[BeaverFever]

$1:

Of course it can, especially when these laws can be updated to further fit somebody's agenda. And the economy didn't suddenly fall apart in 2007. It was built up until it fell apart. If you think the market just suddenly decided to collapse for the hell of it, you're wrong.

No, first of all, see point 3 - that the provisions were watered down, not strenghthend, but more on that later. Second, the market didnt build up over 30 years, it rose and fell with the business cycle until recently. The reason why it built up to the point where real estate prices were ridiculously overheated was due to the fact that deregulation allowed these Mortgages to be securitized and speculated upon in financial markets. These securities were ridiculously overvalued but people were making money so critics were silenced. Fannie and Freddie were no doubt instrumental in this, but these are appendages of an uber-capitalist government that caters to and takes advice from the very financial industry that was making money off this process.

$1:

It "encourages" lending by securing loans using government funds. Remember Fannie Mae and Freddie Mac? Telling banks that you can make risky loans and we'll cover the loss allows banks to be easy with their money. The CRA was created to try to get more loans out there. If those banks didn't start lending, somebody would have started labeling the bank for racism or discrimination.

As mentioned above, Freddie and Fannie securitized, not underwrote loans, that is a big difference. Also neither are synonymous with the CRA. The value of those securities is what was at question and those securities were very profitable until people started opeing up the mystery box and seeing that they were actually worthless. Your allegation that banks knowingly exposed themselves to massive risks simply for fear of being called names is just ideological speculation at best and makes little sense in a market driven by money and greed.

$1:

No, those loans played a part too. But the foreclosures in middle and upper middle class neighborhoods was a very new event for a lot of people, thus why they were more publicized.

"University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”

...CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley"
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

$1:

Anyway, in the end, you know what this proves? Absolutely nothing. Because statistics can be made to say anything. Anything at all.

THIS IS A PATENTLY FALSE FOLK SAYING. People who dont understand stats or those wish to deliberately mislead said people will try to draw false conclusions from them, but an informed, logical analysis of all relevant statisticsject on a sub will discount theories on the subject while supporting an ever-narrowing list of others. For example, you cant use the "stat" that 100% of astronauts have eaten chicken to prove that eating chicken turns you into an astronaut. Why? because logic would tell you to examine that stat in reverse - ie what percent of people who have eaten chicken became astronauts? - as well as other statistics that would be unique to astronauts. Statistics dont lie or mislead -- people do.

[Proculation]

BeaverFever BeaverFever:

Oh please dont start in with that CRA nonsense. The CRA:

1) Is over 30 years old, dont tell me some law passed 30 years ago suddenly undermined the global economy in 2007.

2)Does not "require" banks to do any lending, except to use their discretion and try to find other factors to take into consideration when assessing a loan applicant.

3)Has been successfully watered-down and weakened by every government that has come into office since it was first passed and has always been weakly enforced.

4)Only applies to first-time, low income home buyers. The majority of failed subprime mortgaes involved re-finances and/or non low income buyers; therefore would not have been applicable.

5)Only applied to traditional banks that took deposits and handled traditional personal banking activities, not to indepedent mortgage brokers, who sold most of the subprime mortgages.

If there was a real free-market exchange in the subprimes, what happened would not have happened.

Just to tell: before the crisis, the subprimes were 20% of all the mortgages issued. After the crash, private lenders stopped to issue them and it went to almost 0%. You know how it is now ? Back to near 20%. Who is issuing them ? Freddie and Fannie at 95%, government owned companies. MUCH better than free-market

The government is back at doing exactly what created the crisis.

[Proculation]

$1:

As mentioned above, Freddie and Fannie securitized, not underwrote loans, that is a big difference. Also neither are synonymous with the CRA. The value of those securities is what was at question and those securities were very profitable until people started opeing up the mystery box and seeing that they were actually worthless. Your allegation that banks knowingly exposed themselves to massive risks simply for fear of being called names is just ideological speculation at best and makes little sense in a market driven by money and greed.

I'm not really good at all those interests and insurance thing but something I am sure is the more risky it is, the higher the interests are. That's quite basic. I also know that when the person "securizing" your loan has technically unlimited fund available, the risks are quite low = low interests.

Sure, private enterprises want to do profit. I don't see any flaw in that: that's the fundamentals of capitalism. The flaw in all that equation was that the loans were "secured" by the government, that's not free market at all... Tell me that I can borrow 1000$ to buy high risk stocks but that if I lose it, it will be refunded: I will buy the stocks !

