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Old 06-04-2009, 12:33 PM   #21
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I agree, but if the programs were designed to make loans to people in underserved areas that could afford to repay them, I see no problem. However twisting the arm of a bank to engage in poor underwriting practices under any circumstances is wrong. What I would like to know is what percentage of the poor underwritten loans were written under Government pressure.
The trouble is, it seems that whenever an attempt is made to artificially influence a market, the law of unintended consequences comes into play. Push or pull the market one way, and inevitably you will get an equal and opposite force somewhere else down the line. And those forces arise faster than laws can address them (which just makes them pop somewhere else).


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I do believe that the bulk of the problem in underwriting was due more to greed, such as banks and loan brokers gathering up as many loans as possible to re-sell to secondary buyers for a quick profit, as opposed to the banks having their arms twisted to make such loans.

Profit I believe was the motive more than anything.

jug
I've never bought into the "greed" explanation. Are you saying that the secondary buyers were not just as greedy, or were they just stupid? Doesn't make sense to me that one group would be benevolent while one group would be "greedy". How would this separation occur? I think the artificial market manipulation just changed the rules of the game, so that greed was not in check as it is in a free market. Did any of this happen in parts of the world where the govt was not trying to make loans available to people who could not really afford them? I don't think so. IMO, there is your answer.

Greed is good, profit motive is good. It is what advances our society. It's not perfect but it appears to be better than any alternative I've seen. My computer, my ISP, and this forum are motivated by profit. That is good IMO, w/o a profit motive I would probaly have none of them. Greed is good, profit motive is good.

OK, here's an explanation that I've considered using as a thread starter, but it fits here, so I will toss it in:

Greed is almost powerless to do harm in a free market.

Consider a Farmer's Market - ten farmers bring their apples to sell. All the apples are of equal quality. Nine of the farmers are "good guys/gals", seeking long term relationships with their clients. The price of those apples is going to float to the level that supply/demand dictates. If the farmers could get an exorbitant price for their apples, more farmers would travel to that market, increasing supply, and the price would come into balance once again. If the farmers cannot get enough to provide a reasonable profit, they will switch to other crops, or sell to other markets, until the supply of apples goes down, and demand brings the price back into balance. Econ 101, right?

The tenth farmer is a "greedy" old SOB. But... so what? How can he charge more for his apples? He can't, the people will go to one of the other nine farmers. He is almost powerless in a free market.

So, manipulated markets are the problem as I see it, not "greed". To me "greed" is like gravity - use it to your advantage (a paperweight, traction for your car) and it works just fine. Slip on the ice, and gravity might provide you with a broken hip. But gravity was not good or bad, it just "is". Greed is the same, in my view.

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Old 06-04-2009, 12:47 PM   #22
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Originally Posted by ERD50 View Post
The trouble is, it seems that whenever an attempt is made to artificially influence a market, the law of unintended consequences comes into play. Push or pull the market one way, and inevitably you will get an equal and opposite force somewhere else down the line. And those forces arise faster than laws can address them (which just makes them pop somewhere else).




I've never bought into the "greed" explanation. Are you saying that the secondary buyers were not just as greedy, or were they just stupid? Doesn't make sense to me that one group would be benevolent while one group would be "greedy". How would this separation occur? I think the artificial market manipulation just changed the rules of the game, so that greed was not in check as it is in a free market. Did any of this happen in parts of the world where the govt was not trying to make loans available to people who could not really afford them? I don't think so. IMO, there is your answer.

Greed is good, profit motive is good. It is what advances our society. It's not perfect but it appears to be better than any alternative I've seen. My computer, my ISP, and this forum are motivated by profit. That is good IMO, w/o a profit motive I would probaly have none of them. Greed is good, profit motive is good.

OK, here's an explanation that I've considered using as a thread starter, but it fits here, so I will toss it in:

Greed is almost powerless to do harm in a free market.

Consider a Farmer's Market - ten farmers bring their apples to sell. All the apples are of equal quality. Nine of the farmers are "good guys/gals", seeking long term relationships with their clients. The price of those apples is going to float to the level that supply/demand dictates. If the farmers could get an exorbitant price for their apples, more farmers would travel to that market, increasing supply, and the price would come into balance once again. If the farmers cannot get enough to provide a reasonable profit, they will switch to other crops, or sell to other markets, until the supply of apples goes down, and demand brings the price back into balance. Econ 101, right?

