Is Regulation the problem or the solution?

[clifp]

I found this article in the WSJ very thought provoking. I don't think a WSJ sub is required but if it is here is some of the important paragraphs

...
The crisis on Wall Street has, of course, become a political football. Cries of "moral hazard" and "socialism" on one side are drowned out by charges that the current mess is the result of deregulation, and too cozy a relationship between "Wall Street fat cats" and the current administration in Washington. If only reality were that simple. The blame game will continue, but it won't do much to fix what's broken.
Let's get a few canards out of the way: First, yes, stupidity and cupidity and complacency and hubris are involved, and yes, there is gambling in Casablanca. Second, the idea that there is this thing called "the free market" that governments tame or muck up with regulation is a fiction. Governments create the legal conditions for markets; markets shape what governments can do or are willing to do. Regulation versus free-market is a false dichotomy. Maybe in some theoretical universe, if we could start with a blank slate and construct society anew, it wouldn't be. But we exist in a web of markets and regulations, and the challenge is to respond to problems in such a way so that we decrease the odds of future crises.
And that is where AIG becomes instructive. Even good regulations can't prevent all future crises, especially ones that are the result of new technologies and changes that result from them. The capital flows, derivatives contracts and nearly frictionless interlinking of global markets today are the direct result of the information technologies of the 1990s. The implications weren't known until very recently, so it would have been nearly impossible for regulations to have prevented what is happening. But if good regulation can't prevent crises, bad regulations can cause them.
The current meltdown isn't the result of too much regulation or too little. The root cause is bad regulation.


Call it the revenge of Enron. The collapse of Enron in 2002 triggered a wave of regulations, most notably Sarbanes-Oxley. Less noticed but ultimately more consequential for today were accounting rules that forced financial service companies to change the way they report the value of their assets (or liabilities). Enron valued future contracts in such a way as to vastly inflate its reported profits. In response, accounting standards were shifted by the Financial Accounting Standards Board and validated by the SEC. The new standards force companies to value or "mark" their assets according to a different set of standards and levels.
The rules are complicated and arcane; the result isn't. Beginning last year, financial companies exposed to the mortgage market began to mark down their assets, quickly and steeply. That created a chain reaction, as losses that were reported on balance sheets led to declining stock prices and lower credit ratings, forcing these companies to put aside ever larger reserves (also dictated by banking regulations) to cover those losses.
In the case of AIG, the issues are even more arcane. In February, as its balance sheet continued to sharply decline, the company issued a statement saying that it "believes that its mark-to-market unrealized losses on the super senior credit default swap portfolio . . . are not indicative of the losses it may realize over time." Unless one is steeped in these issues, that statement is completely incomprehensible. Yet the inside baseball of accounting rules, regulation and markets adds up to the very comprehensible $85 billion of taxpayer money.

Bolding mine.

One of the most important thing I've learned as an investor, and certainly Buffett talks about this a lot, is price and value can be widely separated. Now over time the price and value of asset tend to converge, but on any give day, week, month, or year they can be vastly different. Who can argue that the value of the future earning stream of all of the US corporations (and virtually the rest of the world) is ~10% lower today than it was on Friday, but the price of these same assets is.

For instance, say AIG offered insurance on credit swap involving say GE capital debt, and JP Morgan debt due in say 3 years. Now the chance of these two companies defaulting on the debt is very low. (Of course one could have said the same thing about AIG... but they haven't default yet...) . However, because of the turmoil in the system there was no market for these credit swaps, so AIG was force to value the risk associated with the insurance based some crazy prices. Imagine if the only comparable sale was credit swap for GM capital and IndyMac bank and the default risk for the lousy corporation had gone up a lot and the price/cost had decline by 10x. But regulations are regulations and if the computer models say that CDS for AAA companies are worth 2x more than junk CDS, suddenly a AIG balance sheet has taken a huge hit. However, the actual risk associated with JP Morgan or GE defaulting on debt isn't at all reflected in the price.

