Quote of the Day: Alan Greenspan on SubPrime, I/O and other exotic mortgages
We were overdue for a housing related post, and this quote is simply Astonishing:
"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . .
Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending . . . fostering constructive innovation that is both responsive to market demand and beneficial to consumers." (emphasis added)-Remarks by Chairman Alan Greenspan on Consumer Finance
At the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. April 8, 2005
There's nothing I can add to his own words that are more damning then, well, his own words.
Wednesday, March 07, 2007 | 10:02 AM | Permalink
| Comments (50)
| TrackBack (2)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d8342ed50e53ef
Listed below are links to weblogs that reference Quote of the Day: Alan Greenspan on SubPrime, I/O and other exotic mortgages:
» You cant make this stuff up from The Real Estate Realist
File this under: Truth is stranger than fiction!
The link below will take you to Barry Ritholtz fabulous blog The Big Picture (see blogroll in the sidebar also). Barrys blog is the best of its type on the internet, in my opinion.
This post, the ... [Read More]
Tracked on Mar 8, 2007 11:52:48 AM
» Pop Goes the Weasel from Political Animal
POP GOES THE WEASEL....The collapse of the home mortgage market, especially among subprime lenders who (until recently) have been eagerly offering risky variable-rate mortgages to questionable applicants, prompts a plea from Reed Hundt: "Help me, reade... [Read More]
Tracked on Mar 11, 2007 3:31:08 PM
Comments
is greenspan saying anything wrong? there will always be marginal borrowers but financial innovation does indeed push the frontier of that marginal borrower. yesterday's marginal borowwer is a safe credit borrower in part because of the reasons greenspan mentions.
Posted by: sa | Mar 7, 2007 10:39:55 AM
What a maroon. The King of Rationalization.
And the truly unfair part is that he'll either be dead or living on easy street while millions of people are getting their dinner from dumpsters.
I can't even watch his wife on TV anymore. I change the channel. Strangely, faced with bubbles bursting or about to burst all around, I find 'Match Game' reruns soothing and amusing. Although they're better when they're from the Richard Dawson era. IMHO.
Posted by: dark1p | Mar 7, 2007 10:40:16 AM
The Big Picture, I found your blog through bill of "Vix and more". Quite good blog providing lot of enriching information that helps one develop a overall perspective. It was pleasure reading your blog and I shall see how I can share your thoughts so my readers also benfit from your blog.
I am primarily focus on Option trading and covers all sorts of strategies which i then share with real trade examples. Pls visit OptionPundit.net and review if there is something valuable for your readers...pls feel free to share.
(posted this once again asI got error msg)
Wish you profitable trading,
OptionPundit
www.OptionPundit.net
Posted by: OptionPundit | Mar 7, 2007 10:44:13 AM
Just goes to show how far removed from reality our central bankers can be.
I will never, EVER, believe a word they say, preferring instead to reach my own conclusions.
Posted by: winjr | Mar 7, 2007 11:06:50 AM
"is greenspan saying anything wrong?"
Yes. The part that is underlined on lenders correctly evaluating risk. That is why he underlined it.
Posted by: Walker | Mar 7, 2007 11:15:58 AM
i don´t know how to post a single cartoon.
but i think the 2 greenspan cartoons in this link shows that bernanke cannot win.....
http://immobilienblasen.blogspot.com/2007/03/business-week-cover-story-what-market.html
Posted by: jmf | Mar 7, 2007 11:17:57 AM
Ah, yes, that would be our new 'future-predicting' technology... the same one we use to reliably predict such things as the weather, the stock markets, political elections and other things far into the future.
Posted by: wally | Mar 7, 2007 11:27:36 AM
Why does the Fed have any credibility? I have wondered this for years now. The Fed is an abolute joke.
