Patterico's Pontifications

2/17/2020

Bloomberg Is (Partially) Right: Federal Housing Policy Did Contribute to the Housing Crisis

Filed under: General — Patterico @ 11:37 am



A video recently surfaced in which Mike Bloomberg blamed the federal government, and specifically a law called the Community Reinvestment Act, for the housing crisis. He’s (partially) right. It was (partially) responsible for the housing crisis.

You should know that the guy who wrote the law, Robert Kuttner, thinks his own law is not responsible. He has written a piece titled I wrote the law Bloomberg blames for the financial crisis. He’s wrong. Kuttner begins by setting out Bloomberg’s criticism:

Ever since the collapse of subprime mortgages took down the entire economy, the right wing has repeated a simple story: The government compelled banks to lend money to borrowers who were not qualified. When they defaulted on their loans, banks took big losses and the foreclosures cascaded into a general financial crisis.

That story has the cause and effect backward, yet former New York mayor turned presidential candidate Mike Bloomberg has embraced it. In a 2008 speech at Georgetown that recently surfaced, he attributed the collapse to “pressure on banks to make loans to everyone.” He defended redlining entire neighborhoods as sound banking practice. As Bloomberg explained it, “Redlining, if you remember, was the term where banks took whole neighborhoods and said, ‘People in these neighborhoods are poor, they’re not going to be able to pay off their mortgages, tell your salesmen, “Don’t go into those areas.” ’ ”

“And then Congress got involved — local elected officials as well — and said, ‘Oh, that’s not fair, these people should be able to get credit.’ . . . Banks started making more and more loans where the credit of the person buying the house wasn’t as good as you would like,” Bloomberg said.

Everything about that claim is wrong. I should know, because I wrote the law.

“I am biased towards a belief that the law I wrote did not contribute to the financial crisis. Turns out I do not believe it.”

Kuttner rests his defense on the fact that the CRA, which “created an affirmative obligation not to redline and to provide credit without regard to location,” had language that clarified that this obligation was to be met “consistent with the safe and sound operation of such institutions.” He explains: “We made sure to add that phrase so the legislation would neither pressure banks to make bad loans nor be faulted for doing so.”

What Kuttner ignores is that the language he cites fell by the wayside in practice. There is simply no disputing that the government used the law and similar policies to pressure and in some cases force banks to make loans that Democrat housing officials and the left-leaning media acknowledged carried a higher risk of default. For example, in 2008 Ed Morrissey posted a video in which Clinton’s HUD Secretary Andrew Cuomo proudly explained that a lawsuit settlement with a Texas bank would create “affirmative action” by the bank (compelled by the settlement) that would result in the bank taking a “higher risk” on mortgages that would result in a “higher default rate.” I can no longer find the video but here is Morrissey’s transcript of an excerpt:

CUOMO: To take a greater risk on these mortgages, yes. To give families mortgages that they would not have given otherwise, yes.

Q: [unintelligible] … that they would not have given the loans at all?

CUOMO: They would not have qualified but for this affirmative action on the part of the bank, yes.

Q: Are minorities represented in that low and moderate income group?

CUOMO: It is by income, and is it also by minorities? Yes.

CUOMO: With the 2.1 billion, lending that amount in mortgages — which will be a higher risk, and I’m sure there will be a higher default rate on those mortgages than on the rest of the portfolio

This was hardly the only such settlement, and the settlements were of lawsuits brought under the CRA regarding lending practices in CRA Assessment Areas.

Thomas Sowell explains the mentality behind these lawsuits and cites some facts you may not have heard:

A major factor in the housing boom and bust that created the present economic predicament was massive government intervention in the housing market, supposedly to correct discrimination in mortgage lending. How did they know that there was discrimination? Because blacks were turned down for mortgage loans at a higher rate than whites.

It so happens that whites were turned down for mortgage loans at a higher rate than Asian Americans, but that fact seldom made it into the newspaper headlines or the political rhetoric. Nor did either the mainstream media or political leaders mention the fact that black-owned banks turned down black mortgage loan applicants at least as often as white-owned banks did.

There was never the slightest reason to expect the different racial or ethnic groups in the United States to have the same credit ratings or the same behavior or performance in any other way, when both racial and non-racial groups of various sorts have for centuries had radically different patterns of behavior and performance in countries around the world.

The difference between per capita income in Eastern Europe and Western Europe has long been greater than the difference in per capita income between blacks and whites in America.

Sowell explains in another column that the notion that lenders were leaving money on the table that they could make from totally qualified black buyers strains credulity:

[L]enders are in the business of making money, and they don’t much care whose money it is, so long as they get paid.

Politicians, on the other hand, are in the business of getting votes, and they don’t much care whose votes it is — or what they have to say or do in order to get those votes.

It was government intervention in the financial markets, which is now supposed to save the situation, that created the problem in the first place.

Laws and regulations pressured lending institutions to lend to people that they were not lending to, given the economic realities. The Community Reinvestment Act forced them to lend in places where they did not want to send their money, and where neither they nor the politicians wanted to walk.

Now that this whole situation has blown up in everybody’s face, the government intervention that brought on this disaster in the first place is supposed to save the day.

That fact was recognized by none other than top Clinton housing official Henry Cisneros and the well-known right-leaning publication The New York Times, which once wrote: “As the Clinton administration’s top housing official in the mid-1990s, Mr. Cisneros loosened mortgage restrictions so first-time buyers could qualify for loans they could never get before.” The Times goes on to say that as a private developer (but also obviously as a housing official) Cisneros “encouraged the unprepared to buy homes” as “part of a broad national trend with dire economic consequences.” It says Cisneros “reflects often on his role in the debacle” and says I’ve been waiting for someone to put all the blame at my doorstep”:

Mr. Cisneros, 61, had a foot in a number of those worlds. Despite his qualms, he encouraged the unprepared to buy homes — part of a broad national trend with dire economic consequences.