Another example of regulation and Congress exacerbating the problems. Increasing home ownership has been goal of Dem. and Rep. administrations for decades, with much cheering and legislation form Congress. One of the regulation that was put in place was to insure that banks didn't discriminate in lending against poor/minorities. Now this is worthy goal, but lets be honest poor people in general have worse track record of paying back money than richer people. So right now all of the Congress critters (I just heard Barney Frank complain about this.) are yelling that we didn't have regulation of non-banks making mortgage loans and that is are problem.
However, just a few years ago banks were being pressured to loan more underserved communities by Congress and regulators. To a large extent how they meet their poor/minority goals was by making funding available to mortgage broker who worked with poor people with poor credit. Viola Sub prime mortgages are born. Of course banks not being stupid didn't want to carry these crazy loans on their books and sold them off!

 

[Purron]

Just a couple of thoughts. As far as regulation, we could look at the logic used by those in favor of gun ownership who often claim we don't need new gun laws; we need to enforce the ones we already have. I wonder if the problem is regulation which places the responsibility on Congress to create or revise the laws or enforcement which places the responsibility on regulators to carry out Congressional intent. I believe it might be a combination of the two.

Clifp, the comments you made regarding sub prime mortgages trouble me as well. It did seem like a lofty idea to help people of modest means realize the American dream of home ownership. Was this a social problem we should have expected our financial institutions to solve? Was the Community Reinvestment Act used to encourage irresponsible behavior? Were the regulators encouraged to turn a blind eye on sub prime lending so the politicians could take the credit for helping the underserved? I don’t know the answers and am sure of only one thing – there is going to be a lot of finger pointing on who is to blame.

 

[free4now]

I came across this argument that a big problem was simply overleveraging, allowed by regulators. Apparently three of the failed firms are members of the five that were given special permission from the SEC to have more than double the leverage normally allowed.

The Big Picture | How SEC Regulatory Exemptions Helped Lead to Collapse

My take on the "big picture" is that free financial markets are inherently greedy and short term focussed. Free markets inherently tend to burn up whatever resources they run on, in an unsustainable way. Many industries are powered by natural energy, and we are all used to the way that free markets tend to voraciously consume natural resources even though such consumption ultimately destroys the industry. Financial industries do the same sort of short-sighted behavior... whatever gets next quarter's results up is the priority, even if it ultimately ruins the future. That's why insurance regulation is necessary; without it every Tom Dick and Harry would set up ponzi insurance schemes, taking in premiums until a big payout is required and then folding and moving to another state. Corporations are inherently amoral and psychotic; the only thing keeping them from doing evil is regulation. What we have seen is that essentially we haven't regulated sufficiently. It may very well be that derivative financial products are too complicated for us to regulate successfully, which would mean that they should be regulated out of existence.

 

[2B]

clifp,

Excellent post with the best summary of the situation I've seen to date.

I can't help but think that all of the bankrupted assets of AIG and Lehman are actually worth far more than their current accounting value. Once the dust settles and an orderly market returns, there's going to be some serious upward revisions.

 

[ladelfina]

If wages had followed inflation, that would have increased the number of people able to purchase a home. If home prices had not been artificially expanded by the vacuum/vortex that the NEED to furnish ever-higher levels of bank/mtg./related debt creates, then people would also have been more able to purchase a home. McCain said workers "couldn't" pick lettuce for $50/hr ($100k/year), but of course if that were the going rate homeownership even at current higher prices would not be an issue, nor would loan defaults or securities collapse. Home prices were not so much inflated [people anxious to instill more perceived value into them, like tulip bulbs] as "ex"-flated from without [we need to keep supplying N+1 loans to the system so we'll scrape the bottom of the barrel and beyond].

I have to laugh about clifp's comment that it's harder to get money back from poor people. Will shareholders or taxpayers get any money back from the CEOs and investment bankers who looted these companies and ran them into the ground with malinvestments?

