The Mortgage Mess and its causes

It's popular to blame this on Clinton, Carter, Bush or whomever. But I - a decided partisan who absolutely loathes Bush - submit this mess is a result mainly of greed, which knows no party lines.

There are two main causes that blamemeisters point to: the CRA, and Clinton's housing initiative in the late '90's. Let me show you how neither one of those is the reason for where we are now.

THE COMMUNITY REINVESTMENT ACT ("CRA")
This Act was passed in 1977 during the Carter Administration. Its aim was to get banks to quit "redlining", which means avoiding lending any money to areas of town that were deemed too high a risk. These areas were always areas of minority concentration, so it meant that even those with good credit or good business plans in the redlined area couldn't get credit.

Some would have you believe that banks lent responsibly under this Act for almost 30 years, and then somehow the CRA suddenly mandated that banks make $$$billions of bad mortgages. I think anyone can see the idiocy of that position.

Some would have you believe that changes to the CRA over the years led to these problems. But what they don't tell you is that the CRA's requirements never changed. All that changed in the CRA updates was how the effects of the law were monitored.

In other words, the CRA was never changed to make banks lend more money in low-income areas than they had been required to lend before.

So, if the requirements were never changed, the whole "THE CRA MADE ME DO IT!" line of BS falls apart.

But wait - there's more!

Some will tell you the CRA hurts banks. But the Federal Reserve begs to differ with you. They did a comprehensive study that was released in 1997, and it concluded, "[CRA] lenders active in lower-income neighborhoods and with lower-income borrowers appear to be as profitable as other mortgage-oriented commercial banks". And Ben Bernanke said just last year that "managers of financial institutions found that these loan portfolios, if properly underwritten and managed, could be profitable" and that the loans "usually did not involve disproportionately higher levels of default".

But wait - there's even more!

Even if you grant that the CRA made banks make bad loans, the fact is that only 20% of subprime loans were made by institutions covered by the CRA.

So 80% of subprime loans were made by entities that couldn't care less what the CRA said, because it didn't apply to them.

Sources:

http://en.wikipedia.org/w...stment_Act
http://www.house.gov/apps...021308.pdf

Case closed.

CLINTON'S HOUSING INITIATIVE
In the late '90's, President Clinton urged Fannie Mae and Freddie Mac to open up lending and make home ownership possible for more Americans. This, say the uninformed, is what really led to the mess we're in today.

Only one problem...well, several problems, actually. But the main problem with that flawed logic is this:

Most of the defaulted subprime loans were made in 2006 and 2007. If Bill Clinton did something in 1999, why would it take seven years for the problem to manifest?

If Bill Clinton REALLY made Fannie and Freddie make bad loans in 1999, why didn't mortgage defaults rise in 2000? Or 2001? Or 2002? Or 2003? Or 2004? Or 2005?

Again - the vast majority of the defaulted subprime loans that have caused this mess were made within the last two years.

This makes sense, because if someone gets a loan they can't afford, the likelihood they can pay on it for several years before going into default just doesn't exist.

Now, if you REALLY want to place the blame on this mess on Clinton's initiative, then you have to give just as much blame - if not more - to George Bush. After all, he didn't repeal or cancel Clinton's mandate. He let it continue. And most, if not all, of the defaulted loans were made under HIS watch.

But I don't blame Bush for most of this, and neither should you.

Source:

http://online.wsj.com/art...12611.html

WHO DO WE BLAME?
Or more accurately, WHAT do we blame?

Greed.

Investment banks figured out they could make fees buying and selling mortgage portfolios. So, they increased their appetite and demand for mortgages at an exponential rate throughout the mid 2000's.

Mortgage brokers could only make so many "good" loans. In order to keep up with Wall Street's demand, they had to loosen credit standards. And Wall Street said, "Fine with us!"

Before long, there weren't any credit underwriting standards at all. And Wall Street said, "Fine with us! Inflation will solve any default problems, and if it doesn't, we bought insurance with credit default swaps, so we're covered!"

I think you can see the flaw in their logic.

But greed clouds the minds of good men and women. They never considered that home prices might go down, making it impossible for homeowners in a pinch to get out of the mortgage by selling the home.

That led to foreclosures, and you know the rest.

