Whose fault is housing crisis? People/banks/gov't?

Hammy and co wrote:

Sir Lance-alot wrote:

Yes, it wasn't the fault of chipmunks, I will agree with you on that. They had nothing to do with it.

This ^ is the correct answer. Should have been the end of the thread.

Hey Lance, have you ever observed chipmunks in the wild (or squirrels for that matter)? They are pretty friggin greedy when it comes to hoarding food and or mating. Augurs more for social Darwinism than anything else.

Funny were back to talking about chipmunks and goldfish. Well, perhaps we are saying that people really are animals.

The greed was everywhere man. Yes, the banks could sell the loans, the loans could be repackaged into various risk tranches, and the buyer of last resort assumed the risk, which was fine until they started collateralizing the collateral (and, yet, that last buyer knew it was inherently risky but WANTED the extreme yield).

But a bank can't FORCE you to sign. They can play to your greed and indulge it, but they can't force the transaction. Again, I'm not exonerating the banks. Remind me why they were bailed out and continue to be? Remind me again why AIG drew the ire of the president and the media, but it was all silent when it came to Fannie (until very recently). Remind me how it was that Fannie and Freddie were allowed to be levered up at 50-1, despite having to restate four years of bloated earnings? Remind me why the government was in the business of choosing what banks would fail and those that would not?

we're

What?!!! Who the hell says people are like goldfish? That is ridiculous. You're saying that if a bank gives a person a loan and that person has no business taking that loan that that is the fault of the bank? Well, it might be STUPID of the bank to do that but the person taking the loan is absolutely responsible for that.Who the hell is responsible for their own finances other than them? I honestly don't understand how someone can think that way. Someone offers you a loan and you take it no questions asked. Holy crap!

X-Runner wrote:

People are like goldfish.

Goldfish will keep eating as long as there is food.

They will eat until they die.

So if someone keeps feeding their goldsih and they die, do you blame the owner or do you blame the goldfish?

Whoever contributes (even partially) to the problem by defaulting, is still part of the problem. They should have factored in the possibility of their home values dropping, like I did many times when I refused to upgrade my home. NOBODY forced them to upgrade their homes or take out higher mortgages.

You did not read what I wrote - Where did I ever say that borrowers shoulder no blame? I stated at minimum, lenders share half the blame for defaults.

Fair enough, although you seem to have swallowed some right wing spin on the causes of the crises. See the link I posted earlier for example of the lies about the cause of the crises – I am really curious what you think of the data shown here:

Hey guess what – I agree with you here. But the same logic applies to lenders (i.e, no bail-outs).

I'm saying you give people too much credit for being smart.

Here is another analogy:

You put your money in your bank.

A homeless person walks into your bank and asks for a loan.

Banker asks if the person has income or any way to pay the loan back.

Person says no and no.

Banker says, here is some money anyway. Pay me back next Tuesday.

Homeless person never pays back the loan.

You look in your account and notice money missing.

Banker says he lent it to a homeless person who never paid it back.

At this point you get angry.

Are you angry at the bank or the homeless person?

Flagpole wrote:

I blame all three but weighted differently and in the following order:

2) Government - Specifically the CLINTON Administration. I liked Bill Clinton and thought he was a very good president, but his meddling with the Community Reinvestment Act in many ways handcuffed banks and forced them to make risky loans to bad borrowers.

How so? Some of the early criticisms of the CRA was that it wasn't doing enough to encourage loans to low income people - not that it was doing too much. The number of loans to poor and lower middle income people rose faster than those to higher income people, true, but the total dollar amount did not. There was also regulatory oversight and I believe that banks bound by the CRA made fewer subprime loans than lending institutions that were not. The majority of subprime loans were unsupervised - precisely what the CRA didn't want.

As for being forced to make bad loans to keep up with competition, really? If you are sufficiently dumb that you make crappy deals just because everyone else is then I don't think that you really need to blame other people for your problems.

X-Runner wrote:

Here is another analogy:

You put your money in your bank.

A homeless person walks into your bank and asks for a loan.

Banker asks if the person has income or any way to pay the loan back.

Person says no and no.

