Hey, Barney Frank: The Government Did Cause the Housing Crisis - Peter Wallison - Business - The Atlantic

Government policy had almost zero to do with the housing/financial crisis. That government policies made very, very small impacts is true, but the overwhelming majority of the problems were created solely by private parties/entities without any government mandate whatsoever.

Really? No Fannie & Freddie culpability? No Barney role?

I agree there were some very stupid home buyers.

Did I miss the word 'derivatives'? Anything about unregulated markets?

Any knowledgeable economist knows the housing crisis was primarily caused by the unregulated market in mortgage based derivatives

• Lenders profit from fees associated with making a loan.
• They don't care if the buyer can pay for the loan because they don't intend to carry the loan to term.
• Lenders package the bad loans into securities then pay a ratings agency to give junk securities a AAA rating.
• Institutional investors buy the securities without studying the underlying value because the ratings agency gave it a AAA rating.
• Lenders buy credit default swaps to cover the losses on the loans which they know will collapse.
• Insurance companies sell the credit default swaps at values less than they should based on the risk because ratings agencies have given the securities a AAA rating.
• Banks leverage themselves into insolvency in a greedy feeding frenzy using federally insured deposits to invest in junk.
• Everything is fine as long as the housing price bubble keeps expanding.
• Then the bubble bursts.

Housing crisis was a result, not a cause.

Ever heard of the

"mers" milkshake?

here....from Congresswoman, .Marcy Kaptur:

http://www.youtube.com/watch?v=votgh-sMOcs

on foreclosure Fraud.

Here, I found another one....

from then Congressman, Alan Grayson of Florida:

http://www.youtube.com/watch?v=AqnHLDeedVg

mers...

backroads

Really? No Fannie & Freddie culpability? No Barney role?

Yep! One single Democratic congressman (during a time DOMINATED by the GOP) did all this. And you do understand that Fannie & Freddie only played a tiny roll in the big picture and at the tail end, right?

I agree there were some very stupid home buyers.

And of course, the insatiable greed of everyone else in the banks and Wall $treet had nothing to do with it????? Explain the logic process here. PLEASE.

Years ago, the mortgage market was a balanced process between banks and home owners. Without governmental intervention, banks tended to only loan to those that had high probability of repayment. This seemed to exclude many within certain low income geographical zones and banks were accused of "red-lining" out low income communities.

You mean decades ago?

Fannie and Freddie have been buying mortgages for a while.

Policy caused the financial crisis and policy needs to be readdressed to bring balance back to the financial markets.

Two things.

The FCIC revealed that CRA loans were of *higher quality* than private loans made by banks to subprime borrower that didn't qualify by those guidelines. (Not to mention that prime loans made 95% of the whole market anyway).

The second thing is that.....policies created *INCENTIVES*

But Financial Institutions invented ways to get more money off those incentives. Like using Fannie and Freddie to churn out loans and remove them from the books while generating lots of fees.

But let me ask this....200+ trillion in financial instruments were created off a surge of 5 trillion in mortgage lending. What regulation, policy, or anything created those financial instruments?

The answer is none. They exist in the *unregulated* derivatives market.

If I gave $100 to jump off a roof would you do it? This is me providing you *an incentive*. So the question is....Am I responsible for *your actions*

It's pretty funny because people routinely blame borrowers individually all the time. About irresponsible home owners, people who took on too much debt, etc, etc. And the situation is pretty identical. A massive incentive was created to encourage that behaviour.

So I see banks/financial institutions are exempt from the exact same behaviour as irresponsible individual borrowers? Not only that, but they were massively more irresponsible in terms of the total amount of debt.

All that aside, the gov and business are in it together for the most part these days. If you're a wealthy corporation, bank, person, etc. The government is addressing your needs. Who the government is not working for is about 99.999% of the rest of us.

The policies that started enabled the real-estate market to overheat are still in place.

Yes it comes from having banks involved in both lending and trading in securities. It has nothing to do with incentives to make mortgage loans more accessible. No government policy required lenders to make bad loans. Fannie and Freddie maintained high lending standards until they became "for profit" public companies. At that point the felt they had to invest mortgage based securities to complete. They were losing market share. This had more to do with their insolvency than loan failures.

Too big to fail is also too big to regulate and too big to prosecute.