RodeoSchro said:

more of what you never address:

Well, Hiin - if your position is that deregulation caused this mess, I'm not going to argue with you.

John McCain might, but I won't.

RodeoSchro said:

HiinEnkelte said:

very interesting, Rodeo - thanks! i can't argue economics, but philosophically, i agree that every last ill in the world can be traced back to greed and attachment.

one question - what role do you think developers have played in all this? seems to me that overdevelopment in many states (NC, FL, etc.) contributed to the problem. what's going to happen (or is happening already) to large developers around the country?

IrresistibleB1tch said:

RodeoSchro said:

HiinEnkelte said:

RodeoSchro said:

IrresistibleB1tch said:

RodeoSchro said:

Very little. Over-development always happens in boom times. Whether we're talking homes, office buildings or strip centers, there's always more built than are needed.

The thing is, developers know that, but like everyone else, they think theirs is the one that will prosper.

Developers just react to demand.

isn't there some creation of demand involved as well?

and what do you think is going to happen to half-finished residential or commercial development as credit continues to dry up? i'm picturing abandoned strip malls, neighborhoods affected by unsightly unfinished homes, etc. (guess somebody will plunk down some cash to buy them on the cheap? )

RodeoSchro said:

IrresistibleB1tch said:

isn't there some creation of demand involved as well?

and what do you think is going to happen to half-finished residential or commercial development as credit continues to dry up? i'm picturing abandoned strip malls, neighborhoods affected by unsightly unfinished homes, etc. (guess somebody will plunk down some cash to buy them on the cheap? )

Yep.

I highly recommend putting together as much cash and credit as you can, because there are going to be literally tens of thousands of commercial properties available for a song next year.

You can set up an incredible retirement if you buy some commercial properties. That's my ultimate plan.

IrresistibleB1tch said:

RodeoSchro said:

Yep.

I highly recommend putting together as much cash and credit as you can, because there are going to be literally tens of thousands of commercial properties available for a song next year.

You can set up an incredible retirement if you buy some commercial properties. That's my ultimate plan.

those 25 bucks aren't going to buy much - remember, i'm a starving writer. but i wish you luck though!

RodeoSchro said:

IrresistibleB1tch said:

those 25 bucks aren't going to buy much - remember, i'm a starving writer. but i wish you luck though!

You might be surprised how far $25 will go!

with regards to economics - i hate to go political ... because anyone who has taken economics classes - knows that the economic cycles go up and down .... at various times ....

that being said ... i do think blame can go around to some of the things that u point out ... Clinton's initiatives and Bush's deregulation .... personally i blame Bush more on this - cus we knew the housing bust was coming for years .... they were giving loans to anyone .... and the 100,000 houses arent the real problem ... we can sell them for 90 ( a discount ....) --- the problem is the 450,000 +/- ones that now cant be sold for 250.... (cus noone can qualify in some of these markets .... )

my personal opinion they were all goin for the stock prices ... and not taking care of the boring accounting ....

ColAngus said:

with regards to economics - i hate to go political ... because anyone who has taken economics classes - knows that the economic cycles go up and down .... at various times ....

that being said ... i do think blame can go around to some of the things that u point out ... Clinton's initiatives and Bush's deregulation .... personally i blame Bush more on this - cus we knew the housing bust was coming for years .... they were giving loans to anyone .... and the 100,000 houses arent the real problem ... we can sell them for 90 ( a discount ....) --- the problem is the 450,000 +/- ones that now cant be sold for 250.... (cus noone can qualify in some of these markets .... )

my personal opinion they were all goin for the stock prices ... and not taking care of the boring accounting ....

ColAngus said:

with regards to economics - i hate to go political ... because anyone who has taken economics classes - knows that the economic cycles go up and down .... at various times ....

that being said ... i do think blame can go around to some of the things that u point out ... Clinton's initiatives and Bush's deregulation .... personally i blame Bush more on this - cus we knew the housing bust was coming for years .... they were giving loans to anyone .... and the 100,000 houses arent the real problem ... we can sell them for 90 ( a discount ....) --- the problem is the 450,000 +/- ones that now cant be sold for 250.... (cus noone can qualify in some of these markets .... )

my personal opinion they were all goin for the stock prices ... and not taking care of the boring accounting ....