In his dissent from the Financial Crisis Inquiry Commission majority report, Peter Wallison writes,
in other developed countries–many of which also had large bubbles during the 1997-2007 period–the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than the losses suffered in the United States when the 1997-2007 deflated.
Wallison, as you may know, is one of the few experts wanting to put most of the blame for the crisis on government pressure on Freddie, Fannie, and the banks to reduce lending standards. One of the criticisms leveled at this view is that it is impossible to blame U.S. housing policy for foreign housing bubbles. As you can see, Wallison’s comeback is that foreign housing bubbles did not produce as much financial devastation, because mortgage credit standards were not as heavily compromised as in the U.S. (I would add that some of the devastation at European banks was due to their holdings of U.S. mortgage securities.)
Later, Wallison writes,
Fannie and Freddie had already acquired at least $701 billion in NTMs [nontraditional mortages] by 2001. Obviously, the GSEs did not have to follow anyone into NTM or subprime lending; they were already the dominant players in that market before 2002. Table 7 also shows that in 2002, when the entire PMBS [private mortgage-backed securities] market was $134 billion, Fannie and Freddie acquired $206 billion in whole subprime mortgages and $368 billion in other NTMs, demonstrating again that the GSEs were no strangers to risky lending well before the PMBS market began to develop.
That is how he handles the claim that Freddie and Fannie innocently followed the evil private market into high-risk lending.
Later, he writes,
of NTMs outstanding on June 30, 2008, identified government agencies and private organizations required by the government to acquire, hold, or securitize NTMs as responsible for two-thirds of these mortgages, about 19 million. The table also identifies the private sector as the securitizer of the remaining third, about 7.8 million loans. In other words, if we are looking for the buyer of the NTMs that were being created by originators at the local level, the government’s policies would seem to be the most likely culprit. The private sector certainly played a role, but it was a subordinate one.
But did regulated institutions make these loans in pursuit of profit?
Profit had nothing to do with the motivations of these firms; they were responding to government direction. Under these circumstances, it should be no surprise that underwriting standards declined as all of these organizations scrambled to acquire the same low-quality mortgages.
However, a major point of Wallison’s piece is that the proportion of NTMs among all mortgages issued from 1998-2007 is much higher than most people realize. Something like half of all mortgages. However, I believe that this in turn implies that the the holdings of NTMs at regulated institutions were higher than was necessary to meet government goals for loans to target populations.
Still, Wallison effectively documents that the Department of Housing and Urban Development deliberate set out to cause a weakening of underwriting standards. This effort was successful, and until recently it was a source of pride for HUD officials.
Wallison’s view is despised by most officials and commentators on the left and the center. The result is that he has really sharpened his case in order to meet his critics. It is a very impressive piece of work.
Moreover, if Wallison’s estimate (which in turn comes from Ed Pinto) of the number of the number of risky mortgages is correct, then this has implications for the current outlook. In particular, we are still quite far from reaching the bottom in the housing and mortgage market. Even if the attempts to rewrite mortgages had reached their goals–and they have failed miserably to do so–they would have been only a drop in the bucket.
If the housing and mortgage crisis drags on past 2013 or so, I would view that as a strong indication that Wallison and Pinto have uncovered something very important. In any case, his dissent is a significant document. I am not saying that it is the final word on the subject. But no one should dismiss his views without first reading his paper.
READER COMMENTS
Steve Sailer
Feb 8 2011 at 3:48pm
The collapse of the American subprime market in 2007 was the original impetus for the global disasters of 2008, in much the same sense as
– the Wall Street crash of 1929 was the original impetus for the global depression of the 1930s
– the assassination of Archduke Franz Ferdinand and the Great War
– Pearl Harbor and American involvement in WWII
In all three of these older examples, you can make a perfectly reasonable case that, “Well, sure, but something else would have come along sooner or later and the overall outcome would have been much the same.” That’s true, and that should not be overlooked.
On the other hand, that’s not what happened. We shouldn’t ignore, say, Pearl Harbor because noticing it might make FDR look bad or might cause ethnic prejudice against Japanese or all the other reasons people might have to forget Pearl Harbor. If you want to understand American involvement in WWII, you have to think a lot about Pearl Harbor.