The tenth farmer is a "greedy" old SOB. But... so what? How can he charge more for his apples? He can't, the people will go to one of the other nine farmers. He is almost powerless in a free market.

So, manipulated markets are the problem as I see it, not "greed". To me "greed" is like gravity - use it to your advantage (a paperweight, traction for your car) and it works just fine. Slip on the ice, and gravity might provide you with a broken hip. But gravity was not good or bad, it just "is". Greed is the same, in my view.

-ERD50
Very well thought out.... The ultimate power in a free market is to simply say "no". As long as there is no coercive power, govt or otherwise theatening your decision making, then I have no problem with it.

I tend to dislike anything that will "unbalence" the free market. A monopoly is a good example of this. Where there is no competition, business gets an unfair advantage. Price fixing, and colusion are other forms of illegal "market unbalencing". In such situations a company CAN charge more than the market will allow, because there is no alternative that a consumer can turn to.

At the same time, I am just as opposed to unions. In a way.... you can think of unions as a "people monopoly". In this situation, you wind up with businesses being "coerced" into paying wages they might not be able to sustain, and would normally say no to. This is one of the primary reasons for the current auto-maker meltdown. Eventually the debt monster that was created over the last 30 years could not be fed anymore. Most of the companies probably knew it was unsustainable years ago, but with union controll there was nothing they could really do about it.

And there you have it... not seen through a rich or poor man's prism. Just reality as I have found it....
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Old 06-04-2009, 08:06 PM   #23
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Originally Posted by jug View Post
I agree, but if the programs were designed to make loans to people in underserved areas that could afford to repay them, I see no problem. However twisting the arm of a bank to engage in poor underwriting practices under any circumstances is wrong. What I would like to know is what percentage of the poor underwritten loans were written under Government pressure.

I do believe that the bulk of the problem in underwriting was due more to greed, such as banks and loan brokers gathering up as many loans as possible to re-sell to secondary buyers for a quick profit, as opposed to the banks having their arms twisted to make such loans.

Profit I believe was the motive more than anything.

jug
Here's the best I could get with a little Googling:

Quote:



Federal Reserve Board data show that:
  • More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
  • Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
  • Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.
Private sector loans, not Fannie or Freddie, triggered crisis | McClatchy

The reason the quote is relevant to your question is that "private lending institutions" supposedly aren't subject to the CRA. The big run-up in mortgage lending originated outside the regulated sector. I don't know the details of who's regulated and by whom, but that's the claim that I've seen. Maybe someone else can provide more data.

I'd like to see the link to the "Federal Reserve Board data" just to see for myself what it says.

My guess is that the most we could say about gov't pressure goes something like this: Gov't pressure in the 80's and 90's got banks to make loans they wouldn't have made otherwise. Banks discovered, to their surprise, that they could do this profitably. People didn't default just because they lived in the "wrong" neighborhood. This discovery may have been one of the reasons that the bubble got started, but not the reason it turned into a bubble.
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Old 06-04-2009, 08:12 PM   #24
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I tend to dislike anything that will "unbalence" the free market. A monopoly is a good example of this. Where there is no competition, business gets an unfair advantage. Price fixing, and colusion are other forms of illegal "market unbalencing". In such situations a company CAN charge more than the market will allow, because there is no alternative that a consumer can turn to.
The complexity is that sometimes a "free" market is naturally "unbalanced". For example, any market that provides naturally high barriers to entry is likely to develop a monopoly. Think of electrical distribution to homes in your community. It's so expensive to run all the wiring that the first company to do it can scare anybody else out.
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Old 06-04-2009, 10:41 PM   #25
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The complexity is that sometimes a "free" market is naturally "unbalanced". For example, any market that provides naturally high barriers to entry is likely to develop a monopoly. Think of electrical distribution to homes in your community. It's so expensive to run all the wiring that the first company to do it can scare anybody else out.
Correct, and in those cases I think some sort of govt intervention can be the "lesser of two evils". Or even a good thing if the govt does it right, which it actually does sometimes, but it seems rare.

