Economics

Economist Miron: Bail on the Bailout

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Via Drudge comes this CNN.com column by economist Jeffrey Miron. After detailing the government's role in fueling the subprime mortgage crisis, which is at the heart of the current "crisis," he concludes:

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

Miron notes that, among other things, Wall Street is now engaging in "strategic behavior" in anticipation of a bailout. He argues that the current credit freeze, such as it is, is largely a function of firms waiting to see what's coming out of Washington. The whole piece is well worth reading.

Miron participated in our recent forum, "The Great Bailout Brouhaha." His contribution:

Jeffrey A. Miron

1. How bad is the current market situation?
The current situation is serious, but not so much because the economic conditions are especially bad. The situation is serious because policymakers seem poised to undertake an enormous intervention that will have huge adverse effects and may well exacerbate the very kind of problem the intervention is meant to fix.

2. How bad are the current proposed bailout plans?
See #1. The bailout is a terrible idea. It transfers a huge amount of wealth to people who do not deserve it. It will generate enormous incentives for creative bookkeeping as the investment houses and banks try to rid themselves of any assets they do not want. The bailout fails to eliminate the crucial policies that contributed to and caused the current situation, such as the Community Reinvestment Act, the creation of Fannie Mae and Freddie Mac, and so on. Last but hardly least, the bailout sets a terrible precedent: If you take huge risks and become too big to fail, the government will bail you out.

3. What's the one thing we should be doing that we're not?
The only things we should be doing are eliminating the underlying policy causes of the current situation; see #2.

Jeffrey A. Miron is senior lecturer and director of undergraduate studies in the Department of Economics at Harvard University.

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  1. Uh Oh! Another prominent economist is talking about CRA!

    What’s the over/under on the number of posts it takes until the so-called “progressives” start h*ndwaving about it?

    I say less than ten.

  2. This guy obviously didn’t learn anything from Larry Summers.

  3. I expected to see some argument about the CRA playing a role in this.

    Nope.

    It would have been nice, because for all of the handwaving about the CRA causing the financial meltdown, I’ve yet to see anyone able to articulate how it, as opposed to MBSs and Fannie Mae guarantees, played any role whatsoever.

  4. I don’t care what somebody on some college campus says.

  5. Uh Oh! Another prominent economist is talking about CRA!

    What’s the over/under on the number of posts it takes until the so-called “progressives” start h*ndwaving about it?

    What’s the over/under on the number of posts until somebody actually finds evidence of a positive correlation between CRA loans and the defaults that fed the current mess? Because at this rate we’ll be listening to Chinese Democracy before we’re done waiting for that.

  6. TAO,

    You just don’t get it. People with poor credit ratings and little or no down payments are the only ones not defaulting. Their default rate is so low as to be negligible. CRA and other policies (pushed by both parties) to expand home ownership has nothing at all to do with this.

    There. Now the well intentioned champions of the poor and dispossessed don’t need to bother.

  7. But…but…but…poor pepole, NotThatDavid!

    Don’t you get it? It helps poor people get houses. Some other things done to help poor people get houses played a role in causing the problem, so CRA must have, too.

    Sigh. You need to take Econ 101.

  8. What’s the over/under on the number of posts until somebody actually finds evidence of a positive correlation between CRA loans and the defaults that fed the current mess?

    What about “pressured into subprime” did you miss in the post?

  9. CRA and other policies…

    Like, stuff did…you know…stuff.

  10. Grow a brain, Miron!

  11. Lessee – CRA = contributory. FNM and FRM – somewhere closer to causative.

    Where have I heard that before?

  12. What about “pressured into subprime” did you miss in the post?

    The part where the CRA increased, rather decreased, the risky mortgages handed out as a result of that pressure in CRA-covered neighborhoods. You know, that whole “of a positive correlation between CRA loans and the defaults that fed the current mess” thing. That’s the part I missed.

    Because, you see, it wasn’t there. Because, you see, it doesn’t exist.

  13. TAO’s mom = gila monster.

    I have now provided exactly as much evidence of TAO’s mom being a gila monster as has been provided that the CRA contributed in any way, to any degree, to the mortgage meltdown.

  14. You know, that whole “of a positive correlation between CRA loans and the defaults that fed the current mess” thing

    That’s not the argument and you know it. No one’s saying CRA-loans directly melted down the markets.