Steve Sailer
Feb 8 2011 at 3:55pm
There’s another common fallacy in the efforts to pooh-pooh the importance of American subprime: Let’s say that America had kept its subprime house in order, so instead of there being a global crash in 2008, there was instead a global crash in 2010 that was only 2/3 as bad as the one that happened in 2008.
Well, do the math in terms of long run growth. Assume crashes are inevitable but the # of years between crashes and the depth of the crashes are not. If good American policy can stretch the average length between crashes out from 8 to 10 years and reduce the drop-off in the crash by 1/3rd, then we all be a lot richer in, say, 2050 than if America contributes to more frequent and deeper crashes.
Steve Sailer
Feb 8 2011 at 4:22pm
Wallison writes:
“Profit had nothing to do with the motivations of these firms; they were responding to government direction.”
That seems highly overstated.
A more sophisticated way to think about it is that among profit-seeking lenders there will always be optimists and pessimists about the ability of marginal borrowers to pay back their home loans. Government policy from 1991 onward was heavily biased toward being nice to optimist lenders and not nice to pessimists lenders This nurtured a climate in which the businesses of the optimists grew and people in the middle shifted toward optimism, while pessimists moved toward other lines of work.
Consider Angelo Mozilo of Countrywide, who on January 13, 2005 catastrophically pledged $1,000,000,000,000.00 in mortgages by 2010 to minority and lower income borrowers. The government can’t force anybody to lend a trillion bucks to bad risks. A billion dollars, sure. But a trillion? The lender has to want to do it.
That doesn’t mean that politicians weren’t intimately involved in cultivating Mozilo’s delusional state of mind where he thought he was doing well by doing good and vice-versa.
There’s no question that Mozilo was first prodded down this path by the hoopla over the stupid early 1990s Boston Fed “study” of discrimination in mortgage lending. Crucially, the Clinton Administration’s threat in 1994 to extend the Community Reinvestment Act paperwork requirements to nonbanks like Countrywide led Mozilo to sign a treaty with Clinton’s HUD secretary Henry Cisneros promising to lend like Countrywide was covered by the CRA.
But, Mozilo became infatuated with Cisneros’s “vision” and put Cisneros on Countrywide’s board. They both became convinced that lending vastly more to Hispanics was a great business idea.
If you didn’t believe that, well, you’d better keep your mouth shut because you could be sued for discrimination, and regulators could make your life hell. So, the government helped change the culture of mortgage lending in part by selecting more credulous people like Mozilo for favorable attention and giving more skeptical people a hard time.
Another example is Kerry Killinger of Washington Mutual. He survived 29 Community Reinvestment Act reviews as he bought up other lenders by making huge pledges of minority and lower income lending , up to $375,000,000,000 for the acquisition of Dime Bank. So, there is a selection effect. The government gave the thumbs up to optimists expanding and the thumbs down to pessimists. So, the culture of lending shifted toward credulity.
Simon K
Feb 8 2011 at 5:40pm
I was hoping that Wallison’s dissent would lay out a more fully formed view of the crisis, but unfortunately it seems to be as incomplete as previous Wallison/Pinto articles have been. I can’t escape the impression that he knows the answer he wants and only poses questions that help him get there. In particular, there are two gaps here that still need to be filled in to make a complete narrative, and I’ve pretty much lost patience waiting for them to complete them:
1. Wallison uses Pinto’s definition of a “non-traditional” mortgage. It essentially includes all mortgages with any high risk characteristics. Normal mortgage lending practice – now, during the bubble and long before – is that different factors compensate for one another. A 640 credit score is okay with a 50% loan to value ration. A 95% loan to value ratio is okay with an 800 FICO and a solid employment history. No employment history is okay if there’s proof of sufficient assets. And so on. But all of these loans – everything other than a full-doc, 80% LTV, 660+ FICO loan – is a non-traditional mortgage in Wallison’s definition. I don’t see any reason to suppose this is an especially risky class of loans, and they don’t give one. Yes, those are risk factors. No, a loan with one of those factors is not necessarily a risky loan.