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Old 06-05-2009, 09:05 AM   #26
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Independent--As I've understood it, "private lending institution" can be interpreted as any institution that was not federally insured or regulated. The "private lending institutions" are those "lending only" institutions, such as Countrywide, Di-Tech, etc, mortgage brokers (most were local), and investment banks. Many of the banks now having troubles, like Bank of America, Citifinancial, etc. were at least federal regulated or federally insured. The regional federally insured and regulated banks the DW worked for all are having troubles also. They wrote directly to Fannie and Freddie guidelines with the exception of the VA/FHA/HUD programs. Their primary investors were the government programs.

One thing I find interesting is Bank of America was making a profit every quarter, until it purchased Merrill. The deal was "strongly encouraged" by the FED after Ken Lewis discovered how bad things really were at Merrill. Lewis wanted out of the deal but was pressured into it. The amazing thing is after the loss and swallowing the bitter pill of Merrill, Bank of America returned to profitability the next quarter.

I must also point out, that was a very left slanted article.
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Old 06-05-2009, 10:12 AM   #27
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Thanks for the definition, it seems consistent with the use in the article. I'll agree that the article was taking the "left" side in the debate, it was the only thing I found quickly that seemed to have any statistics that might indicate how much the CRA had to do with this. I figure that the numbers are what they are, regardless of who quotes them (but I'd like to see the context in the original source).

(I'm sure I saw an article recently that looked at this from the borrower side. It claimed that almost all subprime borrowers in CA were people with too much income, or buying into neighborhoods that were "too good", to be subject to the CRA. But I couldn't dig it out.)

I understand that regulators can push beyond the letter of the law. You point out that the gov't apparantly pushed BoA into the Merrill deal. I've assumed that it also pushed JP Morgan into the Bear Stearns deal. But I'm not seeing evidence that that all the subprime lending was caused by the gov't pushing people into it (as contrasted with "Did the gov't do everything it could to stop the housing bubble?").
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Old 06-06-2009, 06:12 AM   #28
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The only policy the DW complained about as far as pushing people into loans they shouldn't receive were with minorities. Seven or eight years ago there was a sort of affirmative action with the mortgage loans. A percentage of the loans her bank made had to go to minorities. The percentage was supposed to reflect the approximate percentage of minorities in the community. This does not mean all of the minority loans were to poor credit risks, but I'm sure a few less than desirable borrowers were given loans to bring up the stats. I don't know what the driving force of the policy was, but I do remember the DW saying the bank could be sued if the number of minority loans dropped. Unfortunately the DW only remembers her boss and two interesting loans she worked on at that bank, so I can't ask her.
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Old 06-08-2009, 05:19 PM   #29
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As far as minorities, I know that there were a lot of subprime mortgages sold to Latinos in the SW, calif and colorado but many subprime borrowers were not minorities, if that has anything to do with it. Anyway, we are now past the subprime crisis. The next blowup will be option ARMs and interest only loans. Most of those were made in Calif, primarily because of the high housing prices. Borrowers took out these creative mortgages because they thought they'd be able to refinance in a few years before the mortgage recast. They lost their bets.

I wouldn't say that these borrowers were greedy. They did want to own homes. They were willfully ignorant of the history of real estate and didn't see the writing on the wall. Few did. I certainly didn't.

I remember my realtor pointing out the difference between the original selling price of a condo in 2002 and the current price in 2005. The big appreciation was clearly evident, which I took to be a good sign. But what he meant was that real estate was a bubble market. He was trying to educate me. But I was 6 months post divorce and I wanted a home again. Anyway, I didn't buy in an overly bubblicious market anyway.

There are many reasons why people behaved the way they did during the RE bubble. I don't think it's useful to blame borrowers. The financial wizards who created the MBS and CDOs also created the climate in which the bubble was possible. Then the brokers and agents took advantage. There's lots of blame to go around.
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Old 06-08-2009, 07:07 PM   #30
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I just learned there was another cause for the prime morgagor default rate to rise. They are walking away from their homes.

An acquaintance couple of mine bought a home near the top of the market with little downpayment. Of course their mortage is now upside down. So while they still have their job and good credit rating, they are buying a second home. When it closes, they will walk away from their first home.

Other than a bad credit rating for a few years, they said that there was no other repercussion possible from the lender. And I thought that they could be forced into bankruptcy. What do I know, a straight guy who never intends to renege on my debt?
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Old 06-08-2009, 09:04 PM   #31
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I just learned there was another cause for the prime morgagor default rate to rise. They are walking away from their homes.

