The government determines that home ownership should be available and affordable for everyone.
As a result, the government mandates loan quotas and encourages reckless lending. Liquidity is injected to assure cheap loans. Tax laws are structured to encourage ownership of the most expensive home possible.
A housing boom and bubble builds during the cash flush dot com era. When it bursts, government redoubles its home ownership effort.
Lending institutions, taking note of the policy, lend accordingly with reckless abandon. The mortgage securities have special tax and bankruptcy treatment granted by the government, encouraging institutions to exuberantly buy them up. The quasi governmental Freddie and Fannie prop up this market as buyers of last resort.
As a cumulative result home ownership rises and more cheap sprawling subdivisions are built (simultaneously exhausting the nations infrastructure budget). The ownership demand outstrips available supply in many markets that are running out of building space (most notably Western cities surrounded by Federal no-build enclaves: San Diego, Los Angeles, San Francisco, Portland, Seattle, Las Vegas, Denver). Housing prices soar in many markets on the artificially inflated demand (created by governmental incentives of cheap loan availability).
Inevitably the artificial liquidity puts inflationary risk into the market and rates are raised, thus ending the spiral. The glut of home building provides an excess amount of housing as the raised rates begin to cause foreclosures. That puts downward pressure on the housing market and home prices fall below the loan amounts. Triggering more foreclosures, which puts downward pressure on the now flooded market, and causing trouble for people who were leveraging their lifestyle on inflated real estate.
So the government proposes (another) cash injection into the economy in an attempt to keep liquidity and lending practices alive. More liquidity should enable banks to make more loans so people can afford to pay inflated prices for homes. Thus sustaining the housing market at artificially high levels.
- - -
Government goal: affordable home ownership
Result achieved: record increase in home cost.
But Congress and the President assure me that government is going to fix this problem. so thank god.
* Greed is of course a factor also. On Wall Street and on Main street. I'm not tossing the Republicans nor the Democrats under the bus, I'm tossing them both. The political boat was happy floating high on the flooded river and neither party wanted to bother looking to see what was down stream. Now that the flood they helped create and certainly didn't try to stop is hitting populated areas they'll throw money at the problem.
This is no great depression (economic fundamentals are sound: manufacturing, agriculture, and most service sector jobs are doing just fine). It is a large market correction of everything artificially inflated or bet (direct or indirectly) on the inflated housing. The best thing the government can do is allow it to land softly - don't try to save it.
Just so you don't think this fell on deaf ears.
I miss the good ole days before you had a real job and could keep everyone well informed from somewhat of a centrist perspective. [:P]
I think you summarize the consumer and housing side of the crisis pretty well, though I think it's far from certain that Clinton era affordable housing initiatives propped up this bubble . . . I think it's way more likely that lack of oversight and an easy money policy (low, low interest rates) from the fed spurred it on.
What you're not talking about much is how these bad mortgages were securitized, rated, and sold, and how that contributed much more directly to the bank failures we're seeing today.
One of the main problems here is that mortgage lending became divorced from its main purpose, which should be to help an individual consumer secure a home. In fact, that purpose became secondary. The primary purpose became simply to make enough loans -- good, bad, or middle of the road didn't matter -- to bundle and sell off as a Collateralized Debt Obligation. And CDOs were virtually all bought and sold by investment banks, almost all of whom are now nonexistent.
CDOs came into being in an effort to 1) find a new way to make mortgage debt into a security and 2) to diffuse the risk enough amongst the various counterparties so that no one could take a hit. These securities have become enormously popular because they are unregulated and because the housing boom guaranteed incredible gains. Figures I've seen vary, but anywhere from 1 to 2T$ globally is invested in these securities.
One of the unspoken problems here is the collusion of the bond rating agencies (Standard and Poor's, Moody's, etc.) These agencies are the Consumer Reports of the bond markets, and are trusted implicitly to rate the quality of a company's debt (which is in essence what a bond is). The problem is that these agencies are for-profit, and take payment from the entities who float bonds. In the case of CDOs, the rating agencies neither understood them nor assigned them accurate ratings. Typically, CDOs were given excellent ratings, and hence became excellent investments.