2. Wallison’s “non-traditional” mortgages don’t have any clear mechanism by which they could cause a financial crisis. To cause a crisis, many actors need to suddenly realize that their prior valuation of an asset was wrong. Wallison does nothing to explain how this can have happened with conforming loan, pools of them, or conforming MBS, and indeed valuations remained pretty consistent throughout the crisis. Indeed, mortgage rates fell. This is hardly the sign of an asset that’s causing the financial system to collapse. Sub-prime derived instruments, on the other hand, do have a clear mechanism by which they can cause a crisis – their value depends on the value of the underlying collateral, even though they were sold as fixed income instruments. Sub-prime MBS prices and house prices can form a self-reinforcing death spiral in a way that conventional MBS cannot. This is independent of the credit quality of the underlying loans.
Silas Barta
Feb 8 2011 at 5:50pm
Good points all around. People don’t seem to “get” the role of expectations of private banks in all this. If they expect to be forced through sham “discrimination” reviews, and to be able to unload subprime mortgages on FM/FM very easily (which huge purchases by them kinda lead you to believe), that will tend to make the subprime public/private ratio irrelevant.
If FM/FM had continued (somehow) to buy junky mortgages and the related MBSes (perhaps by getting to loot the taxpayer even more), Mozilo-types would be patting themselves on the back for such brilliant decision-making. They only look stupid because of the precise moment *when* reality had to show its face.
Evan
Feb 8 2011 at 6:40pm
I have invented a new “Steve Sailer Drinking Game.” Read something written by Sailer on a topic that does not have anything directly to do with race or immigration. Take a drink every time, in the course of your reading, he says something negative about Hispanics.
On the main topic of the thread, Wallison’s work adds more weight to the theory that the recession has been this bad because of the government’s efforts rather than in spite of them. This theory is of course, in accord with my libertarian prejudices, so I try very hard to keep an open mind to other theories. But it still makes me happy to see some evidence that seems to support it.
Mr. Econotarian
Feb 8 2011 at 6:53pm
Any >80% LTV home loan is nuts, because there have been plenty of 10%-20% value declines in the home price market, and underwater people, even well-off ones, are likely to walk away under any economic pressure (especially in non-recourse states).
Unfortunately, my house is in Virginia…
Steve Sailer
Feb 8 2011 at 7:17pm
“Read something written by Sailer on a topic that does not have anything directly to do with race or immigration.”
The housing bubble was directly related to race and immigration. For example, read what Henry Cisneros and Angelo Mozilo had to say about why they thought Countrywide’s strategy was a winner. They issued a huge number of press releases all through the housing bubble about how race and immigration meant that there was a huge and growing market of underserved borrowers that they were profiting by serving.
For example, Connie Bruck’s June 29, 2009 article in The New Yorker, Angelo’s Ashes, documents Mozilo’s views:
“Mozilo always saw himself as providing mortgages to many who were like him — disenfranchised. (‘So they’re not upper-middle-class white people—so what?’ he would say. ‘They’re Hispanics, and maybe their money is not in a bank—but they are responsible.’)”
Bruck’s article suggests that Mozilo actually believes what he told Congress in 2008:
“By the early 1990s, the government had recognized the obvious truth that our housing finance system was leaving major segments of society behind. In 1992, a landmark study by the Federal Reserve Bank of Boston made it clear that there were systemic underwriting issues relating to the treatment of African American and Hispanic borrowers. Policymakers called upon the mortgage industry to change their practices and redouble their efforts to better serve minorities and underserved communities. While many in the industry discounted the Boston Fed study as flawed, at Countrywide, we stepped up to the challenge by creating our affordable lending initiative known as ‘House America.’ ”
Bruck’s New Yorker article supports Mozilo’s sincerity—or self-delusion:
“… In 1992, shortly after Mozilo became chairman of the Mortgage Bankers Association, the Federal Reserve Bank of Boston issued a report stating that it had found systemic discrimination by mortgage lenders against African-American and Hispanic borrowers. … Mozilo was appalled. He ordered that all Countrywide’s records on rejected minority applicants be sent to him, and he retroactively approved about half of them. …”
Result: Mozilo grew into the ultimate embodiment of the type of financial executive the federal government had been cultivating: a monster of ambition combined with a diva of diversity.