Banker says, here is some money anyway. Pay me back next Tuesday.

Homeless person never pays back the loan.

You look in your account and notice money missing.

Banker says he lent it to a homeless person who never paid it back.

At this point you get angry.

Are you angry at the bank or the homeless person?

Exactly!

And furthermore, you forgot the part about how the bank gets repaid while you are out of luck.

This is MUCH deeper than people simply taking out bad loans. Flagpole, you are way to focused on the personal responsibility side to see the forest through the trees.

Most would agree with you on the personal responsibility thing... It is about more than that.

It's fine to believe that, however, why don't you SPECIFICALLY DISPUTE the findings/numbers/research I have presented you, that contradict your claim about CRA, instead of just saying: hey, one can use stats to prove anything. That's a cop-out.

Look flagpole, of course people making bad choices on what mortgages to accept were at the root of the problem. But c'mon, can't you see that it was the dishonesty, greed, recklessness, and EQUAL STUPIDITY of the lenders/banks/ratings agencies/investors that truly took those initial bad decisions and built them into a monstrosity that could end up collapsing the economy?? It is bizarre to me that you are making a complete disconnect between the borrower and the lender. Even if both were equally stupid and greedy, or shortsighted, why put 90% of the blame on the borrower. Yes, a bank can't force you to sign something, just as YOU CAN'T FORCE A BANK TO GIVE YOU A LOAN. And that was just beginning of the chain that led to the whole mess. What about all the investors buying shaky/shady investments based on these loans??? If the people who took them out were sooooo stupid, and should have known better, why didn't the banks exposed to this risk, and the investors know better to get involved in them?

So everyone was stupid, reckless, shortsighted, greedy, etc. But who has the most power in this situation? Who has the most information? Who gets what they want from congress? Who took these bad mortgages and turned them in a multi-trillion $ investment vehicles? If you are the one with the power, and you take advantage of naivete/stupidity/ignorance and create a house of cards with it that can collapse everyone who is connected to it, then I put more of the blame on the people that constructed the house of cards, the people who REALLY should have known better.

But no matter how you cut it, the one thing that could have stopped it was more sensible regulation, to keep people from using such greed, recklessness, and stupidity to nearly bring about a Depression. But the right abhors any regulation, and actually tries to state, AS YOU ARE, that it was gov't regulation that caused the mess?! This is truly orwellian. Those are NOT the facts.

I just finished Reckless Endangerment by Morgenson & Rosner, which covers this very topic. They put the lion's share of the blame on the GSE's, espcially Fannie. CRA dates back to the Carter admin, so it was more of a precursor than a cause.

But there was a study 1992 study by the Boston Fed that found racial discrimination in lending. The study was later found to be flawed, but that was what opened the floodgates for loosening of lending standards. In order to fix the discrimination problem, Fannie argued that lending standards had to be loosened. What they didn't say was that it meant rapid growth for them and millions in bonuses for their execs, espcially James Johnson who made over $100 million, and Franklin Raines who made almost $100 million.

Secondly there was the 'implicit guarantee' that Fannie and Freddie would be bailed out by the taxpayer if they got into trouble. Much of what caused the bubble was the idea that you could 'offload risk.' Standing at the end of the offload chain was the US taxpayer.

towhee26 wrote:

I just finished Reckless Endangerment by Morgenson & Rosner, which covers this very topic. They put the lion's share of the blame on the GSE's, espcially Fannie.

surprise, surprise, you had read a 100% BS one-sided right wing hit job on the gov't and minorities being the cause of the housing bubble/collapse, and you bought into it.

Not a serious economist in the world would truly buy your statement above on the GSE's deserving the "lion's share of the blame."