He reflects often on his role in the debacle, he says, which has changed homeownership from something that secured a place in the middle class to something that is ejecting people from it. “I’ve been waiting for someone to put all the blame at my doorstep,” he says lightly, but with a bit of worry, too.

The Times tries to spin some of this by suggesting that Cisneros’s willingness to take blame is related to his private activities. But his reference to “all the blame” seems to make it clear that he is talking about his actions as a housing official rather than as one of a gazillion developers. And the debacle of which he speaks was one clearly set in motion by the federal government’s actions in loosening standards for first-time buyers in an effort to increase home ownership for low-incoming and minority homeowners:

Indeed, Mr. Cisneros says his mistake was not the greed that afflicted many of his counterparts in banking and housing; it was unwavering belief.

It was, he argues, impossible to know in the beginning that the federal push to increase homeownership would end so badly. Once the housing boom got going, he suggests, laws and regulations barely had a chance.

“You think you have a finely tuned instrument that you can use to say: ‘Stop! We’re at 69 percent homeownership. We should not go further. There are people who should remain renters,’ ” he says. “But you really are just given a sledgehammer and an ax. They are blunt tools.

From people dizzily drawing home equity loans out of increasingly valuable houses to banks racking up huge fees, few wanted the party to end.

“I’m not sure you can regulate when we’re talking about an entire nation of 300 million people and this behavior becomes viral,” Mr. Cisneros says.

. . . .

Under Mr. Cisneros, there were small and big changes at HUD, an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans. Families no longer had to prove they had five years of stable income; three years sufficed.

And in another change championed by the mortgage industry, lenders were allowed to hire their own appraisers rather than rely on a government-selected panel. This saved borrowers money but opened the door for inflated appraisals. (A later HUD inquiry uncovered appraisal fraud that imperiled the federal mortgage insurance fund.)

Now people like Robert Kuttner are trying to whitewash this history, and suggest that greed by banks (which was certainly a factor) was the entire story, and that the federal government’s loosening of standards for minority ownership had no effect.

Was the CRA the whole problem? No. Did it contribute to the housing crisis? Yes.

61 Responses to “Bloomberg Is (Partially) Right: Federal Housing Policy Did Contribute to the Housing Crisis”

  1. Absolutely right that the CRA was one of the multitude government programs/actions that contributed to the housing crisis.

    I love how Thomas Sowell drives home the point that its asinine to believe that lenders would “leave money on the table” from qualified minority buyers.

    whembly (fd57f6)

  2. The law isn all its magnificent equality forbids the rich man as well as the poor man from sleeping under a bridge. Les miserable. Some things never change. The main problem is rich white people trying to chase out the poor to go somewhere else. Try putting a single wide mobile home on a lot in your city (maybe some in the south where we don’t seem to here so much about people sleeping on the street)

    asset (cf1d9b)

  3. The only groups that reaped a windfall from the housing crisis were the left wing organizations payed billions from the shakedowns that Eric Holder’s DOJ orchestrated. A corrupt practice which Trump and Sessions ended.

    https://www.foxnews.com/politics/doj-ends-holder-era-slush-fund-payouts-to-outside-groups

    Munroe (dd6b64)

  4. Good post and nice add-on by Munroe.

    The Democrats made the American taxpayer the victim and then convinced minority borrowers they were the victims, all while stuffing the coffers of their political cronies/community organizers.

    harkin (b64479)

  5. Kuttner rests his defense on the fact that the CRA, which “created an affirmative obligation not to redline and to provide credit without regard to location,” had language that clarified that this obligation was to be met “consistent with the safe and sound operation of such institutions.” He explains: “We made sure to add that phrase so the legislation would neither pressure banks to make bad loans nor be faulted for doing so.”

    What Kuttner ignores is that the language he cites fell by the wayside in practice.

    And this is the perennial problem with leftist thinking. All theory, no practice. The law has a sentence that says one thing, so who cares what happened in reality.

    Bored Lawyer (56c962)

  6. I actually think that Bloomberg’s economic analysis is pretty often correct. He’s a self-made billionaire and, like Gates and Bezos, his business acumen is beyond reproach.

    The problems come when he turns his hand to social engineering and directing the lives of others. At which point he becomes as noxious as any other control freak.

    Kevin M (ab1c11)

  7. The idea that insisting on sound lending when the government regulators are only looking at group statistics leaves the banker trying to claim that certain groups are statistically less sound borrowers. And of course, THAT will never do.

    Kevin M (ab1c11)

  8. “You think you have a finely tuned instrument that you can use to say: ‘Stop! We’re at 69 percent homeownership. We should not go further. There are people who should remain renters,’ ” [Henry Cisneros] says. “But you really are just given a sledgehammer and an ax. They are blunt tools.”

    Let’s stop to take a moment and recognize one of the first known instances of a Democrat politician acknowledging that federal programs really don’t have a whole lot of nimbleness or flexibility to them. And let’s also remind ourselves that this is the party that wants to manage the entire nation’s healthcare.

    JVW (54fd0b)

  9. There was another problem as well — the practice by banks of packaging and reselling mortgages as “mortgage-backed securities.” This had been going on for some time — it was being done since at least the early 90’s. And even then they had been dumping iffy loans into the mix whenever possible. Eventually the practice became a commodity.