"Deregulation" stories for you, veralto,

from the Congressional Oversight Panel, or,

Senate.cop.gov.

read on,

http://www.senate.gov/general/search/search_cfm.cfm?q=deregulation&site=default_collection&num=10&filter=0&x=15&y=8

Peace to all*

... In 1992, President George H.W. Bush signed the Housing and Community Development Act of 1992. The Act amended the charter of Fannie Mae and Freddie Mac to reflect Congress' view that the GSEs "... have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return;" For the first time, the GSEs were required to meet "affordable housing goals" set annually by the Department of Housing and Urban Development (HUD) and approved by Congress. The initial annual goal for low-income and moderate-income mortgage purchases for each GSE was 30% of the total number of dwelling units financed by mortgage purchases and increased to 55% by 2007.

The intent was that Fannie Mae's enforcement of the underwriting standards they maintained for standard conforming mortgages would also provide safe and stable means of lending to buyers who did not have prime credit. As Daniel Mudd, then President and CEO of Fannie Mae, testified in 2007, instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: "We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families.

... "Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates, interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors."

... Following their mission to meet federal Housing and Urban Development (HUD) housing goals, GSEs such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) have striven to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a 30-year fixed-rate mortgage with a low down payment... and the continuous availability of mortgage credit under a wide range of economic conditions." (HUD 2002 Annual Housing Activities Report) Then in 2003-2004, the subprime mortgage crisis began. The market shifted away from regulated GSEs and radically toward Mortgage Backed Securities (MBS) issued by unregulated private-label securitization conduits, typically operated by investment banks.

http://en.wikipedia.org/wiki/FNMA

All agree that derivatives were an important tool in the process of selling off mortgages. F&F were and still are deeply involved in this process. These agencies established MERS to ease the process.

This just goes to show that *you* should not be talking about this.

Derivatives have very little to do with the ability to sell off mortgages. The simple fact is that the government created an incentive for banks to make lots of mortgage loans. That's it.

They created a system to make profits off that (loan generation fees, packaging mortgages as investments, and betting on mortgage pools using derivatives).

Derivatives don't even have to be associated with mortgages. In fact, of the 700+ trillion in existence, most of them have nothing to do with that. Most are bets on bonds of companies or governments.

Policy allowed banks to sell 100% of each loan (previously they were required to hold 10%.)

Bull@!$%#.

I see we're just gonna wing numbers out there.

That's interesting considering banks held trillions of what is called "performing loans" on their balance sheets in 2008. Sorry, but you are wrong.

FHA has been around a long time, government has always bought loans off banks balance sheets. Even with that, at the peak, 50% of loans were still with private banks.

This policy means that loan originators have no care about repayment prospects.

The bank doesn't *HAVE* to sell the loans to the gov.

Just amazing.

So, by your reasoning, it's *not my fault* if banks give me 0% interest loans and I go bankrupt as long as I am trying to make money?

There was an incentive, and they abused it (like a lot of people did in those days).

Agreed, this is in fact is due to policy that needs change.

So they need more regulation, not less.

Agreed. Early in the real estate price run-up most loans were considered low risk and could be packaged with the few high risk to bury them and create "low risk" overall derivatives.

You know a SIV isn't a derivative right? Neither is an MBS.

A derivative is a *bet* against an underlying financial instrument.

A CDS is a derivative (one of the more popular ones). SIVs and MBS are the underlying financial instruments.

What caused the complete collapse wasn't a mortgage problem. If it was just a mortgage problem, it wouldn't have even mattered. A 30% cut to 10 trillion in mortgage value, *big deal* when you consider overall wealth and GDP.

It's this simple.

Lehman was large enough to trigger it, made so large because of the reversal of Glass-Steagal. There are bets against Lehmans "debt", other institutions were depending on getting insurance against those debts, if not, they have to write down the debt immediately (by the rules back then, you have to write down debts by value at various time frames, daily, weekly, monthly, etc)

AIG had taken on huge levels of that insurance, which they couldn't pay out. Given how much larger AIG was and the real assets on board, the exact same thing, everyone had bets on AIGs debt.