    How many times must “contributory” must be said to you?

    Maybe you should cite that ambulance-chaser report again.

  15. Just an observation. Many of the house Dems on the left side of the party with lower income constituencies are demanding that borrower bailouts be included.

    Why is that?

    When the forensic examination of these firms deaths and the mortage backed fiascos they dealt in is completed, we shall see what we shall see.

  16. Forget it, joe. You’re really not worth wasting time over. Jesus Christ himself could tell you your wrong, but your idols are greater than that.

    Bah. Depressing.

  17. * tell you you’re

  18. You mean the report that actually analyzes data to find out if the CRA increased risky lending?

    Maybe I should, since it is the only such collection of evidence that anyone taking an position on this question has ever posted or linked to.

  19. Just an observation. Many of the house Dems on the left side of the party with lower income constituencies are demanding that borrower bailouts be included.

    Oh J sub! That could not be possibly because there are policies that encourage loans to go to high-credit-risk individuals! Didn’t you see some report where CRA loans defaulted less?

  20. The only anti-CRA argument I can see as possible, given that the homeowners involved aren’t actually defaulting, is that, if a bank considers a CRA loan a probable loser, they would be more inclined to seek out high-risk-high-reward activity, like the “subprime” morass (which also includes ballooning rates etc. etc. etc. we’ve been over this) in order to make up the difference elsewhere. However, I have no idea if that premise is even true, and if it is it’s still no excuse for the banks to pick an obviously terrible gamble and then not take steps to prepare for the gamble to fail.

  21. If Jesus H. Christ told me my Honda was breaking down, Jesus H. Christ would be wrong.

    Especially if Jesus H. Christ was a car salesman, or a UAW organizer.

    I’m really not much for taking naked assertions unsupported by evidence or logic at face value, particularly when the evidence demonstrates that the opposite is true.

  22. Let’s not forget about the predatory lenders that hunted down poor people in the streets and made them sign mortgages to buy houses they couldn’t afford.

  23. No one’s saying CRA-loans directly melted down the markets.

    How many times must “contributory” must be said to you?

    Until you explain how, exactly, it contributed? Just a thought. I could say that the increasing sales of Hannah Montana merchandise were a contributory factor to the crisis and I’d have given exactly as much support for my position as you.

  24. 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.

  25. Oh J sub! That could not be possibly because there are policies that encourage loans to go to high-credit-risk individuals!

    Since some policies intended to extend mortgages to poor people played a role in the problem, all policies intended to extend mortgages to poor people played a role in the problem.

    Even though the actual evidence demonstrates that the CRA ameliorated the problem by allowing people who otherwise would have taken high-risk mortgages to take responsible ones, we know this is true, because…you know…poor people.

  26. …Hannah Montana…

    I knew that tween temptress was up to no good!

  27. Let’s not forget about the predatory lenders that hunted down poor people in the streets and made them sign mortgages to buy houses they couldn’t afford.

    If you’d written “fooled people into thinking they could afford mortgages they actually could not afford,” that would be a good point. That happened a lot, and did contribute to this crisis. Default rates on loans from non-banks in poor neighborhoods are out of control – at least twice a high as default rates on loans from federally-insured deposit institutions.

    Good thing the CRA made bank loans more available, or default rates in those neighborhood would be higher still.

    On the other hand…poor people, y’know?

  28. If you’d written “fooled people into thinking they could afford mortgages they actually could not afford,” that would be a good point.

    It was just snark. I was just having a flashback to about a year ago when the defaults started piling up.

  29. If you’d written “fooled people into thinking they could afford mortgages they actually could not afford,” that would be a good point.

    Nasty Lenderssss! They trickses us!

  30. Default rates on loans from non-banks in poor neighborhoods are out of control – at least twice a high as default rates on loans from federally-insured deposit institutions.

    Wonder what it was that brought on the peddling of such bad loans?

    What? What could it be?

    I know, it’s just mean ol’ nasty greed, right?

    More regulation!

  31. Good thing the CRA made bank loans more available, or default rates in those neighborhood would be higher still.

    That is to be expected, given the crowding out effect of CRA loans. If you qualify you would be crazy not to accept one as your lend of first resort.

