Homeowners foreclose on Bank of America

[Native_NM]

It actually "started" because of government regulation.  Regulations and laws passed to fill a social agenda.  The "poor" people were just part of the problem.  There were lots of solid middle income families who borrowed more than they could afford.  My cousin and her husband made over $100,000 per year.  

As a banker you were familiar with the ratios and guidelines that were in place since the early 1960's. The "25% of gross" rule or the "2.5 times salary" were benchmark guidelines.  Lending somebody 5 or 6 times their income was foolish.  As a professional banker you knew this.

The demand for CDO's existed because in many cases investors viewed them as a government-backed paper.  The government created demand by artificially supplying buyers.   Some bankers were dirty.  There was fraud during the frenzy.  But the government was the one dropping the food into the tank.  Artificially low interest rates and federally-mandated lax lending standards, along with Freddie and Fannie waving a "get out of jail free" card on the sideline were as much to blame, if not more, than all the other parties combined.  

I'll lend you my neighbor's money all day long.  I don't even care if you pay him back.  Just give me my commission up front.  If you want to borrow MY money, we got to have a little talk first...

[Native_NM]

It all could have been stopped by prudent gov't regulation.  But we all know how the suggestion of any form of gov't regulation is received in this political environment.  Even now,  after the catastrophe has taken place, very little has been done to prevent the next one.

Interesting that Obama administration is now concerned that the new tighter lending standards are pushing low-income and minorities out of the market.  Since before the election the Democrats have pounded Bush and the bankers.  About three weeks ago Obama commented that certain provisions of Dodd-Frank is going to hurt the low-income and minority buyer.  I try and stay non-partisan but when I heard that, I was stunned.  A year ago he bragged about how it would end fraud and abuse and protect America from the big, bad bankers.  A year later, forcing banks to keep 5% of their own paper, requiring income verification and a history of paying your bills is somehow discriminatory. 

From the WSJ:

"Advocacy groups like the N.A.A.C.P. and the National Council of La Raza, a Latino civil rights organization, are working with others to fight rules they say could make home loans less affordable for minority and working-class Americans."

"Most people don't have 20 percent to put down," said Janis Bowdler, a project director in La Raza's office of research, advocacy and legislation. "These rules will so significantly deter the ability of first-time buyers to break into the market that we will see a real decline in home ownership."

"It is more likely that the credit restrictions that result will disproportionately fall on lower-income borrowers," said Robert R. Davis, an executive vice president for the American Bankers Association. That, in turn, puts banks in a bind, because it gives the appearance of violating fair-lending practices.

[Native_NM]

One thought as we discuss the issue is how important resources like this board will become as the nation moves forward.  I think the number of people building their own small home will increase dramatically over the next five years. 

[ScottA]

All this nonsense about discrimination is just a cover for banking deregulation. I'm not a fan of more laws but banking is something that really needs to be regulated to protect the people. Sadly it's not the people being protected under the current system but rather the banks. If the government really wanted to help poor people own houses they would finance them intrest free.

[archimedes]

I'm not a fan of more laws but banking is something that really needs to be regulated to protect the people. Sadly it's not the people being protected under the current system but rather the banks.

I couldn't agree more.  And I'm a banker!

It actually "started" because of government regulation. 

Completely false.
Glass Steagall never should have been repealed.  Additionally, it was the lack of gov't oversight of the financial industry that led to the recent economic crisis.

The government created demand by artificially supplying buyers.   

This completely defies every law of economics.  That by artificially creating supply that you create demand???  What???  Nonsense.

You've got it completely backwards.  You've got the tail wagging the dog,  rather than the other way around.

Lastly,  even back as far as the late '70's the income ratios were 28/36,  not 25%

[Squirl]

One of the greatest myths I see perpetuated,  by the idealogically driven,  is that somehow poor people caused the economic collapse with their carelessness.  When in fact it was the poor that were used as a means of generating huge profits by the financial industry.  While nobody has clean hands,  the poor were used as a means to generate loan paper to meet the ever increasing demand for CDO's.  The pool of qualified buyers wasn't big enough to meet the demand for loans generated by the CDO market,  so lending standards had to be lowered.

I had heard this from some of my friends that had gone into the industry, both as mortgage brokers and on Wall Street.  Money was pouring in, not just from the government (Fannie and Freddie), but from overseas.  The overseas money dwarfed our own. Asia (China, Malaysia, Indonesia, etc.), Europe (Germany), and the Middle East (Saudi Arabia) needed an investment to trade in their dollars for that they had accumulated over the years.  Most of these CDO's had nothing to do with Freddie or Fannie.  There was an implicit belief built into the financial system though that because of the government sponsored organizations prices could only slide so far.  Yes low interest rates partially contributed.  The CDO's had AAA rating and were paying better interest rates than Tbills so they looked like the better investment.  NM, Don't get me wrong, there were massive problems with Freddie and Fannie.  They were definitely part of the problem, but only a part. Archimedes,  Your statement about the lower standards is similar to my point.  There was a higher up executive or banker that should have known better, but when the money was dangled in front of them, they lowered standards to make money.

