Fed handed out $1.2 Trillion in secret loans during the crisis.

[charter.rights]

Based on our history I would assume we would flock to gold and silver and use that as money.

Some people are already there.

Free Lakota Bank

[joeblack]

Based on our history I would assume we would flock to gold and silver and use that as money.

There isn't enough precious metal to cover the current credit market, and that is why the current financial system is the way it is. The gold standard was actually a huge reason the depression of the 30's happened. Once countries left the gold standard, the extension of credit to individuals and businesses exploded and in turn grew the respective country's economy.

[Pliny]

No actually Fanny and Freddy had DECREASED their share of this market in the years prior to the meltdown. The vast majority of securitized loans were bought by the private sector, and those investors are lining up to sue as well.

And again... WILL YOU PLEASE READ THE GOD DAMN CRA? There is absolutely NOTHING in it that mandated mortgage origionators to relax their standards, and it DID NOT EVEN APPLY to the origionators making all the subprime loans.

. I don't know what CRA you are reading but basically it encouraged banks to make mortgage loans to lower income individuals. In the nineties it gained a little teeth and banks that were not complying with it.....well...read it for yourself. The following analysis is all over the net from various sources.

here's how the CRA contributed to the housing bubble

In order for banks to abandon a century of prudent lending there had to be some creation of 'moral hazard" to lead them to such irresponsible behavior. if no one is watching you then you may be able to get away with bending the rules, if the authorities are encouraging you to abandon sound practices or threatening you with non-compliance with the CRA - and that is the case - then you really have no choice. It's what they want you to do.

Gretchen Morgensons's "Reckless Endangerment" explains the whole process.

Edited September 6, 2011 by Pliny

[dre]

. I don't know what CRA you are reading but basically it encouraged banks to make mortgage loans to lower income individuals. In the nineties it gained a little teeth and banks that were not complying with it.....well...read it for yourself. The following analysis is all over the net from various sources.

here's how the CRA contributed to the housing bubble

In order for banks to abandon a century of prudent lending there had to be some creation of 'moral hazard" to lead them to such irresponsible behavior. if no one is watching you then you may be able to get away with bending the rules, if the authorities are encouraging you to abandon sound practices or threatening you with non-compliance with the CRA - and that is the case - then you really have no choice. It's what they want you to do.

Gretchen Morgensons's "Reckless Endangerment" explains the whole process.

Thats an OP-ED by a guy that ALSO hasnt read the CRA.

In order for banks to abandon a century of prudent lending there had to be some creation of 'moral hazard" to lead them to such irresponsible behavior.

Yeah and its pretty clear what that was. The banks were no longer keeping any of these loans on their books! It didnt matter if the loans were prudent or not as long as you could sell the securities they were bundled into... then the loans become someone elses problem.

Like I said. Theres nothing at all in the CRA that forces banks to change their lending standards in any way. The act is about red-lining. And futhermore only 1 of the top 25 sub-prime lenders was even subject to this act.

The reason these companies were doing this is because it was profitable. END OF STORY.

[Pliny]

There isn't enough precious metal to cover the current credit market, and that is why the current financial system is the way it is.

The purpose of the current financial system is to keep wages and prices generally stable and a slight inflationary monetary policy is followed inorder to do so. Not to mention those that make the fiscal decisions have a clear financial advantage over those guessing what the central bank will do.

As for precious metals to cover the current credit market the price of gold would have to be around $5000/oz. (just a guesstimate). The old credit market was dependent mostly on real savings....which begs the question....why you think the below would be true.

The gold standard was actually a huge reason the depression of the 30's happened.

"The system (world money system) has emerged by bits and pieces since WWI. From then until 1971, much of the world was effectively on a dollar standard, while the United States, though ostensibly on a gold standard (except for a brief period in 1933-34), actually was on a fiat standard combined with a government program for pegging the price of gold." ("Money Mischief" - Chapter 10 paragraph 2, Milton Friedman.

Once countries left the gold standard, the extension of credit to individuals and businesses exploded and in turn grew the respective country's economy.

Most countries, per the above were on a dollar standard after WWI. Is that the same time they left the gold standard? Mostly what happened was hyperinflation in Germany, Brazil, Bolivia, Chile, Argentina, Mexico and Israel.

Governments are hesitant to admit the failings of their inflationary policies and more than ready to ooze out from under any criticism by claiming the extension of credit to individuals and businesses exploded and grew the respective economies. While it is true there will be increased economic growth. It won't necessarily be the growth we want and that is why we have experienced depressions and recessions and general booms and busts. A lot of that made available credit goes into malinvestments and losses. Credit extended on the basis of real savings from real created production will, I believe, make growth slower, but it tends to be more stable growth. Overall, being on a commmodity based and not fiat based monetary system would have definitely given us a different world - one that I think may have been better in some respects and perhaps worse in others.