Bruck goes on:
“By 2004, Countrywide had become a leading U.S. mortgage lender to what it called ‘multicultural market communities.’ Mozilo always described Countrywide’s inclusion of minority and immigrant populations as both business and mission, and he had become perhaps the single most important advocate of those who believed in advancing homeownership as a means of achieving a more equitable society.”
http://www.vdare.com/sailer/090622_mozilo.htm
Steve Sailer
Feb 8 2011 at 7:25pm
Countrywide Financial press release, January 14, 2005:
Countrywide Expands Commitment to $1 Trillion in Home Loans to Minority and Lower-Income Borrowers
ORLANDO, Fla., Jan. 14 /PRNewswire/ — Countrywide Home Loans, Inc., a national leader in expanding homeownership across America, today announced an extension of its We House America(R) initiative to fund $1 trillion in home loans to minorities and lower-income borrowers and communities through 2010.
“The $1 Trillion We House America Challenge, expanded from $600 billion announced in 2003, embodies Countrywide’s long-standing commitment to lead the mortgage industry in closing the homeownership gap for minority and lower-income families and communities,” said Countrywide Financial Corporation Chairman and CEO Angelo Mozilo, who announced the initiative at the International Builders’ Show in Orlando.
“For several years now, Countrywide has been a leading lender to minorities and lower-income households,” Mozilo said. “I am proud of our lending record and pleased to announce the expansion of our lending commitment to $1 trillion. The We House America program has already placed 2.4 million families into homes, and we expect to nearly triple that number by 2010.”
To help reach the $1 trillion funding goal, Countrywide will build on its existing comprehensive programs and policies that have made it the industry leader. The company will continue to develop innovative programs emphasizing non-traditional lending criteria, thus helping to address challenges Mozilo has made to the industry, such as calling for improved underwriting systems that eliminate the over-reliance on traditional credit scores that can mask a borrower’s true credit-worthiness. Countrywide is already responding to this challenge with the launch last year of its successful Optimum Loan program.
That program addresses major obstacles for hard-to-qualify borrowers, such as allowing for non-occupant co-borrowers, other secondary income, and pooled funds for down payments. …
“To ensure that this objective is achieved, we intend to expand upon our existing partnerships with specific community groups,” Mozilo said. “We have also called upon one of our esteemed directors, the Honorable Henry Cisneros, former Secretary of Housing and Urban Development and a former mayor of San Antonio. Henry will put to use his long and respected experience as an advocate for affordable housing who understands the benefits to communities of homeownership. He has graciously agreed to lend his support and expertise to this effort with the goal of assuring Countrywide’s continued leadership in innovative, responsible and flexible mortgage products.”
Secretary Cisneros said of the initiative, “Countrywide’s $1 trillion commitment is very tangible proof of this company’s commitment to fair, affordable and responsible lending. This company is leading the industry in closing the homeownership gap through ambitious lending commitments, innovative programs, and a strong corporate culture that constantly looks for ways to improve.” …
Countrywide formalized its commitment to affordable lending more than a decade ago by launching We House America, an initiative to provide increased homeownership opportunities for all Americans. The previous commitment covered the years of 2001 through 2010 and has provided $341 billion of home loans as of December 31, 2004. The company is now extending the goal to $1 trillion by 2010.
http://www.prnewswire.com/news-releases/countrywide-expands-commitment-to-1-trillion-in-home-loans-to-minority-and-lower-income-borrowers-54027497.html
Elvin
Feb 8 2011 at 7:28pm
I’ve read the conclusion of the crisis commission, not the whole report, but it seemed to me to be saying, “Dear Average American: It wasn’t your fault, it was the stupid Fed, SEC, and those evil bankers. Bad people did this to you.”
No mention of the many, many average Americans that saw nothing but dollar signs and bought homes thinking that they only go up or as flippers. I personally know several people with advanced degrees who bought homes at the height of the bubble without the aid of a sleazy broker.
