Its killing me here not to put cites up as to the fraud thats being disputed here. But after the other night I swore to myself I would waste no more time. I’ve spent thousands of hours and many thousands of dollars over the last 3 years shouting from the rooftops about this and when the shit hit the fan in August I figured people were now ready to see. I fooled myself by looking at groups that would prove this correct and make myself feel good about the work I had done. Saturday night was an eye opener.
The rating agencies yes. But the whole purpose of these is to allow investors to not do their own investigations. Like I said above, some banks figured out that high return/low risk was fishy, but they had to forgo good returns before the music stopped and they suddenly looked smart. But I suspect that many purchasers followed their companies guidelines as to risk - though it looks like some over-invested in these, which is different.
Do you really think this went on without a complete understanding from the big banks like Citi ?. They all knew the risk. These salesmen you talk about would have had no way to sell these loans without approval from those who bought them. These actions were encouraged and risks were not hidden. there has been conversation about this mess for years. Give me short term profits let the future be damned. It would have been easy to prevent. The salesmen and the loan buyers could not stop it .It took the government and regulators to make this happen.
Not exactly. The ratings agencies are simply a guideline. A very powerful guideline to be sure but they are not guarantors of a particular investment .
I hope I didn’t give the impression that I thought the rating agencies guaranteed anything. Clearly not. I’ve read though that investigations are beginning as to why they got it so wrong. That will be interesting to see the results of.
The whole point of these instruments - chopping up loans and distributing them widely, with loans from different parts of the country (and different levels of quality) all smeared together, was to reduce risk. The theory was that you didn’t care if someone defaulted, since only a tiny portion of your portfolio would be affected. In the past only one section of the country at a time saw its real estate market tank. This time, everything tanked, and it appears that the true risk of the loans was masked. There is a difference between a subprime loan to a marginal borrower, and one made with no documentation, or to someone that any reasonable person would reject.
The government, by the way, didn’t stop anything. The market for subprimes dried up, for obvious reasons, and that stopped it. It also affected things like jumbo loans also, and so there was shrapnel from the explosion.
I think the fact that the banks still are figuring out their exposure contradicts your assertion that they knew what they were doing. Bankers are just as susceptible to the madness of a bubble as anyone else.
This is a key part of the problem. Many of these instruments were extremely complicated: on top of falsified documents, I am not sure that many of the bankers really understood just what they were buying. The instrument had a high rating, was delivering high returns, and hell, all of his colleagues were buying them. Where is his incentive to open the can of worms, especially if he is planning on turning over these products very quickly to the next sucker?
It’s no surprise that the banks are still figuring out how big the impact will be. It is not trivial to unwind all of these blended instruments to see how rotten the cores are.
Let’s also make sure to separate the bankers securitizing the loans, and the traders buying and selling the securitized loans. When sub-prime loans became the hot investment, traders created a demand for more instruments. Unfortunately, to meet the demand, the supply kept getting shoddier and shoddier. It’s not easy to properly qualify sub-prime borrowers, and with money being thrown at it, people (and companies) stopped trying. It isn’t as if Citi (or JPMChase or UBS or etc) goes out and looks at each loan it buys. What they do is buy a pool of loans with certain characteristics. Obviously, their due diligence into the pools could have been better, but they knew that the faster they could turn around the loans into securities, the higher their commission numbers could be.
Bubbles are created by greed, and there was greed at every level. Once the bubble started, NO ONE involved was making prudent financial decisions. And as I mentioned above, having so much money floating around, so easy to get, brought out the crooks.
http://www.alternet.org/story/74510/ The issue is the rating companies were owned or in cahoots with the banks. They owned much stock in the rating companies and they distorted each other for quick profits.
Well according to my girlfriend who has a MBA from NYU and works for a rating agency where she rates CDOs and was actually deposed by the SEC and the NY Attorney Generals office, the problem was caused by a combination of greedy mortgage brokers encouraging greedy people who knew they couldn’t afford their homes to lie on their applications and take out more than they could ever pay back. Now many those people are defaulting on their mortgages and in many cases refusing to refinance because the value of their homes have dropped and they would rather just wash their hands of the whole thing.
