Anatomy of a Train Wreck: Causes of the Mortgage Meltdown

The Independent Institute ^ | October 3, 2008 | Stan J. Liebowitz

[Sopater]

Why did the mortgage market melt down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere as risky as they actually turned out to be?

This report concludes that, in an attempt to increase home ownership, particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s. Regulators, academic specialists, GSEs, and housing activists universally praised the decline in mortgage-underwriting standards as an “innovation” in mortgage lending. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The price bubble, along with relaxed lending standards, allowed speculators to purchase homes without putting their own money at risk.

The recent rise in foreclosures is not related empirically to the distinction between subprime and prime loans since both sustained the same percentage increase of foreclosures and at the same time. Nor is it consistent with the “nasty subprime lender” hypothesis currently considered to be the cause of the mortgage meltdown. Instead, the important factor is the distinction between adjustable-rate and fixed-rate mortgages. This evidence is consistent with speculators turning and running when housing prices stopped rising.

Anatomy of a Train Wreck is included in the forthcoming Independent Institute book, Housing America: Building Out of a Crisis, edited by Randall G. Holcombe and Benjamin Powell.

-------------------------------------------------------------------------------- Stan J. Liebowitz is Research Fellow at The Independent Institute, Ashbel Smith Professor of Economics and Director of the Center for the Analysis of Property Rights and Innovation at the University of Texas at Dallas, and co-author with Stephen Margolis of Winners, Losers, and Microsoft: Competition and Antitrust in High Technology, published by the Independent Institute.

[Sopater]

PDF Copy of Report (29 pages)

[volunbeer]

mark for later

[AngelesCrestHighway]

You can start by thanking guys like asshat Barney Fwank. He and other democrats strongarmed Fannie Mae and Freddie Mac to make loans to people who had no business or financial means to be in a home.

[Lord Jim]

for later

[RC2]

“innovation” in mortgage lending??????? People who took out these loans had no investment in the home. When housing prices sky rocketed, they even took out loans on something that wasn’t theirs and then walked out on the homes. You can’t tell me that the Clinton Admin didn’t know that this was going to happen.

[VOA]

bump

[Lord Jim]

“The recent rise in foreclosures is not related empirically to the distinction between subprime and prime loans since both sustained the same percentage increase of foreclosures and at the same time.”

Do I read this correctly? The “regular American” loans have the same default rate as the “welfare beggar bum” loans? Is this true, and what could it mean?

[Jeff Head]

Activities of liberal Community Organizers, getting the people who should never have had such loans on the rolls for them is one cause.

Then the activities of the organiazations sponsoring those organizers then getting these people lined up with Fannie Mae and Freddie Mac and lenders who had been mandated to make these loans.

Then the liberal (mostly) politicians who pushed the legislation mandating the loans and the regulations (or lack thereof) controlling them) and then were so in bed with the entitites that they received huge campaign recompense to do so.

And the BALD FACED TRUTH of all of that is that maong the many involved, Obamawas an active participamt at all levels, from his community organizer days clear through to now as a U.S. Senator.

BARACK HUSSEIN OBAMA IS TIED DIRECTLY TO THE CAUSE OF THE ECONOMIC CRISIS

[Oldexpat]

These “innovation” in lending allowed in a rash of real fraud on the part of borrows, lenders, appraisers, real estate agents etc. Those “innovations” allowed those with low character to take advantage of the new system and make fortunes at the expense of honest investors and tax payers.
Each foreclosurer where the home owner took at large sums in refinance money or 0ver 100% loans on new purchases needs to be investigated by local authorities for fraud.
Unfortunately, the IRS also will need to look at those people who took money out and then defaulted for unpaid taxes..that will scoop up the innocent and the fraudlent, but the innocent still got the trip to Bali, the college degree or the BMW.

[Terry Mross]

There was another type loan...interest only for about 2 years. When the time came to fix the rate, the house no longer appraised. These people were screwed and, I’m sure, lied to by loan officers. But, there is a document you must sign explaining how and when the rate adjusts. Apparently some didn’t read it. Others understood perfectly what was going to happen but believed the value would go up and they wouldn’t have a problem.

When I was a loan officer I’d tell people to buy an ARM but I explained it very clearly: Your house must appraise and don’t go out buying boats and new truck ‘cause if you do you won’t qualify.