Simon K
Feb 8 2011 at 7:28pm
Mr Econotarian – Home loans with an LTV of >80% must have mortgage insurance to be sold to Fannie and Freddie. So the note holder isn’t taking any risk of not getting his money back in the event of default, just prepayment risk. Its still a risk factor for default, but the additional risk is of prepayment, not not getting the principal back, so credit score can compensate for it. This is true for normal price fluctuations anyway – the biggest price drops in the bubble states, up to 50% in place, obviously nothing will ever compensate for.
frankcross
Feb 8 2011 at 9:54pm
When the first page of your dissent reads like Rush Limbaugh, you do not do wonders for your credibility.
Douglass Holmes
Feb 8 2011 at 10:12pm
Steve Sailor, your point was very well made in your first posting.
Evan, I do not consider what Steve said to be negative about Hispanics. When a bank purposefully targets a racial group, based on their race, in the belief that they are under-served, then they are obviously looking at race more than at financial qualifications for loans. That is risky. What Steve said was a negative comment about a lending strategy.
Elvin, thanks for reminding us that this crisis included greed and stupidity at all economic levels. Few people mention the fact that buyers, sellers, and Realtors were inflating the prices of the homes that they bought and sold.
MernaMoose
Feb 8 2011 at 11:11pm
Okay, a question for you economics & finance specialists, from an engineer who doesn’t get it. From Steve Sailor’s post above:
In 1992, a landmark study by the Federal Reserve Bank of Boston made it clear that there were systemic underwriting issues relating to the treatment of African American and Hispanic borrowers. Policymakers called upon the mortgage industry to change their practices and redouble their efforts to better serve minorities and underserved communities.
I have no problem with this line of discussion. Just another stripe on the Affirmative Action zebra, which (my opinion) has achieved little but positive damage. And I’m a classical liberal, hence inclined to believe the “government did this to you” theme.
But somehow this story doesn’t add up. If the root cause of the housing crisis was that government pushed risky loans for minorities on the lending industry then — how come the housing crisis is not just in low end housing?
These minorities that we’re talking about, can’t be the kind of people who buy $500k and up homes. I’d expect they’re the types who are buying $100k +/- homes, at least in most markets (excepting insane locales like SoCal). So how come in places like FL, NV, AZ, etc where the bubble has been worst, we’re seeing a glut of much higher priced houses?
Seems like the root cause story has to include a theme whereby, lending standards were reduced across the board. Not just the low end minority market.
Can anybody explain how this works? Because I’m really not seeing it.
The only thing that is clear to me, is that the real estate crash has to be the single biggest contributor to the current recession.
Another thing that makes this not all add up: I’ve read recently that Southern California is closer to climbing out of the housing price decline than most places, and that San Diego even anticipates a 2% increase in home prices over 2011. This, in spite of everything else happening in California.
How the heck can Southern California be climbing out the hole faster than anybody else? Because they just had a glut of bad loans to clear out, and hadn’t “over built” (for lack of room and zoning law prohibitions)? If that’s the case then poetic justice is fickle.
Steve Sailer
Feb 8 2011 at 11:55pm
“These minorities that we’re talking about, can’t be the kind of people who buy $500k and up homes. I’d expect they’re the types who are buying $100k +/- homes, at least in most markets (excepting insane locales like SoCal). So how come in places like FL, NV, AZ, etc where the bubble has been worst, we’re seeing a glut of much higher priced houses?”
The median home in foreclosure in California through October 2009 was about 1600 square feet.
The people who were buying homes in inland California during the Bubble turned out to have a hard time affording a 1600 square foot house, so it’s hardly surprising that there is a glut on the market of 3200 square foot homes.
MernaMoose
Feb 8 2011 at 11:56pm
I also don’t follow this.
If the housing and mortgage crisis drags on past 2013 or so, I would view that as a strong indication that Wallison and Pinto have uncovered something very important.
It’s hard to believe the FL-AZ-NV locales are going to have climbed out of the hole by 2013. But then, I wouldn’t have expected California to be showing any signs of improvement by then either.
I’d have expected a SoCal mass exodus to be in effect. I guess those beaches must be something like drugs.