Most investment banks had no qualms about investing in these vehicles that 1) had excellent ratings, 2) were unregulated, 3) were structured explicitely to be risk free, and 4) were based on a booming housing market. This also explains the global rush to invest in them.
Problems start occurring when the underlying loans (the mortgages) start defaulting. Individual homeowners cease payment on a variety of different loan types for a variety of different reasons, but the effect on the security is to destabilize it. Because the CDO risk was supposedly diffuse, no one now understands who is left holding the bag. Who will take the final hit? Who will pay? No one knows, and consequently their value fluctuates wildly, because if you can't accurately assess risk, you can't accurately assess value. So these CDOs now have a value anywhere between 0 and infinity, but no one knows exactly how much.
So while the problem is occurring on an individual level -- a homeowner who may or may not be facing foreclosure due to a bad decision -- the problem is amplified into the credit markets because banks own and have invested in hundreds and thousands of these bad mortgages-as-securities, and now must dedicate all their capital to paying down these securities.
There're more facets to this discuss, but I have to go to work now [:)]
(http://lolfed.com/wp-content/mr-t-subprime.jpg)
Good stuff WeVus.
A knowledgeable veteran of economics told me recently that he was very impressed with how the players in the financial markets had managed to take what was basically an asset and transform it into a liability and did so without regulatory oversight. When you hold a mortgage it is an asset, a source of future revenues backed with an interest in real property. When you combine it with 1000's of other mortgages and sell them as a security on a market, they are now a liability. You must rely on the ratings of others as to the strength of that security and since the ratings companies are being paid by the security sellers, its value is suspect. All this occurred out of the purview of regulators.
Then I saw guests on MSNBC relay the same thought this morning. They noted with incredulity that now it is difficult to know who is even on the hook for these liabilities. Meanwhile the culprits who securitized these packages as CDO's took their profits and live in Manhattan totally financially protected.
It took me a while to understand but it highlights that this was not the result of loosened lending requirements, was not the result of a Clinton/Bush era focus on an "ownership" society. It is the reflection of how a weak economy was masked with a hot mortgage market that was being grown and exploited by unsupervised bandits. These guys were smart but lacked any self restraint.
More and more I am doubtful of the re-structuring plan being proposed and modified. Who does it benefit most? We need credit flow in the system but is this the best way to do it? Who the hell am I? We're just as much at the mercy of Congress as the economy was at the hands of investment bankers. Just making note.
Wevus, packaging and re-selling debt is an old practice, though packaging it as securities is a newer idea to broaden investment in our debt and to make more cash available for more loans. Tulsa, unfortunately figures prominently in the history of "debt for securities".
The way it used to work was Bank A in Tulsa would decide they wanted out of the rural real estate business, so they would package up all their loans in rural areas into one bundle and sell it at a discount from the remaining balance to Bank B or another lender. Or a retail lender like CitiFinancial or AIG might decide to get out of the furniture finance business and sell off their furniture loan portfolio at a discount to another retail lender.
Unfortunately, Wall St. had a glimpse of the perils of consumer debt-backed securities when CFS crumbled right about 10 years ago. Charged-off credit card debt was bundled and sold on Wall St. as securities. The only real "collateral" on the bundles of securities was CFS's reputed ability to collect the debts. I believe CFS owned around $15 bln at face value of "signature" debt (iow- there was no security other than the borrowers promise to repay). Naturally, they owned it for pennies on the dollar. If I had to guess, CFS's total investment was maybe 20% or less of face value.
I guess Wall St. figured it was an aberrition and Bill Bartmann was just a huckster from Muskogee who got lucky. Certainly wouldn't happen in the mortgage business, after all there were sticks, bricks, and dirt ultimately securing those loans, but they still could create a hedge, just in case.
Wall St. realized that when real estate markets peaked and inevitably cooled off, that the ultimate value of the "collateral" on the debt they were buying could be worth less than the debt they were holding. Instead of following common sense, mathematicians and physicists were ostensibly employed to write out formulas which would create collateral out of other financial instruments to offset the risk of lower hard collateral values.
The claim now is that hardly any of the financial experts understand how these securities work(ed), nor could they figure out how to tell if they were shielding bad debt or not. It's somewhere between a shell game and ponzi scheme.