    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.

    If correct, that is pretty much the thread winner. Sorry, Miron.

  32. I know, kinnath. I was just riffing off it, because it gave me a good opening for my point.

    Which was, the CRA lowered default rates, not raised them.

    I must now go type the letter S too many times at the ends of some words, so as to make an argument I can’t refute appear somehow distasteful.

  33. I refute it thusly!

    *kicks rock*.

  34. The root cause of the current mess is simply greed, nothing more.

    People (poor, middle class, and wealthy) felt compelled to live larger lives than they could afford. They ignored the risk because rising prices meant they could always sell their houses for a profit.

    Lenders (small & local to large & global) made loans knowing the buyer couldn’t afford the payments, because the loan would get sold to someone else who shouldered the risk. Besides, rising prices meant the buyer could always sell his/her house for a profit.

    Stockholders dumped as much money as possible into mortgage securities because “everyone” was making a killing and the risk was spread all over the place. Besides, rising prices meant the buyer could always sell his/her house for a profit.

    Only one tiny flaw in the concept.

  35. Wonder what it was that brought on the peddling of such bad loans?

    What? What could it be?

    I know, it’s just mean ol’ nasty greed, right?

    More regulation!

    Now, if you’d limited your argument to defensible positions like this, for example, that artificially low interest rates and the implicit guarantee of Freddie and Fannie and the rest of the financial world, you wouldn’t be getting your ass handed to you over and over again.

    But you’ve just gotta stretch the argument to include the CRA, because you don’t actually know what you’re talking about, but…you know…poor people…and Democrats…you know?

  36. Nasty Lenderssss! They trickses us!

    Well, yes. Interest-only loans and the like represent higher profit for the bank and a worse deal for a large majority of customers, which means if they’re being marketed straightforwardly people aren’t going to take them. So they’re marketed deceptively instead, playing the low initial payments and avoiding mention of how high the payments get later on unless the borrower calls them on it. I’m not crying “fraud! Predators! Lynch them all!” – it’s a customer’s responsibility to know what they’re buying – but that doesn’t mean the banks bear no responsibility for working up loans that people will struggle to pay and then not planning for the possibility of mass default.

  37. alan,

    If correct, that is pretty much the thread winner. Sorry, Miron.

    What’s interesting about that figure is that it not only refutes the notion that the CRA increased default rates by giving loans to people in poor neighborhoods, but the (perfectly reasonable) hypothesis that NotThatDavid offered about banks issuing riskier loans elsewhere to make up for their CRA loans.

  38. keep saying “poor people….you know?” joe and eventually you’ll be right.

    Maybe you should try all caps. I hear that helps.

    The root cause of the current mess is simply greed, nothing more.

    Not even joe goes this far.

  39. So they’re marketed deceptively instead, playing the low initial payments and avoiding mention of how high the payments get later on unless the borrower calls them on it.

    What you meant to say was “If borrowers actually read the shit they signed when they obligate themselves to pay back a debt”.

    But the banks! They trickses the dumb poor folks.

    Lemme pull a joe here “But, greed, you know…?”

  40. Actually, I think I’ll keep providing hard numbers and logical trains of thought, and THEN writing “poor people.” Oh, look ALL CAPS.

    And I’ll be right.

    But I’m still going to do a little touchdown dance after beating you down when you call me out like this.

  41. But I’m still going to do a little touchdown dance after beating you down when you call me out like this.

    Go forth and be king of your own little world, joe. knock yourself out, hero.

  42. So you stopped reading after that sentence, then?

    I’m not crying “fraud! Predators! Lynch them all!” – it’s a customer’s responsibility to know what they’re buying – but that doesn’t mean the banks bear no responsibility for working up loans that people will struggle to pay and then not planning for the possibility of mass default.

  43. Fortunately, all the poor retards who took out mortgages they can’t afford can keep warm at night with all that paperwork.
    Or they could go fucking postal and shoot a couple of CEOs. I hear prison food beats Top Ramen.

  44. OK, The Angry Optimsit, I shall.

    Ahem.