As an accountant, you know that most businesses can keep their books but use accountants to do their taxes, and tax law is the major reason for the demand. The structure of society also keeps corporate lawyers very busy as well. I don't think the complexity of tax law is really necessary and when it reaches the point where they won't stand behind their own advices - it's long past due for an overhaul.

[Pliny]

Thats an OP-ED by a guy that ALSO hasnt read the CRA.

Yeah and its pretty clear what that was. The banks were no longer keeping any of these loans on their books! It didnt matter if the loans were prudent or not as long as you could sell the securities they were bundled into... then the loans become someone elses problem.

Like I said. Theres nothing at all in the CRA that forces banks to change their lending standards in any way. The act is about red-lining. And futhermore only 1 of the top 25 sub-prime lenders was even subject to this act.

The reason these companies were doing this is because it was profitable. END OF STORY.

I cited the blog I did because the writer had originally held your position. The arguments for and against are all there for you to view with all the players. But you choose to just brush it off as an op-ed? I don't think you are interested in discovering anything beyond what Krugman says.

There were regulations in the CRA that banks were expected to comply with, what were they? Perhaps you should read what was added to the CRA in the nineties. Bank lending standards were indeed compromised.

So Banks went along with regulators from the CRA and got some good ratings from them for helping to put lower income families in homes. The higher risk of the loans was overlooked in favour of that policy.

Yours has been "end of story" since you Krugman stated it. I recommend "Reckless Endangerment" by Gretchen Mortgenson.

And I'm not certain you understood what you read in the CRA but you clearly missed the primary purpose of it and how it would enable lower income individuals to get mortgages.

[dre]

I cited the blog I did because the writer had originally held your position. The arguments for and against are all there for you to view with all the players. But you choose to just brush it off as an op-ed? I don't think you are interested in discovering anything beyond what Krugman says.

There were regulations in the CRA that banks were expected to comply with, what were they? Perhaps you should read what was added to the CRA in the nineties. Bank lending standards were indeed compromised.

So Banks went along with regulators from the CRA and got some good ratings from them for helping to put lower income families in homes. The higher risk of the loans was overlooked in favour of that policy.

Yours has been "end of story" since you Krugman stated it. I recommend "Reckless Endangerment" by Gretchen Mortgenson.

And I'm not certain you understood what you read in the CRA but you clearly missed the primary purpose of it and how it would enable lower income individuals to get mortgages.

There were regulations in the CRA that banks were expected to comply with, what were they? Perhaps you should read what was added to the CRA in the nineties. Bank lending standards were indeed compromised

Ok what paragraph? Show me?

And I'm not certain you understood what you read in the CRA but you clearly missed the primary purpose of it and how it would enable lower income individuals to get mortgages.

That wasnt the primary purpose of it. It was meant to prevent red-lining, not encourage loans to low income families, and banks both before and after that were free to set whatever standards they want.

But again... only 1 of the big sub prime lenders was even subject to the CRA.

Iv read almost nothing by Krugman btw.

Edited September 9, 2011 by dre

[msj]

Dre, there's little point trying to discuss the CRA with Pliny.

His mind is made up and damn the facts.

For those lurking here are some links as a primer on this issue.

Oh, and yes, it does help to have actually read the CRA because once you do you realize that Pliny really doesn't have a clue what he's talking about. [i would recommend following the many links in the Wikipedia entry on this to begin to understand it - that's right, start at reference #1 and work your way through it.]

Why You Should Really Be Angry About Fannie/Freddie

Private Sector loans (i.e. non-CRA) played a big part in the crisis. Oh yeah, and there's that 1 in 25 subprime lenders who was subject to the CRA rules as Dre has already previously mentioned.

This is also not to say that Krugman hasn't had anything intelligent nor interesting to say on this matter; particularly the hypocrisy of certain CRA/Fannie/Freddie critics. [but go ahead and do your usual ad hominem attack on Krugman, Pliny, and avoid touching the argument altogether]

All in all, this guy probably has it about right: The Sarah Palinization of the financial crisis

The big lesson here was not about government distortions to the market (except perhaps the Fed's low interest rates). The big lesson here was that unrestrained, unregulated lending practices by the private sector can be dangerous for consumers and for the financial system as a whole. To the extent that "government policy'' contributed to the crisis, the first failure was in not stopping the reckless private-sector lending and the second failure was in not stopping Fannie and Freddie from following suit.

Edited September 9, 2011 by msj

[Pliny]

Ok what paragraph? Show me?

Here is the stated purpose and the ratings of banks.

This department oversees the ratings of financial institutions.

The CRA requires each federal financial supervisory agency to use its authority when examining a financial institution subject to its supervision, to assess the institution's record of meeting the credit needs of its assessment area.

That wasnt the primary purpose of it. It was meant to prevent red-lining, not encourage loans to low income families, and banks both before and after that were free to set whatever standards they want.

