Big Up Day So Far

[clifp]

Listen to us socialists gleefully celebrating! All it takes is a good scare and niceties go out the window.

Ha

No atheist in a foxhole, no pure capitalist in a stock market meltdown.

Give me the choice between being richer and ideologically purity---

SHOW ME THE MONEY

 

[haha]

No atheist in a foxhole, no pure capitalist in a stock market meltdown.

Give me the choice between being richer and ideologically purity---

SHOW ME THE MONEY

Agree completely. Since as big taxpayers we are going to be paying for all this, we had better get what we can from the lift.

Ha

 

[ERD50]

No atheist in a foxhole, no pure capitalist in a stock market meltdown.

Give me the choice between being richer and ideologically purity---

SHOW ME THE MONEY

Agree completely. Since as big taxpayers we are going to be paying for all this, we had better get what we can from the lift.

Ha

But weren't' some socialist practices (*everybody* should be able to buy a home, even if they can't afford it) a big contributing factor? If so, I don't think it's fair to say that capitalists are being hypocrites. To the extent the govt got us into this problem, we need them to help get us out.

I would have preferred they stay out in the first place.

-ERD50

 

[Gotadimple]

But weren't' some socialist practices (*everybody* should be able to buy a home, even if they can't afford it) a big contributing factor?

Well that's certainly one perspective. Mine is that banks and mortgage brokers were greedy. They could make almost pure profit on the fees, and then go and borrow more $ to lend. That's how people were convinced it was their right to own a home. The failure to adequately underwrite the risk was shunted aside to make profits (pay commissions, executive bonuses, etc.).

-- Rita

 

[ERD50]

Well that's certainly one perspective. Mine is that banks and mortgage brokers were greedy. They could make almost pure profit on the fees, and then go and borrow more $ to lend. That's how people were convinced it was their right to own a home. The failure to adequately underwrite the risk was shunted aside to make profits (pay commissions, executive bonuses, etc.).

-- Rita

But didn't that happen because the govt was backing these loans through Freddie/Fannie?

That's my understanding, but I'll be the first to admit that I've been buried in all the info, I'm not sure that I know what I
know, or that I don't know what I don't know. So take that as a question, just as I wrote it, not a rhetorical one.

edit/add: Mine is that banks and mortgage brokers were greedy.

I addressed this earlier, but it bears repeating. I just don't buy this 'greed' thing as an explanation. Sure, they were greedy. Just like the majority of businesses and people are greedy. That is not a recent phenomenon. So it does not explain recent events. It appears to me that the normal risk that keeps greed in check is what got messed with - and that allowed greed to run free, and contributed to the mess.

So back to my question - wasn't it the govt support of Fannie/Freddie that took the checks/balances off of the ever-present greed?

-ERD50

 

[Marquette]

So back to my question - wasn't it the govt support of Fannie/Freddie that took the checks/balances off of the ever-present greed?

-ERD50

It was greed that gripped the populace... the truly great makings of a bubble. I haven't given this enough thought, but something akin to this could be causal.

There's a limited number of houses at all levels of supply (there's a finite number of $50k houses, $150k houses, $500k houses, $5mm houses, etc).

Purchases increase along the lower band. As supply goes down, if demand remains, then price will go up to stabilize demand.

But, now we see that prices are going up, this looks like more of a sure bet. I'm comfortable taking on a slightly higher mortgage, especially since I'm leveraged and more leverage plus increase in price means I make even more.

This ripples up and down the chain. Supply is still limited. I can only build so many houses at a time.

We can assume supply was tight simply because of the percentage increase in home ownership (from 65%-74% or thereabouts). I recall that, at one point, even in Minneapolis... with lots of land to expand and no reason for a bubble, houses would be bid over asking price by 5-10% on the first day of listing at the height of the craze. That promoted a weird mentality of people being convinced that they had to buy.

At some point, we're not even talking about F&F backed paper any more. We're talking about people going for loans for houses they could barely afford that were well over the size of the loans that F&F would buy.

So, it takes greed on a few parts. You need someone that thinks their house will only go up and they should get the biggest house they can afford. You need someone that will offer them an ARM, 40 yr mortgage, whatever. You need underwriters that will go along with it. you need appraisers that will agree that the house is fairly valued.

It's not just greed in an isolated form of capitalist greed, but a weird kind of greed that makes shows like Property Ladder and House Flippers popular.

 

[ERD50]

....

So, it takes greed on a few parts. You need someone that thinks their house will only go up and they should get the biggest house they can afford. You need someone that will offer them an ARM, 40 yr mortgage, whatever. You need underwriters that will go along with it. you need appraisers that will agree that the house is fairly valued.