A certain ideology also insisted it was necessary to break down the barriers between banking, brokerages, insurance, etc. Ok, now they're broken. People seem to take these credit default swaps and derivatives and so forth as a normal part of the financial universe, but they are pretty new:

The credit derivatives market is booming because it meets broad needs and carries well-known benefits. Some benefits are microeconomic:

• Credit derivatives enable lenders and investors better to take credit risks they want and to lay off the ones they don’t want.
• Using them, we can price risk more precisely by separating credit from other risks.
• They improve the intermediation process by enhancing market liquidity, efficiency and completeness.

There are also important macro benefits.

• They may diffuse credit risks across markets and may tend to reduce risk concentration by putting such risks in the hands of those who want and are better equipped to hold them.
• This evolving structure acts as a set of financial shock absorbers for the economy, making financial infrastructure more resilient than in the past.

More broadly, the growth of the credit derivatives market appears to have created a virtuous circle of macroeconomic and financial stability. As an observer of markets and a market participant, I believe that these financial innovations have contributed to favorable financial conditions and thus to strong global growth. In turn, that stable macro environment has legitimately increased risk appetite and willingness to embrace leverage.

Morgan Stanley - Global Economic Forum

Does anyone think any of these objectives has been achieved? Outside of the "legitimately" increasing risk appetite and willingness to embrace leverage?

EMBRACE the leverage.. the leverage is your friend.. you are getting verry sleeepy..

These "innovations" were embraced because they had not been particularly common or particularly well-regulated.. so it seems almost comical that one would ask whether the problem here is too much regulation.

The WSJ is extremely [but not suprisingly] disingenuous here in saying it would have been "nearly impossible" to regulate these items.. but of course that's not true. It's simply a matter of will.


It's also a bit of doddering hornswaggle to blame it on computers as they do. If they could get away with saying "computers can calculate quickly so we have no control over insider trading.." they obviously would.

 

[youbet]

McCain said workers "couldn't" pick lettuce for $50/hr ($100k/year).

Hard to disagree with that, at least in terms of the dollar's current ability to be exchanged for goods and services. If it cost $50/hr for low skill manual labor and if the prices of other goods and services rose proportionately, the value of our accumulated savings would be close to nil.

 

[ladelfina]

He was speaking to a group of union workers.."can't do it, my friends".. implying they would be unwilling to even if that were on offer. I am not arguing that $50 is a correct price- it was an extreme example, just to illustrate that if over the last 10 years people's real wages had not fallen then a certain amount of those people would be more able to buy homes with the normal 10-20% down, etc. Some Democrats were absolutely complicit in their rush to offer loans as a "way out" of this trap of "unaffordability".. rather than working to help raise wages. It just shows that the banksters, sadly, have everyone's private parts in a vise.

youbet, as to the rest, maybe so, but I look at it in a context where people's accumulated savings ARE plummeting (among those who have savings.. esp. anyone with stock in financials, particularly the now-bankrupt ones) and people's accumulated savings in home equity (not talking about the 0% down crowd) ARE in some cases less than nil.

It's a matter of balance. We can't look at suppliers without looking at consumers. We can't look at mortgages without looking at wages. We can't look at packaged loans without looking at real underlying assets rather than fantasy projections inflated to meet quarterly targets. We can't look at the results of regulation without looking at the results of deregulation.

 

[Independent]

The WSJ article gives one example of "bad regulation" - requirements for mark-to-market accounting. They point out that this requires that a market actually exists, there have to be buyers and sellers actively trading these assets to get a reliable market price.

It's possible that the lack of a market reflects some global "system lockup". In that case, the regulation can be improved by giving some accounting board/gov't agency the power to temporarily suspend the requirement for certain classes of assets, for all owners.

It's also possible that the lack of a market reflects a sudden awareness that this particular asset class has been vastly over-valued, maybe due to a bubble. In this case, mark-to-market simply catches up for past errors. The results are unpleasant, but the problem isn't the regulation.

