Quote of the Day: Aggressive lending to 1st-time buyers
From a speech back in 2004 comes this telling quote:
>
"One other thing I've done, is I've called on private sector mortgage banks and banks to be more aggressive about lending money to first-time home buyers. And the response has been really good. There's a lot of people in this -- our communities around the country that deeply care about the issue of homeownership, and they've been responsive."
- George W. Bush, U.S. President, March 26, 2004.
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Its important to understand how this situation occurred in the first place, if we want to be able to fix it. Blaming the CRA and Fannie/Freddie is a total misunderstanding of how the problem occurred, and what we need to do to fix it now, and avoid doing it again in the future.
To repeat my prior arguments, the proximate cause of the Housing crisis were 1) Ultra-low rates; and 2) Abdication of traditional lending standards, thanks to 3) originators ability to resell mortgages for securitization purposes, and hence, 4) not have to worry about loan defaults.
The credit crisis was caused by 1) the above securitized mortgage paper, that was 2) rated triple AAA by Moody's and Standard & Poors, which then 3) Which was then "insured" by credit default swaps (CDS) -- the unreserved for, shadow insurance products 4) whose exemption was made possible by the Commodities Futures Modernization Act. That legislation exempted these derivatives from any supervision or regulation. The lack of reserve requirements is why there is now $62 trillion in CDS, many of which will never pay their counter parties the promised insurance.
If you are going to blame Fannie/Freddie/CRA, or George Bush or Barney Frank, you are missing the big picture.
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Previously:
Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs (October 2008)
http://bigpicture.typepad.com/comments/2008/10/misunderstandin.html
Source:
Remarks by the President in a Conversation on Homeownership
Phoenix Carpenters Training Center
2:02 P.M. MST
http://www.whitehouse.gov/news/releases/2004/03/20040326-15.html
Wednesday, October 08, 2008 | 05:45 PM | Permalink
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I guess that lays to rest the idea that this mess was caused by the Democrats in Congress.
Posted by: OkieLawyer | Oct 8, 2008 6:14:36 AM
Okie, the only thing "that" does is prove how much of a puppet this president was/is.
Posted by: JustinTheSkeptic | Oct 8, 2008 6:21:16 AM
"Warren Buffett for Treasury Secretary"
I'll bet the Oracle's kicking himself. When you take one of those government jobs you get to unload your assets tax free. I hear his basis in BRK is fairly low.
Posted by: VennData | Oct 8, 2008 6:52:52 AM
Don't forget that a lot of subprime/Alt-A activity was due to flippers speculating on newly-built/renovated homes. These were 2 and 3rd houses (and 12th in some cases) that were financed as "vacation" homes even though the borrower had no intention of living in the house.
Posted by: Rajesh Raut | Oct 8, 2008 6:54:21 AM
could we have survived dotcom Enron 9/11 and the jihod wars without this mechanism of "go forth and shop"?
don't lose site that this mechanism (instruments in tandum) was about greasing the gears of a deteriate'g engine
Posted by: Greg0658 | Oct 8, 2008 6:57:58 AM
It is realistic to blame both. Recall that HUD (which had a good deal of influence over banks and the GSE's) demanded increases in "affordable" lending when Andy Cuomo ran it.
'One or the other' doesn't cut it.
Posted by: dad29 | Oct 8, 2008 8:00:46 AM
I blame the Financial Industry.
Just like I blamed the Nuclear Industry for 3 Mile Island and Chernobyl.
Posted by: Greg0658 | Oct 8, 2008 8:10:49 AM
While I agree that rates were too low, my hunch is that securitization would have still occurred at 3 or 4% given the kind of "vig" on the table for the CDO/CDS. This kind of securitization was still happening after the rates rose. I'm still pointing my finger at Wall Street as I think we all knew or at least we know now that none of these "hot shot" financiers had a clue about risk. I remember my Wharton professors saying you could answer any question in business with one word "risk" and nobody really understood risk.