Indeed, redlining was the concern. What was the solution? Encouraging loans in lower income areas.

How is that going to affect the risk-level of mortgages?

But again... only 1 of the big sub prime lenders was even subject to the CRA.

Only one?

The same Federal banking agencies that are responsible for supervising depository institutions are also the agencies that conduct examinations for CRA compliance.[10] These agencies are the Federal Reserve System (FRB), the FDIC, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). In 1981, to help achieve the goals of the CRA, each of the Federal Reserve banks established a Community Affairs Office to work with banking institutions and the public in identifying credit needs within the community and ways to address those needs.[6]

Hmmm...Community Affairs Office...shades of ACORN. It became popular to picket banks, and the homes of the Managers of Banks with low CRA ratings. Solution take the risky mortgages demanded by Community affairs offices and repackage them up.

Iv read almost nothing by Krugman btw.

Then you are getting your information from at least third hand sources.

[Pliny]

All in all, this guy probably has it about right: The Sarah Palinization of the financial crisis

I believe, and you are not alone as is obvious by your citations, what is missing is cause and effect.

Your basic motivation for the housing bubble was Wall street greed. You believe that Wall Street was stupid enough to tank itself. It defintely was trying to get out from under high risk sub-prime mortgages. Selling them to all takers, one quarter of which were bopught by Fannie and Freddie. But there was a rating on the derivatives. They were quite risky - they weren't a triple A investment.

But if greed is the sole motivator what was it that allowed it to surface because that is what regualtions are for. Was it deregulation on the market? Why was there deregulation? Perhaps to encourage lending along with a low interest rate?

Greed must be granted opportunity. What was the opportunity? People were all of a sudden willing to take high risks with their investments?

Establishment of creditworthiness

ScienceDaily (June 2, 2011) — A common reading of the recent subprime mortgage crisis pins the blame on bankers and loan brokers who extended mortgages to those who could not afford them, thereby inflating a housing bubble that was destined to burst.

While technically correct, that reading ignores the "politics of creditworthiness" that undergirded the rise of subprime mortgages, as explained in a new article in the June issue of the American Sociological Review by Simone Polillo, an assistant professor of sociology in the University of Virginia's College of Arts & Sciences.

[maple_leafs182]

There isn't enough precious metal to cover the current credit market, and that is why the current financial system is the way it is. The gold standard was actually a huge reason the depression of the 30's happened. Once countries left the gold standard, the extension of credit to individuals and businesses exploded and in turn grew the respective country's economy.

The easy credit of the 20's created the depression. Should of never allowed banks to create money out of nothing with fractional reserve banking. That is why the depression happened.

[dre]

I believe, and you are not alone as is obvious by your citations, what is missing is cause and effect.

Your basic motivation for the housing bubble was Wall street greed. You believe that Wall Street was stupid enough to tank itself. It defintely was trying to get out from under high risk sub-prime mortgages. Selling them to all takers, one quarter of which were bopught by Fannie and Freddie. But there was a rating on the derivatives. They were quite risky - they weren't a triple A investment.

But if greed is the sole motivator what was it that allowed it to surface because that is what regualtions are for. Was it deregulation on the market? Why was there deregulation? Perhaps to encourage lending along with a low interest rate?

Greed must be granted opportunity. What was the opportunity? People were all of a sudden willing to take high risks with their investments?

Establishment of creditworthiness

I already explained to you why risk management changed. The entire point of bank enforcing traditional income / debt ratios is because the banks that made these loans had to hold them and collect payments.

But the mortgage companies making all these loans were not keeping them on their books. They were getting bundled and sold, and they became the responsibility of the buyers. The buyers were mislead by the ratings agencies (which were paid by the exact same people who were making these products.

Indeed, redlining was the concern. What was the solution? Encouraging loans in lower income areas.

How is that going to affect the risk-level of mortgages?

Not at all unless you lend to poor credit risks. Even in low income areas there is plenty of people who are good credit risks. Lots of people with medium and high incomes... lots of people with great credit histories and scores. The problem was that banks would accept deposits from these communities but refuse to lend money to even the members of the community with high credit scores and stable incomes.

THESE ARE NOT SUBPRIME LOANS, and the banks regulated by the CRA and accepting insured deposits were actually the most responsible players in this whole mess.

The same Federal banking agencies that are responsible for supervising depository institutions are also the agencies that conduct examinations for CRA compliance.[10] These agencies are the Federal Reserve System (FRB), the FDIC, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). In 1981, to help achieve the goals of the CRA, each of the Federal Reserve banks established a Community Affairs Office to work with banking institutions and the public in identifying credit needs within the community and ways to address those needs.[6]

Hmmm...Community Affairs Office...shades of ACORN. It became popular to picket banks, and the homes of the Managers of Banks with low CRA ratings. Solution take the risky mortgages demanded by Community affairs offices and repackage them up.