    Before the crash, some lenders had been generating loans as quickly as possible, with reduced attention to risk (and not only for CRA purposes, the fees were the point) and bundling them off to Fannie Mae is riskier and riskier packages.

    Kevin M (ab1c11)

  10. For-essentially-ever, mortgage loans were very safe. Why? One big reason is that you can’t bankrupt around a mortgage. They are secured assets, and a consumer either reaffirms the debt during the bankruptcy or they surrender the home. Another reason was the very well established lending criteria that had been in place or decades.

    There was plenty of “greed” involved, as lots of ordinary people bought homes that were beyond them as part of the “flipping” fad, in addition to the market distortions from the BIG GOVERNMENT fans and the others who were taking advantage.

    The results were predictable AND predicted. You cannot screw with markets like Dodd and Fwank and their buds in power did and NOT have a disaster. And, boy, did we have a disaster!

    Looking around at some of the dumb crap that T-rump and his posse are playing with, I wonder if any lessons were learned.

    Ragspierre (d9bec9)

  11. There’s an excellent podcast on this, I think it may have been Dustin who originally pointed it out:

    Podcast:
    https://www.thisamericanlife.org/355/the-giant-pool-of-money

    Transcript:
    https://www.thisamericanlife.org/355/transcript

    Dave (1bb933)

  12. 10. The worst (best?) is yet to come. We’re sitting on a powder keg that will make the 30’s look like a Moulin Rouge soiree.

    Gryph (08c844)

  13. Yeah, the Banking crisis of 2008 when the rubber hit the road, and we learned all the Libertarians actually loved Big Government. Seems the Free market is OK in its place, but when it affects Goldman Sachs and AIG, well that’s different.

    Privatize the profits, socialize the losses.

    rcocean (1a839e)

  14. ‘Privatize the profits, socialize the losses.’

    Reaganomics. 😉

    DCSCA (797bc0)

  15. To a certain extent, though, the banks were also being ridiculous and I’m ambivalent about us having bailed them out. I was in the target age for 1st time home ownership and I know so many people that the banks told them they could afford their loan and everything would be fine and it should have been obvious that this was not the case (I also know people who unnecessarily shortsaled on the advice of their banker when they should have just held on because they weren’t moving towns or anything). People think their banker is looking out for them as part of the self interest of the bank, but they aren’t. Over the long term, it isn’t necessarily a bad deal for the bank if someone pays a down payment, then pays on their loan for 10 years, loses the house in a financial crisis and the bank can sell it in a few years for more than the original price, as long as they don’t have too many of those happen at once. But if they took that willingness to risk too far, shouldn’t they have to pay at least something for it? OTOH, should the country have to pay if the banks fail? I don’t know a good answer to that.

    Nic (896fdf)

  16. Seems the Free market is OK in its place, but when it affects Goldman Sachs and AIG, well that’s different.

    Because letting the global economy collapse, taking peoples’ jobs and retirement savings with it, would have been the right and moral thing to do by the working people.

    Dave (1bb933)

  17. …we learned all the Libertarians actually loved Big Government.

    Who is this “we”, Kemosabe?

    You never heard “too big to fail” from any conservative.

    BTW, your Great God Cheeto passed out MORE money to the farmers his idiot tariffs hurt than then was spent on the bank bail-outs.

    Jes’ keepin’ it real…

    Ragspierre (d9bec9)

  18. the right wing has repeated a simple story: The government compelled banks to lend money to borrowers who were not qualified

    Like as if the “qualifications” made sense.

    No adjustment for different tax rates in different sates. Does this make sense? A 45 year old a would get a 30 year mortgage> Is he going to continue working for 30 more years?

    So you see that a mortgage really rested on the value of the house being more than the mortgage. All the rest was nonsense. All that the qualifications were good for was predicting whether the borrower would or would not default the first year.

    The true fail safe was they didn’t lend above appraised value. The problem was they assumed prices could never fall. Because nobody would sell if it didn’t cover the mortgage. They’d hold out for a higher price. Housing prices could not drop.

    The banks did reduce the income and assets standards. But they did this for everyone. For awhile, they made it continuously easier and easier to by a house. This enabled prices to keep rising.. This enabled housing prices to keep rising. The Community Re-investment Act was simply irrelevant. While that, too, could make it easier to buy a house, everybody in real estate business had other reasons for doing that.

    The real problem was that housing was priced too high – not for a month, but for years, and appraisals didn’t take account of that. They like to say people bought too much house. People didn’t buy too much house; everybody was paying too much.

    The worst problem was they gave adjustable rate mortgages, and judged the ability to pay by the current interest rate. I guess the thinking was if rates rose, they could always sell. Or refinance.

    Then the Fed began raising interest rates. Starting about 2004.

    https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135

    2004

    Jun 30 1.25% Low rates pushed interest-only loans
    Aug 10 1.5% That caused Subprime Mortgage Crisis
    Sep 21 1.75%
    Nov 10 2.0%
    Dec 14 2.25

    It got to 5.25% on June 29, 2006.

    And finally the housing market froze in August 2007. People couldn’t sell.

    But some sales were forced. Foreclosures. And prices dropped.

    On Sep 18, 2007 the Fed funds rate was reduced to 4.75%. But that, of course, didn’t help.

    On Mar 18, 2008 it was 2.25% (Bear Stearns.

    The crisis came about Sept 15, 2007.

    Rates for the remainder of 207:

    Apr 30 2.0%
    Oct 8 1.5% Lehman fails; Bank bailout approved
    Oct 29 1.0% AIG bailout
    Dec 16 0.25% Lowest fed fund rates possible

    Sammy Finkelman (8e96a4)

  19. 17. The global economic collapse is mathematically imminent. Not to say that anyone in charge has shown any inclination towards caring, but it is what it is.