Posted by: rick | Oct 8, 2008 8:10:55 AM
listening to Charlie G. on CNBC discussing the JPM and whoever the sword is slicing into this week and how the lawyers and beancounters (for their cut of the pie) are gearing up for the next battle ...
do I have to work for this system ... can I escape to somewhere else?
maybe homelessness or a self sufficient landcraft
jojo wrote this many months ago ... I love it ... "a waste is a terrible thing to mind"
Posted by: Greg0658 | Oct 8, 2008 8:27:57 AM
There are a couple of big factors I think you're leaving out. Low rates were a function of a) low target rates, b) flatter yield curve, and c) low spreads. Therefore, massive global demand for "low risk" assets (esp. as a result of Chinese mercantilism) and a ready supply in the form of Agencies and other CMOs were essential contributors to the crisis. The implicit guarantee on Fannie and Freddie was a classic "free lunch" until the bill came due. I'm sure there will be academic studies which try to estimate Fannie/Freddie's impact (given their size) on risk premia across fixed income, as I'm sure there will be studies which compare their losses to those caused by private MBS, not to mention CDS--both of which on the surface are more ridiculous concepts. I'll go out on a limb and guess nobody explained this in last night's Presidential debate.
Posted by: Namazu | Oct 8, 2008 8:34:38 AM
Barry, you are blaming a set of abstracts.
The REAL cause is neither abstract nor impersonal: it is plain human avarice, ignorance, and keeping up with the Joneses.
Only when those characteristics are firmly in place in a person can all the other factors kick in for the kill.....
Until each and every one takes responsibility for their personal part in this scheme, nothing will change (no bailout, no regulation, no voting the politicians out).
No more blaming and a whole lot more humble pie on the part of every one! It is really THAT simple.
Posted by: A.S. | Oct 8, 2008 8:41:56 AM
I miss the big picture after only 8 hours or so. At this stage, it's constitutionally impossible for me to go more than a day with out seeing the Big Picture.
Posted by: VoiceFromTheWilderness | Oct 8, 2008 8:51:04 AM
@OkieLawyer - "I guess that lays to rest the idea that this mess was caused by the Democrats in Congress."
Is that a level? I think most ppl now are aware that the push for lax-lending standards began back in the Clinton Administration...no? I'll cite on your request.
Posted by: Bill | Oct 8, 2008 8:54:07 AM
Without a convenient government sponsored entity to buy the poorly underwritten mortgage paper, the banks would have been forced to actually conduct due dilligence when they lent money. To that extent, the government sponsored 'homeownership society' which intended to promote homeownership but ended up making homes excessively expensive, has to shoulder a good amount of the blame.
Posted by: rathipon | Oct 8, 2008 9:05:20 AM
I agree with BR.
What also exacerbated the residential real estate bubble was Federal tax policy that favored speculation, i.e. deductibility of home mortgage interest, points, etc.
By allowing taxpayers to exclude from their taxable income up to $500,000 of gains from the sale of a personal residence, the government---driven by the real estate industry---played a key role in turning home ownership into a speculative enterprise.
Posted by: Craig in Georgia | Oct 8, 2008 9:13:42 AM
Barry - your liberal bias is showing here. Why start with the Bush quote that you did and then close by saying don't blame politicians?!
Posted by: Kevin | Oct 8, 2008 9:37:20 AM
lol VftW
my self sufficient landcraft gots to be parked in a good wifi zone
and if taxes on the parking spot gets to much; an important factory disappears (maybe my job); crime gets impossible; or the weather gets horrendous ... rollup the jacks and head to Sausalito
http://www.youtube.com/watch?v=ZfrkWDAQpzI
Posted by: Greg0658 | Oct 8, 2008 9:46:42 AM
Kevin | Oct 8, 2008 9:37:20 AM
He didn't say politicians were exempt from blame, he said the impact of Bush/Frank was marginal in the scheme of things as was that of F/F and the CRA who the right are trying to shove the blame onto. And he's surely correct. Your conservative bias is showing I'm afraid. What BR is pointing up is the danger of creating these false narratives for political purposes when you're trying to avoid them in the future. America has always had a bit of penchant for believing its own propaganda but it seems to have assumed monumental proportions over the past 15 years. The consequences are all around us economically, politically and diplomatically. We've already started on the first steps of our relative decline, there seems no reason to accelerate the process by blinding ourselves to realities.
Posted by: John(2) | Oct 8, 2008 9:58:46 AM
This reminds me of the Seinfeld episode where Kramer's sperm count is low, and he has to get off briefs and go to boxers. Well, he can't endure boxers, so he goes 'commando'"
Same with the housing thing, naked underneath it all, to quote Jerry and Elaine:
"Get used to those boxers?"
Kramer, "no, I'm done with them".
"You went back to briefs?"
Kramer: "I woudln't say that either".
"Don't ya see what's going on here - no boxers, no briefs...."
Jeryy and Elaine, "Whwewwww...oh no"
Posted by: Alan Wilensky | Oct 8, 2008 10:26:28 AM
Is it at all practical to outlaw CDS unless you are a holder of the debt in question? We need to get rid of the speculation in this marketplace. Housing, oil all of it. I can see re-insurance as a risk mitigation effort. Why not the same approach for CDS?