    RATHER THAN CONTRIBUTING TO THE MORTGAGE MELTDOWN, THE COMMUNITY REINVESTMENT ACT AMERLIORATED IT, BY MAKING SAFER, MORE RESPONSIBLE LENDING MORE AVAILABLE IN POOR NEIGHBORHOODS, ALLOWING PEOPLE WHO OTHERWISE WOULD HAVE TAKEN SOME SCAM OPTION-ARM PROVIDED BY A MORTGAGE COMPANY THAT INTENDED TO SELL IT FOR MBSS TO INSTEAD TAKE A PLAIN VANILLA MORTGAGE PROVIDED BY A LOCAL BANK THAT WAS MORE RESPONSIBLE IN MATCHING THEIR LOAN TO THEIR ABILITY TO PAY.

    WAKE UP AMERICA!!!

  45. The root cause of the current mess is simply greed, nothing more.

    Not even joe goes this far.

    Was that an attempted refutation?

  46. I read it, NotThatDavid, it just didn’t make any sense.

    Banks don’t bear any “responsibility” for offering bad products. People bear responsibility for buying them, especially when their horribleness is right there to read.

    Now, I think that responsible stewardship of a business dictates a better practice, HOWEVER, the only ones with legal obligations should be the morons (rich and poor) who went in over their heads. I don’t care how it’s advertised: don’t eat shit if you don’t want to get sick.

  47. But the banks! They trickses the dumb poor folks.

    Many banks, firms rating beureus and the like got tricked into believing in the fiduciary soundness of the housing market and Federal reserve policy by Greenspan over those many years.: ‘The housing market in the United States is quite heterogeneous, and it does not have the capacity to move excesses easily from one area to another. Instead, we have a collection of only loosely connected local markets.’
    Translation:
    Sure go ahead and bundle’em up, you lose here and there you still come out on top everywhere else.

    CRA has been around a long time, you can argue on various structural matters about it as I briefly mentioned one above, but as the cause of this collapse, not really.

  48. As long as we’re talking $700 billion in phony money created by the Treasury out of thin air …
    Would any homeowner here object to getting a $75,000 check to write down their mortgage? Because that’s the amount we’re talking about here, when you divide it all up among the outstanding mortgages.

  49. I’m pretty sure there are more than a 9,333,333 outstanding mortgages, JK. What did you mean?

  50. I think this is a good thread to point out again that the first time I signed a mortgage, I paid an additional $500 in order to have my own lawyer, not one provided by the bank, at the closing to represent ME.

    Not that I really needed to spend that money, but there are a lot of people, it turns out, who should have had a damn lawyer there to keep them from signing bad mortgages. Best $500 I ever wasted. 🙂

    On my refi and my current morgage, I didnt bother. But, I was young and didnt know anything about the whole real estate business then.

  51. Banks bear a responsibility for the failure of their self-defeating business plan, i.e. the current liquidity crisis. They came up with this brilliant strategy of selling people mortgages they couldn’t afford. Now, yes, taking out one of these loans is dumb, which means that most of the people who do take one out don’t know what they’re getting into. This is their own damn fault for not reading the paperwork, but it’s also a freaking stupid thing for the banks to do, because you’re selling a product that can only succeed if the people buying it don’t know what they’re getting. And, surprise! When the homeowners find out what they got, a bunch of them defaulted, which the banks should have prepared for and didn’t. Individual homeowners are responsible for their own bankruptcies; banks are responsible for making a bunch of high-risk loans and then getting caught with their pants down when the debt went bad.

  52. joe,

    I was trying to find that number yesterday. Only thing I could find was about $10.5T in mortages outstanding. Still, they could pay off 5% of everyone’s principle and it would cost less than $700B.

  53. Or, to follow “don’t eat shit if you don’t want to get sick”: You’d have to be a fucking moron to buy and eat a shitburger, but the CEO of Shitburger Hut should not come crying to me when his business tanks.

  54. Just curious about this: Are foreign financial institutions allowed to make home loans in the United States? Are there explicit or implicit barriers to them doing so?

  55. According to the Census Bureau’s 2007 American Community Survey there were 51,615,003 households with a mortgage in the U.S. at the end of 2007.

  56. Let’s not forget about the predatory lenders that hunted down poor people in the streets and made them sign mortgages to buy houses they couldn’t afford.

    If you’d written “fooled people into thinking they could afford mortgages they actually could not afford,” that would be a good point.