Steve Sailer
Feb 9 2011 at 5:40am
There was never a huge decline near the beach. There are always a lot of high income and/or trust funders who want to live near the beach and will and can pay. The real estate catastrophe in California in 2008 was inland: Central Valley, High Desert, Inland Empire, and in the spillover states of Nevada and Arizona. It’s like Rajan says: nobody in power has a clue how to help the working class earn more, so they just came up with ways for the second quartile of society to borrow more. That worked until it stopped working.
Per Kurowski
Feb 9 2011 at 7:49am
The regulators, the banks and the sharks and their baits
The world’s bank regulators in the Basel Committee, assumed with unbelievable hubris the role of risk managers of the world; ignoring that perceived risks are not dangerous to the system, only those not-perceived are, authorized the banks to leverage their capital 60 times or more, when investing in or lending to anything related to a triple-A rating.
As should have been expected, the banks, carrying the minuscule life-vests ordained, in pursuit of easy profits, huge bonuses and too big to fail growth rates, entered massively the triple-A rated waters… where the sharks had baited them with some triple-A rated securities collateralized with lousily awarded subprime mortgages paying juicy interests… and a true bloodbath ensued.
The saddest part of the story though, is that our banks are still regulated by the same regulators using precisely the same tools applied the same way… just more of it.
Mole
Feb 9 2011 at 9:07am
Simon K:
You wrote,
In a previous career I was involved in housing finance and I know a good amount about private mortgage insurance. If I remember correctly, the typical MI policy reimburses the insured (the lender) for only ~25% of the claim/loss. So there is additional credit risk to the lender on high-LTV loans; it is only partially mitigated by PMI.
Frank
Feb 9 2011 at 11:18am
Arnold,
You recently claimed that the capital-requirements account of the financial crisis, unlike its competitors, explains why the crisis was international. This is important if true, but I have never had a detailed understanding of how this is supposed to have worked (other than general references to the Basel Accords). This current post adds to my confusion concerning exactly what your position on this is.
Wallison seems to say that the non-U.S. extent of the crisis has been exaggerated. (What have all the headlines out of Europe been about?) You do not explicitly endorse or dispute this assertion, but if it were true, wouldn’t it diminish the force of your claim just referred to?
You state that part of the European banks’ difficulties came from their holdings of U.S. mortgage securities. Does that further diminish the force of your claim (even some of the apparently international aspects were really U.S. aspects) or illustrate it (this is precisely how the Basel Accords sucked European banks into U.S. subprime problems)?
Two years ago, I think many commentators agreed that a key test of whether an explanation of the crisis was correct was whether it explained why it was international, and accounted for the variation in its severity among countries. Although I have by no means followed the literature on this subject, my impression has been that this desideratum fell by the wayside. I have assumed that people did not want to be slowed down in their rush to provide explanations, and to derive from them sweeping conclusions about political economy. Is this correct, or did I just miss a careful discussion of this point?
MernaMoose
Feb 9 2011 at 11:59am
The people who were buying homes in inland California during the Bubble turned out to have a hard time affording a 1600 square foot house, so it’s hardly surprising that there is a glut on the market of 3200 square foot homes.
Hmm. So you’re telling me that they relaxed lending standards to the point that, marginal buyers (or not even) were not only permitted to buy, but they were permitted to buy higher end houses?
That’s not “relaxing” lending standards, it’s eliminating them.
Simon K
Feb 9 2011 at 3:55pm
Mole – Yes, PMI is typically for about 20% of the note amount, but this is enough, from the note-holder’s point of view, to make a 100% LTV loan equivalent to an 80% LTV loan. Provided the value of the collateral declines by now more than 20%, he gets his principal back in the event of default.
MernaMoose – Financially speaking, the critical factor in the housing crises was that lenders started to rely on house price appreciation. The loans they were making couldn’t be justified off the back of the borrower’s credit-worthiness, but only by the expected appreciation of the collateral. This pushed house prices up in a positive spiral up to a point, but also made things unstable to that when prices fell, loans went into default at a much greater rate, pushing prices down further.