So what? FDIC insured banks were not the ones making the vast majority of subprime loans.

But there was a rating on the derivatives. They were quite risky - they weren't a triple A investment.

Man... You arent even paying attention :angry:

Edited September 10, 2011 by dre

[Pliny]

I already explained to you why risk management changed. The entire point of bank enforcing traditional income / debt ratios is because the banks that made these loans had to hold them and collect payments.

But the mortgage companies making all these loans were not keeping them on their books. They were getting bundled and sold, and they became the responsibility of the buyers. The buyers were mislead by the ratings agencies (which were paid by the exact same people who were making these products.

Track for me a mortgage from it's origin to the underwriter who manages the debt, to their appearance on Wall Street as a mortgage backed security.

The fact is the debt always shows on the books of the underwriters since they are managing the debt. Mortgage brokers, at least in the States, are generally go betweens and not the underwriters;that is, "managers", of the mortgages themselves Wall street packages the debt and secures investment as a mortgage backed security from investors. They are betting the mortgage payments will be made. The debt always appears on the mortgage underwriter's books.

Not at all unless you lend to poor credit risks. Even in low income areas there is plenty of people who are good credit risks. Lots of people with medium and high incomes... lots of people with great credit histories and scores. The problem was that banks would accept deposits from these communities but refuse to lend money to even the members of the community with high credit scores and stable incomes.

Why weren't loans being made to them?

THESE ARE NOT SUBPRIME LOANS, and the banks regulated by the CRA and accepting insured deposits were actually the most responsible players in this whole mess.

All the banks were rated by the CRA. "Rated" - not regulated. The policy of the Community Affairs Offices set up in communities was to make housing as available as possible to as many as possible. They picketed banks that didn't make loans to lower income individuals.

There is only two things that could prevent redlining. Not allow mortgages to be sold in middle to upper income neighbourhoods, impossible since it would be counter productive, or encourage lending in lower class neighbourhoods. Why weren't loans being made to, as you say, the plenty of eligible people who were good credit risks?

Subprime loans became a way for lower income individuals to qualify for a mortgage.

So what? FDIC insured banks were not the ones making the vast majority of subprime loans.

I don't know why you continually bring up FDIC insured banks since they don't insure stocks, bonds, mutual funds or money funds or mortgages or securities. They only insure deposits.

Man... You arent even paying attention :angry:

You could say there was no CRA in Ireland or Spain so what explains their coincident housing bubble?

I would answer low interest rates, easy credit, and a government that chose to look the other way in order to look good itself - a booming housing market and growing economy where people are owning their own homes. If the boom had continued in the US Canada would have been in the same shoes but it ended before Canada's lending institutions fell victim to the moral hazard and abandoned prudence. Consequently, we weren't bitten as hard.

[dre]

Track for me a mortgage from it's origin to the underwriter who manages the debt, to their appearance on Wall Street as a mortgage backed security.

Again? Sure.

1. Lender Loans Pliny 300K. This loan represents an income stream of about $500k over the next 20 years in monthly payments.

2. Lender sells this income stream and risk associated with it to financial firm who bundles it into mortgage backed securities.

3. Financial Firm sells this security to global investor.

4. The lender takes the money it got paid for the mortgage it sold, pockets a little bit of profit, and lends the money out again.

The fact is the debt always shows on the books of the underwriters since they are managing the debt. Mortgage brokers, at least in the States, are generally go betweens and not the underwriters;that is, "managers", of the mortgages themselves Wall street packages the debt and secures investment as a mortgage backed security from investors. They are betting the mortgage payments will be made. The debt always appears on the mortgage underwriter's books.

No you dont appear to understand what "off the books" mean. Once these banks sold these mortgages they were neither an asset or a liability on their balance sheet. They couldnt care less if they defaulted or not.

You can see how this dramatically change the risk paradigm. Lenders were not worried anymore about the ability of borrowers to pay as long as they were able to sell the contract. And the ratings agencies made sure of that by assigning triple A ratings to derivatives with way too much toxic paper in them.

All the banks were rated by the CRA. "Rated" - not regulated.

Right but banks werent the ones making all these loans. They were trusts, thrifts, and mortgate companies that lent out investors money.

I would answer low interest rates, easy credit, and a government that chose to look the other way in order to look good itself - a booming housing market and growing economy where people are owning their own homes.

Yup. Poor regulation... and interest rates too low for too long. But youre ignoring the 800lb guerilla in the room that funded this whole thing. Securitization! And the glut of capital dumped into the market by global investors, hedge funds, pension funds, etc.

I don't know why you continually bring up FDIC insured banks since they don't insure stocks, bonds, mutual funds or money funds or mortgages or securities. They only insure deposits.

Because FDIC insured banks are the ones that are bound by the CRA.

Edited September 11, 2011 by dre

[joeblack]

Pliny, research "credit tranches" if you want to follow how mortgage vehicles work. You're quite off base.