At that point, everyone is insolvement. And due to the fact that now almost all the Wallstreet banks have FDIC accounts in them (remember, investment banks and stock banks were allowed to combine or have operations in both areas), the FDIC was obligated to take immediate recievership of almost all these banks.

Of course, that's probably what they should have allowed, because the gov backstopped them all anyway. This would have cost a lot of money, but the gov would have actually then had a direct line to get credit into the economy very directly. Instead of trying to prop the situation up.

The people that judged them to be AAA worthy were all *private* credit rating agencies. S&P, Fitch, Moody's are all private institutions.

But by '05 or so with real estate prices so high, all loans would soon be underwater and essentially be "high risk."

No idea what this even means.

Prices nationally are down 30%, most *aren't* underwater point of fact.

The need to bury high risk mortgages seems to have been born by the need to rid mortgage loan banks (F&F included) books of CRA type loans. But over time grew to include essentially all new loans due to the overheated real estate market.

subprime CRA loans *outperformed* non-CRA subprime loans issued privately. (Which, banks issued many, many, many more loans that was ever required of them).

Agreed. The control should be to return to the requirement that mortgage banks hold 10% of each loan for the life of the loan. Loan agents would then be pressured to make good loans. This control mechanism is easily audited by governmental oversight.

That doesn't fix that. Private ratings companies. In fact, that has nothing to do with why they were AAA rated.

Investment funds bought the junk.

The banks run the largest investment funds (and have the largest amounts invested).

congress to issue TARP. We the tax payers stepped into the mortgage buying space vacated by the investment funds. Congratulations :)

Not really. TARP didn't unfreeze the credit markets.

It allowed banks to survive, but it didn't do much to unfreeze credit. Eventually the Federal Reserve just had to start buying various assets on the private market.

__________

There is an incentive both publicly and privately for people to have homes. But what I would look at is this *exact* same thing happened to the Commerical Real Estate Market. Which offers the conclusion that it's not F&F.

It's rather a combination of things. There's no F&F in the commercial real estate market. But banks pretty much did the same thing and the same kind of bubble collapse happened.

You're deluded to believe the government had nothing to do with this financial fiasco. One guarantee you can have in life is that while people can frack-up, it takes government to really make a mess of things.

No, I am in the business, and have been for nearly 30 years. The government did not cause the mortgage markets to go stupid, the private sector did. Period. End of story.

You are the one who is deluded if you think the government "caused" any of it. The government picked away at the margins ONLY with affordable housing/low income mortgage lending provisions. But the private sector first ran far afield of what the government provided in both it's lending standards (underwriting) to something radically more risky than anything anyone in government ever proposed, much less required - the private sector created all the liars loans and interest only ARMS and negative am loans that many of us in the business could see would obviously default at some point.

Fannie and Freddie weren't buying any of that crap either, until the very end of the mortgage market debacle, and did so because market (ie. quarterly profit) pressures compelled them to compete with other PRIVATE entities, and then did so by buying generally only the safest tranches of the elaborate derivatives created (by the PRIVATE SECTOR) from what would otherwise have been vanilla MBS.

If the private sector hadn't sliced and dices MBS into derivatives where the market later discovered no one really knew who was subject to what risk from default, the mortgage collapse never would have happened. And the private sector sliced and diced precisely to jack up returns to satisfy (ignorant) private sector investor demand. And the criminal ratings agencies lied to investors regarding what was and was not in these sliced and diced securities, NOT the government.

The markets for these derivatives never would have frozen up, as they did, if investors knew what they were getting (ie. if only simple MBS existed), because even with really crappy subprime loans, and even in a really crappy housing market, if you have a package of loans with an anticipated default rate of (even) say 50%, and had an expectation of a 50% recovery from the underlying collateral, the security would still be worth 75% of face value.

But because of the 100% totally private sector generated "securitization by tranche" system the private sector set up, no one knew if they could recover anything from any particular security, so no one was willing to buy even the perfectly "good" ones at an appropriate discount.

The real problems were not at all created by, or related to, any government policies.

Incentives created by policy is the control point or "standard" in "the art of process thinking." The incentive to make new loans by virtue of the fact that F&F bought loans giving the banks new cash to continue the loan making process played a decisive roll in the overheated real estate market.

Again, this is simple.