It's not just greed in an isolated form of capitalist greed, but a weird kind of greed that makes shows like Property Ladder and House Flippers popular.

Sorry I didn't reply sooner - been busy....

But it seems that the MAIN reason that prices were going up, up, up and tempting so many to jump on board, was the easy mortgage money. If every buyer required the traditional 20% down, and trad income, there would be fewer buyers. Less demand relative to supply, more stable prices.

So wasn't that govt intervention that caused that? If we look at what was happening in Australia, we see that this money was not easily available. I think the main diff is the extent to which the govt got involved.

http://www.early-retirement.org/forums/showpost.php?p=727581&postcount=32

So I would not call it 'weird greed'. I would call it government subsidized greed.

I am very open to challenges on this, it's a complex topic and I don't pretend to know the details - but I'm getting a pretty good sense that this govt intervention was key to the problem. Please, (anyone) correct me if there is flaw in my logic/info. I'm trying to learn.

-ERD50

 

[FIREd]

But weren't' some socialist practices (*everybody* should be able to buy a home, even if they can't afford it) a big contributing factor? If so, I don't think it's fair to say that capitalists are being hypocrites. To the extent the govt got us into this problem, we need them to help get us out.

I would have preferred they stay out in the first place.

-ERD50

I don't know if universal homeownership is a socialist ideal (everyone should have a home, yes, but not necessarily own it). The percentage of people owning their homes is much lower in many socialist countries than it is in America (60% in the US Vs. around 50% in much of Western Europe).

NationMaster - Home ownership (most recent) by country

I think that the high level of homeownership in the US has more to do with people wanting to live the American dream rather than socialist practices. Having lived in a socialist country, I can assure you it is much harder to buy a home there than it is to buy a home in the US. Credit is much harder to obtain (qualifying for credit is often based on many factors such as your income and credit score but also your age and health) and the down payment requirements are much higher. Those obstacles are in place in part to protect the banks, but also to prevent people from overextending themselves (that's the socialist part of the equation: the state must protect people, from themselves included).

 

[NW-Bound]

In response to ERD50:

Yes, I believe the low interest rate by the government and the greedy loan processors and mortgage bankers got us in this mess. More than that, our tax policy didn't help either. Instead of channeling money into "good investments" (alternative energy, mass transit, etc...), the low interest rate pours it into McMansions. People looked at the mortgage deduction and figured that was where they would get the "surest return" for their money! I'd rather the tax was cut across the board. Incentivizing homeownership too much causes a good thing to turn bad.

In response to FireDreamer:

From many earlier threads, I learned that no other countries encourage home ownership to the extent that we do, with easy loans and special tax treatment. I am referring to posts by ladelfina and some Canadian posters. What was the American Dream turned into the American NIGHTMARE. There is no other better illustration of the Law of Unintended Consequences, regarding our housing policy.

Don't get me wrong. I like to own my home(s). But the system encouraged us to buy a much bigger house than we needed or could afford. All that homebuilding drove up the GDP, making the economy look very good indeed. Now, the nation is stuck with big houses that were funded by foreign money. They won't be sending us money anymore.

I am trying to say that there are many factors at play here. Collectively, they cause this problem, the bad karma.

 

[ERD50]

OK, thanks for that perspective. I guess 'socialist' wasn't the best term to use then. Maybe the 'redistribution of wealth' idea? Is that closer? The idea that 'rich' and 'middle class' people own homes, so the lower class should too? And if they can't really afford it, the govt (I guess that's where I come back to 'socialism') will help them get it?

And since looser lending practices helped the lower classes to afford housing, it also helped the middle and middle-upper class to afford MORE housing than previously. Bubble forms.

And it is my impression that, left to themselves, the banks would not have made such risky loans. So it seems the protections are already in place, and it was the (US) govt that messed with them.

I don't know - was this housing bubble mostly a US phenomena? Did the more conservative lending practices in other countries protect the people there? I assume that is the case.

-ERD50

 

[ERD50]

NW-Bound - excellent points.

This is why I am so in favor of minimal govt intervention. There are always those unintended consequences. They are often complex and hard to foresee, and the general response is to throw in *another* layer of rules/regs/tax benefits on top, resulting in additional unintended consequences.

When they try to 'favor' one investment, they are artificially reducing demand for other investments that might be as good/better.

Which is why I hate the approach they are taking with alternate energy. Don't favor one tech or the other - just put a tax on fossil fuel if we want to reduce consumption of it. Let the free market handle the rest.

The first step should be eliminate any/all subsidies for fossil fuel.