As for the Friedman quote, countries were not, in fact, on a fiat system "right after WW1." Britain returned to the standard in 1925, and then once again left the gold standard in 1931. Many countries followed the same return/exit pathway. And stats show that the sooner countries left the gold standard, the quicker their respective economies recovered. The US was the exception to the rule, as ironically staying out of the war until the very end and at the same time functioning as a lender to France and Britain allowed the US to essentially accumulate all the gold stores in the world at the time.

You have to remember that at the time, all the European powers left the gold standard during WW1 in order to finance their war efforts. Germany (using your example) not only had to finance their own war, but afterwards had to pay for the war efforts of the Allied nations as well. Printing money with no economic faith in the country's system is what caused the "rampant inflation" you are describing.

Wikipedia for once actually offers a pretty good read on the gold standard, and provides a touch more information than an out-of-context quote from Milton. http://en.wikipedia.org/wiki/Gold_standard#Depression_and_World_War_II_.281932.E2.80.9346.29

As for the tax system, I agree it is complex. It gets that way out of our own ingenuity. Good intentions start the pathway, but then when an ingenious fellow decides that capital gains are not the same as income, then suddenly the good intentions don't quite cover it. An amendment is made, and things continue. If you think tax law is complex, try interpreting common law... All that being said, Canadian tax law is actually very progressive and forward compared to our Yankee brothers to the south. Now THERE is a messed up system.

Edited September 13, 2011 by joeblack

[Pliny]

Pliny, research "credit tranches" if you want to follow how mortgage vehicles work. You're quite off base.

I'm off base? "Credit tranches", are layers or "slices" of different levels of securitization. I haven't done a full study of them but let me answer dre in his simplified version of mortgages.

Wikipedia for once actually offers a pretty good read on the gold standard, and provides a touch more information than an out-of-context quote from Milton. http://en.wikipedia.org/wiki/Gold_standard#Depression_and_World_War_II_.281932.E2.80.9346.29

I found wikipedia to present the establishment view which I feel is off.

As for the tax system, I agree it is complex. It gets that way out of our own ingenuity. Good intentions start the pathway, but then when an ingenious fellow decides that capital gains are not the same as income, then suddenly the good intentions don't quite cover it. An amendment is made, and things continue. If you think tax law is complex, try interpreting common law... All that being said, Canadian tax law is actually very progressive and forward compared to our Yankee brothers to the south. Now THERE is a messed up system.

Americans are indeed becoming aware they are in need of tax reform.

[Pliny]

Again? Sure.

1. Lender Loans Pliny 300K. This loan represents an income stream of about $500k over the next 20 years in monthly payments.

2. Lender sells this income stream and risk associated with it to financial firm who bundles it into mortgage backed securities.

3. Financial Firm sells this security to global investor.

4. The lender takes the money it got paid for the mortgage it sold, pockets a little bit of profit, and lends the money out again.

You don't need any understanding of mortgages to write that.

If you want me to understand something about it then you have to explain in a little more detail. What you describe sounds like a private mortgage loan.

Under point 1:

"Lender Loans Pliny 300K. This loan represents an income stream of about $500k over the next 20 years in monthly payments."

I assume the lender is a bank. The mortgage is a claim on a land title or deed to property. So the lender actually buys the property from the seller and the mortgagee agrees to a term and payment structure to buy it off the bank.

Under point 2:

"Lender sells this income stream and risk associated with it to financial firm who bundles it into mortgage backed securities."

I assume from point 4, "The lender takes the money it got paid for the mortgage it sold, pockets a little bit of profit, and lends the money out again." that you mean the mortgage has been sold?

Lender sells it to financial firm? This would involve a transfer of the deed to the property. While I agree this happens, one bank takes over underwriting the mortgage from another at a price such as say $2000, the land title transfers to them. Mortgagees will sometimes pay the penalty to transfer the mortgage if they get a better rate from another institution or will change when the mrtgage comes up for renewal. Title to the property in this case is transferred. A financial firm, or investment firm, unless it has a commercial banking department (not possible in the US until the cancellation of the Glass-Steagall Act)" doesn't buy the mortgage - that is, the title to the land. It only securitizes the loan and trades the securities.

An investment firm does not necessarily buy the mortgages. It has an agreement with a bank, to sell an interest in the mortgage to investors and it securitizes the mortgages. The investment firm, financial istitution makes it's money buying and selling these securities.

Under point 3:

Financial Firm sells this security to global investor.

That's what financial firms do. They more often than not also have a mortgage brokeraging department which charges a fee to write up a mortgage and submit it to a lender, usually a commercial bank. Fannie and Freddie got into that act as well and often underwrote the riskiest loans that other banks wouldn't Since they were a quasi-government run organization, they forwarded the policies of easy credit for low income earners the government promoted.

Under point 4:

"The lender takes the money it got paid for the mortgage it sold, pockets a little bit of profit, and lends the money out again."