You keep misrepresenting what I said. I am NOT saying that government regulation caused this mess; I'm a fan of most regulation actually (kind of a Democrat thing). In fact, I am giving the government LESS THAN 10% OF THE BLAME...SPECIFICALLY I'LL SAY ABOUT 6%. I put 90% of the blame squarely on the people. Banks tried to sell people a bill of goods, and man did they ever, but the problem is that it takes a BUYER to agree to those horrible terms for a loan they can't afford. Regardless of how stupid it was for banks to offer the loan to them, it was the responsibility of the people to NOT accept those loans. Just as it is bad to get a loan from a pay day lender, lease a car (in just about every case), buy a car with a crazy high interest rate, etc. There is no shortage of bad things that lenders will allow you to do...the problem occurs when you DO it. True that you can't force a bank to give you a loan, but that has no bearing here. The consumer is the one who puts their name on the dotted line, and when banks offer bad loans, the one driving the deal is the BUYER.

When there's a world where the people can only make a good decision if the government has arranged everything so that that's the ONLY thing they can do, then I don't want to be a part of that. People SHOULD have the freedom to make mistakes, but then when they do, it is time to own up to those mistakes. Again, no shady mortgage person or evil used car salesman or someone wanting to sell me a bridge in Florida got me to make a bad decision. Why are the rest of the people in the US who made bad decisions off the hook with you? They shouldn't be.

OMG Flagpole. Give it up. The housing crises is about home values plummeting in value and banks not having the collateral to back up their loans creating a financial crises. Homes simply becoming cheaper is not a crises. Borrowers are responsible for the payment on their loans. They are not responsible for overall home values across the U.S. They certainly aren't responsible for banks leveraging themselves over 30-1 and creating synthetic CDOs financed by short term overnight loans.

Also you need to wake up if you don't believe there was outright coercion to get people to take out bad loans. A lot of people who took out bad loans were responsible hard working middle class earners. Contrary to what you may hear those people can get taxed a ton on their job if they don't have kids and don't own a home. The benefits of the home mortgage interest deduction amounted to mild extortion. Take the loan and your tax bill could be dramatically reduced. But if you don't take the loan Uncle Sam will take it from you.

It would be one thing if banks were simply offering people money. But they were like drug dealers pushing the loans on people showing them their life would suck if they don't buy a bag of the dope. Yet even in the face of that there was actually a lot of Americans who turned their back on the loans even as it was sold to them. Its thanks to them we are in better shape than we otherwise could be. They saw that having little to no equity in their home was actually no ownership at all. Many of those who took out bad loans have paid the price by being evicted. They weren't bailed out. Only banks have been bailed out because it was only they who were freaking out about a housing crises.

Umm...the values dropped because people weren't able to pay the mortgages they signed up for due to the bad loans they took out. This started the domino effect which led to the housing and financial crisis.I agree with you that philosophically a drop in home value isn't a problem (I mean my home lost $60,000 in value from its peak to its low point), but that's true only for people like me who bought a house as they should have - 3% down or more, no more than about 25% of your take home pay, a FIXED RATE MORTGAGE, no ARMs or interest only loans, no loans that have super high interest rates because of your bad credit, plan to be in the home for 15 years.People (and these are not the CRA people) bought homes with ARMs and interest only loans because they saw the housing market balloon and they wanted to own it for a short time and cash out later with a profit...well, when the values started dropping, they couldn't sell or refinance without coming to the table with big coin, so they foreclosed.Again, so what if there was coercion to get people to take out bad loans. 5th grade level math was required to know that you shouldn't...just because it was offered doesn't mean it was the right thing to do.I've had sales people try to twist my arm before. It's pretty easy to not allow them...you just say "No thanks"; and if you're not as polite as I am, you just so "No".

Sir Lance-alot wrote:

surprise, surprise, you had read a 100% BS one-sided right wing hit job on the gov't and minorities being the cause of the housing bubble/collapse, and you bought into it.

Not a serious economist in the world would truly buy your statement above on the GSE's deserving the "lion's share of the blame."

really? And, of course, you've never posted a 100% BS partisan hackjob. Hell, you're the king of that (this is where you respond by posting that liberal Nouriel Roubini link, this same Roubini who has predicted 10 of the last two recessions). "Lion's share" may be a bit strong, but the GSE's sure as hell get a lot of the blame, and contrary to popular (liberal?) belief, many conservatives did try to rein (it's rein Flagpole - you're an English major so you don't get any slack) them in, only to be bucked by the left as they were a liberal bastion and a place to go comfortably retire from the Hill.