Posted by: Mike M | Mar 7, 2007 11:28:27 AM
I'm with sa and see nothing wrong with what he said. "lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately" is quite rational and led to the highest level of home ownership we ever had in this country. The problem was the bubble era, when lenders judged the risk by holding a mirror to the applicant's mouth and if it fogged a little the applicant passed. Having the ability to judge, and actually bothering to judge are two completely different camps. No matter what improvements you make to a free market economic system, you can only make it fool proof, you can never make it "damn fool" proof.
Actually heard one of the "damn fools" on NPR this morning, explaining that China was in trouble because it had "too much money", especially in reserves. "Too much money"= problem? Nearly split a gut laughing at him.
I think any of these that I have heard lately - "too much money", "prudent subprime lender", "conservative San Francisco politician", or "inexpensive Starbucks latte" can send me into gales of laughter.
Posted by: lewis | Mar 7, 2007 11:48:59 AM
...lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately...
Yeah...
...that's why when I shopped for a loan, they asked me questions like, "what do you want your monthly payment to be?" and "this is what your income needs to be to qualify *wink* *wink*"
Posted by: Michael C. | Mar 7, 2007 11:51:49 AM
The issue as I see it, isn't necessarily that financial institutions have extended credit to the sub prime market, it's that some lenders didn't practice strong risk management practices. ie, Their loan portfolios are too concentrated in risky loans.
So, to take the flip side of the argument, would a company like Citi or B of A as an example, who might have practiced stronger lending practices, ultimately make money by including sub prime lending in their portfolio? I suspect the answer is yes. So, technically, Greenspan may have a point. And, he may be referring to such practices in the overall context of his statement to give him the benefit of the doubt. (Which I'm not saying he deserves.) But, for those who left their brain at the door, well, they will suffer the consequences.
Posted by: BDG123 | Mar 7, 2007 12:12:39 PM
Why does the Fed have any credibility? I have wondered this for years now. The Fed is an abolute joke.
They're mocking us 'fools' Mike. You need to understand Greenspan's job. It's his job to throw out this bunk, keep a straight face and be totally dumbfounded at why the public doesn't get it(evidenced by the fact that they haven't rushed the stage and strung him up yet). Welcome to the biggest human psychology experiment mankind has ever experienced
And I see that the new definition of greed = innovation. That's a new one
On a side note I hope you read that column by C. Baum this week Barry. She is really getting good at those zingers. I think she is developing a healthy disrespect for the industry she writes about. It may not win her accolades from the industry but it will definitely win her fans among those of us looking at the same train wreck
Posted by: DavidB | Mar 7, 2007 12:15:05 PM
His other profoundly bad call was when he encouraged people to take ARMs right as interest rates were clearly near a several decade long bottom.
What a great idea, take on an ARM when you know the future holds higher rates.
Posted by: mh497 | Mar 7, 2007 12:18:07 PM
Greenspan is a GOP hack, always has been, always will. I have never understood why anyone (besides the extremely rich) cares for this guy.
He stuck it to the average American with the Social Security commission in 1982-1983, raising FICA taxes, then sat back as income taxes were slashed . . . shifting the tax burden down the income scale.
Then he blessed Bush's tax cuts, which have pushed the country close to bankruptcy, and did nothing when Bush et al used this self-inflicted insolvency to justify looting social security.
They didn't get away with it this time, but no thanks to Alan. Add in his role in the tech bubble and ensuing liquidity bubble . . . this guy should be flogged in the public square and placed in a hair shirt.
Greenspan. Pffft.
Posted by: Brooklynite | Mar 7, 2007 12:19:24 PM
Just goes to show you can be as academically qualified as you like but common sense is a rare, soon to be priceless quality.
**"With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . "**
Honestly, advances in technology? Yeah its called a cheap, crappy, badly thought out loan.
Posted by: Si | Mar 7, 2007 12:21:33 PM
Advances in lending technology:
1. State your income. No verification.
2. State your assets. No verification.
3. Don't worry about a down payment.
4. Collateral valuation is unnecessary.
Isn't technology wonderful?
