GOP Whiffs On Bank Reform, Big Time

http://www.forbes.com/sites/stevedenning/2011/11/22/5086/#356938175b56

Interesting article....the percentage of subprime mortgages made by exempt, private sector lenders was even greater than I thought if this number is accurate. This is pretty much in line with what I’d been thinking, although Toddster’s find about the GSEs being pressured to make Alt-A loans still has to be a significant factor.

“It is clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it. More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending. These private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations. The nonbank underwriters made more than 12 million subprime mortgages with a value of nearly $2 trillion. The lenders who made these were exempt from federal regulations.

By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies--all under congressional and HUD pressure--followed suit. This continued through the 1990s and 2000s until the housing bubble--created by all this government-backed spending--collapsed in 2007. As a result, in 2008, before the mortgage meltdown that triggered the crisis, there were 27 million subprime and other low quality mortgages in the US financial system. That was half of all mortgages. Of these, over 70% (19.2 million) were on the books of government agencies like Fannie and Freddie, so there is no doubt that the government created the demand for these weak loans; less than 30% (7.8 million) were held or distributed by the banks, which profited from the opportunity created by the government.

http://www.theatlantic.com/business/archive/2011/12/hey-barney-frank-the-government-did-cause-the-housing-crisis/249903/

tx!

Yep. There is no discounting the role of gov’t in creating demand for these loans. And at the same time you had shadow banks farming the subprime sector in their own hunt for yield when they were getting essentially no return on their usual investments. None of them appreciated the amount of risk that they were involved in.

Yes, with the GSEs demanding such a huge amount of these loans, there was a race by everyone else to get their own.

Enough so that there was demand by some Goldman customers for synthetic MBS.

“Enough so that there was demand by some Goldman customers for synthetic MBS.”

I remember trying to sort out Synthetic CDOs, CDOs Squared, and all the rest of the derivatives that had been cranked out during the bubble. My head was spinning. I wonder if anybody in charge of investment firms had the slightest idea what all of this stuff was made of. I think they must have trusted their quants and left it at that.

clear to anyone who has studied the financial crisis of 2008 that the private sector’s drive for short-term profit was behind it.

Even if that were so the next question would be whether that greed was pushing or being pulled. there really is a lot to this and easy answers don't satisfy.

And IBD’s suggested alternative is what?

No doubt whatsover that the CRA had an impact. But I can't find anything that validates that Fannie/Freddie was the major player in 2003-2008, and in fact were making changes to allow them to get into the game because they were losing market share rapidly. Also the losses were concentrated in 3 areas - California, Florida, and Las Vegas (and Detroit, although much lower $ amt). If it was just the CRA, the losses would have been catastrophic everywhere - including where I was living with 35% minority, but our prices only dropped about 5%. Furthermore, I knew LOTS of people who were middle class white Americans with Alt-A loans. In 2004-07, getting a mortgage loan was a piece of cake for everyone. They didn't call them liar loans for nothing. Also, everyone was using HELOCs as a piggy bank and refinancing as well to cash out, which is also not a CRA issue. [and yes, CRA should be repealed]

Private sector loans, not Fannie or Freddie, triggered crisis

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.
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

Lastly, I'd note that banks and financial institutions could have gone the more conservative route - which is to require tougher standards on prime loans rather than relax or eliminate standards on subprime and alt-a loans. And with property leverage, it wouldn't have been a big deal anyway, but when you allow financial institutions to lever up close to 50:1, it only takes a 2% deterioration in the value to blow it up. That is why I have a major issue with fractional reserve lending.

“No doubt whatsover that the CRA had an impact. But I can’t find anything that validates that Fannie/Freddie was the major player in 2003-2008, and in fact were making changes to allow them to get into the game because they were losing market share rapidly.”

What you’ve said here is virtually word for word what I have believed about the bubble, and I’m still inclined to agree with you. It seemed to me that while the CRA was walking everyone towards the fire, that the real fuel for the conflagration was coming from private sector rivals of Fannie and Freddie, who were eating F&F’s lunch and taking market share from them in a huge way. The HELOCs, the home-as-ATM, tap your house equity once or twice a year, that was SOP here in California, I knew more people who were doing it than who weren’t. And I know maybe a half-dozen personally who lost their houses as a consequence.

It’s been my opinion that there simply weren’t enough CRA loans issued to have caused the crisis even if every single one of them had blown up. OTOH there was a huge amount of high risk, non-conforming subprime paper cranked out by the shadow banks. No doc Ninja loans, 125% loan to value option ARMS, No Down Down No Job No Asset loans. $800,000 loans to a Ventura strawberry picker. These loans were time bombs and they really happened.

The main thing that has me wondering if I was right is what Toddster dug up about F&F being pushed to buy a huge amount of Alt-A loans. I’m just not sure how big a factor that was in all of it. It may have contributed more than I thought. But maybe it was late in the game and wasn’t a driving force. I’m still open on what it means.

I think F&Fs real exposure was mostly due to their huge size. The only way to have avoided disaster was to have stopped lending in the last couple of years of the bubble. We had a local S&L here in SoCal that got badly hurt even though they had been very conservative in their own lending practices. When the bubble blew it took everybody down. F&F with their huge portfolio (and undercapitalized as well, too much leverage) were the most exposed of all.