    Yeah. Those people are poor! Don’t y’all get it? They are unable to read and understand contracts and too stupid to have somebody look it over for them. It’s only the biggest investment they will ever make and you can’t expect poor people to understand what they’re signing.

    If only we had a regulation on the books that a lawyer, provided by the government of course, reviewed these contracts and had the authority to forbid these poor, ignorant and childlike victims from enetering into a binding contract with predatory lenders.

  57. Banks bear a responsibility for the failure of their self-defeating business plan,

    You need to get out a little more.

    The banks that maintained the old business model of taking deposits and lending the money to their customers are doing just fine.

    The banks that originated loans and resold them into securities market are also doing fine.

    The banks and other financial entities that bought mortgage securities (with shareholder dollars) are fucked.

    Please review your rant and then target the correct set of villians.

  58. I’m pretty sure there are more than a 9,333,333 outstanding mortgages, JK.

    Sorry, joe … that’s the approx. number of delinquent subprime loans.

  59. scott clark,

    Thanks, that was the number I was looking for yesterday.

    So, we could issue every mortgage holder on their primary residence (not bailing out 2nd homes or businesses) a 13k voucher towards their mortgage, that can only be used on 1st mortgages in existence, for amounts up to what exists, on Oct 1, 2008 that can be used towards paying off mortgages.

    It can be used for:

    1. paying back payments in arrears
    2. paying down the principle (without any penalties if mortgage has early payoff penalties)

    This would get people who are a bit underwater on their houses back above water. This would help some people who are behind and can make their payments but cant catch up. This would help solidify some of the MBSes. This would knock a number of years off of mortgages for people who havent been screwing up and provide some capital to the banks to loosen up the credit market a bit.

    I dont favor this idea, of course. But, I think it would be a better use of the $700B than taking over the debt instruments or nationalizing banks.

  60. “””Banks don’t bear any “responsibility” for offering bad products. People bear responsibility for buying them, especially when their horribleness is right there to read.”””

    Banks assess their clients eligibility for a loan and make the determination if that client is worthy of the loan. The bank IS the gatekeeper of who gets or a loan or not, they make the decision. How is it that the decision maker is not responsible for their decision?

    That does not excuse the people biting off more than they can chew. But to claim the banks have no responsiblity in the matter is just nuts.

  61. My “plan” knocks 55 months off my mortgage.

  62. TrickyVic,

    The borrowers deserve to lose their homes. The lenders deserve to lose the money.

  63. robc,

    At $150k in outstanding principal per mortgage (which seems like a reasonable wild-assed guess), that would work out to 70 million outstanding mortgages.

    Which seems about the right order of magnitude.

  64. Yeah. Those people are poor! Don’t y’all get it? They are unable to read and understand contracts and too stupid to have somebody look it over for them. It’s only the biggest investment they will ever make and you can’t expect poor people to understand what they’re signing.

    If only we had a regulation on the books that a lawyer, provided by the government of course, reviewed these contracts and had the authority to forbid these poor, ignorant and childlike victims from enetering into a binding contract with predatory lenders.

    Shorter J sub D: because I don’t like what I imagine to be the political implications of believing that people get taken advantage of by mortgage brokers, I’m going to pretend that it doesn’t exist.

  65. The borrowers deserve to lose their homes. The lenders deserve to lose the money.

    Ding, ding, ding!

    We have a winner. Let those who made the bed lie in it.

  66. robc, how would the taxpayer’s recoup? The current bailout has the possiblity of recouping some of the money when the MBSs are sold.

    I guess you could put in an agreement that the money would be recouped if the house is sold at a later date.

  67. This would get people who are a bit underwater on their houses back above water. This would help some people who are behind and can make their payments but cant catch up. This would help solidify some of the MBSes. This would knock a number of years off of mortgages for people who havent been screwing up and provide some capital to the banks to loosen up the credit market a bit.

    Just to run with this idea, it would also inject a great deal of liquidity into the credit market.

  68. Shorter joe.

    Poor people can not morally be held responsible for the contracts they sign.

  69. joe,

    I fully believe that people were taken advantage of by mortgage brokers. I also fully believe that they were just as capable as I was of having a lawyer read over the papers and give them advice. I have posted this on other forums and people found that what I did was unreasonable. Do you join them? I dont see how hiring a lawyer for the largest financial transaction that most people will ever do is even remotely unreasonable.