Posted by: Fred S. | Oct 8, 2008 10:29:02 AM
B.R. posted:
> "If you are going to blame Fannie/Freddie/CRA, or George Bush or Barney Frank, you are missing the big picture."
John (2) posted:
> He didn't say politicians were exempt from blame, ... What BR is pointing up is the danger of creating these false narratives for political purposes when you're trying to avoid them in the future
*******
BR,
I agree with you 100% about the causes. It was a series of systemic issues that encouraged excessive risk. And rational persons (greedy or otherwise) will look to maximize their results within that system (i.e. buy a bigger house, obtain a higher return).
And, John (2), your point is well taken - but who, in the "big picture", shall I hold accountable (blame, if you will) for setting up that system??
Well let's just think about that:
1. A quick wiki search reveals:
"The "Commodity Futures Modernization Act of 2000" [H.R. 5660 was introduced in the House on Dec. 14, 2000 by Rep. Thomas W. Ewing [R-IL] and cosponsored by Rep. Thomas J. Bliley, Jr. (R-VA) Rep. Larry Combest (R-TX) Rep. John J. LaFalce (D-NY) Rep. Jim Leach (R-IA) and never debated in the House.[2]
The companion bill (S.3283) was introduced in the Senate on Dec. 15th, 2000 by Sen. Richard Lugar (R-IN) and cosponsored by Sen. Peter Fitzgerald (R-IL) Sen. Phil Gramm (R-TX) Sen. Chuck Hagel (R-NE) Sen. Thomas Harkin (D-IA) Sen. Tim Johnson (D-SD) and never debated in the Senate.[2]"
NEVER DEBATED IN EITHER HOUSE OF CONGRESS!!
Paulson got his moneys worth from those lobbyists.
2. SEC chair Cox is still waiting for someone to explain his job to him.
3. Congressman Artur Davis of Alabama issued the following statement:
"Like a lot of my Democratic colleagues I was too slow to appreciate the recklessness of Fannie and Freddie. I defended their efforts to encourage affordable homeownership when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit when it comes to Fannie and Freddie, we were wrong. By the way, I wish my Republican colleagues would admit that they missed the early warning signs, that Wall Street deregulation was overheating the securities market and promoting dangerously lax lending practices. When it comes to the debacle in our capital markets, there is much blame to go around for both sides."
4. and you gotta love this one, from a 2004 oversight hearing about the GSEs:
REP. MAXINE WATERS, D-CALIF.: There were nearly a dozen hearings where frankly we were trying to fix something that wasn't broke. Mr. Chairman, we do not have a crisis at Freddie Mac and in particular at Fannie Mae under the outstanding leadership of Mr. Frank Raines.
Maxine baby, you are ready to be a SNL player. ROTFLOL!
5. Well, that is all I have time for, but the list goes on and on and on, Dems and Repubs alike.
So, I would assert that in the search for the corrections, we have to understand how we arrived here. Did someone make a Bad Call? Did some group let a major issue slide by without debate? Were any important regulators asleep at the switch?
Just my 2 cents. Damn, that is all I have left.
Posted by: Scott in SC | Oct 8, 2008 11:30:04 AM
Brilliant summation of the problem
Posted by: ENM | Oct 8, 2008 11:39:35 AM
Not the causes. And, that is the reason why this fat tail is so misunderstood. Everyone is focusing on correlation = causation. Housing cannot bring down the economy. Nor can the debt associated with it. It can mute the economy for some time. In a certain sense, housing is completely irrelevant.
Posted by: bdg123 | Oct 8, 2008 11:59:35 AM
Great explanation BR!!
You left out one cause - Absolute Personal Greed!!
I watched the Oversight hearings of Lehman and AIG - and especially for AIG - did you see the AIG CEO trying to explain why bonuses were paid out - even after huge losses reported.
Thanks Greedy CEOs!!
Posted by: ap | Oct 8, 2008 12:11:21 PM
That's a good summary, Barry. What I'm missing though is why Fannie & Freddie aren't tied directly to point 2: the ability of banks and other lenders to sell the bad loans thus off-loading the risk. I'm still not convinced that this whole thing could have occurred without F&F (and, thus, the US government) implicity, if not explicitly, backstopping the losses. Could you explain that if you get a chance?
Posted by: jdp | Oct 8, 2008 12:21:40 PM
