Posted on 07/03/2009 6:42:23 AM PDT by GOP_Lady
Zero money down, not subprime loans, led to the mortgage meltdown.
What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.
Many policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates. Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards.
(Excerpt) Read more at online.wsj.com ...
Interesting read.
My dad ALWAYS said if you cared enough about something, you would “have skin in the game.” SO SO TRUE!
1) Fraud on mortgage apps
2) Willingness by banks to lower their lending standards
3) Willingness by consumers to take on more debt then they could handle
4) Greed at the corporate and individual level with no respect for risk
5) Bad oversight by the Feds
Sure, writing subprime junk was a bad thing to do but the risk is priced into the rate. The bad lending standards and willingness by banks to loan out money without any responsibility was collective suicide.
That doesn't excuse the Democrats and their incestuous relationship with Freddie and Fannie but the Repubs who supported Graham's bill in 1999 and allowed the leverage limits to be lifted in 2004 have blood on their hands too.
You have a SMART dad! ;-)
I tend to agree with you — it was a combination of irresponsible things.
“This means that most government policies are misdirected.”
There. Fixed it! :)
$90K to go on the farm mortgage and we’re DEBT FREE! Of course, Dear Leader will see to it that I’m still an indentured slave for the rest of my natural days, but at least we’re trying!
You, of all people, with make it, Diana! :-)
No down payment? If you ain’t got nothin’, you ain’t got nothin’ to lose.
Why does the author assume price declines will stop when prices hit their “long-term inflation-adjusted average”
All markets overshoot and undershoot. I would expect housing prices to be like any other market, and decline below their long-term averages in a bear market like this one.
There is a lot of truth in this short article. The CRA did lead to lowering underwriting standards. That was the reason that CRA was invented. Plus is lead to 100% loans and other shakey loans.
The other big bad actor that was not mentioned was the fact that Fannie and Freddie kept raising the cap on their conforming loans. They raised them beyond the economic value of homes..ie..when someone is paying two or three times the payment to buy rather than rent..should Fannie and Freddie still been buying those mortgages? Or should they have decided that things were out of wack and not lent 100% on those greatly inflated prices. At those prices home weren’t a necessity..since you could rent much cheaper.
Now they are right back at it again. Fannie and Feddie should not be loaning over 700k for houses in CA. Why should the govt guarantee at that level when you can rent the same house for 2500 per month? Plus..they are now making 125% loans..which means there will be price inflation and fraud. They will never learn.
Nor does it excuse Bush whose administration expanded Fannie and Freddie's purchasing of sub-prime loans. He also appointed two cronies, Martinez and Jackson as Secretaries Of HUD, to expand the reach into minority loans. He also set up a program to use taxpayer money to provide down payment money to minority at-risk buyers.
There is blame all around. It was greed on all parts. Bush wanted to leave a legacy of "homeownership" and pushed for all sorts of ways to get people buying.
One could argue that nearly all your five factors can be traced back, in large part, to CRA.
CRA was the thin edge of the wedge. To meet CRA requirements, covered lenders were forced to abandon traditional lending standards for minority borrowers. Minorities typically, on average, had lower credit ratings, less income and less money for downpayments. So, the solution to provide more mortgages for privileged groups was to:
- lower credit standards;
- depart from the traditional ratios of debt service to income,
- and go for lower and lower downpayments,
until, effectively, one could obtain a mortgage for more than the sale price of the home (I remember many folks in my area advertising 103% financing - so that folks didn't even have to bring closing costs to the table).
The flip side of this is that covered lenders became more competitive in attracting the mortgage business of minorities. Lenders NOT covered by CRA took notice, and realized that they would become non-competitive if they didn't adopt similar standards.
Then, lenders asked, well, if we can use these standards with minorities, how about with the rest of the population? Why not? If you lower your standards enough, you can apply them equally across the board, and still reduce to close to zero any disparate impact. Once you lower the standard to two questions - are you breathing? do you have a pulse? - EVERYONE qualifies.
And the first lender to figure this out gained a competitive advantage over all the others. At that point, it was just a race to the bottom, the result of the original CRA requirements.