Archimedes, I agree that Glass-Stiegel should never have been repealed.  The initial argument basis of the law was to separate riskier investment banking from the rest of the financial market.  The argument made when repealing it was that when there were problems in investment banking people took their money out of it and put their money in safer investments (savings accounts).    The exact converse of this argument is that when there are troubles in the investment banking market, there is nowhere to hide.  There are no safe assets then and the whole financial system become exposed to the risk of investment banks.  Through the consolidation process a few banks have much of this country's assets under their control.  If any went bankrupt it would take down the U.S. dollar and financial system.  Hence, too big to fail.

[OlJarhead]

I haven't been following this thread but ask:  Has anyone mentioned the CRA?  If not, then why not?

I contend a discussion about this issue without the CRA included is like armchair generals discussing a lost war without ever including the leadership.  Pointless.

[Native_NM]

Archimedes,

I think the fact that Keynsian hocus-pocus defies the laws of economics is what has the Republicans so upset.  The success of the stimulus, for example, was predicated on the government artificially increasing the money supply (via debt) to artificially increase the supply/demand curve away from its current position, which was unfavorable as the market tried to return to equilibrium on its own.  When Greenspan lowered interest rates below the market rates after 9/11 to stimulate the economy, he created demand in sectors of the economy that would not have been there without his actions.  The fake supply of easy mortgage money (which was artificial on at least two fronts) created the demand for housing which facilitated the bubble. 

"Stopping" legislation [repealing] is the same as "starting" on the other side.  The argument is not Red or Blue, but right or wrong.  I agree we shouldn't have repealed certain legislation, nor should we have enacted other regulations that forced the market outside of equilibrium.  Keynes was last relevant in the 1930's, yet the politicians still look at him as some kind of mystical OB-1. He is more likely Darth Vader.     

[Squirl]

No, I didn't mention the CRA.  It was only for FDIC regulated institutions.  70-80% of CDO's came from institutions totally outside of the FDIC jurisdiction, such as investment banks.  While I agree that the CRA also promoted banks to make bad loans, the dollars just didn't bear out.  CRA cdos were a small percentage of the investment market, especially when compared to Fannie and Freddie.  If those were the brunt of the bad loans, the government could have written the check and moved on.  I heard the last estimate that there was only a total of $100 billion (going off of memory) in CRA loans in total.  Compared to the Trillions of dollars spent so far. CRA loans were meant to overcome the policy of redlining based upon houses in geographically poor neighborhoods.  So most CRA loans were in low income urban areas.  The real disasters of the housing collapse were in middle income suburban neighborhoods in California, Arizona, Nevada, and Florida, far outside the urban inner cities where most CRA loans were made.   So the CRA certainly didn't help, but the numbers simply don't play out as a large factor.

1000th post, I spend way too much time on here.

[archimedes]

Squirl,
You've hit the nail right on the head.  Cheers   

[Native_NM]

What percentage of the all mortgages do the GSE's control?  Whether CRA loans, subprime, conventional, or the corner loan shark, the GSE's bought trillions of the loans.  This freed the banks from the liability and allowed them to lend more than their balance sheet would otherwise afford. Everyone agrees on that point.  They created an artificial supply to fill a SOCIAL agenda.  It's not Red or Blue. It's just fact. 

[ScottA]

Sorry Native_NM but it was never about a social agenda. It was about making money. To be more exact it was about creating money out of thin air, which each and every one of these loans did. They needed to create all this new money to cover up the de-industrialization of America which took place at the same time as the home building/buying orgy. Now we are seeing class destruction as all that money is being removed from the system with nothing to replace it. A very clever transfer of wealth scheme is becoming clear.

[Windpower]

Scott

that is it exactly

we are seeing the greatest transfer of wealth in the history of the world

[Squirl]

For round figures. Fannie and Freddie held 90% of all GSE CDO's.  They have around 2 Trillion on the balance sheet and another 3 trillion in CDO's they had packaged and sold.  This is 15-30% of the 14 Trillion mortgage market.  The other 70-85% is out of private investment banks and funds.  If it was simply them, Lehman brothers would never have gone bankrupt, AIG would never have gone bankrupt, Meryl Lynch would have gone bankrupt, the rating agencies would never have gone bankrupt, the insurance companies would never have gone bankrupt, and all other banks wouldn't have needed a bail out.  If the Fannie CDO's were the only bad ones the banks would just go back to Fannie (AKA the federal government) and get paid.  The problem was most of this paper was generated far outside of the GSE sphere, so when the dominos fell, they didn't end with Fannie.  Again, don't get me wrong Fannie and Freddie were definitely part of the problem, but the motivation was different.  They were private organizations with stockholders (trading at $60 a share!) and bankers.  As the money poured in from overseas, investment banks started making all the profit by lowering their standards.  This wasn't going to sit well with the shareholders of Fannie or the bankers that controlled it.  They lowered their standards too. Not for social reasons, but to make ass loads of money (and they did).  They got away with it through political ties, corruption, and no oversight whatsoever.

[Native_NM]

I strait numbers, the GSE's held 35% of the subprime mortgages directly, and control (directly or indirectly) 90% of the US mortgage market. 