This mechanism – a kind of shared appreciation, although no-one called it that – was used to make all kinds of loans, but especially loans to people with bad credit. Obviously people with bad credit disproportionatly tend to be poor, and some minorities tend to be poor. Beyond that I don’t think whether the borrowers were minorities or not is especially relevant to the causes or mechanisms of the crisis. although it certainly is relevant to its impact – Stockton, Tracy, the Inland Empire, etc are all disproportionately Hispanic and massively impacted by the crisis.
Regarding whether we’re talking about “higher end homes” here, I don’t know about FL, AZ, or NV, but in California you have to think about house prices as if they were in Zimbabwe dollars. Even now. In the inner suburbs of the Bay Area, a small 2 bedroom house on a smallish lot in a nice part of town easily fetches $750k, and 2/3 of that of course is land value. Even in a not-nice part of town – where were you could easily see your neighbours get shot – $500k is just the price of entry. And that’s now. 4 years ago and you could add 20% to those numbers. So yes, in national price terms these are “higher end homes”, but in terms of what the actual house consists of, no they’re not. There are rational – I don’t want to say “good”, because the situation is clearly nuts – reasons for this. Lots of people want to live here. The housing is quite low density and that can’t be changed. Salaries are high across the board, and there are plenty of rich people. The area is surrounded by hills and water and its impossible to get permission to build anything outside the established urban areas. I’ve no doubt the inners suburbs of La La Land are the same.
What appears to have happened is that as it became easier and easier to get credit, more people entered these very inflexible inner suburb housing markets and pushed prices up. As prices went up, it looked more and more sensible to look outside the suburban core to get more yous – first in Pleasanton, then Livermore, and then in Tracy. You could get a 3000sq ft home in Tracy at the height of the bubble for the prices of 1200 sq ft 2/1 in Palo Alto and people did. But to live 100 miles away from where you would is clearly a tenuous and expensive proposition, and its hard to justify valuing even a 1/2 acre of Tracy at the same price as a lot in Palo Alto. Some economic shock – I blame gas prices and then the Fed, personally – triggered defaults, prices fell, more defaults, and the rest is history.
Steve Sailer
Feb 9 2011 at 5:58pm
“Two years ago, I think many commentators agreed that a key test of whether an explanation of the crisis was correct was whether it explained why it was international, and accounted for the variation in its severity among countries.”
Perhaps, but simple chronology shouldn’t be ignored, just as the assassination of the Austrian Archduke in June 1914 can’t be handwaved away in discussing the causes of WWI on the grounds that the worst fighting was on the Western Front, and that no doubt war between Germany and France would have broken out sooner or later, no matter what happened that day in Sarajevo.
Similarly, the chronological roots of the Great Financial Crash can be seen in American subprime loans, mostly in the four Sand States. These started to teeter in late winter 2007, when New Century Financial of Orange County went under. Around August 1, 2007, the markets lost confidence in subprime in general. The subsequent events are well known.
MernaMoose
Feb 9 2011 at 6:59pm
Steve and Simon — thanks.
steve
Feb 10 2011 at 2:00pm
You need to read Bill Black more often.
1) The GSEs were engaged in accounting fraud in order to make lots of money for their executives. Profit very much was a motive.
2) Wallison repeatedly testified before Congress that the GSEs were not doing enough to make loans to poor people. He lauded the efforts of the private sector.
3) Please note how he changes definitions and terms. Also note that he does not mention the default rates on those NTMs. After the GSEs had been caught committing accounting fraud while they were growing their portfolio and increasing interest risk, they responded by increasing credit risk, again maintaining salaries for their execs. Just a bit from Black.
