This is an example of Countrywide (now Bank of America) illegally selling sub-prime trash with false income data to the GSE’s. These are called “putbacks”.
Thus, this was purely a free-market failure.
Now, you could say that Congress failed to regulate enough or that Fannie and Freddie should have never existed and I would have no rebuttal.
But to say Congress caused the 2008 financial crisis is pure nonsense.
Point of order, your honor. If Congress failed to regulate enough and the under-regulated sub-prime mortgages led to the financial crisis, how is Congress not involved?
If Fannie and Freddie had not been encouraged to further participate in the growing sub-prime bubble, if Fannie and Freddie had refused to participate in the under-regulated growing sub-prime bubble, what would have happened to the sub-prime market? Would it have continued to grow if there was fewer places to unload them?
There are plenty of people who took advantage of the situation to buy, sell, resell the sub-primes in their various packaged forms but who created the situation in the first place?
The home buyers didn’t create the regulations. The money lenders didn’t pass the laws. Congress created the situation and refused to put a halt to the sub-prime market even after they were alerted, several times, to the impending bubble burst.
Nice try, but that just allows them to screw up, it didn’t force them to screw up. Unless they just couldn’t help themselves …
Actually that was a good law. If you were around at the time, and I was, there was tremendous inflation, and no one wanted to be locked into 12% mortgages. (We financed the buyer of our house in Louisiana at 12.5%, and he was getting a good deal. The contract said he could refinance with a bank when interest rates fell below that, which he did. ) When we bought a house in 1985, we had an ARM, which kept falling as interest rates fell. If people were locked into high mortgages, the market in places like Texas would have been even worse.
Congress did not create the sub-prime market - the market did.
Who created the Dutch tulip mania? The market or government?
Who created the dot.com bubble? The market or Congress? Should Congress have regulated the market for scarce Tickle-Me Elmo dolls when prices skyrocketed?
Home prices only rose for 70+ years and the whole world fell for permanent increases in the market. Remember, the Brits and plenty of others saw asset prices burst in 2008.
You’re missing the point. Say the every decade flood floods 500 feet from the river bank. If houses are evenly distributed, there will be damage but not major damage. However if every damn person wants to build right on the river for the view, the flood will be catastrophic. Because of the better returns, the banks put together products that were effectively on the river bank. And they got flooded.
Since the deregulators made Fannie and Freddie half public and half private, kind of a Frankenstein’s monster of a company, they did start taking more risk because of the competitive pressures from the Countrywides of the world. But this was following, not leading, the market, and their portfolio was still in better shape than the banks.
If he is saying the Republican deregulators in Congress, and the Dems who fell in line to not be called business-haters, were responsible then he’d have a point.
Deregulation makes companies money in the short run - in the long run the increased risk means that either they fall off the cliff or they damage the rest of us, or both.
True, but FNM/FRE did not declare Ch.11. Congress propped them up to the tune of $160 billion in emergency funds and put them into receivership.
If that had been the extent of the mortgage crisis it would have been dirt cheap to fix at that price. Instead, the rot caused by the private shadow bankers spread throughout the economy and crashed it. Total wealth lost in the US was over $15 trillion for 2008.
The focus on FNM/FRE misses the root cause of the problem - poor private risk analysis as shadow bankers played hot potato with trash mortgages even FNM/FRE didn’t want.
And how much dew can a dew drop drop?
If a centipede a pint,
and a quadruped a quart,
how much could a precipice?
On a more serious note, who regulated the prime mortgage market? Why did/do the mortage providers spend weeks (months) verifying that the property is in good shape and checking the ability of the future homeowner to pay back the loan? Were the home loan providers of prime loans following government regulations and guidelines? Or did they just make up the rules as they went along?
Sub-primes could be had in a few days if not overnight. How bigga loan ya want? Well here it is. Send your friends in to see us. Where was the regulatory power and authority of Congress when the bubble began and while the bubble was growing?
