Links of the Day for Wednesday, October 12, 2011

A rundown of the changes for the iPhone 4s.

Here is Walt Mossberg’s take:

We ordered my wife one last weekend. Her other iPhone was the 3Gs and was well over 2-years old. I think she’ll be impressed with the new phone. We shall see.

Switching gears to the “Occupy” movement…

Here is an interesting piece in today’s WSJ by American Enterprise Institute’s Peter J. Wallison titled Wall Street’s Gullipble Occupiers, which echoes my thoughts regarding our government’s and politicians’ involvement in helping create the crisis.

Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.

It is certainly possible to find prime borrowers among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards.

Fannie and Freddie were not the only government-backed or government-controlled organizations that were enlisted in this process. The Federal Housing Administration was competing with Fannie and Freddie for the same mortgages. And thanks to rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served.

That, my friends, is how the crisis got started. No, it wasn’t the entire cause but it did kick it off. I read something very similar in Thomas Sowell’s The Housing Boom and Bust: Revised Edition*, a must-read if you desire a different take on the creation of the housing crisis. Thomas Sowell does an excellent job and he uses about 1/4 of the book to list his sources.

*Affiliate Link

8 thoughts on “Links of the Day for Wednesday, October 12, 2011”

  1. Bush on the topic:

    Do NOT try to blame this on “liberals”. I think the true cause is the repealing of Glass-Steagall act, which lead to banks going haywire and taking on tremendous amounts of risk.

  2. It wasn’t just liberal utopian thinking. Most of the blame lies on Wall Street for their insatiable demand for loans that drove the ever decreasing underwriting guidelines during the bubble. However, more importantly, what most of these articles, pundits, and the like tend to gloss over is the sheer amount of fraud that was going in regards to mortgage lending.

    When the bubble first popped, the first foreclosures were primarily speculators. Everybody and their grandmother became mini-trumps investing in real estate. Much of the financing used to finance these purchases was rife with fraud – borrowers lying about intent to occupy, stated income, NINJA loans, etc. Developers inflating appraisals. Developers selling investmetn condos as primary residences, etc. The pay option arms were a favorite of the Specuvestor as i like to call them.

    In fact, where I am from mortgage fraud at the street level got so lucrative, street gangs got out of selling drugs and became mortgage bankers. The Chicago Tribune did a full article on all the fraud going on back 2005 as that is when the issues started to bubble up.,0,3971381.story

    As banks reigned in the loose lending and value begin to crash, after the Specuvestor got washed out, those foreclosures started taking down legitimate homeowners. The constriction in lending essentially threw out the baby with the bath water resulting in this morass we have now where hardly anyone can get a mortgage.

  3. JLP) Fair enough — but Thomas Sowell loves putting the blame on the two democratic senators that you mention and Sowell loves throwing around the ‘liberal’ word all the time. Sorry for directing my attack at you and not Sowell specifically.

    BTW: thanks for embedding the video directly into the comments!

    Russ) People who can make a down payment and can actually afford a mortgage can easily get a loan. Lending standards have been tightened up (not a bad thing). This is the exact opposite of Bush where he was using taxpayer money to make the down-payment for people (as stated in that video).

  4. BG: Yes, they can get a mortgage, but it isn’t as easy as it seems. I know, I am a mortgage banker originating mortgages everyday for a living and deal mostly with high income professionals. You’d be surprised at how frequently obviously qualified borrowers get denied mortgages for the most assine reasons in this market. Often times, it has nothing to do with the borrower qualifying but technical issues associated with Fannie/Freddie. However, that really isn’t my point.

    My point though was that the bubble wasn’t necessarily a result of liberal lending policies like Sowell and other pundits would have you believe. Sure, it was a contributor, but not the sole reason.

    Fraud committed by small time investors, organized crime, mortgage originators, Realtors, CONSUMERS, and others in an attempt to make a quick buck is the real cause of this mess. There are ENTIRE condo buildings that were nothing more than shams for speculators in every major city.

    A large percentage of the foreclosures that you read about were nothing more than speculators. Foreclosures were not little old ladies eating cat food. As all the fraudsters started losing their bets, they began to take down the regular homeowners because they brought down the values. In addition, banks started reigning in loan products that resulting in many legitimate homeowners being stuck without financing options for refinancing.

    Stated income, pay option arms, interest-only, 100% financing, etc have been around for decades. These products were nothing new. What was new is that these products were marketed towards Joe Sixpack and the guidelines for their usage were abused to put anyone in a mortgage, not just the qualified borrowers that used them in the past.

  5. BG,

    If you read Sowell’s book, you will see that he does not place the blame just on two democrats. He spreads it around.

    Yes, Sowell is a libertarian, which means he tends to line up with conservatives more than liberals on lots of issues. But, when something doesn’t sit well with him, he calls them on it, no matter what their political stripes. That’s why I like and respect him so much.

    What Bush said in that video in your comment was foolish. I’ll be the first to admit that. I have never supported Bush on most economic issues.

  6. The idea that the GSEs were the “cause” of the mortgage crisis has been convincingly refuted in the academic literature. See for example Coleman, Lacour-Little and Vandell (2008).

    Here is the key finding from the abstract:

    “However, we do find strong evidence that a credit regime shift took place in late 2003, as the GSE’s were displaced in the market by private issuers of new mortgage products. Market fundamentals became insignificant in affecting house price returns, and the price-momentum conditions characteristic of a “bubble” were created.”

    Here is a graph of the various actors in the mortgage market which is very informative:

    While Fannie and Freddie (the GSEs) are no doubt the largest market participants, the housing bubble and crisis was precipitated primarily by loans bundled into asset-backed securities, which explode in 2003 and collapse several years later as all those idiotic adjustable rate mortgages reset.

Comments are closed.