An acquaintance couple of mine bought a home near the top of the market with little downpayment. Of course their mortage is now upside down. So while they still have their job and good credit rating, they are buying a second home. When it closes, they will walk away from their first home.

Other than a bad credit rating for a few years, they said that there was no other repercussion possible from the lender. And I thought that they could be forced into bankruptcy. What do I know, a straight guy who never intends to renege on my debt?
It depends on whether you live in a state where mortgages are recourse or non-recourse. If the mortgage is recourse, the bank can attempt to execute against your other assets for the deficiency. I understand that California and Arizona are non-recourse states, so the walk-away tactic works there. It would not work in my state. Presumably, mortgage loans in CA and AZ were priced to reflect this increased risk, but perhaps not. I just don't know.
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Old 06-09-2009, 03:34 AM   #32
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Many tend to blame this crisis on the Fed compelling the banks to give out loans to minorities who cannot afford to pay back. If this is the issue, then so be it.

But, I haven't been shown any stats giving credence to this concept and it seems it is simply a political tactic to spread this info.

I believe that primary lenders were tempted to make as many loans as possible, and stretch the truth on the apps so they can sell these loans to the secondary people, who in turn packed them up and sold to wall street to be securitirized. Here everyone got a piece of the action, with the false belief that the housing market can only go up, never down.

A banker should know better, but he had no stake since he sold it. Also many "brokerages" in mortgages were involved and the more volume, the better. So it was a rush for all, people who couldn't add threee numbers (good deal of our population) got a house, banks/brokers made a quick buck, secondary people made a quick buck, wall street made money packing them up and peddling them, everyone made money.

UNTIL..... reality kicked in, the music stopped, the market was flooded with these instruments of unknown value, housing was in abundant supply from overbuilding ( I live in Vegas and can surely vouch for that), pushing prices down, being prices were getting out of reach anyhow, and anyone holding these mortgages, notes, securities, derivatives, all tied to these properties sobered up causing a panic, bringing prices down further, and Kaboom, the whole banking system is off kilter.

If banks orginally kept the securities they wrote, or if even the secondary market demanded sound underwriting, we would not have this problem.

Everyone was drunk in their pursuit to get some housing "action" from the buyer to the trader, now comes the hangover. Like getting married to someone in Vegas who you just met.

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Old 06-09-2009, 08:42 AM   #33
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Many tend to blame this crisis on the Fed compelling the banks to give out loans to minorities who cannot afford to pay back. If this is the issue, then so be it.

But, I haven't been shown any stats giving credence to this concept and it seems it is simply a political tactic to spread this info.
I don't have any stats, because I don't know how to parse the data out from all the background noise, but I think there is something to it. I don't think there is any "agenda" behind the belief. (edit - I would pull "minorities" from the statement, and just say "people who could not afford mortgages", I don't think anything other than their economic status is relevant).

Quote:
....
A banker should know better, but he had no stake since he sold it.
This is the step in the explanation where it all falls apart for me. The person who bought it had a stake in it. So, as I said earlier ( a few posts back), was this group stupid? It seems odd to me that one group in this market is stupid and not measuring risk/reward, and the other "clever" and "greedy". It seems more logical to me that they were both trying to take advantage of an artificially manipulated market.

I'd agree that this was all multiplied by a bubble mentality. I've seen it in a bubble in other areas. Our megacorp was throwing money to expand to meet a bubble of demand for our product. So much so that much of the money was spent foolishly. However, if we didn't rush to spend it to meet demand, our competitors would grab that market share (and maybe grab a customer for life). And yes, there was a nasty hangover when that bubble burst, leaving us with high production costs - those costs were OK when profits were high during the bubble, but not after it burst. Bubbles do affect behavior, no question in my mind.

I'd like to see some clear data also, but lacking that, logic will be my guide. And to me, it is not logical that the buyers of these products were so much more unsophisticated than the sellers.

And since the govt (going back through several admins) seemed to want to support easy mortgage money through a number of programs, I would say that the burdun of proof is upon *you* to 'prove' this didn't play a significant role, rather than just to say that those who claim it have an agenda.

It is tough to say, the data is so mangled and mixed ( at least to me), but that is my view and my reasoning. I could certainly be wrong.