    Gryph (08c844)

  20. Like as if the “qualifications” made sense.

    Gorsh, Sammy, they had for decades.

    All that the qualifications were good for was predicting whether the borrower would or would not default the first year.

    Where do you get this nonsense!

    Ragspierre (d9bec9)

  21. The reason they used to redline was that you could project that the crime rate would rise and people would not want to buy houses there. But during this period of time, crime was dropping…everywhere, because there was a virtuous cycle – the more crime dropped, the more it was easier to drop further. (the root cause was the AIDS virus reaching into the IV drug using population starting about 1988. Not abortion. It took about two years for a significant number of addicts, who made their money by stealing, to get sick. Even after life saving treatment became widespread the reduction in crime continued because the virtuous cycle had been set.)

    So no new neighborhoods became “bad.” The opposite in fact started to happen.

    This is called gentrification and disliked by politicians, who don;t want a change in the voter base. Disliked especially by bad politicians. And they all were because in troubled neighborhoods you don’t have much competition. The Voting Rights Act, as interpreted, ensured they would be protected when reapportionment time came no matter how many people voted with their feet.

    The CRA didn’t cause bad business judgments to be made. It didn’t even put pressure to do so.

    Sammy Finkelman (8e96a4)

  22. The CRA didn’t cause bad business judgments to be made. It didn’t even put pressure to do so.

    So allllll the economists who say the opposite are just wrong?

    Dude, you need to stop writing blog comments and monetize all this wisdom.

    Ragspierre (d9bec9)

  23. SF: Like as if the “qualifications” made sense.

    Ragspierre (d9bec9) — 2/17/2020 @ 5:23 pm

    Gorsh, Sammy, they had for decades.

    They hadn’t made sense for decades. Ever. Security for mortgages rested only on the person borrowing having a good track record of paying bills and on the value of the house compared to the mortgage. Anything else was really arbitrary. They were just fooling themselves if they believed the criteria mattered. Looked valid because the mortgage was always for less than the value of the house, and they did screen for fraud. Otherwise NINJA loans worked fine as long as housing prices didn’t drop. And if they did drop, nothing they screened for mattered.

    SF: All that the qualifications were good for was predicting whether the borrower would or would not default the first year.

    Where do you get this nonsense!

    I think I read that in the paper years ago. Somewhere there’s a study.

    Sammy Finkelman (8e96a4)

  24. SF: The CRA didn’t cause bad business judgments to be made. It didn’t even put pressure to do so.

    So allllll the economists who say the opposite are just wrong?

    I don’t know that they are all economists. Yes, they are wrong. Not because maybe in certain circumstances the CRA couldn’t cause bad business judgments to be made, but because the CRA wasn’t necessary for that. And the reasons why redlining made sense had disappeared.

    Were the loans that turned bad just limited to majority minority neighborhoods? And when they changed standards after the crisis, did they make an exception anywhere because of the CRA?

    Sammy Finkelman (8e96a4)

  25. They were just fooling themselves if they believed the criteria mattered.

    Huh. More idiots that just had things work for decades, not having the SammySense to know the truth!

    Otherwise NINJA loans worked fine as long as housing prices didn’t drop. And if they did drop, nothing they screened for mattered.

    Golly, a NINJA loan (no income, no job, no assets) was just swell, then. Curious, were there housing slumps before? Would a person with a good job, assets, and some other attributes mortgage lenders screened for just roll over and default on their home during a market slump?

    I dun tink so, Luuuci.

    Ragspierre (d9bec9)

  26. Ragspierre @10

    You start ff right, Mortgages were secured loans. Until the appraisals failed to take account of the fact housinng was in a bubble.

    And nobody bought houses that were beyond them. That assumes that the price was right. And if it was what does it matter that what they paid was beyond them to anyone but themselves? A mortgage is a secured loan, remember? You just said it. People signing on for too much doesn’t make it unsecured.

    The problem was they paid too much for what they bought. Prices stayed too high for years, like they did later with New York City taxi medallions.

    It wasn’t that prices were right, and too many people getting in over their heads caused prices to become too low.

    Sammy Finkelman (8e96a4)

  27. The CRA didn’t cause bad business judgments to be made. It didn’t even put pressure to do so.

    but now

    Not because maybe in certain circumstances the CRA couldn’t cause bad business judgments to be made, but because the CRA wasn’t necessary for that.

    Were the loans that turned bad just limited to majority minority neighborhoods?

    Nope. As I noted earlier, there were people buying WAY outside of their ability to service a mortgage because “flipping” got to be a craze. One reason it did was because there were people who were buying houses who would never have been able to under the normal criteria.

    That had little to do with red-lining. (And I’m not letting you off on your whole AIDS riff. I can only deal with so much nonsense at a time.)

    Ragspierre (d9bec9)

  28. 26. Ragspierre (d9bec9) — 2/17/2020 @ 6:00 pm

    Would a person with a good job, assets, and some other attributes mortgage lenders screened for just roll over and default on their home during a market slump?

    Yes, they did. Not everyone, but many did. If they felt the market wouldn’t recover.

    https://www.bankrate.com/finance/mortgages/risks-of-walking-away-from-mortgage-debt-1.aspx

    Strategic default — also called “strategic foreclosure” — on underwater homes became increasingly common during the financial crisis, when such mortgages peaked at 26 percent of all mortgaged homes in 2009. Many homeowners did the math and made a painful but rational decision to walk away from the upside down mortgage.