Either way, mark-to-market looks better than any alternative that I've seen.

Clifp gives a different example - he says that banks were required to make loans to high risk people that they would have preferred to turn down. To me, that's a case of the gov't trying to get private businesses to subsidize some activity, rather than spend tax dollars subsidizing it directly. That kind of gov't decision is almost always wrong.

I think that regulations aimed at making the market more efficient, and reducing negative externalities are a fundamental part of modern economies. We'll never get them perfect, but either extreme of "no regulation" or "you can't move without gov't approval" is clearly wrong.

OTOH "regulations" which require subsidies are almost always wrong. (In a related area, taxpayers have been providing a subsidy to mortgage borrowers through the implied guarantee of F&F debt. That subsidy was hidden to most Americans, and I think it is a bad idea, too.)

 

[armor99]

There is a darkside to all of this call to "regulate" the loan industry now. I was watching Fox news last night, and listened to Dick Morris say the following... "And if it were up to me... I would not allow any bank loans to anyone without 20% down..."

I almost fell out of my chair! This is the type of knee jerk answer that completely frightens me. I paid 5% down on my loan. Why? Because at the time I did not have the 20% to put down, and interest rates were at a 40 year low. I am a responsible person financially, and figured out that I could easily afford to do this safely. After two years I met all of the obligations, and was able to drop my PMI as well. But now the thinking is that because "some people" (usually a small percentage) cannot be responsible, now I will not be "allowed" the opportunity to find a good deal for myself. This is the type of thinking that scares me to the core. The idea that for the "common good", I cannot set up my life the way I want to, because too many others MIGHT screw it all up.
As we all know here on the forum, your credit score plays into what rate you can get on a loan etc. What if it was suddenly decreed that everyone gets the same interest rate everywhere, because it is not fair that someone with a lower credit score needs to pay more for a loan, because after all... they will have a tougher time trying to pay it back. Where is the reward for responsible behavior, and a responsible lifestyle? In an effort to make thinks more "fair" and more "equal", in reality neither are produced.

 

[ziggy29]

There is a darkside to all of this call to "regulate" the loan industry now. I was watching Fox news last night, and listened to Dick Morris say the following... "And if it were up to me... I would not allow any bank loans to anyone without 20% down..."

I almost fell out of my chair! This is the type of knee jerk answer that completely frightens me.

This is a little excessive, IMO. As long as PMI premiums are set to adequately cover risk of nonpayment and foreclosure, it seems to be overkill.

Part of the problem is that borrowers and lenders were using "creative" financing to get around PMI. That often meant a traditional 80% LTV first mortgage and a subordinate second mortgage or HELOC for another 10-20%. Now the higher interest rate of the second is supposed to compensate that lender for their additional risk, but in a massive meltdown with a large number of nonperforming loans in a declining housing market, it didn't do so.

Indeed, when we bought our house in San Jose back in 1997, we used an 80/15/5. We were lucky that the value appreciated quickly so a year later we could refi the entire loan balance into one 80% LTV fixed rate loan, but without the ability to buy on 5% down we would have been priced out and we would have lost a lot of wealth we accumulated through the appreciation of that home.

 

[ladelfina]

armor99, we can agree that Dick Morris is a fatuous tool, and I can take you at your word that you are a good credit risk..but really.. think about it.. A bank is handing over what can be a half-million-dollar or more asset with only 5% down. Would YOU do that, if you had a lot of cash and were interested in making personal loans.. let's say, if you wanted to sell your old house privately with owner financing?

I never said people with poor credit shouldn't pay something of a premium; the issue that is facing the global economy is the risk taken on by institutions making bets that assets would not drop 5% or even 1% or even .05%. Those bets are wiped out. Now the taxpayer is looked upon as "the House" who has to make good on those wagers, while -when the wagers went the other way- private companies profited.