  70. …unless they’re CRA loans, in which case, both the lender and the borrower are completely off the hook morally.

    Have I got that right?

  71. joe,

    provide some capital to the banks to loosen up the credit market a bit.

    Just to run with this idea, it would also inject a great deal of liquidity into the credit market.

    I agree. Even in advance.

  72. “””The borrowers deserve to lose their homes. The lenders deserve to lose the money.”””

    Sure. Both sides are party to a bad loan. But the lender doesn’t necessarily lose much, they get the mortgage that was paid, plus the house back in the foreclosure. I have no problem with that.

  73. Poor people can not morally be held responsible for the contracts they sign.

    Oh, there’s plenty of moral responsibility to go around.

    “Are you sure I can afford this?”

    “Yep. Absolutely. Er, translate that for her, will you, Pedro?” I’m so going to dump this POS mortgage onto Fannie before this fossil goes broke in three months.

    Plenty of moral responsibility to go around.

  74. TrickyVic,

    robc, how would the taxpayer’s recoup? The current bailout has the possiblity of recouping some of the money when the MBSs are sold.

    I, as a taxpayer, would immediately recoup 13k. My parents, who havent had a mortgage in over 40 years (they paid off their house before I was born), would be screwed. My Dad was born during the depression, he is used to it. 🙂

  75. That’s a good point, too, robc.

    You know what just occured to me…?

    😉

  76. TrickyVic,

    The borrowers dont lose much. They get any equity they built in the house. They never really owned the house anyway. Borrowers loss = Amount paid towards mortgage – equity – cost of rent for similar home.

  77. Giving mortgagees a big fat check to pay down their loan does nothing to prevent defaults, unless the check is big enough to pay off the loan entirely. The reason loans go into default is because the monthly payments aren’t made; a single balloon payment won’t solve that.

    Not to mention that taking my money to give someone a free house, or $75,000 in equity in their current house, just because they can’t afford their payments, is immoral.

  78. “””I fully believe that people were taken advantage of by mortgage brokers. I also fully believe that they were just as capable as I was of having a lawyer read over the papers and give them advice. “””

    Agreed.

    I believe the brokers didn’t want to present the buyer with the “what if the interest rate rises” scenario. It would have turned buyers away. EVERYONE in business tries to make sales, not lose them. That, in and of its self, is not an excuse for the buyer.

  79. I’m poor and literate, so HAH!

  80. “””I, as a taxpayer, would immediately recoup 13k.”””

    So how does the other taxpayers that chipped in to give you the 13k recoup?

  81. Not to mention that taking my money to give someone a free house, or $75,000 in equity in their current house, just because they can’t afford their payments, is immoral.

    Im choosing amongst immoral options.

    Or as joe would call it, plan B.

    I would vote against it, Im just running a gedanken experiment here.

  82. So how does the other taxpayers that chipped in to give you the 13k recoup?

    If they have a mortgage they also recoup 13k. As I said, anyone without a mortgage gets screwed. Thats how socialism always works.

  83. Giving mortgagees a big fat check to pay down their loan does nothing to prevent defaults, unless the check is big enough to pay off the loan entirely.

    It reduces the amount of the loss to the bank by the amount of the check. Which increases the value of the underlying MBS.

    Its a horrible idea, but on a horribleness scale of 1-10, where 1 is “let them fail” and 10 is “the thing voted on yesterday”, I think this comes in at an 8.

  84. EVERYONE in business tries to make sales, not lose them.

    I have never had a salesman of any kind present me with the worst case scenario. Or wait, insurance salesman, but thats a different kind of worst case.

  85. “””Borrowers loss = Amount paid towards mortgage – equity – cost of rent for similar home.”””

    Wouldn’t it be more like

    Borrowers loss = Amount paid + taxes paid + maintenance – equity – cost of renting a similar home.

    If you rent you don’t have to pay for the maintenance. I think your point still stands.

  86. TV,

    yeah, I left out some details.

  87. “””If they have a mortgage they also recoup 13k. As I said, anyone without a mortgage gets screwed. Thats how socialism always works.”””