[Squirl]

That is a pretty exaggerated figure.  Where does it come from?  If it were 90% you are saying they have control of almost $13 Trillion in mortgages.  That defies almost every financial publication I have ever seen.    If they control all of it, no one would have needed a bail out.    Why would all the investment banks go bankrupt if the subprime loans were out of GSE's? When borrowers stopped paying, they just would have gone back to those GSE's for payment. Anyone that could get payment did.  They cashed every GSE mortgage right back in for full payment.

http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm

No one was forcing bankers to make hundreds of billions of dollars for a social agenda.  I think we just have a different perspective.  I may be misinterpreting this, but I am under the belief that you believe the government and the laws controlled the financial markets and the extremely wealthy to give their money to the poor and middle class.  I am of the perspective that the extremely wealthy controlled the government to profit off of everyone, especially the middle class, and left the government holding the downside in the end.

[Native_NM]

Its a fact.  I stated "control (directly or indirectly)".

I own a minority interest in a company (~21%), but I effectively have "control" based on the ownership percentages of the other minority shareholders.  The next largest shareholder is barely a 5% shareholder.  Sadly, it is a small company so I don't get any salary of even any dividends to speak of.  But I technically "control" it, and if I had the time or resources I could probably do something with it.  Until then, I keep my day job.  Everyone of the few employees makes more than I do from it.  They at least draw a salary.

The GSE's are no different.  Look at how the banks packaged the CDO's.  Tranches based on the quality of the loans, with government-backed mortgages mixed into each tranche to mitigate risk.  They don't have to own or underwrite 100% of the loans outright to "control" the market.  There is a huge multiplier effect.  Add back the derivatives and other government voodoo and the GSE influence is far larger than the $8 trillion of off-balance sheet liabilities attributed to the GSE's.

Somewhere in the bits and bytes of my computer is a link to the article that discusses their ownership and control influence.  It was probably the WSJ or the Economist, as those are the two I read the most.     

[Native_NM]

Informative article in WSJ today.  Discusses impact of GSE's on housing market. Seems they now control 9 out of 10 mortgages.

[Squirl]

I have not read the article, but that information would seem in line with the intent of the bail out.  They bought, or partially invested in most unsecured non GSE investment bank loans so there wasn't a run on the banks and a complete collapse of the U.S. dollar and financial system.

[Squirl]

Native_NM do you have a link to the article?  I can't seem to find it on there site.

[Native_NM]

I thought you would be interested in the following story from The Wall Street Journal.
Government Stays Glued to Mortgage Market

http://online.wsj.com/article/SB10001424052702304186404576389863819100854.html

The Wall Street Journal for iPad provides a new way to experience the Journal's award winning coverage, blending the best of print and online. Special features include:


http://www.wsj.com/ipad

[Squirl]

The article said that GSE are behind 9 out of 10 "new" mortgages.  This is a far different from 90% of "all" mortgages and cdo's of the past 30 years let alone the past 10.  Especially the critical 2003 through 2005 beginning of the mortgage crisis.  As a matter of fact it states that they dominate the home mortgage security market after private lenders left.  Many of the numbers and citations are the same as what I referenced above.

" offer guarantees to make investors whole if borrowers default."  If the bad loans were mainly through them in the beginning of the crisis there would not be large scale bankruptcies.  Only Fannie and Freddie would have gone under. Hence: "During the past decade, investment and mortgage banks jumped in and began issuing their own mortgage-backed securities. These private-label bonds, issued by the likes of Bear Stearns and Countrywide Financial, comprised riskier loans."

I do love how they define "fair value" and or who the "average buyer" is.  Notice they never say when the median household income makes enough for the median home price. Incomes would have to rise or prices fall first.

[Native_NM]

Yes, new mortgages.  I earlier stated they controlled directly or indirectly 90% of the mortgage market. Now they directly control 90% of the mortgage market.

[Squirl]

I guess it is a definitional difference.  The "mortgage market" to me is all outstanding mortgages.  It appears to you the "mortgage market" is just what is being issued today.

[archimedes]

I strait numbers, the GSE's held 35% of the subprime mortgages directly, and control (directly or indirectly) 90% of the US mortgage market. 

You're playing fast an loose with the statistics.

The GSE's on average held about 25% of the sub prime mortgage market - never 90% or anything close.  And they were late comers to the market,  never able to effectively complete with the private sources of money.   Before the real estate melt down they held about 80% of the prime or "A" paper market -  but that's been the case for generations.

They now have upped the % of the prime "A" paper market to about 90% only because no one else is lending.  And virtually no one is doing sub prime loans.

If you think the real estate market is bad now,  pull Fannie and Freddie out of the equation and see what happens.  They are making very high quality loans now which is the way it should have always been.  And was the way it used to be when they functioned very effectively for generations.

Fannie saw the profits that were being made by private sub prime lenders and tried to get in on the game late.  They never should have participated at all.  But that decision was based on greed not on a social agenda.

Now that Fannie and Freddie are gov't owned,  and the profit motive of the directors is removed,  and underwriting standards are kept high like they used to be,  then they could function well indefinitely.