They may not have directly held sub-prime debt, but they were levered even more than the banks, fraught with accounting shenanigans, and held most of the risky loans in their portfolio, obfuscating the price transparency and availability of credit and enabling lenders to make even riskier loans, whether they were dircetly sold to the GSE's or not. And, yes, they had an implicit backing from the Federal government (taxpayer) which should have been made explicit from the get-go. From your favorite source:

"Fannie and Freddie amplified the housing boom by buying mortgages from lenders, allowing them to originate even more loans. They grew into behemoths because they lobbied aggressively and played the Washington political game to a T. But after both companies bought boatloads of risky mortgages, they required a federal rescue."

"Outwardly, Fannie and Freddie wrapped themselves in the American flag and the dream of homeownership. But internally, they were relentless in their pursuit of profits from partners in the mortgage boom. One of their biggest and most steadfast collaborators was Countrywide, the subprime lending machine run by Angelo R. Mozilo.

Countrywide was the biggest supplier of loans to Fannie during the mania; in 2004, it sold 26 percent of the loans Fannie bought. Three years later, it was selling 28 percent. What Countrywide got out of the relationship was clear — a buyer for its dubious loans. Now the taxpayer is on the hook for those losses.

But what was in it for Fannie?

An internal Fannie document from 2004 obtained by The New York Times sheds light on this question. A “Customer Engagement Plan” for Countrywide, it shows how assiduously Fannie pursued Mr. Mozilo and 14 of his lieutenants to make sure the company continued to shovel loans its way.

Nine bullet points fall under the heading “Fannie Mae’s Top Strategic Business Objectives With Lender.” The first: “Deepen relationship at all levels throughout CHL and Fannie Mae to foster alignment and collaboration between our companies at every opportunity.” (CHL refers to Countrywide Home Loans.) No. 2: “Create barriers to exit partnership.” Next: “Disciplined Risk/Servicing Management” and “Achieve Fannie Mae Profitability Goals.

(Later in 2004, by the way, the Securities and Exchange Commission found that Fannie had used improper accounting and ordered it to restate its earnings for the previous four years. Some $6.3 billion in profit was wiped out.)"

It's absolutely incredulous that this administration hired Franklin Raines as an economic advisor, albeit temporarily. No cronyism in government whatsoever.

And here's a pretty pie chart for you, because I know you didn't bother to read the article since you have the least objective lens of anyone on this board (and very little knowledge of the inner-workings of financial engineering as you may pretend otherwise):

I do think Flagpole is overplaying the role of the CRA or doesn't totally understand it, but he's right about the consumer. In all but maybe 5-10% of cases, pure greed drove their decisions. The banks should take a hit on the foreclosures, they shouldn't continue to receive bailouts and never should've originally, and they should be forced to increase loan-loss reserves and bring off-balance sheet debt back on the books. The debt was never restructured properly. Same is true for Fannie, which, curiously enough, is in the spotlight again:

"But by far the biggest recipient of bailout money are the two government-linked lenders Fannie Mae and Freddie Mac, which have paid millions in bonuses while the White House remains curiously silent:

Not only where they at the epicenter of the housing bubble, but also the government had to take them over, pumping in cash to cover their huge losses on the mortgages they owned and guaranteed. And far from paying taxpayers back, the best-case scenario for Fannie and Freddie is that their bailout will cost over $120 billion.

But that didn’t stop the two agencies from giving their top 10 executives $12.8 million in bonuses for meeting what have been charitably described as “modest goals.”

This is a dead issue. We need to be talking about the future, and the future does not involve adopting the Greek model:

Go ahead and cherry-pick away, oh revered expert and objectivist...

I'll tell you what I agree with, that Fannie and Freddie played a huge part in this.

As a business.

Private. Public. Whatever. It is a business to make make money for its employees.

Tons of loans were bought to be serviced. This freed up mortgage originators to make more loans, which meant more money from closing costs, etc for them.

Now the loans being purchased were set up on a profit model.

You lend money, and have it paid back, plus interest.

The loan is backed by the value of the property.

If the loan goes to default, the property can be sold to pay off the loan plus fees incurred for this process.

