PeakTrader.com

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PeakTrader said...

Did the housing bubble turn "good renters into bad homeowners?"

The housing bubble turned many good renters into good homeowners.

Of course, some homeowners, particularly those who bought at the top, had to rent after losing their jobs from a lack of liquidity in the economy.

They may be working at McDonalds now.

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Steve said...

Fair enough. Although to be more detailed in allocating causes you should have written "the chart illustrates how government policies AT THE REQUEST OF AMERICAN FINANCIAL INSTITUTIONS created an unsustainable "homeownership bubble.""

Discussing the role of government policies (or lack of policies, c.f. lack of enforcement of financial regulations) is fine, but you simply must include that most of the policies existed because Big Finance wanted them there.

To ignore that significant point is to hang it all on 'activist government', and to avoid any blame directed at the central actors and gatekeepers, which in the end, were private financial companies.

I'll accept the large role of failed government policies if you accept the larger role of failed management within financial intermediaries and private capital.

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PeakTrader said...

Steve, how can you blame U.S. financial firms being forced by a naive government policy to take big risks financing low income homebuyers?

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morganovich said...

steve-

"AT THE REQUEST OF AMERICAN FINANCIAL INSTITUTIONS" is completely untrue. the CRA was forced on banks. many resisted. then, once citibank was sued into compliance, they all folded and began to lend to subprime borrowers as demanded by law.

being forced at gunpoint is not a "request".

they then did the only sane think they could and packaged the loans to sell off.

however, even that would not have been possible without government action. freddy and fannie stamped those loans and guaranteed them. everyone in the market understood that that meant they were back by the US treasury. (and this turned out to be true)

that's where the AAA ratings came from and why institutions were willing to buy them.

the impetus for the bad loans came from federal requirements and the guarantees that allowed the MBS market to flourish did too.

sorry, but this was pretty much a government mess.

without the incentives they created, it never would have happened.

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Steve said...

@PeakTrader: "How can you blame U.S. financial firms being forced by a naive government policy to take big risks financing low income homebuyers?"

How was private money forced to loan money? CRA doesn't count (see below). As Chuck Prince, head of Citigroup until 2007, said about high-volume mortgage lending as the housing market was cracking: "as long as the music is playing, you've got to get up and dance." That is squarely bad decisions by private market participants.

Now, we could have a discussion about how the US Fed created the global search for yield by disasterously lowering Fed Funds rates too far for too long 1991-2003, in order to avoid capital taking any hits during normal business cycle reversals, but I don't think that's what you're getting at, and even so, loaning lots of leveraged money to bad risks isn't smart no matter how much you want higher yields.

So, how did U.S. government housing policies cause excesses across the entire worldwide credit markets? US housing, European housing, Australian housing, (all with much different housing/mortgage policies, mind you) auto loans, student loans, consumer revolving credit, asset-backed securities - yield spreads tightened across the board and excess credit was available because global underwriting was loose. That is an indictment of debt leverage in private credit market participants, not the direct fault of U.S. housing policy.

---
CRA: outside of the AEI/Heritage, nobody really believes the CRA had much to do with the credit bubble and crash. Home mortgages to low-income borrowers from CRA-covered institutions were a pretty small % of the total - something like 2/3 of all residential mortgages were from financial institutions not covered by the CRA, half of the rest were not affected by CRA, etc. Barry Ritholtz has debunked that CRA point, decisively and repeatedly. The one argument standing, unpersuasive to me, is that somehow the CRA requirements from a none-too-significant part of the U.S. credit markets led to a massive feedback loop that ruined private underwriting standards across the entire global credit markets. Doesn't make sense.

For all the folks who blame the CRA for the global credit excesses, I thought this is a good read, if you're open to it:

http://www.ritholtz.com/blog/2009/06/cra-thought-experiment/

(block quote)
Rather than show more facts, data and specific details, instead, I want to do a little thought experiment.

Imagine, if you will, that the discredited meme is actually correct: Assume that the CRA was a prime cause of the mortgage, credit and housing related crises.