    And another thing: You can’t predict who’s going to lose their job.

    Sammy Finkelman (8e96a4)

  29. Ragspierre (d9bec9) — 2/17/2020 @ 6:13 pm

    , there were people buying WAY outside of their ability to service a mortgage because “flipping” got to be a craze. One reason it did was because there were people who were buying houses who would never have been able to under the normal criteria.

    Yes, true. It doesn’t mean that the criteria made sense. Now, n certain places there got to be outright fraud.

    But again, a mortgage is secured loan. Even a house someone intends to flip is secured – if the appraisal is valid

    The appraisal process was unsound. It was wrong all these years and maybe still is, but the wrongness didn’t matter for along time.

    That had little to do with red-lining.

    But the CRA did. If what went wrong had nothing to do with redlining, it had nothing to do with the CRA either. The CRA was intended to counteract redlining.

    Sammy Finkelman (8e96a4)

  30. (And I’m not letting you off on your whole AIDS riff. I can only deal with so much nonsense at a time.)

    The Freakonomics people say abortion, but I think it was HIV.

    The logic is impeccable. Low income heroin addicts commit crimes. Sick and dying addicts commit fewer crimes. Less crime means more success for law enforcement. Greater law enforcement means less crime. But it all started with HIV.

    Louis Farrakhan claimed that (Jewish) doctors were giving addicts AIDS. Now that wasn’t true. They were getting it from re-using needles. Blaming doctors for selecting people they thought bad was away to keep addicts using as long as possible. But it was true that more AIDS resulted in less crime. No place more than New York City because New York City had the highest incidence of AIDS. Law enforcement could catch up. This happened everywhere. Are we to imagine that simultaneously, all across the nation, law enforcement suddenly got smarter? No, HIV was he only common factor. It should have happened a better way.

    Sammy Finkelman (8e96a4)

  31. And nobody bought houses that were beyond them. That assumes that the price was right.

    Sure they were and DID, and it makes no such assumption. IF the price is “right” and you don’t have the PRESENT capacity to service the debt, you bought BEYOND your capacity.

    And if it was what does it matter that what they paid was beyond them to anyone but themselves? A mortgage is a secured loan, remember? You just said it. People signing on for too much doesn’t make it unsecured.

    Geez. I guess I’d have to TRY to make you comprehend a bubble. I’m exhausted.

    It mattered to our whole economy. Because the portion of the debt that people foolishly took on that was UNSECURED (because they didn’t have any PRESENT capacity to meet their obligations AND the house they bought was suddenly NOT security for their debt) caused a major upheaval in our economy

    Ragspierre (d9bec9)

  32. Yes there was appraisal fraud, but prices dropped even were there wasn’t. The appraisal process could not recognize a bubble that last fr=or years.

    And we’re still in a bubble. Have been since the Great Depression. If we abolished 30-year mortgages and limited mortgages to a maximum of 15 years, or required a down payment of 33% housing prices would drop. How is that not a bubble?

    It’s all relative.

    Now if too many people try to flip then you get something else: a Ponzi scheme.

    Sammy Finkelman (8e96a4)

  33. Mikey sure is pumping up the Trump economy with his election bid.

    mg (8cbc69)

  34. Even a house someone intends to flip is secured – if the appraisal is valid

    More nonsense! I could make an absolutely valid appraisal today that would be worthless next year for a variety of reasons.

    Ragspierre (d9bec9)

  35. The CRA was intended to counteract redlining.

    Partly. Did you read any of Dr. Sowell’s treatments on this debacle?

    Ragspierre (d9bec9)

  36. Now if too many people try to flip then you get something else: a Ponzi scheme.

    Oferchrissakes…!!!

    Ragspierre (d9bec9)

  37. Never forget:

    Bloomberg News Says It Won’t Cover Owner’s Presidential Campaign Or His Rivals

    Bloomberg News says it won’t cover presidential candidate Michael Bloomberg. Bloomberg doesn’t want the newsroom he owns reporting on him and the newsroom is planning to accommodate his decision. -source, https://www.www.npr.org/2019/11/25/782732936

    Very William Randolph Hearst of him. One thing all billionaires have in common is their own set of self-centered, can-do-no-wrong eccentricities. So far, Americans been flooded with canned commercials featuring Little Big Mike w/images of Obama and assorted players from times past. But his authoritarian character comes through in his comments surfacing on topics from times gone by– from race, to women to banks to soda pop.

    His implosion will come out of his own mouth– when you hear his winkie-caught-in-his-zipper-voice and has to wing it, live, over a prolonged period of time in a debate w/other candidates. “Running to defeat Donald Trump” in a series of pressers is not campaigning– nor a vision for America’s future.

    Beware: Bloomberg.

    DCSCA (797bc0)

  38. Ragspierre (d9bec9) — 2/17/2020 @ 6:33 pm

    IF the price is “right” and you don’t have the PRESENT capacity to service the debt, you bought BEYOND your capacity.

    Bt the price wasn’t right.

    IF the price is “right” and you don’t have the capacity to service the debt, bad for you but not bad for the market. If the price is right, ad they;re reasonably honest, what does it matter to anyone but themselves that what they paid was beyond them?

    And besides which a lot of people did have the PRESENT capacity to service the debt – they just didn’t have the capacity to service the debt IF INTEREST RATES ROSE because they had adjustable rate mortgages. The possibility of interest rates rising was treated as a non factor, because, after all, if worst came to worst, you could always sell if you couldn’t refinance the mortgage and get a new adjustable rate mortgage. It would always be 2006. You might turn out to have paid a very high “rent” but the lender would be OK.

    the portion of the debt that people foolishly took on that was UNSECURED (because they didn’t have any PRESENT capacity to meet their obligations AND the house they bought was suddenly NOT security for their debt) caused a major upheaval in our economy

    The interest rate RESETTING or the house’s value dropping was the problem i most cases. And the security was the value of the house.