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Old 06-09-2009, 06:19 PM   #34
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A banker should know better, but he had no stake since he sold it. Also many "brokerages" in mortgages were involved and the more volume, the better. So it was a rush for all, people who couldn't add threee numbers (good deal of our population) got a house, banks/brokers made a quick buck, secondary people made a quick buck, wall street made money packing them up and peddling them, everyone made money.
I got a bit of Bob Brinkers Moneytalk this last weekend. One of his guest was Dan Ariely a MIT professor of behavior economics. He recently published book called predictably irrational which is about stupid things people do about money.

One of the example he gave was a study he did on how people shopped for a house. He said the first thing a person typically did was get on the internet and find a mortgage calculator. They'd type in their salary and current payments, and the calculator would spit out the maximum price house they could afford.

Evidently for most people that was the starting point for their house hunting. No evalutation do we need a that expensive of house, no budgeting can we really afford $4,000 a month mortgage. If anything people would try to figure out away of buying an even more expensive house (e.g. the NY Times econ reporter).

So at first approximation, most American leveraged themselves to the maximum amount possible, helped out by banks who also leveraged themselfs to the max.
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Old 06-09-2009, 06:24 PM   #35
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I got a bit of Bob Brinkers Moneytalk this last weekend. One of his guest was Dan Ariely a MIT professor of behavior economics. He recently published book called predictably irrational which is about stupid things people do about money.

One of the example he gave was a study he did on how people shopped for a house. He said the first thing a person typically did was get on the internet and find a mortgage calculator. They'd type in their salary and current payments, and the calculator would spit out the maximum price house they could afford.

Evidently for most people that was the starting point for their house hunting. No evalutation do we need a that expensive of house, no budgeting can we really afford $4,000 a month mortgage. If anything people would try to figure out away of buying an even more expensive house (e.g. the NY Times econ reporter).

So at first approximation, most American leveraged themselves to the maximum amount possible, helped out by banks who also leveraged themselfs to the max.
People thought that way long before the recent real estate bubble. Some of the car sales people here could confirm it, but it has always been my impression that most people just look at the monthly payment amount when they finance a car purchase. Hence, sales people are trained to emphasize that monthly number, rather than the total cost. The fact that they need to stretch out the loan term to get the payments low enough does not enter into the picture.
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Old 06-09-2009, 11:41 PM   #36
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One of his guest was Dan Ariely a MIT professor of behavior economics. He recently published book called predictably irrational which is about stupid things people do about money.
Excellent book.

It's entered our daily vocabulary and it's been especially helpful in getting our consumer-frenzied teen to understand how the evil advertisers suck the dollars out of her pocket...
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Old 06-10-2009, 12:28 AM   #37
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I'd like to see some clear data also, but lacking that, logic will be my guide. And to me, it is not logical that the buyers of these products were so much more unsophisticated than the sellers. ERD50
In general, sellers are usually more sophisticated than buyers. The seller knows what he has, the buyer can only form guesses based on whatever data or impressions he has been able to gather.

Incidentally, MBS(s) are a good product; once we get over this current fright they will be back strong. Regulation might perhaps require that the originator hold bigger participation, or a longer period of being on the hook.

As far as sub-prime, alt A, no-doc etc they mostly stink and I can't imagine how dumb the buy side must have been to have accepted these.

Overall, stupidity is the enemy, not greed. Most of us are greedy, even if some of us cannot claim it. Those few who aren't greedy for money are usually greedy for something else.



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Old 06-13-2009, 11:35 AM   #38
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This is slightly OT but illuminating, I think. When I was in Ecuador last Jan I met two young guys who were traveling around the world. They were about three years out of college. One had worked at Morgan Stanley, the other at Countrywide in San Diego. They told us how they made a LOT of money in bonuses and were able to save up for two years for this around the world traveling. The Morgan Stanley guy had been laid off; the Countrywide guy quit, knowing his layoff was coming.

What was striking to me was how arrogant they were. "It's good to know how money works" one of them said.

They also lauded Bank of America's purchase of Countrywide, saying BofA had this pile of cash. I questioned them on that and their response was basically a nonverbal "You're an idiot"

The arrogance in the FIRE industry is, I think, pretty typical and that is part of the problem. Maybe this economic meltdown will instill some humility but I fear not.
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