So much for "predatory lenders"

[lets-retire]

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.

 

[Independent]

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?").

 

[lets-retire]

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.

 

[Zoocat]

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.

 

[NW-Bound]

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?

 

[Gumby]

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.

 

[jug]

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.

jug

 

[ERD50]

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).

....
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.

-ERD50

 

[clifp]

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.

 

[Gumby]

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.

 

[Nords]

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...

 

[haha]

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.

Ha

 

[Zoocat]

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.