For what it’s worth, the rating agencies don’t rate the individual mortgages. They rate the bonds and CDOs created from the mortgages after they have been securitized.
The people who are really getting screwed are the regular working stiffs at the investment banks. I don’t feel bad for people who lost their homes because they can’t calculate simple interest.
This is a classic problem with major market failures. It’s all private money until something really bad happens, but then the government needs to step in to make sure that major institutions aren’t destroyed. So it’s private when it’s profitable, but public once it’s unprofitable.
If you bailout the big guys and the little guys, the people who really get screwed are the people who did the prudent thing. The people who didn’t buy houses they couldn’t afford will continue to not be able to buy affordable houses because the bailout keeps the market from settling at a reasonable value, where houses are affordable and people buy them without absurd mortgages. Any new action or regulation is going to have winners and losers. But why should we be rewarding the people who made risky bets and lost, and punishing those who didn’t?
FBI in subprime crackdown The FBI is on the case trying to root out the evil doers. You might note the borrowers are not being investigated. Why would that be? Seems obvious to me.
I’m not looking at it as punishing some folks and rewarding others, at least my choices don’t have anything to do with ensuring some people hurt and others don’t. I’m looking to avoid this situation becoming a major problem with the economy at large. You think the prudent folks are getting really screwed, I say really screwed means not only do you still rent an apartment, but your job and personal finances are put at risk because the whole economy tanked.
If we have lending rules that promote more responsible lending in the future, the prices will settle to more reasonable values, but settle, not crash/spike/crash to the new values.
Misrepresenting your earnings on a loan application maybe? I guess you really can’t blame the borrowers though. If a schoolteacher or someone asked me for a $600,000 loan, I can’t blame them if I give them the money and never see it again.
Misrepresenting earnings in loans is simple to prevent. the fact that they did not simply proves the loan originators did not do their jobs. More than that ,loans were sold to people by saying we will not question earnings on the paperwork.
We can get you into a house with no money down,. We will get you a low starting interest rate and when it goes up ,we will refinance you . Since houses always go up in value,you can sell and even make money. Kinda of hard to resist when the guy talking to you is a mortgage expert and you are not.
I blame both parties. It’s stupid to lend money to people who can’t pay it back and it’s stupid for someone to enter into a financial agreement they don’t understand. You don’t need an MBA to know that if you have an adjstable rate mortgage and you can barely make the payments, you might be in real trouble if the rates go up.
But people have been using ARMs for years with no issues, so Joe Average is likely to believe the broker. I had ARMs in the late '80s which kept on going down. The problem is that the reset on these ARMs was so great, from their being subprimes, and that teaser rate was so low.
BTW, can those of you complaining about a bailout please give a link to the terms? The only one I know of is the government urging banks to voluntarily keep rates at the teaser level for those people current in their payments. I’m having a hard time seeing how this is going to wreak such havoc.
People have been investing in stocks for years, but that didn’t prevent the dot-com bubble. As I said, I blame both sides. I think more people have the expectation these days that they deserve to live in a McMansion and that they will just figure out some way to pay for things down the road, exacerbated by the real estate bubble and the belief that their house will be worth 5 times as much in a few years. It’s like ten years ago when people were leveraging themselves so they could throw money in the stock market.
On the other hand it’s the lenders responsibility to make sure they make sound loans.
But the bubble didn’t invalidate the concept of owning stock. “A man should never gamble more than he can afford to lose.” People shouldn’t get loans they can’t afford on resetting, and brokers shouldn’t sell them. From what I’ve seen, the people getting foreclosed are not McMansion owners, but those just on the borderline of being able to afford a house, or those snookered into refinancing.
I’m not sure how you define McMansion anyway - the 3 br prefab houses a few streets from me are going for $500K - $600K still, which is a drop. And while you’re right about unrealistic expectations, there are a set of people who did put off buying a few years ago because prices were so high, and then saw them go up another 20%.
So those people I feel for. I don’t feel for the nitwits who took every penny they could of equity in loans to buy their new BMW or vacation or whatever. Those people, and I know some of them, are getting what they deserve.