[Proculation]

About the article: a survey doesn't mean anything. It only asks a question and it gives you the impression of what people thinks. That doesn't mean it's true or false: it's a survey, not a scientific research.

[BeaverFever]

Well, what I think you may be missing is that by the term "securitized" we mean these mortgages were used by the banks (including F&F) to create investment funds that were sold on the stock market to investors. Basically, a bank creates an investment fund and claims the fund is worth lets say one billion dollars. The bank wants people to invest in this fund on the expectation that its worth will grow as more and more people invest in it. So what does this fund do with the investment money? It buys rights to the proceeds of consumer debt - mortgages, car loans, credit card debt, etc- from various lenders and brokers across the country. Alternatively, the fund may buy the rights to own a portion of those debts collected by those lenders when they are paid off. So the fund grows in two ways - when people pay off or refinance debt, and when new investors throw their money into the pot so they can get in on the action. Consumer debt has risen steadily for years and refinancing houses became an ever popular trend that was heavily promoted by the majority of so called experts in the media and financial advisors.

The problem is that nobody knew exactly how much these funds were REALLY worth. The formulas used to evaluate them were complex and performed by workers with phds in mathematics and physics (my sister was one of these ppl) but were poorly understood by the business and financial guys in those same firms who often misrepresented those numbers. In addition, these firms claimed their formulas and the actual value of specific underlying assets (ie the actual debts themselves) were proprietary and revealing too much would undermine markets. The investment banks PAID valuation firms like Moodys to value the funds, who in turn gave many them AA or AAA ratings, despite the fact they were so opaque and complex nobody really knew what they were worth.

On top of that, the banks as well as private investors took out CREDIT DEFAULT SWAPS which is basically like a secret private insurance contract with firms like AIG. AIG has an AAA rating, which helped give these questionable investments that same rating. In addition, other market players who were not even invested in or invovled with these funds could take out credit default swaps against them which would pay out to them in case the funds failed. This last point is crucial to understanding the collapse: its like me taking out insurance on YOUR car and the insurance has to pay out to me and you if you have an accident. Its basically no different than sports betting.

These investments became very popular and as more people speculated on their worth, their value began to rise, which in turn made them even more popular. This incentivised brokers and lenders to issue more and more loans and mortgages without doing due dilligence because investment banks were buying them like hotcakes and were not overly concerned about their value. The mortgage broker wasnt concerned because its not his money that is being lent out and hes getting a handsome commission for each loan he issues anyway. The banks were so confident they were minimizing risks by slicing and mixing these mortgages into different funds that they werent really concerned. There was a minority opinion in goverment and in the media that warned of the dangers, but this activity was so profitable at the time, these ppl where either silenced or ignored.

Meanwhile, speculation on real estate prices was driving housing prices so high that homes were being valued far beyond their real worth; just as specualtion on these investment derivatives were driving their value far beyond their actual worth. In cyclical fashion, more speculation on these investments lead to more speculation on real estate prices, which lead to more speculation on the investments, etc. Borrowers were constantly bombarded with advice and advertising telling them that the home is the "new piggy bank of the 21st century" as real estate will almost always go up because "God isnt making any more of it...HAW HAW HAW!" People were encourged to refinance the $300k home they just bought for $500k and use the difference to pay off medical bills, credit card debt, buy a new gas guzzling SUV and otherwise pursue the American Dream. The monthly payments came with low teaser rates that were affordable for a few years then would suddenly balloon into something completely unaffordable. Not to worry, they were told because by that time your house will be worth $700k and you can refinance again, paying off the old mortgage and starting over with a new affordable teaser rate. "Subprime" mortgage doesnt mean poor or low income borrowers - it means any mortgage where the applicants income and/or credit creates a high level risk for a particular loan. You can be a millionaire and still be a subprime borrower if you're trying to buy a massive mansion estate with no money down or insufficient collateral.

This worked for about a decade until one day the real estate market peaked and people couldnt refiance their houses, so the mortgages and other debts out there started to default and the investement securities based on this debt started to fail. This caused investors to question what exactly they were investing in but because these securities were so complex and opaque, nobody knew, not even the investment banks who created the investments in the first place. So people start trying to sell off these funds and banks are writing off losses wholesale because they have no idea what their assets are really worth but know they are not worth anything near their reported value.