It can sell the mortgage but that's not the norm. It likes to hold the deed to the land and get a stream of payments from the mortgagee, plus have a financial institution securitize the debt and sell the securities to investors, to beef up it's reserves in order for it to hold more mortgages. Giving the investor a small portion of the mortgage payments as a return on his investment.

When the financial institution sells mortgage backed securities to the investors, the investors money goes into a mortgage pool at the bank that holds the mortgage deed and this boost in the banks reserves allows it to make more mortgage loans. Payments of interest and principal on the loan from the mortgagee then starts to provide a return on investment to both the bank and the investor.

No you dont appear to understand what "off the books" mean. Once these banks sold these mortgages they were neither an asset or a liability on their balance sheet. They couldnt care less if they defaulted or not.

Once they sell the mortgages, and transfer title to the land, they are "off their books". If they securitize the debt and trade it on Wall street the mortgage is still on their books.

You can see how this dramatically change the risk paradigm. Lenders were not worried anymore about the ability of borrowers to pay as long as they were able to sell the contract. And the ratings agencies made sure of that by assigning triple A ratings to derivatives with way too much toxic paper in them.

There is little advantage in a bank or anybody underwriting a mortgage and then selling it. Why would a bank settle for a few thousand dollars when it can over a period of 20 years earn $200,000 in interest.

It will earn approximately fifty thousand dollars over a five year term on a $300K mortgage.

Certainly, the housing bubble, the boom, must have made them nervous about their mortgages but they held the deeds and were making money securitizing the debt.

Fannie and freddie bought a lot of the higher risk mortgages that mortgage brokers sold them. that helped to continue the bubble. Other bankers looked at Fannie and freddie and ignored the signals that were there regarding risk.

Right but banks werent the ones making all these loans. They were trusts, thrifts, and mortgate companies that lent out investors money.

well, percentages of who financed what could be looked up, I suppose. But I don't think it is an important point. The point is that banks were picketed to make low income loans.

Yup. Poor regulation... and interest rates too low for too long. But youre ignoring the 800lb guerilla in the room that funded this whole thing. Securitization! And the glut of capital dumped into the market by global investors, hedge funds, pension funds, etc.

It's the cart before the horse. There has to be a demand to purchase housing first. Securitization did allow the banks to create more credit as investors beefed up their reserves, I agree. But as far banks go the securitization isn't what directly funded the mortgages. The banks owned the deed. the securitization allowed them to create the credit to buy and own the land titles. The investors only owned the securities - the debt the banks created. If the investors bought the mortgage they would have been the one's doing the foreclosing.

Because FDIC insured banks are the ones that are bound by the CRA.

All banks, FDIC insured or not, were "rated" not "bound" by the CRA.

[maple_leafs182]

I understand what you guys are saying, but there is no way in hell the market could of been so leveraged if not for such low interest rates. That was the problem with the economy, there was too much debt, there was over inflation, now the solution we are told is more debt and more inflation, I bet we will get the same endgame...a tanking economy.

[dre]

You don't need any understanding of mortgages to write that.

If you want me to understand something about it then you have to explain in a little more detail. What you describe sounds like a private mortgage loan.

Under point 1:

"Lender Loans Pliny 300K. This loan represents an income stream of about $500k over the next 20 years in monthly payments."

I assume the lender is a bank. The mortgage is a claim on a land title or deed to property. So the lender actually buys the property from the seller and the mortgagee agrees to a term and payment structure to buy it off the bank.

Under point 2:

"Lender sells this income stream and risk associated with it to financial firm who bundles it into mortgage backed securities."

I assume from point 4, "The lender takes the money it got paid for the mortgage it sold, pockets a little bit of profit, and lends the money out again." that you mean the mortgage has been sold?

Lender sells it to financial firm? This would involve a transfer of the deed to the property. While I agree this happens, one bank takes over underwriting the mortgage from another at a price such as say $2000, the land title transfers to them. Mortgagees will sometimes pay the penalty to transfer the mortgage if they get a better rate from another institution or will change when the mrtgage comes up for renewal. Title to the property in this case is transferred. A financial firm, or investment firm, unless it has a commercial banking department (not possible in the US until the cancellation of the Glass-Steagall Act)" doesn't buy the mortgage - that is, the title to the land. It only securitizes the loan and trades the securities.

An investment firm does not necessarily buy the mortgages. It has an agreement with a bank, to sell an interest in the mortgage to investors and it securitizes the mortgages. The investment firm, financial istitution makes it's money buying and selling these securities.

Under point 3:

Financial Firm sells this security to global investor.

That's what financial firms do. They more often than not also have a mortgage brokeraging department which charges a fee to write up a mortgage and submit it to a lender, usually a commercial bank. Fannie and Freddie got into that act as well and often underwrote the riskiest loans that other banks wouldn't Since they were a quasi-government run organization, they forwarded the policies of easy credit for low income earners the government promoted.