-ERD50

 

[ikubak]

Well that's certainly one perspective. Mine is that banks and mortgage brokers were greedy. They could make almost pure profit on the fees, and then go and borrow more $ to lend. That's how people were convinced it was their right to own a home. The failure to adequately underwrite the risk was shunted aside to make profits (pay commissions, executive bonuses, etc.).

-- Rita

Yeah, greed, or attempts to make profits as I like to call it, mixed with pressure from the US Gov't to increase the number of subprime loans is a dangerous concoction.....

"Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders...a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers." - NY Times 1999

As a result, I will be imbibing some dangerous tequila concoctions myself.

 

[FIREd]

OK, thanks for that perspective. I guess 'socialist' wasn't the best term to use then. Maybe the 'redistribution of wealth' idea? Is that closer? The idea that 'rich' and 'middle class' people own homes, so the lower class should too? And if they can't really afford it, the govt (I guess that's where I come back to 'socialism') will help them get it?

And since looser lending practices helped the lower classes to afford housing, it also helped the middle and middle-upper class to afford MORE housing than previously. Bubble forms.

And it is my impression that, left to themselves, the banks would not have made such risky loans. So it seems the protections are already in place, and it was the (US) govt that messed with them.

I don't know - was this housing bubble mostly a US phenomena? Did the more conservative lending practices in other countries protect the people there? I assume that is the case.

-ERD50

I don't disagree with you, I think the government's policies (and the Federal reserve's) definitely played a role in this mess.

The housing bubble is not only a US phenomenon. There are RE bubbles in many European countries as well, though they are not necessarily as severe as in the US. The UK, Ireland and Spain seem to suffer the most at this point.

In general, credit has loosened up in many European countries in the past 10 years (though not nearly as much as it has in the US) and after the stock market bubble burst in 2000, people started favoring RE again as an investment. So there was a bubble in that sense but because interest rates never were as low in Europe as they were here in 2002-2003, the bubble never seemed to inflate as much (with few notable exceptions as noted above).

I know that the UK bubble has kinda overflowed to neighboring countries. At the height of the UK bubble, the brits would cash in on their home equity and buy RE in cheaper, neighboring countries (Spain especially) hence driving RE prices up and inflating a local bubble. It was said, at one point, that a local RE bubble form every time Easyjet (a European discount airline) opens a new route from the UK. Easyjet made it affordable for the brits to jump on the plane and spend the week-end in their villa in Spain or France several times a month.

 

[Marquette]

If every buyer required the traditional 20% down, and trad income, there would be fewer buyers. Less demand relative to supply, more stable prices.

So wasn't that govt intervention that caused that? If we look at what was happening in Australia, we see that this money was not easily available. I think the main diff is the extent to which the govt got involved.

If I could sum it up with a real example, in 2004 I could easily get an $800k loan with 5% down and stated income of $160k at a subprime rate. This isn't California, expensive houses here go for $300k.

Both the underwriter and I would be taking on outsize risk with that kind of loan. I fail to see how government intervention would have caused the underwriter to want to take on that level of risk.

 

[ERD50]

If I could sum it up with a real example, in 2004 I could easily get an $800k loan with 5% down and stated income of $160k at a subprime rate. This isn't California, expensive houses here go for $300k.

Both the underwriter and I would be taking on outsize risk with that kind of loan. I fail to see how government intervention would have caused the underwriter to want to take on that level of risk.

I don't know - hopefully someone can explain.

I keep hearing that these quasi-govt organizations, F&F, helped to loosen loan requirements. But I honestly don't understand what the mechanics were behind that. wiki didn't help much

I guess we are crossing with the many 'bail out' threads.... There is so much info flowing on this subject, yet I feel like I don't understand much at all.

-ERD50

 

[Marquette]

I need to go digging for some data to back up my hypothesis. I think we're fairly in agreement on parts of it.

The highlights swirling in my mind are:

Home ownership increased. Supply shrank. Prices increased. Buyers and lenders became more aggressive (prices always go up, so who cares about large down payments. don't worry about that teaser rate, you'll sell for a big profit before the reset, etc). Underwriters became more lenient because the back office came up with a way to minimize risk by traunching prime and subprime loans.

I've seen, on here, cases made that F&F caused the mess because they were pushing to get loans out to people that should have never been home owners and cases made that F&F started going after subprime loans as they became more profit-oriented and realized they were losing business to other lenders. It's probably somewhere in the middle.

What I mean by weird greed is that everyone was in on it. Even people that were supposed to provide fiduciary oversight, like the underwriters, had to be on board.

 

[ziggy29]

It's probably somewhere in the middle.

It usually is.

This from your friendly neighborhood ideological moderate.

 

[Marquette]

It usually is.

This from your friendly neighborhood ideological moderate.

