The CRA/repeal of Glass-Steagal caused the financial crisis

[Voyager]

@Damuri_Ajashi

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.

I understand that the loan packages were put together to keep the defaults to some allowable level, and that they didn’t ever think there would be no defaults. In the past housing busts were confined to various regions, this was the first that was nationwide.
As for prepayment, I had the impression that many of these loans had significant prepayment penalties in states which allowed this. I also thought that the loans were sold by saying that the borrower could refinances (given his increase house price) before the interest rate ballooned. Was the prepayment concern based on this?
Did the banks actually understand how bad Countrywide’s underwriting standards were? Did they try to push back on them, or did they not care because higher rates meant more money and they were dumping the stuff anyhow?

[Voyager]

@doorhinge

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.

A lot of regulation was supposedly in place, in the hands of the Fed and various agencies. Now, if the President sends a clear message that regulation is bad, these agencies are not going to be very active. And, if you remember, the states attorney generals tried to do something, but Greenspan shot it down.
Those in Congress against regulation - either from ideology or from cash - deserve a lot of blame, but it is not only them.

[Linden_Arden]

@Evil_Captor

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.

Dodd-Frank is pretty damn good legislation. Some highlights:

1- Has a resolution process (kill switch) for big banks that fail to meet higher capital standards (banks are flush with capital now).

2- says that Credit Raters are legally liable for inaccurate ratings (they were not before due to First Amendment immunity)

3- limits proprietary trading to 3% of a strict equity calculation

4- creates a Consumer Protection Bureau as long as the GOP allows it to exist

5- requires that credit derivatives trade in the light of day rather than a dark market hidden from regulators (think AIG and its record bailout)

Of course these are all being fought by lobbyists 24/7.

[Damuri_Ajashi]

@Voyager

In the past housing busts were confined to various regions, this was the first that was nationwide.

Great depression was worse but no one thought that anythig close to that could happen.

As for prepayment, I had the impression that many of these loans had significant prepayment penalties in states which allowed this. I also thought that the loans were sold by saying that the borrower could refinances (given his increase house price) before the interest rate ballooned. Was the prepayment concern based on this?
Did the banks actually understand how bad Countrywide’s underwriting standards were? Did they try to push back on them, or did they not care because higher rates meant more money and they were dumping the stuff anyhow?

The we prepayment assumptions and the strips were priced based on those prepayment assumptions. A very common form of stripping was to strip interest payments from principal payments. The returns on these things are very prepayment rate sensitive.

They punished countrywide paper but not by anywhere near enough to account for the poor quality of the junk they were writing.