Now comes the market collapse: People who had taken out the credit default swaps -the insurance- start calling in but here is how CDS differs from insurance: with insurance, companies are required by law to keep a certain amount of cash available in proportion to how much theyve promised to insure. It is also easy to know how many people are insured by any insurer and how much they are insured for. But this is not the case with CDS, which is a private contract between the CDS 'insurer' and each client who is 'insured'. So investors and banks alike were horrified to find out that AIG and the like had promised to insure everybody in town for so much that they didnt have enough to pay out even a fraction of what they promised. So down they all went like dominoes. Credit Default Swaps were illegal in the US until the Commodities Futures Modernization Act of 2000.

[Proculation]

Yeah I know how the crisis happened. But at the beginning, all those funds would not have sky rocketed without the government intervention in those credit loans.

[Pseudonym]

I like how Germany and Poland still realize the demise of the Soviet Union was a good thing. There may be hope for Europe yet.

[BeaverFever]

Proculation Proculation:

Yeah I know how the crisis happened. But at the beginning, all those funds would not have sky rocketed without the government intervention in those credit loans.

No, that was unfettered free market speculation. Bear Stearns et al were paying handsomely for those loans and investing heavily in them. The govt was a player in that market, but its not larger than all the other players combined. It didnt set the market. Besides F&F were primarily the sellers of those securities, not the investors who drive up the prices. Im not sure that F&F were paying out commissions to the indepedent brokers who sold them.

[BeaverFever]

$1:

Private sector loans, not Fannie or Freddie, triggered crisisDavid Goldstein and Kevin G. Hall | McClatchy Newspapers
last updated: October 27, 2008 03:12:24 PM

McClatchy Washington Bureau
Posted on Sun, Oct. 12, 2008

WASHINGTON — As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

•More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.


•Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.


•Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.

Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans.

It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.

This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.

To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.

But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.

Fueled by low interest rates and cheap credit, home prices between 2001 and 2007 galloped beyond anything ever seen, and that fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market.

About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve.

Conservative critics also blame the subprime lending mess on the Community Reinvestment Act, a 31-year-old law aimed at freeing credit for underserved neighborhoods.

Congress created the CRA in 1977 to reverse years of redlining and other restrictive banking practices that locked the poor, and especially minorities, out of homeownership and the tax breaks and wealth creation it affords. The CRA requires federally regulated and insured financial institutions to show that they're lending and investing in their communities.

Conservative columnist Charles Krauthammer wrote recently that while the goal of the CRA was admirable, "it led to tremendous pressure on Fannie Mae and Freddie Mac — who in turn pressured banks and other lenders — to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."

Fannie and Freddie, however, didn't pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market.

What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.

These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.

In a speech last March, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today's problems.

"Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans," she said. "The CRA has increased the volume of responsible lending to low- and moderate-income households."

In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, "that this new lending is good business."

McClatchy Newspapers 2008

http://www.mcclatchydc.com/251/v-print/story/53802.html

[BeaverFever]

Also this one:

$1:

Fannie, Freddie and the Threat of Economic Meltdown
By Paul Krugman, The New York Times
Posted on July 15, 2008

And now we've reached the next stage of our seemingly never-ending financial crisis. This time Fannie Mae and Freddie Mac are in the headlines, with dire warnings of imminent collapse. How worried should we be?

Well, I'm going to take a contrarian position: the storm over these particular lenders is overblown. Fannie and Freddie probably will need a government rescue. But since it's already clear that that rescue will take place, their problems won't take down the economy.

Furthermore, while Fannie and Freddie are problematic institutions, they aren't responsible for the mess we're in.

Here's the background: Fannie Mae -- the Federal National Mortgage Association -- was created in the 1930s to facilitate homeownership by buying mortgages from banks, freeing up cash that could be used to make new loans. Fannie and Freddie Mac, which does pretty much the same thing, now finance most of the home loans being made in America.

The case against Fannie and Freddie begins with their peculiar status: although they're private companies with stockholders and profits, they're "government-sponsored enterprises" established by federal law, which means that they receive special privileges.

The most important of these privileges is implicit: it's the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.

This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

Such one-way bets can encourage the taking of bad risks, because the downside is someone else's problem. The classic example of how this can happen is the savings-and-loan crisis of the 1980s: S.& L. owners offered high interest rates to attract lots of federally insured deposits, then essentially gambled with the money. When many of their bets went bad, the feds ended up holding the bag. The eventual cleanup cost taxpayers more than $100 billion.

But here's the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn't do any subprime lending, because they can't: the definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

In that case, however, how did they end up in trouble?