 

[clifp]

I have to laugh about clifp's comment that it's harder to get money back from poor people. Will shareholders or taxpayers get any money back from the CEOs and investment bankers who looted these companies and ran them into the ground with malinvestments?
.

The WSJ is extremely [but not suprisingly] disingenuous here in saying it would have been "nearly impossible" to regulate these items.. but of course that's not true. It's simply a matter of will.


It's also a bit of doddering hornswaggle to blame it on computers as they do. If they could get away with saying "computers can calculate quickly so we have no control over insider trading.." they obviously would.

It is pretty much impossible to defend the golden parachutes available to executive of failed firms. But lets not kid ourselves the executives and senior employee at Lehman's, Bearn Sterns and AIG are some of the biggest losers. Hank Greenberg lost virtually his entire net worth $3 Billion when AIG was nationalized. Barney Frank's said when Fannie/Freddie were nationalized the execs compensation package were nullified. (Not sure if that is true... but it is what he said)

I think the taxpayers actually got pretty good deal with AIG. Loaning up to $80 billion at 11% (LIBOR+6%) and getting 80% equity on recently AAA insurance company, may very well turn out to be a hell of a good deal.
(By way of comparison a number of us are looking at loaning money to Sallie MAE (ISM/OSM thread) at ~13% with a max upside of ~2x over 9 years). Freddie and Fannie is a completely different story.

Ladelfina may have a good point about wages and inflation. However, we aren't buying the same home our parents were buying 1100 square foot 3 bedroom, 2 bath. The average american house is now 1800 square feet and has many features only found in top of the line houses a generation ago. So it stands to reason that it would require more of your income to afford them and/or less people could buy them.

I honestly don't know if credit default swaps are on balance good or bad for the world economy. I do think it is a bit much to expect Federal regulator making 60K a year to be able to stay ahead of a Wall St. finance wiz making 300K in controling the risk associated with these instruments.

 

[haha]

youbet, as to the rest, maybe so, but I look at it in a context where people's accumulated savings ARE plummeting (among those who have savings.. esp. anyone with stock in financials, particularly the now-bankrupt ones) and people's accumulated savings in home equity (not talking about the 0% down crowd) ARE in some cases less than nil.

Are you sure you aren't talking about yourself? By far the best thing we who have something can do for ourselves is shut up and try to safeguard. Whenever we get "help" from Washington we end up wishing that we hadn't.

Ha

 

[clifp]

armor99, we can agree that Dick Morris is a fatuous tool, and I can take you at your word that you are a good credit risk..but really.. think about it.. A bank is handing over what can be a half-million-dollar or more asset with only 5% down. Would YOU do that, if you had a lot of cash and were interested in making personal loans.. let's say, if you wanted to sell your old house privately with owner financing?

I never said people with poor credit shouldn't pay something of a premium; the issue that is facing the global economy is the risk taken on by institutions making bets that assets would not drop 5% or even 1% or even .05%. Those bets are wiped out. Now the taxpayer is looked upon as "the House" who has to make good on those wagers, while -when the wagers went the other way- private companies profited.

Every once in a while Ladelfina and I agree this is one of those times.

First let me say up front my first house was bought in a similar situation possibly even worse. I was less than 2 years out of college making good money, I put 10% down (thanks to the bank of mom and dad). The loan was 13.75% (inflation and interest rates were near double digits), it had negative amortization so at the end of 3 years my effective down payment
was like Armor's 5%.

In financial terms our leverage was 20-1 pretty darn high. (I had started my 401K, but I still owed student loans.). Now as it turned out my salary increased, inflation slowed but was still in the 5%+, interest rates dropped. The house was in Silicon Valley and continue to appreciate rapidly. I refinanced, got rid of PMI, just like you did. Everybody came out a winner, me, you, and the banks.

However, there was a 3rd party to our transactions, taxpayers at large. As the recent bailouts have shown, if the situation hadn't worked out and the prices of our homes had dropped it is likely that somebody else would have ended up paying for the risk the banks and we took.