    That’s not a bargain for me, I’ll pass. ;-)It’s also how insurance works. Those who don’t need pay for those who do.

    “””I have never had a salesman of any kind present me with the worst case scenario.”””

    You probably never will. I did retail for years, it’s all about presenting the scenario that helps you move the product.

  88. You know, that whole “of a positive correlation between CRA loans and the defaults that fed the current mess” thing. That’s the part I missed.

    There’s a reason no one’s done that perfectly: it’s impossible. Simply because a loan is considered CRA does not make it caused by the CRA. It’s only the marginal loans, those that would not exist otherwise, that should count. Moreover, the best scenario for banks was getting CRA credit by issuing subprime loans to applicants who were eligible for prime, so there are CRA loans that should be excluded.

    As someone who works in a bank and deals with our mortgage operations frequently, I can tell you that on a practical level the CRA was a big deal. We would negotiate with community groups (we even gave some 6- and 7-digit sums indirectly) for lower lending standards and a new branch to get into the more profitable prime mortgage areas. At that point, it was a tax. When the US allowed the securitization of CRA loans, bad lending practices and lax oversight were pretty much encouraged by the government.

    Bad banks that played along should fail, and good banks shouldn’t be subject to grand social engineering plans. Lending based exclusively on risk = good. If otherwise deserving neighborhoods actually get “redlined” I hereby commit myself to stepping in and making mad profit.

    The banks that maintained the old business model of taking deposits and lending the money to their customers are doing just fine.

    Wachovia bought Golden West, a portfolio lender. Their ARMs kept Golden West’s proprietary loan indices and therefore couldn’t be bundled. In a flat or positive home price appreciation scenario, Golden West actually matched assets and liabilities and got rid of a lot of interest rate risk through normal operations (whereas most banks are liability-sensitive, or less profitable when interest rates rise). Yet, Wachovia fell victim. I’d say it’s the supermarket model that’s been the most successful, unfortunately.

    But the lender doesn’t necessarily lose much, they get the mortgage that was paid, plus the house back in the foreclosure. I have no problem with that.

    Lenders typically have loss severity of 20-40% (loss net of fees divided by unpaid principal as of foreclosure). The number gets big quickly.

    It reduces the amount of the loss to the bank by the amount of the check.

    Potential loss. By the way, the absolute best way to stem foreclosures (that is, Keep People in Their Homes) is to take the worst subset of borrowers and pay off a huge portion of their loans. Paying off half the principal on subprime ARMs would cost $420 billion ($12 trillion in outstanding mortgages, 7% is subprime ARMs, 50%). Since we get absolutely none of that back, it may actually be an 11 on your scale.

  89. It reduces the amount of the loss to the bank by the amount of the check. Which increases the value of the underlying MBS.

    Fair enough.

    So, do we give $75,000 checks only to mortgagees in default, or do we give $13,000 checks to everyone.

    If we go the $75,000 route, I think I’ll skip a few payments to qualify for the check. Why not? Sure, my credit rating will take a ding, but I don’t borrow for anything other than my house anyway, and I’ll rebuild it in a couple of years.

    Anyone without a mortgage or anyone who pays income taxes gets screwed in the long run. Thats how socialism always works.

    Now, I agree.

  90. close blasted tags.

    Damn you, reason, for not having push-button formatting. Damn you to hell.

  91. Blaming CRA for this is a bit much. Claiming that CRA actually worked very well is a bit much, too. The whole mess is quite complex, but the fact is that government pressure to make loans affordable to everyone had a lot to do with the problem, especially combined with nebulous anti-discrimination laws (state and federal) and artificial caps on interest rates. If subprime loans could’ve legally been priced appropriately, lenders very likely would’ve been more careful. But instead, they were threatened if they didn’t make high-risk loans while simultaneously threatened if they charged “too much” for them. Back when I was in the business, we often viewed this as an attempt to quasi-socialize lending–that is, to force lenders to make loans to everyone, while making the prime borrowers actually subsidize the high-risk borrowers. Things exploded before we got that far, however.

    CRA was a small part of the “loans to everyone!” mentality, but I think Fannie and Freddie were much more effective in bringing us to where we are today. . .not to mention the strange policies of the Fed in pushing the bubble. Blame also goes to all of the lenders and investors who knew better, but didn’t want to speak ill of the gravy train. Tsk, tsk. And you irresponsible borrowers can screw off, too.