Part of the answer is the sheer scale of the housing bubble, and the size of the price declines taking place now that the bubble has burst. In Los Angeles, Miami and other places, anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point, even if he or she originally put 20 percent down. The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines.

Also, Fannie and Freddie, while tightly regulated in terms of their lending, haven't been required to put up enough capital -- that is, money raised by selling stock rather than borrowing. This means that even a small decline in the value of their assets can leave them underwater, owing more than they own.

And yes, there is a real political scandal here: there have been repeated warnings that Fannie's and Freddie's thin capitalization posed risks to taxpayers, but the companies' management bought off the political process, systematically hiring influential figures from both parties. While they were ugly, however, Fannie's and Freddie's political machinations didn't play a significant role in causing our current problems.

Still, isn't it shocking that taxpayers may end up having to rescue these institutions? Not really. We're going through a major financial crisis -- and such crises almost always end with some kind of taxpayer bailout for the banking system.

And let's be clear: Fannie and Freddie can't be allowed to fail. With the collapse of subprime lending, they're now more central than ever to the housing market, and the economy as a whole.

© 2009 The New York Times All rights reserved.

[BartSimpson]

Pseudonym Pseudonym:

I like how Germany and Poland still realize the demise of the Soviet Union was a good thing. There may be hope for Europe yet.

Amen to that!

[PublicAnimalNo9]

The real problem stemmed from a study that was done previous to this mess. Apparently, instead of using economists, they hired physicists to develop a "working model" of how this would all work out and benefit everyone.
Unfortunately, physics models and human behaviour are incompatible.

[Proculation]

BeaverFever BeaverFever:

Proculation Proculation:

Yeah I know how the crisis happened. But at the beginning, all those funds would not have sky rocketed without the government intervention in those credit loans.

No, that was unfettered free market speculation. Bear Stearns et al were paying handsomely for those loans and investing heavily in them. The govt was a player in that market, but its not larger than all the other players combined. It didnt set the market. Besides F&F were primarily the sellers of those securities, not the investors who drive up the prices. Im not sure that F&F were paying out commissions to the indepedent brokers who sold them.

Well, I've found that since this is a complex issue, people with left-wing ideology uses the complexity of what happened to attack free-market capitalism. Since you seem to be one of them, I don't see the point of arguing with you on the subject of "who's fault it is". You give one article blaming free-market and I can show you another analysis saying government intervention is at fault. That's a dead end.

I will just point out that since the government took all the control of Freddie, Fannie and a whole pan of the economy, we are almost back at the same point we were before the crisis: very low interest rates, subprimes pushed to low-income people and @ 20% of all loans, more and more credit and debt. That's not free-market's fault: it's the government acting here.

[BeaverFever]

Well, the physicists were mostly there to structure and value these very very complex investments. The bankers dont really understand physics or complex mathematical formulas and so most of the explanations were over their heads and they either deliberately or unintentionally misrepresented their value. Plus, they were making lots of money at the time. Nobody wants to kill the golden goose when the cash is flowing in so they just ignored or dismissed bad news.

[BeaverFever]

I think the facts pretty much illustrate that most of the activity that brought down the market had Credit Default swaps NOT been legalized. I mean, thats a very recent development. But I undstand your basic point that theres an ideological barrier preventing the free flow of facts here.

Supposedly, these new subprimes that have been issued are secure because they were all issued with govt backing funds that actually exist. Also, household net borrowing backed by mortgages (ie other consumer debts where mortgage is used as collateral or to consoolidate debt) continues fall. So far, housing prices have not exploded and neither have investments in these funds. But important questions remain like do these new subprimes have balloon payments that the borrower wont be able to afford in 2 years time? Are the loan applications being scrutinized for accuracy of info? Is this new lending safe?

TO BE FAIR I HAVE MY DOUBTS. Not because I think 'socialism' or leftists have taken over but because I think just as many Democrats have ties to private financial interests. Look at all the resistance to re-regulating the economy. Look at how many Goldman Sachs guys continue to work for or with the Obama administration, remained on after the Bush administration and have close ties to Congressmen and politicians from BOTH parites. The priorities of Bush, Obama and Congress has been simply to try and make the problem go away, reinflate the bubble and put everything back to the way it was in 2006. They refuse to accept that things were not right then nor for years before that. REAL structural change needs to be made.

One could make the argument that America has been and is still operating on the model of private profits first, people second. The politicians may change but it seems the real people who own the US and control its gov't remain regardless of which party is power.