There was another option to loaning us 95% of the money to buying a house. The option was for us to wait and accumulate enough assets to get 20% or at least 10% down. Now if you want to privately provide seller financing for a buyer for 5% down, I completely support your right to do so. Or if Joe's no money down mortgage company wants to get in the business of providing these type of loans, I say go for it. The problem is we the taxpayers were on the hook for the downside of these loans if things went bad, but got no upside when they worked out.

"Oh sure just wait until you get 20%", how the heck to you do these when house cost $500K and go up 10% a year, you are probably asking. Hey nobody said this was easy, but part of the reason house were going up 10-15% was the availability of these no money down loans. In the absence of this type of leverage I think houses probably would have appreciate more slowly.

 

[armor99]

armor99, we can agree that Dick Morris is a fatuous tool, and I can take you at your word that you are a good credit risk..but really.. think about it.. A bank is handing over what can be a half-million-dollar or more asset with only 5% down. Would YOU do that, if you had a lot of cash and were interested in making personal loans.. let's say, if you wanted to sell your old house privately with owner financing?

I never said people with poor credit shouldn't pay something of a premium; the issue that is facing the global economy is the risk taken on by institutions making bets that assets would not drop 5% or even 1% or even .05%. Those bets are wiped out. Now the taxpayer is looked upon as "the House" who has to make good on those wagers, while -when the wagers went the other way- private companies profited.

Just to correct the record... I did NOT call Dick Morris a "fatuous tool", just that I disagreed with a statement he made. I have the ability to separate a statement somone makes, from what I believe about them, and their views in general. In addition, I find name calling to be a counter-productive activity...

I think I can see your point in the rest of the posting... and in one repsect you are correct. If it is in fact MY money that will be taken (via increased taxes) to pay for a banks foolish decision to loan someome much more than they could ever hope to repay, then yes you are correct. I would naturally want to do everything possible to ensure that "my money" will not get used to back up some other persons personal greed... ambition... fantasy... call it what you like. I do not believe that my money (i.e. my taxes) should ever be used by the govt in such a manner.
On the other hand I very much believe that if a business wants to charge a very high fee for a product, or chooses to make a foolish business decision, that they should be free to do so.
After thinking about all of this... I must admit... I am a little torn on these issues. To embrace what I have said fully... would mean that in "my world" there would be no such thing as FDIC for example, and each bank as an independant institution can charge and have policies of their own choosing. There is no govt. backing, and so each bank is now free to go "bankrupt" if they choose to make bad loan decisions. If there is no promise of govt help in bad times, I would think that a bank would have to start being more careful about what they are doing in such a situation, after all.... the goal of all businesses is to make money!
But you know... I like my FDIC.... I think that most people do. But I also understand that it is that very backing, and promise of govt bailout, which allowed problems like this to occur in the first place.
This sort of reminds me of the problem of some utility companies. In certain places power, water, or other utilities might enjoy a monopoly. This might be due to zoning laws not allowing other companies to put up power lines, or extra water pipes etc. Certainly not a "free market" type situation. They are basically a state supported monopoly in some areas. In these cases govt regulation of profits in not unfair, because of the monopoly status given to them by the local govt. I am not sure what would be an OK compromise on this one.... but I enjoy listening to what others think about it.

 

[brewer12345]

I can't help but think that all of the bankrupted assets of AIG and Lehman are actually worth far more than their current accounting value. Once the dust settles and an orderly market returns, there's going to be some serious upward revisions.

Unfortunately for the shareholders of those two firms, the upward revision will come after the assets have moved over to ownership by someone else.

In AIG's case, I have been listening to people in the insurance and reinsurance business moan about how business is suffering because everyone is overcapitalized. I suspect that those who did not do the gawdawful stoopid stuff that AIG did will now have very attractive uses for their excess capital, namely robbing AIG's corpse.

 

[explanade]

We've had a pretty hands-off approach to regulation this decade.