Posted by: Mike M | Mar 7, 2007 12:28:19 PM
everything that's wrong is Greenspan's fault ..... the lending practices of those lenders is his fault .... the sell-off is his fault ... the sun spots are his fault ... global warming's his fault .... the Iraq war's his fault .... AIDS is his fault.......
Posted by: tt | Mar 7, 2007 12:47:39 PM
i have a family member who makes about $70k a year, in $30k CC debt not including an $800 a month car loan, filed bankruptcy about 10 years ago and has qualified for a $350k IO no money down loan. now what's wrong with this picture?
Posted by: Richard | Mar 7, 2007 12:49:12 PM
tt,
A lot of those things are George Bush's fault. Just kidding.
I remember sitting there listening to him talk when he gave that speech. It was unbelievable. He was telling the lenders and the borrowers to go ahead and take on a lot more risk. It will be ok. Because I do not plan to raise rates much.
1) The lenders and the borrowers went on a spree not seen ever before at very low rates, and
2) He ended up raising rates far more than probably he believed at the time.
So is it his fault? Overseeing bank lending practices is the Fed's job, isn't it? He also presided over the biggest bad corporate investment cycle in god knows how long in the 90s.
He is bright enough to know what incentives they were putting in place for the housing market. The market never priced in hikes all the way to 5.25% because of his musings. So he definitely shares the blame.
Posted by: js | Mar 7, 2007 12:55:34 PM
c'mon Brooklynite open your EYES!
The GOP and the dems are both FRB hacks. NOT the other way around. Understand which way the sewage flows
Posted by: DavidB | Mar 7, 2007 1:02:50 PM
It is quite amazing (or disgusting or amusing or heroic..depending on your point of view) to see the folks on CNBC try to blame the problems now on "a couple of twenty year old mortgage brokers" and "dishonest borrowers".
Posted by: Bob A | Mar 7, 2007 1:03:17 PM
Brooklynite nailed it, but aren't all Fed officials just puppets for the politicians in power. Social Security has produced surpluses for over 25 years now,with last year's surplus being over 200 billion. These surpluses extend as far as the eye can see, past the year 2040 I think. The surpluses were produced on the backs of the former middle class and the poor via large FICA tax increases. These surpluses were suppose to be off budget and sacred, but I believe it was the Clinton administration that first started using them to "balance" the budget". Of course, it was the Clinton administration that screwed the middle class and poor when he approved NAFTA and gave most favored trading status to China. Now comes Bernanke talking last week about a "unified budget deficit" instead of telling Congress that Social Security was running a huge surplus and to leave it alone.
Posted by: Teddy | Mar 7, 2007 1:13:28 PM
tt-
AIDS is Greenie's fault? Boy, that old dude really gets around!
Posted by: brion | Mar 7, 2007 1:57:09 PM
All of this kerfuffle about the subprime market has overlooked the fact that people with good credit are increasingly in deep doodoo (to borrow a phrase from Poppy Bush). Countrywide Financial reported that the number of mortgages among those with very good credit ratings that are more than 30 days past due have DOUBLED since last year.
Posted by: VJ | Mar 7, 2007 2:01:48 PM
'Teddy' posted:
"These surpluses were suppose to be off budget and sacred, but I believe it was the Clinton administration that first started using them to ‘balance’ the budget."
A)You are only off by more than a decade. The Reagan administration "unified" the federal budget in the early 1980s, utilizing the Social Security, Medicare, and other trust funds to mask the exploding size of the federal budget deficits, in a desperate attempt to make it appear their failed economic policies were succeeding.
B) After the federal budget reversed and went into surplus during the Clinton administration, it was the Republican Majority controlled Congress that demanded that the administration report the budget with the trust funds off-budget, in a desperate attempt to make it appear the administration's economic policies were failing, but to their dismay, the surpluses continued anyway. Of course, this administration returned to masking their exploding deficits with the trust funds in 2001 with not a peep from the same Republican Majority controlled Congress.
.
Posted by: VJ | Mar 7, 2007 2:07:31 PM
