What Was the Cause of the Mortgage Meltdown?

Great Debates
101

Why do you need all this to happen between '02 and '06? I’m talking about the root causes here.

Banks were not forced to make the loans but they were forced to be CRA compliant in order to, as you said, merge like crazy. This is basically the same thing…in order for the banks to operate as they want, they must be CRA compliant or they cannot expand:

I think you fail to understand that these are two separate issues, one caused in part by the other, that both contributed to the mortgage meltdown.

Sure…here ya go (warning pdf file)
http://www.huduser.org/Publications/PDF/gse.pdf

Do you know the answer already or are you asking me? Here is information from Fannie Mae on it’s losses from subprime and Alt-A loans. Fannie Mae and Freddie Mac did not list the percentage of their portfolio that was subprime but 85% of their losses came from this:

http://www.fanniemae.com/media/pdf/newsreleases/2008_Q2_10Q_Investor_Summary.pdf

Unlike you I am not trying to pin this on a political party. I’m pointing out that government is the problem. Even the best intentions can have disastrous effects.

See the above link. Fannie Mae did not disclose how many loans fell under it’s subprime or Alt-A categories so I don’t know that the question can be answered definitively.

Fannie and Freddlie did not originate loans and, therefore, do not have lending standards per se. I thought you knew this. Nonetheless, Fannie and Freddie were not diligent in making sure the loans they purchased were sound. Read about it here:

Conforming standards? You are living the past. The market was created by Fannie and Freddie. They were buying loans that did not meet their standards. Were they hoodwinked? No, they didn’t bother to make sure the loans met their standards.

LOL

102

Blaming Fanny and Freddie is a right wing tactic. The blame belongs with lenders. The originators of the loans ,made bad loans. The power to stop bad loans was in the hands of the banks. But, since they were not going to keep the loans, they would approve damn near anything. They made billions off them and were not going to have ant long term liability. It was a perfect storm of outrageous speculation.
But that was not enough. They packaged the loans by chopping them up to disguise the danger. They sold the packages around the world with triple A ratings supplied by rating companies that were under great pressure to provide them.
That was not enough. They sold swaps, which are insurance packages for the crappy loans they had spearheaded. They sold swaps to a level that exceeded the total amount of money in the world. How could that be ethical? If the loans crashed, it would be impossible to pay them off. That is fraud. Selling insurance that you know you can not pay off is wrong. The mess is in the lap of the banks who totally got away with it. It is sickening.

103

Hmmm…I wonder how they can force insurance companies to insure everyone. I guess their reach only extends to the insurance industry!

104

Fannie and Freddie dominated the secondary market. Only 4.2% of the servicing agreements made by Fannie and Freddie obligated banks to cover defaults. Banks would have been idiots NOT to sell off these loans in order to lower their own risk. In the process the banks acquired more capital to originate more loans. No question the banks got greedy. The problem is that it was the government that allowed this behavior in the first place.

105

:confused: :smack: :confused: :smack: :confused:

The mass-hypnotic housing boom was caused by a frenzy of greed and irresponsibility. Preachers, for heaven’s sake, were being co-opted by bankers to encourage poor Blacks to buy homes! Media pundits, many of whom knew better, encouraged the delusion that housing was a perpetual money machine.

Government decisions were partly to blame, but the biggest blame against government here was its decision not to govern! Regulatory agencies were understaffed and controlled by stooges of the regulated industries.

To call government the problem here is to twist facts to ideological preconception.

106

Wait, are you advocating government socialization of the banking industry?

107

Confused is the correct expression for you. Excellent job of pointing out one symptom of the problem. Unfortunately you, and many others, hear “greedy bankers” or “preying on consumers” and look no further. This is truly twisting facts to ideological preconception.

108

I think you have misread my post. I am pointing out that the government has ways to force certain industries, particularly ones has heavily regulated as the banking industries, to do what the government demands.

109

Personally, I think “blame” is the wrong way to look at the problem and in the end will simply distract the masses until the problem happens again.

Republicans blame Democrats, Democrats blame Republicans, joke is they are both right.

I’m still going to push my belief that it was the no equity loans that caused the mess. Blame goes all the way around. Home owners should never have agreed to such a loan. Banks should never have issued them. And the government shouldn’t have allowed them.

The rest is just smoke and mirrors

110

That is just another way to say “devil made me do it”

It is still silly coming from the sinners.

The toxic assets that did not exist until recently, fueled in great part the debacle, they did not depend on HUD or Fannie to thrive.

111

I heard this on the radio yesterday, and had to find a cite. Over 50% of subprime mortgages were made to people who qualified for standard ones
From here. Go to the High-risk mortgage loans and lending/borrowing practices section. That had a lot to do with CRA.

112

If I’m not mistaken subprime would include mortgages with a loan to value over 90%. This might explain some of the increase for people who qualify for a prime mortgage but do not have the money for a substantial down payment…especially in the highest markets. I don’t know this for sure but just throwing it out.

113

Wrong again. Saying “government is the problem” when it was government’s failure to govern that was the problem shows the confused preconception.

Another matter which confuses posts here. Some blame easy mortgages on the perpetual-inflation fantasy, some vice versa. No one’s mentioned these formed a vicious circle: Investors flocked to finance houses because “prices would continue to rise.” Prices continued to rise because of the easy credit.