The lending to subprime borrowers wasn't dictated by any govt. law or regulation. That was the finance industry, from Wall Street to mortgage lenders who originated the loans, chasing money. They didn't think the ability to pay loans mattered because they counted on home values increasing indefinitely.

The lenders were going to sell loans on the secondary market so they didn't care about the fitness of borrowers. Wall Street was going to securitize the mortgages and trade them. They cared more about quantity, not quality of mortgages.

The lending industry feasted on subprime borrowers. There were concerns about predatory practices 5 years ago. Virtually every state tried to impose rules to prohibit certain types of practices. At the federal level, they forced the states to back off and the practices continued.

Laissez-faire was the problem. Oh and Dick Fuld made like $500 million as CEO of Lehman. Yeah the federal bureaucrat may not be making as much money. But is Fuld looking smart? Well he's going to pocket a lot of money while ruining the firm.

 

[cute fuzzy bunny]

I'm noticing a pattern.

Financially smart and responsible people with good jobs who bought homes in high appreciation areas are reminiscing about how leverage helped them get a big head start.

Just realize that most people are not smart, nor responsible, many dont have good jobs and many buy in low/no appreciation areas.

Fatuous tool. Thats a good one.

 

[Nords]

I suspect that those who did not do the gawdawful stoopid stuff that AIG did will now have very attractive uses for their excess capital, namely robbing AIG's corpse.

Before we castigate the evil regulators and their red tape, let's look at two examples of compliance (or lack thereof):
Berkshire Hathaway and AIG.

Both sell insurance. Both are publicly-traded companies with shareholders expecting a certain level of performance. Both experienced multi-decade growth under the authoritarian reign of a benevolent despot. Both commanded huge market share and presumably could set the trends in their sectors. Both are presumably capable of reading legislation & accounting standards, following rules, and behaving in an ethical & profitable manner.

Which one has lost billions of dollars, destroyed thousands of shareholders, and sent execs to jail? Is this really the fault of excess regulation?

There is a darkside to all of this call to "regulate" the loan industry now. I was watching Fox news last night, and listened to Dick Morris say the following... "And if it were up to me... I would not allow any bank loans to anyone without 20% down..."
I almost fell out of my chair! This is the type of knee jerk answer that completely frightens me. I paid 5% down on my loan. Why? Because at the time I did not have the 20% to put down, and interest rates were at a 40 year low. I am a responsible person financially, and figured out that I could easily afford to do this safely. After two years I met all of the obligations, and was able to drop my PMI as well. But now the thinking is that because "some people" (usually a small percentage) cannot be responsible, now I will not be "allowed" the opportunity to find a good deal for myself. This is the type of thinking that scares me to the core. The idea that for the "common good", I cannot set up my life the way I want to, because too many others MIGHT screw it all up.

By any chance did you ever attempt to buy a home in the 1980s or earlier? Remember when you not only had to have 20% down but also had to limit mortgage payments to 28% of net income and total debt to 36% of net income?

I wonder which class of homeowners has done better over the years-- the ones who "had" to save to be "allowed" to buy a home... or the ones who could do it for no money down on option ARMs.

 

[clifp]

?


By any chance did you ever attempt to buy a home in the 1980s or earlier? Remember when you not only had to have 20% down but also had to limit mortgage payments to 28% of net income and total debt to 36% of net income?

I wonder which class of homeowners has done better over the years-- the ones who "had" to save to be "allowed" to buy a home... or the ones who could do it for no money down on option ARMs.

My first home was purchased in 1983 with 10% down, negative amortization and money clearly borrowed from parents (of course they had to sign a note saying it was gift, but everybody involved knew that was not really true.) I did have to restrict total payments to 36% of income, but that is why we had negative amortization to get around the limit. Loaning standards weren't so cut and dried back in the good old days. Of course, I am sure they are worse now . If I had waited several year to save the 20% my $156,000 house would have been around $220,000

 

[chinaco]

I agree that innovation and poor or lack of regulation in certain areas is the cause.