    Now assets are also security – if someone had assets they couldn’t just walk away from an underwater mortgage because the lender could sue. But they didn’t really figure on that.

    Sammy Finkelman (8e96a4)

  39. 38. Well, covering his campaign is a problem. I think they are covering it somewhat 0 just nt doing any investigative stories,

    Sammy Finkelman (8e96a4)

  40. Dude, you need to stop writing blog comments and monetize all this wisdom.

    Well, if you want, you could study companies and see if any are dependent on a supply chain in China, and look for others that are not.

    I don’t expect the stock market to drop tomorrow, (Feb 18) though. It’ll take a few weeks for people to look down, and realize they’ve run off the cliff.

    Apple could be in trouble – minor trouble maybe but enough for its stock to drop for awhile.

    https://appleinsider.com/articles/20/02/10/why-apples-supply-chain-is-prepared-for-chinas-coronavirus

    Yet that report was immediately refuted by local authorities in Shenzhen. Officials stated in social media channels that the report was untrue. It also noted that inspections were still ongoing but that factories were expected to resume production “in a timely matter,” and that none of the factory operators have requested any “need to resume production earlier (than the local governments’ recommendations).”

    Yes, the factories may still function, if the Chinese government really pushes it, but how is the product going to get out of China if all of China remains under quarantine?

    That they don’t deal with. What is this Apple Insider anyway?

    Sammy Finkelman (8e96a4)

  41. FWIW, two Federal Reserve economists surveyed the research in 2015, and concluded:

    The CRA provides an incentive structure that could plausibly have motivated banks to originate or purchase loans they would have otherwise considered too risky. However, empirical research indicates that CRA-related loans were a small fraction of the subprime market during the mortgage boom. The literature estimating the effect of the CRA finds small increases in originations–if any at all–and effects on delinquencies that are small or even negative. While we do not have a good estimate of the net costs or benefits of the act, the current best evidence suggests that the CRA was not a significant contributor to the financial crisis.

    The article has links to a large number of other studies, for those who are interested.

    Dave (1bb933)

  42. Any explanation of the 2008 crisis that makes no reference to CDO’s (Collateralized debt obligations), and the failure of credit rating agencies to accurately rate credit is a crap explanation.

    You don’t get a world wide financial crisis because some mortgages go sour. You get a crisis if the rating agencies don’t accurately rate the risk of going sour, and banks are betting hundreds of billions on the idea that that CDO’s based on those mortgages are not going south.

    And if the CRA is responsible for evils, how is it, as noted by Dave, that CRA had little to do with the subprime market, and that Spain had a bigger housing bubble and collapse than the U.S. without having a CRA?

    For actual knowledge on this you should read Krugman’s article in the NYT refuting Caldwell and others who all want to believe that American liberals in the 70’s and 80’s caused a worldwide economic collapse in 2008.

    Victor (4355e3)

  43. And one more comment. Some people seem to believe that the explanation for 2008 was that an American bank was forced by liberals to give poor person a mortgage, and the poor person defaults, and therefore…. the bank collapses and there’s a world wide crisis. As if there’d never been defaults on mortgages before. As if the bank was helpless to mitigate against the risk of the mortgage not being paid. As is every other country wasn’t in the same soup.

    A reasonably accurate picture of the 2008 crisis is portrayed in the movie the Big Short. Watch that movie. You’ll notice that the CRA is mentioned exactly never.

    Victor (4355e3)

  44. Odd that Canada, for instance, did not experience a housing bubble comparable to the US.

    Ragspierre (d9bec9)

  45. I personally make a point of relying on Krugman (economist Enron) and Hollywood for accurate information on complex issues involving BIG GOVERNMENT dicking with the economy.

    Not.

    Ever.

    Ragspierre (d9bec9)

  46. Government apologists and capitalist apologists are both pointing their grubby little fingers at the real victims — the home buyers who lost what little savings they had along with their homes and ended up with only debt — while feeling sorry for the greedy pigs who did not make as much profit as they had thought they would when they thought they would, and both sets of apologists should just go and do something indecent to themselves.

    nk (1d9030)

  47. As I noted above, there was plenty of “greed” all around in this episode, including from ordinary Americans hoping for a quick buck.

    Ragspierre (d9bec9)

  48. Ragspierre. I have yet to see an conservative refute Krugman regarding the economic crisis of 2008 as opposed to insult him.

    Big Short was based on a book Big Short by journalist Michael Lewis.

    The book was shortlisted for the 2010 Financial Times and Goldman Sachs Business Book of the Year Award. It spent 28 weeks on The New York Times’ non-fiction bestseller list.

    It also received the 2011 Robert F. Kennedy Center for Justice and Human Rights Book Award.

    If you have any actual facts to contradict either Krugman or Lewis you should produce them.

    Victor (4355e3)

  49. 43. Victor (4355e3) — 2/18/2020 @ 12:48 am

    Any explanation of the 2008 crisis that makes no reference to CDO’s (Collateralized debt obligations)

    Collateralized debt obligations were essentially a form of insurance, but you can’t insure against an economy wide problem.

    CDO’s enabled the originators of the mortgages to not worry about the soundness of those loans beyond a period of a year or two. And made the problem an economy wide problem.