Under point 4:

"The lender takes the money it got paid for the mortgage it sold, pockets a little bit of profit, and lends the money out again."

It can sell the mortgage but that's not the norm. It likes to hold the deed to the land and get a stream of payments from the mortgagee, plus have a financial institution securitize the debt and sell the securities to investors, to beef up it's reserves in order for it to hold more mortgages. Giving the investor a small portion of the mortgage payments as a return on his investment.

When the financial institution sells mortgage backed securities to the investors, the investors money goes into a mortgage pool at the bank that holds the mortgage deed and this boost in the banks reserves allows it to make more mortgage loans. Payments of interest and principal on the loan from the mortgagee then starts to provide a return on investment to both the bank and the investor.

Once they sell the mortgages, and transfer title to the land, they are "off their books". If they securitize the debt and trade it on Wall street the mortgage is still on their books.

There is little advantage in a bank or anybody underwriting a mortgage and then selling it. Why would a bank settle for a few thousand dollars when it can over a period of 20 years earn $200,000 in interest.

It will earn approximately fifty thousand dollars over a five year term on a $300K mortgage.

Certainly, the housing bubble, the boom, must have made them nervous about their mortgages but they held the deeds and were making money securitizing the debt.

Fannie and freddie bought a lot of the higher risk mortgages that mortgage brokers sold them. that helped to continue the bubble. Other bankers looked at Fannie and freddie and ignored the signals that were there regarding risk.

Right but banks werent the ones making all these loans. They were trusts, thrifts, and mortgate companies that lent out investors money.

well, percentages of who financed what could be looked up, I suppose. But I don't think it is an important point. The point is that banks were picketed to make low income loans.

Yup. Poor regulation... and interest rates too low for too long. But youre ignoring the 800lb guerilla in the room that funded this whole thing. Securitization! And the glut of capital dumped into the market by global investors, hedge funds, pension funds, etc.

It's the cart before the horse. There has to be a demand to purchase housing first. Securitization did allow the banks to create more credit as investors beefed up their reserves, I agree. But as far banks go the securitization isn't what directly funded the mortgages. The banks owned the deed. the securitization allowed them to create the credit to buy and own the land titles. The investors only owned the securities - the debt the banks created. If the investors bought the mortgage they would have been the one's doing the foreclosing.

Because FDIC insured banks are the ones that are bound by the CRA.

All banks, FDIC insured or not, were "rated" not "bound" by the CRA.

All banks, FDIC insured or not, were "rated" not "bound" by the CRA.

Problem is banks were not the ones doing most of the lending.

I assume the lender is a bank. The mortgage is a claim on a land title or deed to property. So the lender actually buys the property from the seller and the mortgagee agrees to a term and payment structure to buy it off the bank.

No in the case of subprime the lenders were not banks. They were mostly either mortgage companies, realestate trusts, and thrifts.

The mortgage is a claim on a land title or deed to property. So the lender actually buys the property from the seller and the mortgagee agrees to a term and payment structure to buy it off the bank.

No a mortgage is a claim on a stream of income that uses the property as collateral. Neither the lender, the securitizer, actually owns the property. The buyer does.

I assume from point 4, "The lender takes the money it got paid for the mortgage it sold, pockets a little bit of profit, and lends the money out again." that you mean the mortgage has been sold?

Yes. The right to that income stream and the risk has been sold.

Lender sells it to financial firm? This would involve a transfer of the deed to the property.

Oh god... Do you even know what a mortgage is? Like in laymens terms? The lender is not selling the deed to the property... that deed is held by the buyer. The lender is selling the right to that income stream, and the risk that it might dry up.

There is little advantage in a bank or anybody underwriting a mortgage and then selling it. Why would a bank settle for a few thousand dollars when it can over a period of 20 years earn $200,000 in interest.

It will earn approximately fifty thousand dollars over a five year term on a $300K mortgage.

The answer to that question is obvious. As is the fact that this is exactly what was happening. Banks can keep rolling those mortgages over, and making more and more loans without assuming any long term risk, and without having to worry about defaults.

Certainly, the housing bubble, the boom, must have made them nervous about their mortgages but they held the deeds and were making money securitizing the debt.

No they dont hold the deeds. The buy holds the deeds. The deeds for my realestate are held by my solicitor, and the lenders name is not on them. The deeds are posted as collateral but that is specified in the contract between you and your lender (also know as a mortgage).

Fannie and freddie bought a lot of the higher risk mortgages that mortgage brokers sold them. that helped to continue the bubble. Other bankers looked at Fannie and freddie and ignored the signals that were there regarding risk.

:lol: Man Iv explained this to you so many times. I dont have the time or patience to do it again.

Securitization did allow the banks to create more credit as investors beefed up their reserves, I agree.