The trend was that property values were going up non-stop.

Any loan would make a profit. Either through interest or default. Risk was nullified (or so they thought).

So here is the debate on Fannie and Freddy:

Did they buy up all of these loans because they just assumed they would be bailed out if something went wrong?

Or did they buy up all of these loans because they just assumed values would keep going up and they didn't see much exposure to risk?

Either way, it was done for the quick buck and the practice of making sure borrowers were credit worthy was disregarded.

I don't think they did it because they wanted every American to own a home. I think they did because they wanted money.

Sir Lance-alot wrote:

surprise, surprise, you had read a 100% BS one-sided right wing hit job on the gov't and minorities being the cause of the housing bubble/collapse, and you bought into it.

Not a serious economist in the world would truly buy your statement above on the GSE's deserving the "lion's share of the blame."

You don't read very well do you? What I said was that Morgenson & Rosner put the lion's share of the blame on the GSE's. If a 'serious economist' disagrees that they did, said serious economist must not have read the book.

We can argue about "lion's share"--an imprecise term if there ever was. But it would be a dumb argument, more than likely conducted by dumb people.

There's another angle that gets little attention, an argument put forth by Randall O'Toole of Cato that much of the problem stemmed from excessive land use regulation.

http://www.cato-at-liberty.org/blame-urban-planning/

O'Toole points out the 'dog that didn't bark,' namely certain areas of the country that never adopted 'growth management' and thus did not experience the steep rise in housing prices.

In fact O'Toole was one of the few guys to have forseen the potential problem--in an article entitled 'Why do houses cost so much," in the now-defunct Liberty magazine from Feb, 2006, he began with a quote from The Economist magazine:

Housing prices have soared in most of the developed world over the past five years. Increased spending on homes and spending out of loans against the increased equity in homes have kept the world economy afloat despite slow growth in Europe, stagnation in Japan, and the dot-com and telecommunications crashes in the United States.

But the increased prices have also brought speculators into housing markets, creating numerous housing bubbles. When these bubbles deflate, it could result in a deep recession. "The whole world economy is at risk," claims The Economist, which estimates that "two-thirds (by economic weight) of the world . . . has a potential housing bubble."1 "It is not going to be pretty," concludes the magazine-that-calls-itself-a-newspaper.

No Flagpole. Housing values dropped because buyers as a whole said that houses were too expensive and were not going to buy at that price. They didn't have the money in any case because they were not getting the money from their work.

There have been irresponsible borrowers for decades. But banks always simply foreclosed on them and sold the house to the next buyer at a value equal or greater than the loan. In fact many lenders see a lack of bad loans as bad business because they are not taking enough risk and losing out on potential profits. It was never a problem before with banks, why suddenly was it a problem starting in 2008? The borrowers took responsiblity for their bad loans by losing their home. They are not additionally responsible for an overall "domino effect" where housing values across the board plummet and banks can't loan out money to businesses because of it.

The "so what" of the coercion is that banks were most responsible for the housing crises. That is the so what.

[quote]Flagpole wrote:

Umm...the values dropped because people weren't able to pay the mortgages they signed up for due to the bad loans they took out. This started the domino effect which led to the housing and financial crisis.

I agree with you that philosophically a drop in home value isn't a problem (I mean my home lost $60,000 in value from its peak to its low point), but that's true only for people like me who bought a house as they should have - 3% down or more, no more than about 25% of your take home pay, a FIXED RATE MORTGAGE, no ARMs or interest only loans, no loans that have super high interest rates because of your bad credit, plan to be in the home for 15 years.

People (and these are not the CRA people) bought homes with ARMs and interest only loans because they saw the housing market balloon and they wanted to own it for a short time and cash out later with a profit...well, when the values started dropping, they couldn't sell or refinance without coming to the table with big coin, so they foreclosed.

Again, so what if there was coercion to get people to take out bad loans. 5th grade level math was required to know that you shouldn't...just because it was offered doesn't mean it was the right thing to do.

I've had sales people try to twist my arm before. It's pretty easy to not allow them...you just say "No thanks"; and if you're not as polite as I am, you just so "No".

[quote]