    I think I can point out a flaw in bankruptcy law. Bankruptcy law does not prioritize recently contracted short term debt. If it did then you wouldn’t have such a crisis. It is prioritized but only for debts contracted after a company goes into bankruptcy court. blockquote> and the failure of credit rating agencies to accurately rate credit is a expletive) explanation. The credit rating agencies, which were specifically designated by law or regulation, they were not used because their customers wanted to use them; they were used because they were required by law. So nobody cared about the quality.

    And again their analysis was not good against changes in economic conditions.

    You don’t get a world wide financial crisis because some mortgages go sour. You get a crisis if the rating agencies don’t accurately rate the risk of going sour, and banks are betting hundreds of billions on the idea that that CDO’s based on those mortgages are not going south.

    You get it because they had become short term debt = money.

    Sammy Finkelman (393233)

  50. 47. nk (1d9030) — 2/18/2020 @ 6:17 am

    the real victims — the home buyers who lost what little savings they had along with their homes and ended up with only debt

    Yes, these were the real victims, and would have been victims even if the loans were not passed on.

    THE PRICE OF HOUSING WAS BID UP TOO HIGH. This is something some people who originated explanations refuse to recognize.

    Sammy Finkelman (393233)

  51. THE PRICE OF HOUSING WAS BID UP TOO HIGH. This is something some people who originated explanations refuse to recognize.

    And driven so high because of the subsidized demand created by CRA along with societal and political beliefs in home ownership. Much like college education today. Many people, not just people at the low economic end but also some of the wealthy, have little need and thus little genuine desire to own a home. Home ownership comes with huge hidden costs and responsibilities that many, many people are not qualified to deal with nor have any desire to deal with. Thus this phony demand pushing prices for existing homes in good location higher and thus driving a housing boom in what were previously less costly real estate markets. As prices in better locations grew, condominiums and such sprang up on speculation in those locations. Which themselves were subsidized not by CRA but by the general “guarantee” of the collateralized property itself. With other speculative markets, like the stock market, the ability to short the stock provides some degree of a feedback mechanism. As short positions rise, other players can see with some degree of transparency that they may be becoming a bit irrational. The ironic thing with CDO’s was that they actually DID provide a mechanism to short the real estate market. The problem with that though was that hardly any buyers were (or even are today) aware that it exists. Though to be most accurate, CDO’s were way too diversified to apply any feedback for a specific piece of real estate. And to be even more accurate, CDO’s ideally, originally diversified such debt across multiple markets. As they became more heavily loaded with real estate, because that’s where the debt was, they became more lucrative for those who understood how over leveraged the real estate market was. The problem wasn’t that CDO’s existed, it was that no sufficient number of players in the real estate market was paying attention.

    PTw (894877)

  52. Victor (4355e3) — 2/18/2020 @ 12:48 am

    For actual knowledge on this you should read Krugman’s article in the NYT refuting Caldwell and others who all want to believe that American liberals in the 70’s and 80’s caused a worldwide economic collapse in 2008.

    Paul Kruman has an opinion article about this in the New York Times today:

    https://www.nytimes.com/2020/02/17/opinion/bloomberg-buttigieg-economy.html

    The title in the printed paper is: Democrats of the Living Dead. He calls this an example of azombie idea.

    But sometimes zombie ideas also manage to eat centrists’ brains. Sure enough, some of the most destructive zombies of the past dozen years have shambled their way into the Democratic primary fight, where a couple of centrists are repeating ideas that were thoroughly debunked years ago.

    And as it happens, the experience of Europe, and Spain in particular, provides some of the bullets we should be using to shoot these particular zombies in the head.

    So let’s start with the origins of the 2008 financial crisis, a topic that remains relevant if we want to avoid repeating past mistakes.

    Although few saw 2008 coming, in retrospect it was a classic banking panic, the type of thing that happened frequently before the 1930s. First, lenders got caught up in a gigantic housing bubble; then, when the bubble burst, much of the financial system just froze up.

    What made this panic possible, after two generations of relative financial calm? The answer, clearly, was the erosion of effective financial regulation over the previous few decades. [More exactly, it was shadow banking – non-banking instruments acting like bank deposits. But leave this be.]

    But right-wingers refused to accept the obvious. Instead, they pushed an alternative narrative in which liberals somehow caused the crisis by forcing poor innocent bankers to lend money to people of color (they weren’t usually that explicit, but that was the clear message). This narrative was so nakedly self-serving that it’s hard to believe that anyone took it seriously; but some influential people bought it. And among those people was Michael Bloomberg. [who is not a very careful or self-checking thinker, in spite of having stumbled upon something that was very useful for Wall Street.]

    At this point the evidence against the liberals-did-it story is overwhelming. The surge in bad loans came neither from government-sponsored agencies nor from regulated banks, but from unregulated mortgage originators. The fallout was so severe because investors believed, wrongly, that fancy financial instruments protected them from risk.

    And, crucially, the housing bubble was an international phenomenon: Spain had a bigger bubble than we did, followed by a worse slump. Did U.S. liberals force Spanish banks to make bad loans?

    Paul Krugman would give Michael Bloomberg some slack if he would admit he was taken in by right-wing disinformation.

    With Pete Buttigieg the zombie idea, he says, is an obsession with government debt.

    Sammy Finkelman (393233)

  53. PTw (894877) — 2/18/2020 @ 8:08 am

    And driven so high because of the subsidized demand created by CRA along with societal and political beliefs in home ownership.

    While the CRA, and other efforts aimed at increasing home ownership, could have put some upward pressure on housing prices, it was not a big factor.

