply wrong here. Banks don’t make loans that lose them money, as a matter of course. Low-mod neighborhoods are still profitable – many local banks and credit unions plug along just fine serving that clientele.

    They’re just not as profitable.

  130. alright, fine, the moral hazard “allowed” or incentivized individuals to take risks where they normally would not take them.

    I understood you the first time. I understood MNG the first time, too. You both used the term quite accurately.

  131. You’re saying that the places in your region with the highest jump in housing prices are also those that had the least regulations. I can buy that.

    The effect of land use regulations on housing prices is, after all, a regional phenomenon, and housing markets themselves operate as regions.

    The rest of this point being, since the regulations in one community effect the housing supply on a regional basis, you’re not going to see a correlation between local regulations and the relative housing costs in the towns of a region.

  132. I should have said “act greedy”…and you’ll note that MNG wasn’t refuting my poor usage, but the notion that a lot of this wasn’t derived from government policy.

    And we’re back on track!

  133. I can solve the housing crisis with dollar value menus!

  134. I put up the two claims upon which joe’s claim rested. TAO did laudably reply with an empirical claim, which joe also replied to, below. So now I need TAO’s discussion of joe’s point.

    “As early as 2000, as many as 25% of CRA-made loans were called “not-profitable” by the Cleveland Division of the Fed. All of the bad debt was covered over by the housing bubble…but guess what happened? And guess which loans are defaulting faster?

    Ah, but the proper comparison isn’t between CRA loans in CRA neighborhoods and loans in other neighborhoods.

    It’s between loans in Low-Mod income neighborhoods made by federally insured deposit institutions vs. those made in those neighborhoods by non-banks.

    Given that that latter have even higher default rates, and given what we know about how mortgage lenders have been operating in regards to risk, it is wholly implausible that the people who got bank loans through the CRA would have been unable to get loans from Countrywide and its ilk.”

    Time out over, back to game

  135. Seriously can someone explain this whole crisis in really, really, really simple terms?

  136. Firstly, Fannie and Freddie failed. Secondly, they commoditized traditional mortgages, which makes them less profitable. Banks had to either compete on volume or move to a different product if they wanted to make a lot.

    This is absolutely true. I would agree, and have myself argued, that the subprime and Alt-A credit industries basically came into existence because lenders were searching for products they could market that would have higher margins than the margins they were realizing from conforming product that had been commoditized by the agencies.

    But if someone offers the claim that the subprime crisis came about because the agencies started doing subprime loans, that claim directly contradicts this one. The subprime crisis can’t simultaneously be the result of the fact that Fannie was doing subprime loans, and the fact that she was not doing subprime loans. I agree with you and vote not. It’s still the indirect result of the government action of creating the agencies – but one narrative reflects the facts and the other doesn’t.

    They had prepayment penalties because a lot of the loans were brokered, so brokers would call up clients whenever rates went down to refinance them and win commissions. Several banks had no prepayment penalties for in-house refis and most penalties were designed to offset the cost of mortgage brokers. The loans that had prepayment penalties even after the reset were pure evil, but as far as I’ve seen they were in the minority.

    I would disagree with you here, though. The problem is related to broker pricing, but not in the way you speculate on here – the problem of broker re-solicitation isn’t universal to all categories of loans, but prepayment penalties were concentrated in Option ARM’s, and tended to be much higher in Option ARM’s than other products. I would argue that prepayment penalties are inherent to the product and the way that it was marketed. Usually broker compensation is based on the interest rate of the loan – the higher the rate, the higher the broker premium. This gives brokers an incentive to negotiate rates up, but consumers tend to resist higher rates by comparison shopping, so there’s a negotiation there and eventually an equilibrium. But since all Option ARM’s pretty much had the same ridiculous start rate, you needed a different mechanism for broker compensation, and the lenders chose to compensate brokers more for delivering loans with harsher prepayment penalty terms, and/or harsher rate adjustment terms after the expiration period. And consumers had little experience in negotiating those elements of the loan price, so brokers generally got away with imposing the worst prepayment penalty and worst adjustment terms available under the product. The World guys knew this, and SOLD it. They couldn’t wait to get into a broker’s office to train them how to fuck people for 3 or 4 points where they used to make 1.

  137. By the way, guys, the big reason the CRA discussion is out of place here is institutional.

    The only entities with CRA requirements are depository institutions.

    The overwhelming number of firms to fail during the current crisis were non-depository institutions.

    The depository firms that have failed – Indy Mac, Wachovia, WAMU, Fremont – all have pretty clear pathologies to their lending history, and not one of them was undone by their CRA lending. Not one.