[Mark was here]

Quick guess. Sophisticated investors were smitten with the promised returns of the variable rate. They just missed the notion that no one planned on paying it. Everyone planned on refinancing before the higher rates kicked in. Now we have to bail out the sophisticated investor?

[Sopater]

You can’t tell me that the Clinton Admin didn’t know that this was going to happen.

It is the thesis of this report that this large increase in defaults had been a potential problem waiting to happen for some time. The reason is that mortgage underwriting standards had been undermined by virtually every branch of the government since the early 1990s.

[dashing doofus]

IMO: primary culprits in order of culpability are:

1. the Wall Street money factory (rating agencies and Wall St. investment banks where masters of the universe created bogus AAA bonds, trillions of them),

2. Fannie/Freddie and lack of oversight, with Barney Frank in 2003 and other democratic cronies fighting against because it would make homes “less affordable,”

3. lack of regulation of the derivatives and CDS markets (I think Phil Gramm takes a hit on that),

4. a period of free money when Greenspan kept short term rates near 1% while fighting the 1999-2000 Clinton/Nasdaq stock market meltdown and that recessions,

4 and 5. mortgage brokers who pushed no income verification loans, appraisers, and individuals who are now screaming they are victims of ARMs, even though their own greed and stupidity convinced them that there was free money to be made in housing.

[Captain Kirk]

Excellent piece. Thanks for posting.

[ZGuy]

"starting in the early 1990s"

So Carter's 1977 Community Reinvestment Act had nothing to do with this? Whew! That's a relief to know. /s

[Sopater]

Do I read this correctly? The “regular American” loans have the same default rate as the “welfare beggar bum” loans? Is this true, and what could it mean?

According to the report, it is the ARMs and other "innovative" mortgage practices that are the problem. If a "regular American" extended himself beyond his means by getting a loan that he couldn't afford after the rate adjusted, he was going to wind up in the same trouble. The trouble was based on speculation that the housing prices were going to continue to climb as they had been in the early part of the 21st century, making houses a good short-term investment.

[Rapunzel]

People using their homes as an ATM machine.

Get lots of equity out of the home via a Home Equity Line of Credit (HELOC)and then buying cars they couldn't afford and going on vacations to exotic places just so they could keep up the Jones'.

And then poof, home prices began to decline quicker than you could say "payment on time".

I personally know several people that have had their HELOC's closed down on them due to the fact the home is no longer valued at the price at the time of the loan. And some of those people were using them to 'pay their bills' during down times in their jobs. (Sales people in particular and small business)

I never did fall for the crap the banks were spewing and fortunately my home is paid for and I still will not pull a HELOC on it.

[TomGuy]

July 18, 2005
BusinessWeek

Embracing Illegals
Companies are getting hooked on the buying power of 11 million undocumented immigrants

http://www.businessweek.com/magazine/content/05_29/b3943001_mz001.htm

“The result is a hot new market in the making. With hundreds of thousands of illegal alien households earning enough to qualify for $95,000 mortgages, according to the National Association of Hispanic Real Estate Professionals, ITIN and conventional mortgages taken out by illegals could be worth as much as $60 billion over the next five years. That's pushing big banks such as JPMorgan Chase & Co. (JPM ) to examine the market and upping pressure on mortgage buyers Fannie Mae (FNM ) and Freddie Mac (FRE ) to create a secondary market for ITIN loans.”

[Note: This was 2005 data.]


==


To quote Rev. Wright:

And the chickenzzzzzzzzzzzzzz
are coming homeeeeeeeeeeeeee
to roostttttttttttttttttttt.

[Logical me]

You can start by thanking guys like asshat Barney Fwank. He and other democrats strongarmed Fannie Mae and Freddie Mac to make loans to people who had no business or financial means to be in a home.

Add to that a totally out of control real estate market that overpriced homes out of greed. What really happened is local Government liked the overpricing because States the have property tax assessments made out like a bird. The overpopulation of real estate dealers, loan companies, and banks liked it for the same reason. All these entities were partly responsible for the market problem. Incidentally the overpopulation of attorneys create somewhat the same problem in the legal industry. Greed sucks.

[umgud]

There are a lot of people who bought into housing who now find themselves upside down, regardless of loan type.

One of my kid’s bought a home for $495K while prices were still climbing and now find that the market value is about $250K. They have a good loan and can make the payments, but I’d guess they will never overcome their negative equity and will have to be in the home forever. A lot of folks would just walk away.