“Yes, some Alt-A loans doubtless did count toward the HUD goals. But massive amounts did not. According to Pinto’s numbers, Fannie and Freddie’s CEOs deliberately purchased extraordinary amounts of Alt-A loans that they knew would not qualify for affordable housing goals and would cause massive losses that would destroy Fannie and Freddie. Pinto’s theory is that absent the HUD goals Fannie and Freddie would not have purchased liar’s loans. His data refute his theory. Moreover, Fannie and Freddie acted to minimize the number of liar’s loans that would qualify by (1) buying loans with grossly inflated “stated income” and (2) misclassifying the loans as prime. Pinto’s grand conspiracy theory is that Fannie and Freddie created the HUD goals to protect itself from President Bush. Pinto claims that Fannie and Freddie sought to emphasize at all times their critical role in aiding affordable housing. But why did they misclassify their loans so that they would appear to make dramatically fewer (Pinto says only one-quarter the reality) nonprime loans to less wealthy Americans if their brilliant political strategy was to do the opposite? Pinto’s data falsify his, and Wallison’s, claims view that the housing goals warped Fannie and Freddie into the Great Satans.”
http://neweconomicperspectives.blogspot.com/2011/02/wallison-is-far-too-kind-to-fannie-and.html
For further enlightenment, check out while you are there Black’s quotations of Wallison complaining that the GSEs were not making enough loans to poor folk.
Steve
Simon K
Feb 10 2011 at 4:29pm
Steve – That Bill Black article is awesome. I’m not convinced by all his points, but unlike Wallison at least he makes them in a straightforward an unbiased way.
James A. Donald
Feb 15 2011 at 7:28pm
Simon K writes:
1. Wallison uses Pinto’s definition of a “non-traditional” mortgage. It essentially includes all mortgages with any high risk characteristics. Normal mortgage lending practice – now, during the bubble and long before – is that different factors compensate for one another. A 640 credit score is okay with a 50% loan to value ration. A 95% loan to value ratio is okay with an 800 FICO and a solid employment history. No employment history is okay if there’s proof of sufficient assets. And so on. But all of these loans – everything other than a full-doc, 80% LTV, 660+ FICO loan – is a non-traditional mortgage in Wallison’s definition. I don’t see any reason to suppose this is an especially risky class of loans, and they don’t give one. Yes, those are risk factors. No, a loan with one of those factors is not necessarily a risky loan.
I was right at the center of the action, (Sunnyvale, California, 2005, 2006) and in actual practice the vast majority of the loans made there had every risk factor simultaneously: They were made to a politically correct recipient, usually Hispanic, who had no job, no assets, no credit history or a credit history of never paying his bills, who was buying a house for near a million dollars no money down.
In practice, if a loan was “non traditional” on any one factor, it was almost always non traditional on every factor.
James A. Donald
Feb 15 2011 at 7:44pm
Frank writes:
I think many commentators agreed that a key test of whether an explanation of the crisis was correct was whether it explained why it was international, and accounted for the variation in its severity among countries.
The common cause of the crisis is that Basel gave governments the opportunity to dispense funds off budget to friends and voter blocks.
In the US, the beneficiaries of this were mostly poorer voting blocks, in particular Hispanics. In Ireland, mostly those well connected to the government, in Iceland, the well connected but also the middle class voter. Singapore, Israel, and for the most part Australia were unaffected, because their governments displayed adequate moral fibre.
James A. Donald
Feb 15 2011 at 7:53pm
MernaMoose writes:
But somehow this story doesn’t add up. If the root cause of the housing crisis was that government pushed risky loans for minorities on the lending industry then — how come the housing crisis is not just in low end housing?
I was at ground zero of the housing bubble – California, Bay Area, 2005-2006, and cat eating no-hablo-English unemployed Hispanics with no assets and no credit were buying million dollar houses no money down.
This was not entirely their fault – the lies in the loan documents that they signed were in English, and these guys could not speak English, let alone read it. I doubt that they had any idea what they were signing.
James A. Donald
Feb 15 2011 at 9:00pm
Steve Sailer writes:
These started to teeter in late winter 2007, when New Century Financial of Orange County went under. Around August 1, 2007, the markets lost confidence in subprime in general. The subsequent events are well known.
It seems to me that panic began in 2005 November. What happened in winter 2007 was that the establishment joined the panic after a long spell of ignoring it and pretending it was not happening.
Money was pouring out of the repo market, and government, banks, and regulators were ever more frantically trying to pour money into the repo market and to keep money from pouring out. Around 2007 August their efforts became so frantic as to attract counterproductive attention, so that people finally started calling it a crisis, but in fact it was a crisis the day the money started pouring out.
Comments are closed.