Insurance companies walk a thin line. If they have to pony up a lot of cash and they are holding illiquid assets or the value of the asset (for whatever reason) cannot be sold at a reasonable price on the market... they are scr3wed. It is not unlike a run on the bank in the old days before the government backed them with the FDIC.


AIG sold too many CDS. It was a derivative whose risks they did not understand fully. It was a stupid move! I am sure the top execs made huge salaries and bonuses for the big profits when they sold the paper. Imagine nothing goes out the door... money comes in. Now there is a flood going out the door.

When one looks at the derivatives being created and sold... it is a bit frightening. We need go slow regulation for these new instruments.

I am not a fan of too much regulation... but it is a neccessary evil. It is similar to the justification for the police force... a small number of criminals make it an ongoing need.

 

[donheff]

Another example of regulation and Congress exacerbating the problems. Increasing home ownership has been goal of Dem. and Rep. administrations for decades, with much cheering and legislation form Congress. One of the regulation that was put in place was to insure that banks didn't discriminate in lending against poor/minorities. Now this is worthy goal, but lets be honest poor people in general have worse track record of paying back money than richer people...
However, just a few years ago banks were being pressured to loan more underserved communities by Congress and regulators. To a large extent how they meet their poor/minority goals was by making funding available to mortgage broker who worked with poor people with poor credit. Viola Sub prime mortgages are born. Of course banks not being stupid didn't want to carry these crazy loans on their books and sold them off!

Writing off the sub-prime crisis to affirmative action is nonsense. The anti-discrimination pressure was against red-lining not against fair treatment based on individual credit-worthiness. I agree that both parties were cheer leaders for home ownership and looked the other way as the financial sector developed its exotic instruments and traded off their tranches of bad loans. But the investment banks and hedge funds were in it to make easy money not to serve the poor because the mean old government was making them do it.

 

[mews]

By any chance did you ever attempt to buy a home in the 1980s or earlier? Remember when you not only had to have 20% down but also had to limit mortgage payments to 28% of net income and total debt to 36% of net income?

Ah, Yes, the good old days. In my case, I was 35 and my parents were deceased, so no bank of mom and dad'. I squeeeeked through the requirements - fortunately I had no other debt, no car payment etc .... I remember, not fondly, being paid bi-weekly - one check a month supported the place, one supported me.

ta,
mews

 

[2B]

My first home was purchased in 1983 with 10% down, negative amortization and money clearly borrowed from parents (of course they had to sign a note saying it was gift, but everybody involved knew that was not really true.) I did have to restrict total payments to 36% of income, but that is why we had negative amortization to get around the limit. Loaning standards weren't so cut and dried back in the good old days. Of course, I am sure they are worse now . If I had waited several year to save the 20% my $156,000 house would have been around $220,000

Lots of people in the Houston area (and other oil patch locations) took out these types of loans and went into foreclosure. I had a tradional 80/20 loan but I narrowly avoided the big B. I don't recall anyone calling on the government to bail us out. It seemed that the general feeling is that we were "irresponsible" and/or "stupid."

 

[Retire Soon]

We absolutely do need more government regulation and we will see a lot of it in coming months. Several large corporations have demonstrated that independence is too much for them and that they can only operate when someone is overseeing their every move.

We obviously will see very significant increases in government regulation in coming months. Bear Stearns, Fannie Mae, Freddie Mac, AIG, and Lehman Brothers have proven without a doubt that self-regulation simply does not work. These and other financial corporations brought us to the brink of another Great Depression. It's too early to determine if a second one has actually been prevented.

Americans are now on the hook for nearly One trillion dollars in taxpayer money because of the failed leadership of some of America's largest financial corporations. These leaders have demonstrated their incompetence, ineptitude and never-ending reckless handling of shareholders' money. Big business has successfully demonstrated that they need a babysitter and they're now going to get one--full time! Government regulation is the only solution, and certainly not the problem.

Capital - WSJ.com