As for individuals taking on more debt than they could afford, this was a direct result of the lowered standards and other actions to accommodate any and all would-be borrowers.
These actions increased by some millions of potential home buyers the number of folks who could now get hocked to buy a house, and also raised the amount of money that any individual buyer could borrow. This led to an imbalance between buyers and sellers in a way that favored sellers - dramatically, in some parts of the country - and thus it became a sellers’ market.
Which meant that if you were a potential buyer and wanted to buy a house that would have been commensurate to your means in the not-so-distant past, you had to compete against every other “enhanced” borrower out there. And since the lenders had lowered their standards for everyone, you had to either bite the bullet and settle for a home that you wouldn't have looked at twice a decade earlier, or you had to bite the bullet, pony up, and either take a “liar loan” (another way to use a legitimate loan structure to illegitimately qualify folks who shouldn't have been), or accept a loan based on a high debt-to-income ratio.
As for “greed,” when you're the president of a bank, and you realize that your mortgage-writing business is going to go into the toilet if you don't lower your lending standards, if you don't look the other way when folks declare their income on no-doc mortgages, etc., but that if you DO do all these things that all your competitors are either doing or are about to do, you'll see earnings per share increase significantly, well, you might not call that greed but rather “returning value to the shareholders.”
This is especially true as the business climate changed to support this nonsense.
When I was a young man, lenders were very strict about their ratios: 28% of your gross income was the limit to service your mortgage, PITI. 33% - 36% was the limit on all debt service.
But I remember in the early to mid-90s (just after the broadening of CRA by Mr. Clinton) reading articles that certain minority groups were financially successful even devoting as much as 40% - yes, you read that right - FORTY PERCENT - of gross household income to their mortgage payments. The stereotype trotted out was that of the thrifty Asian family with the family business who were so frugal that pennies ran screaming in horror from them for fear of being squeezed so tight.
So, now, you're the president of the bank, and you read this “research” that says the old standard of 28% is just too oppressive for enterprising, frugal minorities, and that 40% is still safe. And you're thinking, well, if we stay with the old 28% standard, we're going to lose so much business that the shareholders are going to revolt against me, and we're going to have so much trouble writing minority mortgages that the OCC and the rest of the Feds are going to be coming in the back door with all sorts of ugly pieces of legal papers, and besides, the researchers know better than me.
So, it isn't exactly “greed” that motivates you, but rather, an instinct for self-preservation.
And the otherwise-responsible homebuyer isn't exactly acting on “greed,” either, but rather the self-same instinct of self-preservation.
The only one of your points that doesn't spring directly from CRA is #5 - bad oversight by the Feds. But that springs from the same source as the CRA - corrupt Democrat politicians and spineless Republican politicians.
sitetest
While I’m not a banker, I don’t see much difference between zero down and “subprime”—both say to me that the lender was lending to the uncreditworthy.
These pre-bubble prices appeared to be a long-term equilibrium, meaning that prices would be expected to return to those levels once the government's efforts to artificially increase homeownership receded. Unfortunately, recent attempts by politicians such as Barney Frank (D., Mass.) to again artificially increase homeownership levels might delay this return to sustainable equilibrium prices.
Other government policies are likely to be even less effective in reducing foreclosures. The Obama administration's "Making Homes Affordable" plan focuses on having the government help lower obligation ratios (the share of income devoted to house payments) down to 31% from levels somewhat above 38%. But my analysis finds that mortgages having such obligation ratios at closing did not later experience high foreclosure rates. This suggests that reducing these ratios is not likely to significantly improve the foreclosure problem.
Rather, stronger underwriting standards are needed -- especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell.
Not to worry! After 0bama’s inflation wave rolls over us, you will be making payments in Zimbabwe dollars!
Unfortunately my dearly paid for retirement accounts will be paying me with the same inflated dollars.
Actually CRA was forced on the banks, so it was a great deal of the problem. Regulators saw to it that banks were doing their duty to help the less fortunate. Underwriting standards were relaxed to the detriment of the lender and the borrower in the end.
mortgage free for nine years... thank God.
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