  92. By the way, the absolute best way to stem foreclosures (that is, Keep People in Their Homes) is to take the worst subset of borrowers and pay off a huge portion of their loans.

    I can just about guarantee you that any politician who rewards people who bought more house than they should, by paying off their house will never win another election for as long as they live. The percentage of Greedy People Who Got Their House Paid Off By the Feds will be far smaller than the percentage of Pissed Off Taxpayers.

  93. Oh, there’s plenty of moral responsibility to go around.

    “Are you sure I can afford this?”

    “Yep. Absolutely. Er, translate that for her, will you, Pedro?” I’m so going to dump this POS mortgage onto Fannie before this fossil goes broke in three months.

    Plenty of moral responsibility to go around.

    If someone doesn’t even have the intelligence to learn English in a country where English is the primary language, they probably shouldn’t be taking out a mortgage.

  94. I’m the real predator
    want to buy some copper pipe? sinks?
    I need crack

  95. Banks don’t bear any “responsibility” for offering bad products. People bear responsibility for buying them, especially when their horribleness is right there to read.

    I’ve read some bullshit in my day and that sure is bullshit.

    Banks have no responsibility in the process of making bad loans? I was aware some conservatives think capitalists can do no wrong but this is taking it a little far, don’t you think?

    I’m sure, Angry Optimist, that when you closed on your house you sat there and read the 75 pages of legalese boilerplate they put in front of you. Yeah, sure you did.

  96. Pug,

    Rest assured, there will be many lawsuits filed against lenders before this is all done. For state-regulated subprime lenders, many loans require that the lender confirm the borrower’s ability to repay (I think that might be required under the federal HOEPA, too–can’t recall).

    Aside from that, there’s also quite a bit of fraud and misrepresentation that can be legitimately placed at the feet of some lenders. They’ll pay through the nose in the years to come, I’m sure. And deservedly so. On the other hand, don’t go thinking that many, many borrowers who are in trouble now didn’t participate in the mass deception.

  97. Amakudari,

    It is my understanding that securitizing CRA loans, or selling them off in any way, meant that the banks lost credit for those loans – that they had to hold onto them for them to count towards their CRA rating.

    Am I misunderstanding?

  98. Wow, very compelling arguments. Immigrants suck and minorities smoke crack

  99. I’m sure, Angry Optimist, that when you closed on your house you sat there and read the 75 pages of legalese boilerplate they put in front of you. Yeah, sure you did.

    I read everything before I sign it. Everything…and I make sure I understand it.

    One of those “being a responsible adult” thangs, you know?

    If I push a *horrible* contract across to you, whose responsibility is it if you sign the damned thing?

  100. What’s interesting is how much of that paperwork is mandated by federal (and some state) disclosure laws. Another good idea–adequate disclosures–utterly fails in implementation.

  101. It is my understanding that securitizing CRA loans, or selling them off in any way, meant that the banks lost credit for those loans – that they had to hold onto them for them to count towards their CRA rating.

    Am I misunderstanding?

    I’m talking about the other way around, where dedicated mortgage originators bundled them and CRA-compliant banks bought them. You weren’t supposed to that, but it happened. Personally, I have no idea why you would outsource underwriting standards for low-income loans, but people who figured housing markets were local bought into it.

    To me, the argument against blaming the CRA is that subprime lending grew so quickly in recent years that there was an appetite for risky loans beyond any implied government mandates.

  102. Amakudari,

    Thanks for the reply.

    So, you’re saying that banks would buy MBSs created out of CRA-compliant loans, and then counted those towards their CRA rating? And the feds let them do that?

    Just wow.

  103. So, you’re saying that banks would buy MBSs created out of CRA-compliant loans, and then counted those towards their CRA rating? And the feds let them do that?

    Well, it makes sense to me — I mean, ultimately the bank is on the hook for loans in a particular community. But I don’t like MBS because your lose control of risk management.

    In any case: Fannie Mae’s CRA-target MBS page

  104. As a responsible renter, I want to see people lose their houses that they cannot afford. That will lower housing prices closer to reasonable levels that I can afford.

    I will move into their house and they can move into my apartment.

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