Not just that it accounted for the vast majority of funding for this activity. Trillions and trillions of dollars. Securitization is what flooded the US housing market with money. Iv actually been over all this with you before, and provided you with a paper trail that allowed you to actually follow this money. Securitization, MBS's, CDO', and CDS's were also the vehicles used to hide the risk from investors with the help of private credit raters.

[Pliny]

Just so we don't lose sight of the initial argument, what we're trying to establish here is what was the reason for the housing bubble and subsequent crash.

You are saying it is Wall Street greed and I am saying it is government policy that created a distortion of market signals.

Problem is banks were not the ones doing most of the lending.

[/quote}

Once the boom started and the signals from Washington, in the form of low interest rates and easy credit, plus encouragement to make loans in redlined districts, this point becomes fairly irrelevant.

Who cares if it was banks not doiong most of the lending. The fact is they were doing a sizeable portion of it in the initial stages which led to a bandwagon that others hopped on.

No in the case of subprime the lenders were not banks. They were mostly either mortgage companies, realestate trusts, and thrifts.

I'll go with this. Subprime lenders were mostly not banks. Washington Mutual was one that did engage in the subprime mortgage market.

No a mortgage is a claim on a stream of income that uses the property as collateral. Neither the lender, the securitizer, actually owns the property. The buyer does.

Ok. Whatever, the buyers name is on the deed but the mortgager has first claim to the deed until the debt is paid.

I assume from point 4, "The lender takes the money it got paid for the mortgage it sold, pockets a little bit of profit, and lends the money out again." that you mean the mortgage has been sold?

Yes. The right to that income stream and the risk has been sold.

The way you worded that it sounds like you mean the mortgage is sold for it's full value. The bank made the mortgage of $300K and then sold it for $300K, less any payments on the principal.

Since it is a debt of the mortgagee, no bank or lender will buy a mortgage giving the original mortgagor the full value of the mortgage. All that they buy is the income stream for whatever the going rate is.

Oh god... Do you even know what a mortgage is? Like in laymens terms? The lender is not selling the deed to the property... that deed is held by the buyer. The lender is selling the right to that income stream, and the risk that it might dry up.

Ok, the buyers name is on the deed and as you say the lawyer holds the deed until the claim on it is removed by the mortgagor. Because I said the title of the deed was transferred, not technically correct, but if you consider, in layman's terms the mortgagor basically owns the home until the mrtgage is paid not entirely incorrect. And you can dispense with the condescension.

The answer to that question is obvious. As is the fact that this is exactly what was happening. Banks can keep rolling those mortgages over, and making more and more loans without assuming any long term risk, and without having to worry about defaults.

yes and they are especially inclined to roll over high risk mortgages but Fannie and Freddie weren't particularly averse to them and purchased them.

No they dont hold the deeds. The buy holds the deeds. The deeds for my realestate are held by my solicitor, and the lenders name is not on them. The deeds are posted as collateral but that is specified in the contract between you and your lender (also know as a mortgage).

Ok. I said, "Certainly, the housing bubble, the boom, must have made them nervous about their mortgages but they held the deeds." ...and holding those mortgages meant they "held a claim on the deeds" Better?

Basically, in layman's terms the bank, or owner of the mortgage, owns the property until the mortgage is paid.

:lol: Man Iv explained this to you so many times. I dont have the time or patience to do it again.

Fannie and Freddie by the time the collapse rolled around owned 25% of the mortgages in the US. Is that not a fact? They got them from mostly fly by night mortgage brokers and other banks, Washington Mutual before they folded was trying to get them to take a bunch of them off their hands if I recall.

Not just that it accounted for the vast majority of funding for this activity. Trillions and trillions of dollars. Securitization is what flooded the US housing market with money. Iv actually been over all this with you before, and provided you with a paper trail that allowed you to actually follow this money. Securitization, MBS's, CDO', and CDS's were also the vehicles used to hide the risk from investors with the help of private credit raters.

Ok, look, that money poured into Wall street to buy mortgage backed securities is not arguable. We may argue amounts and percentages but that deflects form what we are trying to determine is the actual cause of this. Why did money pour in to Wall Street for this? What were the market signals that made it ok to do what they did - which was to essentially create the subprime mortgage and the high risk securities that went along with them.

You attribute it entirely to greed. While greed indeed greased the wheels there is still a reason it was allowed to raise it's head. my contention is that it was the signals form the government that started it and a lack of political will on the government's part to curtail the subsequent "irrational exuberance" that it set in motion with its fiscal, monetary and social policies which they then chose to continue, ignoring what several economists and even some politicians tried to bring to their attention. Barney Franks, CEO of Fannie and Freddie at the time, in the July before the crash which occurred in September was saying Fannie and Freddie were fundamentally sound. After the fact, he said he didn't encourage people to invest in it's stock. Well, if saying an insititution is fuandamentally sound isn't encouraging to investors then what is?