Who is irresponsible for taking on more debt than they need. You....or the Bank? If the Bank gives you an ultra low rate 0% interest loan, and is upfront with no fraud, *you* are responsible for the level you take on.

The exact same is true of taking on too many mortgages for private financial institutions. Regardless of any benefits for them to do so.

Can't sit there and say...."But we could make more money because this was in place.....", that's the same as me taking on 100 no interest loans that I could never pay from the bank. Same thing.

Private Banks had money to be responsible with.....they choose to be irresponsible. They had the choice.

The fact that banks no longer must hold 10% of each loan makes ensuring those loans perform a low priority.

Again, that's not true.

At the time of the crisis banks had trillions of dollars of performing loans on their sheets. From credit cards, to personal loans, to helocs, to cars, to mortgages. I guarantee it was more than 10%.

And if they were holding so much, they have a *responsibility* as large as they are to make sure they can survive.

No one told them to hold near 0 cash on their sheets (which is what they all did). BoA had 1+ trillion in debt and they were holding less than 2% in cash or short term. That was a decision boards made because they reasoned they could make more money by not holding cash which was not returning much.

That's all business reasoning that has nothing to do with anyone except what they want to tell investors to make stock prices (and thus their own personal rewards) go up.

Interesting data, could it be that since banks no longer must hold 10% of each loan made and could count on F&F to buy 100% of each loan

Again, banks were holding much more than 10% of the mortgage market in 2008. (Let alone that mortgages wasn't the only thing they had loaned in an out of control fashion).

And again, the *same exact thing* happened in the Commercial Real Estate markets. Where Fannie and Freddie played no role.

So explain by your reasoning how that happens. Had the same boom and same collapse. With no one buying up those loans except on private markets.

, allows the bank to first double then triple then quadruple then...each dollar deposited in their bank and each dollar loaned to them by the Fed?

Uh....no it doesn't.

Fannie and Freddie buying a loan off a bank sheet doesn't translate to the bank making 100% of a loans value. Remember, the bank provides capital for the original loan. So they are out whatever that was.

What it does is allow increased processing. Which means more fees for Banks. The second thing is it allowed them to shift risk off their sheets depending on what they wanted to do. None of that is leveraging, and if you look at the brick banks, they aren't allowed to take on more liabilities than they have in assets.

Wall Street banks leveraging themselves 10 to 1, 20 to 1, 30 to 1, was largely based on buying up various assets and then using the equity of those assets to get margin for other trades.

Taking this viewpoint seems to make the savings side of banks' operations a nuisance since banks seemingly no longer need to raise additional cash for future loan making activities.

In terms of the Federal Reserve, at such low rates, that may be the case. But then again, the Power of the Federal Reserve comes from Private Banks, it's a private institution run with a majority public officials and minority private officials.

No, this is a simple process to analyse for "process thinking." My self preservation balances my incentive for the $100. However, if there is a pool to jump into...then ya I'll do it!

There's was no pool.

There was no government back stop. That's why they had to come in and back stop everything. Because all that was being provided was an incentive. There was no guarantee the gov would bail them out.

F&F buying mortgages doesn't provide that guarantee either.

And it doesn't change the situation. You imply bank operators didn't have to act in a responsible way because there was free money. That's no different than most private individuals in the 2000s. You're saying they didn't have to act responsibily because money was almost free.

It's even more important for a bank to do so because they are responsible to millions of private clients as well as shareholders. As well as the fact of being so large means their decisions have big consequences for the economy as a whole.

CRA loans were enabled by the so-called liar-loans, which together by themselves did not create the mess. But in 1998 everybody became eligible for liar-loans and the mortgage loan making process gradually inflated the real estate market.

A) 35% of us didn't live in homes.

B) 40% of people who did owned their homes free and clear

So no, not all of us jumped "into the pool" and you're ignoring the fact that it's simply not acceptable to behave irresponsibly if you are aware of the consequences.

C) In what world was accepting someones word on income for any loan ok? That's a private check off. Any bank should be checking that. (Even CRA required that).

Flipping played a major roll, but I don't blame people for jumping into the pool. I blame policy.

Bank policy?

Because we're not just talking about mortgages. This is all loans. Banks continually lowered standards thru the 80s and 90s regardless of anything else. The financial sector is the single largest lobbyist of the government and also of contributions to public officials.