Great posts, but I would argue that the actual root of the housing problem was overbuilding, as it tend to be.
I don’t disagree with anything you’ve said, but there were few places where housing starts were lower than the population growth. Places like Las Vegas, and the exurbs in Ca., the east coast, Az., and even in Midwest areas that were losing population were building well above population growth. While I get that all of what is being discussed contributed to the overbuilding, it’s also the one issue that cannot be bailed out or regulated. Those places are still having to do bulk sales on foreclosures because it’s not cost effective to sell them individually.
Utter drivel. The right continuously tries to blame a minority party House member that cannot even filibuster a bill in his own committee.
George W. Bush killed HR 1461, the GSE Reform Act of 2005, after it passed the House. If anyone propped up FNM/FRE it was him.
Absolutely agree. The focus on them is just another attempt to divert blame from the private banks to the evil gummint.
It was in Florida and Vegas, but the Bay Area is pretty much built out, and the price increases came from that. People did build, but far away, and you read about people doing four hour commutes in order to afford a house.
Thanks to the short supply, we are recovering, with bidding wars becoming common.
History simply doesn’t support your position that this sort of real estate collapse was a big risk (in the sense that it was likely or obvious in any way).
Just FYI, the folks who priced these securities were FAR more concerned about prepayment risks than default risks. Maybe they were stupid to focus on that but then almost everyone on wall street was stupid.
Its not the mortgages that were under-regulated, it was the non-bank mortgage lenders like Ameriquest and Countrywide were virtually unregulated.
FNMA and FHLMC were not exactly leaders in this area. They were trying to maintain market share. That is the problem with FNMA and FLHMC. They had a profit motive when they were supposed to serve a public purpose. Look at GNMA and how they behaved during the real estate boom and bust. During the boom, the market didn’t need a mortgage lender of last resort to provide liquidity to the market so they just stayed the fuck out, while FNMA and FLHMC were chasing profits and huge bonuses.
If you create a private entity to serve a public purpose, don’t be surprised when that entity ends up putting profits ahead of their publlic purpose.
The impending bubble burst? If it was so obvious, it would never have become that large a bubble in the first place. With that said, congress shares a lot of the blame but so do free marketeers.
That’s a bad characterization of what happened. In hindsight it might look that way but at the time, the levels of defaults we saw during the collapse was so far off the tail end of every model in existence that its more like everyone building in the middle of the Sahara and getting wiped out by a tsunami.
As far as the products were concerned, there was some bullshit alchemy going on but ultimately it was the defaults and the inability of almost every model to anticipate how badly market mechanisms would fail.
To continue my analogy, it was as if there were a levee between the houses and the river (one lower than a 100 year flood stage) and the builders told everyone not to look over the levee. The reason for the defaults was that the loans were bad, and the reason for the loans being bad was that there was demand for them, since they paid more. And the other reason the banks bought the mortgages was that they looked like they wouldn’t default, being AAA. So, we have supposedly solid investments paying returns as if they were risky investments. I don’t know where they teach that this is a red flag in B-school, but I hope it is early. Of course, it is hard to concentrate on this danger if your stock price, bonus, and competitive position all depend on you ignoring it.
I’m not excusing anyone who participated in this debacle. What I do notice is that many, many people forget who writes the laws that regulate these industries. Where there were no regululations, there should have been. When it was pointed out, repeatedly, that there was a growing problem, what did our elected representatives do about it? Stop it, regulate it, slow it down, ignore it, pour more fuel on it? Offer to roll the dice some more?
People were making money and nobody wanted to rock the boat. People made a lot of money during the dot com bubble. Many people lost money when it failed. People were making money during the sub-prime bubble. The country lost money when it failed.
We elected Congress to watch out for our best interests. Congress failed to do that.
Whoa, Hoss, hang on there. You do realize that banks and other financial institutions spend many millions of dollars yearly to lobby our Congress for less-restrictive regulations, RIIIIIIGHT?