    The real problem was the adjustable rate mortgage. This was done because mortgage debt (and most loans by banks) is essentially banks borrowing short term and loaning long term. Adjustable rate mortgages (and selling off the loan, too) protected banks from loss, and credit rating agencies rated the packaged loans as of the greatest quality.

    As time went on and housing prices climbed, lending standards, some of which mattered and some of which didn’t (the proportion of the home value used for a down payment mattered, for instance) went down because they needed the buyer to be able get the loan. Pretty soon, in reality what you had was a community wide Ponzi scheme in many places in the country..

    With other speculative markets, like the stock market, the ability to short the stock provides some degree of a feedback mechanism. As short positions rise, other players can see with some degree of transparency that they may be becoming a bit irrational.

    But if you buy stocls on margin you can’t short it.

    In 1929 much stock was bought on margin. Now margin is I think limited to a maximum of 50%. But houses were bought at 85%, 95% or even 100% margin.

    CDOs were split into tranches. Like as long as 90% or less of the mortgages were paid that particular bundle would be paid in full. Etc etc. And the historical record showed that no more x% of mortgages defaulted. The problem was that the historical record was not a suitable basis for analysis.

    Sammy Finkelman (393233)

  54. Sammy, what percentage of the problem loans were ARMs? I dunno.

    Ragspierre (d9bec9)

  55. Victor,

    1. Apparently you don’t read very well.

    2. An appeal to authority doesn’t impress me.

    Ragspierre (d9bec9)

  56. it was not a big factor.

    Not by direct footprint size, no, but by moral hazard created at the most vulnerable end of the market. And once those standards were lowered for CRA customers, it was quite hard for banks to deny things like “no money down” and such to people who were obviously of higher quality risk. CRA effectively amplified the risk taking in other areas. On the whole, this was driving prices up which led to even greater demand for loans. So long as the pool of “capital” was effectively infinite, the more loans were made for higher price homes with lower down payments, absorbing the demand without accounting for the risk. Because even those loans were effectively insured by the deposit insurance. And as you say, they needed the buyer to be able get the loan. Pretty soon, in reality what you had was a community wide Ponzi scheme in many places in the country.

    Agree somewhat on the adjustable rate mortgages for low end borrowers. ARM’s for people who have the ability to refinance or other substantial assets beyond their home are not an issue. I have one myself, acquired in 2012, which has worked out well for me. But I have considerably more flexibility than someone who can’t even scramble together even a 5% down payment.

    But if you buy stocls on margin you can’t short it.
    Don’t know if that’s because it’s illegal which doesn’t mean you can’t do it in a shell game. But that’s not really to my point. Even if you buy a stock on margin, the knowledge is out there in the short market for that stock that other players don’t see things your way. I’m not into that sort of trading but I’m guessing it gets harder to buy a stock on margin as the short positions increase on that stock. Or at least I hope so.

    But houses were bought at 85%, 95% or even 100% margin.
    True. Though relatively speaking, real estate holds its value better than stocks. It takes a significant, usually natural disaster to bring the value of a piece of real estate down to zero. Meanwhile, companies on the stock markets go out of business all the time.

    The problem was that the historical record was not a suitable basis for analysis.
    Well, it never is really. In anything. But things have bounced back, so over the long haul it has been. And now as this is history, and we learn from it, we have a better record. Of course there’s no guarantee anyone will learn anything. You just gotta have faith.

    PTw (894877)

  57. Ragspierre,

    Apparently you don’t read well. For example you haven’t read the Big Short. Nor Krugman’s article in the New York Times. Nor any reputable economist. Nor anybody you can cite with an actual explanation of the 2008 crisis.

    Instead you prefer to believe a zombie lie apparently because it comforts you. But actually doing any research on the subject is beyond you.

    Victor (4355e3)

  58. actually, Victor, you’re full of crap.

    Ragspierre (d9bec9)

  59. 57. PTw (894877) — 2/18/2020 @ 9:53 am

    And once those standards were lowered for CRA customers, it was quite hard for banks to deny things like “no money down” and such to people who were obviously of higher quality risk.

    Well, that’s the thing/ The CRA wasn’t taken all that seriously. Some people would sue and then the bank would maybe do something, and if it did it would not feel compelled to be “fair” to other would be borrowers.

    And they weren’t the first place where standards were lowered.

    Agree somewhat on the adjustable rate mortgages for low end borrowers. ARM’s for people who have the ability to refinance or other substantial assets beyond their home are not an issue.

    Or for people who hae no intention of staying in their house long. It was maybe good for a couple where one person was a medical student, whose income would be expected to rise.

    I have one myself, acquired in 2012, which has worked out well for me. But I have considerably more flexibility than someone who can’t even scramble together even a 5% down payment.

    People can gamble if they can afford to lose.

    Though relatively speaking, real estate holds its value better than stocks. It takes a significant, usually natural disaster to bring the value of a piece of real estate down to zero.

    Yes real estate has less chances of falling down to zero, but the question is Can you lose all your equity? If you paid only 5% down – and the first few years barely pay any principal, it can;’t afford to drop more than 5% or so.

    BTW, A house located in the wrong place can lose practically all its value and they have in places like Detroit and South Bend, Indiana. But that’s not thee point.

    The problem was that they were applying a mathematical formula in considering history.

    Sammy Finkelman (393233)

  60. Ragspierre (d9bec9) — 2/18/2020 @ 9:41 am

    Sammy, what percentage of the problem loans were ARMs? I dunno.

    A good question. But the problem goes beyond ARMs. It created a situation where some loans were likely to default if interest rates rose, and if enough did, housing prices would drop.

    Sammy Finkelman (393233)


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