Assume arguendo that CRA legislation forced banks into making high risk, ill advised loans. And, let’s further assume a huge percentage of these government mandated mortgages have gone bad. The buyers who could not legitimately afford these homes or otherwise qualify for other mortgages have defaulted, and these houses are either in default, foreclosure or REOs.

What would this alternative nation look like?

Given the giant US housing boom and bust, this thought experiment would have several obvious and inevitable outcomes from CRA forced lending:
(end block quote)

Ritholtz then shows that none of that actually happened, mostly the opposite.

So if you want to push government as the main responsible party, you'll have to use something other than the CRA.

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PeakTrader said...

Steve, I've stated before:

The federal government created an enormous unfunded social program to help low income people buy houses. The program spun out of control and caused the financial crisis and recession. The federal government decided to help lower income people without paying for it.

Also:

Regulatory changes 1995

"In July 1993, President Bill Clinton asked regulators to reform the CRA...Robert Rubin explained that this was in line with President Clinton's strategy to "deal with the problems of the inner city and distressed rural communities."

Discussing the reasons for the Clinton administration's proposal to strengthen the CRA and further reduce red-lining, Lloyd Bentsen, Secretary of the Treasury at that time, affirmed his belief that availability of credit should not depend on where a person lives..."

The government created a system that almost anyone could take advantage of, not just low income households.

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morganovich said...

steve-

that argument is completely flawed argument and his evidence is haphazard and often flat out false.

ask countrywide how the CRA portfolio worked out.

all his default info is queered by GSE guarantees.

low end property DID go up more that the upper middle stuff. oakland and a bunch of crummy east bay towns appreciated far more than san francisco, for example.

he's also working from a completely false premise that you can tell what a "CRA mandated loan" was. he's so ignorant on this topic that he doesn't even understand how the standards work.

CRA mandated certain ratios of loans to minorities and low income buyers. but how can you tell which was which?

there is extremely compelling data that average FICO score dropped a great deal and that those low FICO borrowers defaulted disproportionately.

the BUST was certainly cause predominantly by subprime. this is why places like san francisco barely saw a hiccup and place like oakland and vallejo crashed.

all over the country, prices fell far more in poor neighborhoods than rich. that shows you where the bubble was biggest.

also note: it was not CRA alone that drove this mess. without the GSE's, it would not have happened either (or at least to nothing like the extent).

the GSE's were the much bigger problem and drove rates to absurd levels. they have been 40-70% of the mortgage market.

the lived off a cost of capital arbitrage based on having government guarantees, then used those guarantees to stick the taxpayers.

but again, they only drove the low end as they only buy conforming loans.

if you want to see where the market really went parabolic, look at when the GSE's dropped their lending standards and went headlong into deep subprime.

ps -

if this was all "at the request of the financial institutions", then why were guys like citibank fighting the CRA in court?

that said, any finincial institution like collecting fees and passing the risk on to someone else. that was what the GSE's let them do.

take freddy and fannie out of the picture, and no one would have wanted to play.

subprime caused a financial crisis. when the residential loans go bad and liquidity goes to zero, what do you think happens to any debt based market?

you might have noticed that the stock market and the economy had some trouble too...

that's what happens when bubbles burst. they affect lots of adjacent areas. all it takes to crush a commercial real estate market is for credit to dry up. add in massive corporate downsizing from the recession sparked by the bubble bursting, and yup, that's a pretty terrible situation.

debt bubbles in are the most contagious and take the longest to clean up.

do you think at all before you ask these questions? that was stupid even for you.

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VangelV said...

"Although to be more detailed in allocating causes you should have written "the chart illustrates how government policies AT THE REQUEST OF AMERICAN FINANCIAL INSTITUTIONS created an unsustainable "homeownership bubble.""

First, this is not true. I saw Congress tell banks that they must make loans to bad credit risks in the minority community. The bankers did not want to do it because they knew that loans would have to be written down.

But once the legislation and rules were passed the bankers responded to the incentives and figured out the best way to profit personally, even if their shareholders and taxpayers wound up paying for the mistakes.

Second, it does not matter what special interest groups want. What Congress does is its own responsibility. My kids want me to let them eat ice cream every day. If I let them it is not their fault by my own.