Now how are we going to have a heated debate with an outlook like that?

 

[Rustic23]

Yes those greedy bankers..... lets see .... they are in the business of lending money and making money.

The government said. Hey we want you to lend to people that really can't afford a loan. It s good for the country for people to be home owners. We will back you up and have Freddie and Fanny buy your notes. So get out there and do what you do.

So the bankers did what the government wanted. Did they make money. Sure, that's what they do.

How many folks on this board would pass up a chance to help the down trodden and make a buck at the same time. Maybe lots of bucks. Not only legal but encouraged by the government.

So to those that hawk the 'Greedy Bankers' line, I say such hypocrisy, given a chance you would do the same thing!

 

[Marquette]

Yes those greedy bankers..... lets see .... they are in the business of lending money and making money.

Making money, not losing money. Are you saying that you don't think fiduciary responsibility and common sense underwriting went out the window? You disagree that greed was involved in all parties?

 

[Rustic23]

Yes I disagree. Define greed. Is Warren Buffet greedy? How about Dell or Bill Gates? Is the guy making 9 bucks an hours that looks a way to make 10 greedy? How many people on this board today are looking at 'bargains'. Greed?

fiduciary rrsponsibility? Bankers were told "The Government backs these practices get out there and loan!" The banks made the loans and sold them. Hindsight is waterproof!

 

[Marquette]

fiduciary rrsponsibility? Bankers were told "The Government backs these practices get out there and loan!" The banks made the loans and sold them. Hindsight is waterproof!

Why was I getting offers from mortgage brokers for $800k loans on $160k stated income with virtually no money down (frankly, no money down since I could do an 80/20 primary/secondary). Can you show me where F&F stated they would purchase loans that large?

 

[Rustic23]

First off, I'm not a banker. I have now clue what your financials look like. You could have $2M in the bank. So as I don't pretend to know why you were offered your loan I could not say if it made since or not. My guess is the bank was going to make the loan and sell it in a bundle with others.

My income is $37,000 a year. I got a $100,000 loan. Now if that is all the information I give you, you don't know if the bank decision was good or bad. Now if I tell you the property was worth $300,000, I have $5m in the bank, qualify for SS but don't take it yet, qualify for two other pensions but don't take either of them. The decision may look different.

Were the bankers being 'Greedy' or doing business. You define greedy. I think you will find one mans greed is another's good business practice.

I would be far more inclined to placed the blame on power hungry politicians that sought to buy votes. Why else do you suppose 51% of the people pay no Income tax. As a reporter put it in our paper today 'Looks like Washington got caught in the 'law of unintended consequences!'' Their purpose to broaden the home ownership base was admirable. The collapse of the financial markets was not intended.

 

[Marquette]

First off, I'm not a banker. I have now clue what your financials look like.

Outside assets were not a factor at all. All you need is a low introductory interest rate and you can swing the minimum payments.

We're not getting anywhere with this. Here's been my rather clear stance from the start. I think there was an inordinate amount of greed coupled with a lack of responsibility at the root of this mess. And, this had to be present at every level in order for things to happen. During a bull market, it doesn't catch anyone. The irresponsible buyer who bought at the upper limits of their financial ability but turned around and sold for a profit looks like a genius. The mortgage broker is getting a very nice paycheck. The underwriter is more lenient and letting more stuff through. The back office is packaging and selling the paper so they don't care. The paper is being retraunched so it doesn't look so bad.

Your counter-argument seems to be that it's all the government's fault but I've seen more solid arguments both for and against your position and I'd need to see something more factual to make a decision.

Edit: Also note, I'm not disagreeing with your position since I've stated that I think part of the trigger could be rising home prices due to contracting supply at the low-end due to a greater percentage of home buyers. I think prices rippled up from there and caused a frenzy around home buying. I've also never said that greed is bad, but I think it took irresponsible greed by multiple parties.

 

[NW-Bound]

I agree with Marquette that greed by bankers who create CDOs and CDSs play a big part. They were able to sell those to gullible foreign bankers, who were hungry for a bit of yield, due to the low interest rate. A friend of mine sent me a simple presentation showing to laymen like myself how it works (or rather does not). I don't know how to share it, not being able to find it on the Web to share the link.

When I saw the faces of these CEOs on TV, it turned my stomach hearing how many 10s or 100s of million dollars they pocketed themselves for doing such a "good job". Sadly, I don't think there is any law against concocting such ridiculous derivatives to sell to foreigners.

Guess what? Foreigners are not sending us their hard-earned savings anymore. Do you follow foreign stocks? They crash as hard as the Dow, or more.

Forget about housing. What do we have to pay them for the things we have been importing?