So let’s not act like the banking industry had no input on the regulations that were in place right before the bubble burst, mmkay? Yeah.
This has been a fascinating thread. What I’ve noticed is that the single thread that unites almost every different approach to the problem is the corrosive effects of money on the regulatory process. At every level, government and regulatory oversight either was missing or failed. Why? Because people with LOTS of money wanted oversight to be missing or inadequate. ? Hell, some firms actually committed FRAUD, telling their customers (pension fund managers and such) that the financial products they were selling were sound investments, when internal emails indicated they knew they were trash. The Obama Administration could not even muster the balls to catch the outright crooks!
Even now, after the worst has happened, Congressional legislators have been unable to put any regulatory teeth into the financial markets. The housing bubble is burst, but all the financial products like CDOs and CDS’s are still around ready to inflate the hell out of whatever new bubble swells, and Citibank can STILL play on the credit market roulette table with depositor money.
Why can’t Congress write any laws to prevent a recurrence? Money in politics is the problem. And it’s only getting worse now that the Supreme Court has opened the way for unlimited, undisclosed contributions to SuperPacs.
Unless and until we get a better handle on the problem of money in politics, we are freaking doomed to repeat this cycle.
Whoa yourself, pardner. You must be confusing me with some other poster. There is plenty of blame to go around. I’m saying that Congress shares in that blame. They made the rules. The whole CRA program was designed to help people buy a home when they “couldn’t qualify” for a prime mortgage. There was no point in subjecting them to a 60 day verification process when it was known in advance that they couldn’t pass one anyway.
How did sub-primes become such a popular option for home ownership? Loans for 200K, 300K, 500K weren’t being made to “poor” people. What “governing body” refused to properly regulate the markets? What “governing body” failed to watch out for the U.S. taxpayers in spite of repeated warnings that their program to help poor people buy homes was now creating an across-the-board false markets in mortgages, housing, land prices, construction jobs, and investments.
You don’t have to hold Congress responsible for this debacle but I do.
Im telling you (for whatever that is worth), people thought they had a handle on the default risk. That is not where the focus was, it was on prepayment risks. It wasn’t obvious or apparent to the market generally that thsi risk existed or someone would have arbitraged the hell out of it (a few people did and made billions but they were only able to do so because they were the rare exception).
Of course the huge prfotis and bonuses colored everything (especially with the ratings agencies), but there was price discrimination between 2006 mortgages and 2003 mortgages because there was a perception that the 2006 mortgages were more likely to default. There was price discrimination ebtween Countrywide mortgage pools and Suntrust mortgage pools because there was a perception that there was a difference in the underwriting standards. Almost noone foresaw the widespread deep housing collapse that we saw, they thought it would be isolated to the stuff that everyone pretty much knew was junk, they didn’t anticipate that all the AAA stuff would have historically high default rates as well. The market simply doesn’t always provide perfect information and the market mechanism that were supposed to prevent a lot of the abuses we saw simply did not work.
On the one hand you have ap arty that wants to believe in infallibility of the free market because they get so many capaign donations from Wall Street and on the other hand you have the Republicans, WTF did you expect would happen?
The actual CRA mortgages didn’t really underperform expectations relative to its comnforming mortgage peers. It was all the other crap that totally tanked and brought everything else down with it.
Whoa at you AGAIN. Congress is bought and paid for by lobbyists, especially corporate lobbyists. Do you really even want to bother disputing that?
I’m not saying one group is more responsible than the other. For that matter, Bill Clinton allowed the Gramm-Leach-Bliley act to go through, which is why gas is $3.50/gallon instead of $2/gallon. If gas were cheaper, then the middle class would have been spending more on good and services over the last 5 years, which would have kept things from getting as bad as they did.
Clinton was a fool for that, as was Phil Gramm. IMHO. They can all kiss my ass.