114

I’m not solely blaming government. I am claiming that government made these conditions possible. Actively made them possible as opposed to lack of regulation. The Fed pushed the bubble through cheap credit. Government intervention practically created the secondary market. Government actively sought to provide loans to individuals in poorer neighborhoods who could not pay them back. Government allowed HUD to offer no-down payment loans.

Unlike many here I am not looking to pin this on either party. Both sides of the aisle had their hand in this. My belief is that government, looking to do the right thing, created a huge mess. What sounds good to politicians and to the public can have huge unintended consequences.

115

I don’t think this stuff says what John Carney thinks it says.

I agree with much of what he says about the chronology but he seems to be saying that the CRA “set the table for the bubble”

In law we have this concept called “a proximate cause” it roughly translates into “a precipitating factor” the CRA would not be a proximate cause or precipitating factor.

For example, if I got into a car accident while driving drunk at my friend’s birthday party, my friend’s mother giving birth to my friend would not be a proximate cause or precipitating factor for my car accident BUT isn’t it true that if my friend had never been born I would not be driving home drunk from his birthday party? Yeah, so?

The CRA didn’t actually or effectively require no money down mortgages, this is simply not true. It may have encouraged lower lending standards (including lower down payments) but it didn’t look anything like the sort of mortages that we all heard about.

And of COURSE we can blame securitization without coming back to the CRA. Our economies were not ruined by high default rates in black neighborhoods, its as simple as that.

I wonder if Mr. Carney has ANY clue what percentage of subprime mortgages were CRA mortgages, because I get the impression that he thinks that some significant percentage of subprime mortgages were CRA mortgages and this simply wasn’t the case. CRA mortgages accounted for a teeny tiny sliver of subprime mortgages.

Yes, I agree that CRA compliance became a factor in the bank consolkidation of the late 90’s early 2000’s but it was hardly a driving force. The majority of bank consolidation occurred BEFORE the bubble formed.

In the end, the CRA simply was not a precipitating factor, or even a significant factor in the bubble. Anyone that tries to tell you different has either been misinformed or is trying to misinform you.

116

This is just my pet conspiracy theory but I think the bubble was intentional. We had a Republican president trying to sell us on obscenely low taxes for the rich (15% capital gains and dividend tax, really?) AND an unnecessary war in Iraq while he was trying to combat the effects of the Dotcom bust and the Enron type scandals. He wanted this bubble, he needed this bubble.

Greenspan on the other hand was very very eager to accommodate him because he wanted to prove his lifelong devotion to AynRandianism correct. He testified that tax cuts would be a good thing (and only later said “oh I thought that spending cuts would naturally go along with those tax cuts” Where the FUCK had he been over the last 20 years? The people who wanted tax cuts believed that tax cuts paid for themselves).

117

Is there a way to find out what percentage were CRA mortgages?

For those that still think the CRA had something to do with all this, the article I linked to in the OP states that nearly 50% of foreclosures were prime mortgages.

And then 1 in 7 mortgages over $1milllion are in delinquency, do you think those were in CRA neighbourhoods?

But even IF the government forced the banks to offer no equity mortgages, did the government also FORCE people to accept them? See how there are at least three people involved?

And then there is a forth: investors were buying pieces of those mortgages. Were they also forced?

118

I know one appraiser and he basically admitted that his profession had abandoned their principles when he saw 40 year old homes being appraised for more than it would have cost to build new.

119

Well historically, homes have in fact been a perpetual money machine but it did so at slightly higher than the risk free rate not at 40%/year.

120

Yeah, and I’m saying that you are going back so fucking far that there is only a tenuous relationship between what you say are the causes of the bubble and the bubble itself.

Yes and how many of the subprime mortgages do you think were CRA mortgages?

And I’m saying that the CRA was about as causative of the subprime mortgage mess as your parents having sex 9 months before you were born is causative of my sitting at he keyboard typing this post. You are reaching and grasping at straws.

This is your statement:

This is what is in your link:

This is hardly subprime or driven by the CRA. Perhaps you were trying to make some other point but in the context of a discussion of subprime mortgages and the CRA you can understand my confusion when you cite to something that has nothing to do with the CRA or subprime mortgages.

I know the answer and despite the obvious fact that most of their losses came from their worst loans, their portfolio was largely conforming loans, they had a relatively small portion of the subprime market and Alt A is not subprime, its the grade between conforming and subprime.

When you say “government IS the problem” you are taking a political stance. You are disowning the Republican party because, well, you have to; but you are not disowning the ideas that inspired the Republican party to drive us into this ditch.

Subprime and alt A are different. You are grasping at straws trying to find some way to salvage your ideology while pinning the blame on “government” or the democrats.

You do know why there some mortgages are called "conforming and others are not right? Because they imposed lending standards for the mortgages they would buy. I thought you knew this.

This is the third time you simply linked a cite without a quote or something a bit more pinpoint. The article STARTS with these words “In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford” why were these regulators ignored? The article says a lot of things, you care to point to the part you think helps your case?

WTF are you talking about? Conforming standards are a pretty real thing. You think they drove the market into subprime? If anything the market drove Fannie and Fredie into buying more subprime then they wanted in order to try and get a handle on that runaway corner of the market. If you didn’t make a market in subprime, you had no say in how the standards evolved. But they STILL didn’t have very much subprime relative to their share of the mortgage market generally.

Then you are parroting someone that is parroting him. Think for yourself, you’ll feel better, most Democrats do.