    And CRA loans aren’t in the mortgage-backed securities that have endangered other firms. The whole point of making a CRA loan is to keep it on your books. A CRA origination that isn’t retained for servicing is just a brokered loan and that helps no one when it’s time to meet the regulator.

    I am not defending CRA, because I think it’s an unjust law that shouldn’t exist. It’s just that I object to the really sloppy narrative that people are trying to create, where CRA created the subprime crisis.

  138. It seems to me that the findings of what another recent Reason H&R post terms behavioral economics, that people (lenders, borrowers, consumers, etc) often make irrational and unwise decisions, have trouble understanding risks and such in certain situations, etc., provides good reasons to suppose that the kind of unwise decisions involved in this mess need not have anything to do with government meddling.

    Don’t get me wrong, I’m a big believer in incentives and their effect on behavior, and it strikes me as plausible that government actions provided many an incentive that could have, as TAO put it been, been contributory to the mess…

  139. fluffy
    What do you think lies behind the mess involving the “mortgage-backed securities that have endangered other firms.” I’m not trying to set a trap, I’d like your insight here.

    And what was up with these “credit-default swaps” that seemed to be involved with dropping AIG. Why did AIG insure so much of these things if they could not cover it?

  140. And CRA loans aren’t in the mortgage-backed securities that have endangered other firms.

    Aren’t? As in just flat are-not?

    I think Bear Stearns would like a word with you.

  141. Bob Barr “wins the day” at Politico!!!

    http://www.politico.com/gameday/

  142. Whoa.. whoa… what’s with the hefty debate?

    Slow down cowboys. The treasury department has this all figured out. Let them proceed apace. This jaw-boning is just that. Needless cowpats in the path of a solution.

  143. This is very simple. A rise in prices caused by a restriction in supply doesn’t suddenly reverse itself and plummet. Next you’ll be telling me that there was a restriction in the supply of tech stocks and tulip bulbs.

    Prices can get to high and demand can slacken because of those prices…oh wait isn’t that exactly what happened?

    joe again shilling for the dems.

    Joe cannot explain away why Fannie Mae was one of the early ones to fail.

    If there was no Fannie Mae and CRA there would be no sub-prime market…without that market there would be no financial crisis.

    No amount of joe spin can dispute those facts

  144. How did government provide a moral hazard for people to get greedy where they otherwise would not?

    It bought sub-prime loans for which there was no market for.

  145. 1. “A” credit loans – these are the plain old vanilla conforming loans for people with verifiable incomes and decent credit histories that people have always gotten. These loans constitute the huge majority of Fannie and Freddie’s loans.

    You forgot to mention that Fannie stopped making loans…and instead focused simply on buying sub-prime loans.

  146. Sub-prime loan before fanny mae entered the market:

    Primarily an in-house loan that could not be sold outside of the lending institution simply because there was no market for them.

    Sub-prime loan after fannie entered the market:

    Sure here is a loan and the very next second I give it to you I will sell it into the market that Fannie is propping up.

    You are right guys there is no government responsibility here.

  147. This thread has gone full-tard. The issue has never been about supply and demand of actual physical properties. It was about supply/demand of financial (potentially profit-creating) paper on said properties.

    BTW, am I the only one having trouble with posts going through?

  148. Aren’t? As in just flat are-not?

    I think Bear Stearns would like a word with you.

    Although CRA loans can be sold, and bundled and sold, bank-to-bank without losing the CRA credit, if a non-bank institution buys them they aren’t CRA loans any more.

    So some banks realized they could sell CRA loans that they had been holding on their books because the loan parameters fit the subprime profile other institutions were trying to acquire.

    But this is more a matter of the subprime boom creating a “found money” opportunity for some banks to unload some CRA deals. There is nothing in the Act requiring Bear Stearns to go out and try to buy CRA loans so they could repackage them as subprime securities – and in fact, once Bear Stearns bought a particular loan, it ceased to be a CRA loan.

    And what was up with these “credit-default swaps” that seemed to be involved with dropping AIG. Why did AIG insure so much of these things if they could not cover it?

    I don’t know enough about the credit-default swap market to comment.

  149. AIG went to Monte Carlo, and put all their chips on the “no pass” line.

  150. Pathetic, joshua. You need to learn when you’re over your head, and hold your tongue.

  151. “””If there was no Fannie Mae and CRA there would be no sub-prime market…without that market there would be no financial crisis.”””

    If there was no earth there would be no evil men.

  152. the show is over, but just for the heck of it, here’s some of that Krugman article referenced in the O’Toole article mentioned by me at 6:50 and rejected by joe at 7:09.:

    Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

    In Flatland, which occupies the middle of the country, it’s easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don’t really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can’t even get started.

    But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions – hence “zoned” – makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

    And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

Please to post comments

Comments are closed.