For those of you who missed the 60 Minutes segment on the debacle Sunday night, it's one of the better presentations of the mess put into layman's terms:
"Altman says one of the biggest problems is uncertainty about how much bad debt Wall Street has hidden away.
"You know I have heard that some of these financial institutions were hiring mathematicians and physicists to write the mathematical formulas that underlied some of these investments, and pretty soon nobody understood what was going on any more," Pelley said.
"Well yes, a level of financial exotica ensued, which boggled the mind and which almost everyone involved didn't understand," Altman replied.
Federal agencies that regulate Wall Street didn't understand, and neither did the companies that rate the quality of investments.
"You're telling me that the credit rating agencies didn't understand these investments?" Pelley asked Altman.
"We had the first instance, at least in my memory, where AAA rated instruments, the highest rating, actually defaulted while rated AAA. Now there's something wrong with that," he replied. "
http://www.cbsnews.com/stories/2008/09/28/60minutes/main4483612_page3.shtml
Wall St. creating artificial collateral is most defintely a part of the debacle, as is lack of government oversight on the bureaucrat, legislative, and executive levels.
Still, you cannot discount the effect of several hundred thousand home owners not paying their mortgage obligations back to the street level lenders. If all those loans were still performing, there would have never been a chain reaction. In this case, **** has definitely run up-hill.
Watching Congress fumble this so badly this week and everyone being afraid of losing their job over how they vote is all anyone needs to know that USHOR and the Senate should no longer have any direct oversight of securities and banking. Too many financial institutions have spread money around to keep this orgy going for years. It appears that just about every Republican and Democrat has fed from this trough of corruption.
I hate bureaucracy with a passion, but this is one case where Congress is showing their limitations in a crisis because some members are afraid to do the right thing. You can see clearly that legislators are trying to figure out which way to vote on this which will equate to the least amount of votes lost on Nov. 4.
Debt's been sold forever -- what's a bond, really, but a purchasable debt? But CDOs are by all acounts much different beasts, and their intentional complexity is the crux of the problem.
More broadly, it's important to me to fully explain Wall Street's role in this; otherwise the individual mortgage holder ends up taking all the blame and this crisis becomes nothing more than a morality tale that reinforces certain ideological biases. I don't think the individual is blameless in this, but there're bigger players here who had means and motive to keep the mortgage money flowing, and at any cost.
I'm not sure how this is an argument for less regulation, however . . . or for less government. I can think of several places where even the broadest of rules -- so long as they were enforced -- could've mitigated elements of this disaster. One place would be in mortgage lending standards, which could use more transparency in documentation and more plainly stated terms with the borrower. Another would be in finding ways to normalize the bond ratings system and to remove the rating companies from conflicts of interest. Another would be in making sure that CDOs are constructed with better integrity and that risk and reward are specified clearly.
None of these things have to do with market manipulation or somehow corrupting entrepeneurship; all of them are strictly about improving the flow of information to the markets.
And as for the politics of the bailout, I think our congressmen and women are getting very mixed messages from their constituents, and because the American people are confused and angry, the congress is mirroring that. It doesn't help that this is happening a little more than a month before a major election.
I've been kinda of taken aback by the class warfare angle that Republicans in the House have been working the last couple of days. A lot of the Main Street vs. Wall Street flogging is a bit shocking and more than a little hypocritical, especially when the conservative critique is about how personal responsibility on the homeowner side is the root cause of this debacle.
Wasn't it Obama that criticized McCain and the Republicans for NOT mentioning Main Street enough?
quote:
Originally posted by iplaw
Wasn't it Obama that criticized McCain and the Republicans for NOT mentioning Main Street enough?
You're the guys who get the vapors every time you hear the words "class warfare" or "income distribution." I'm just pointing out that a significant contingent of House Republicans had to choose either the rock (Big Business in its hour of need) or the hard place (Mr. and Middle Class, furious and possibly ignorant of repercussions). The House Republicans chose Mr. and Mrs. Middle Class. Too bad that pitts them directly against Big Business.
Effect:
Schwarzenegger to US: State may need $7 billion loan: (//%22http://www.latimes.com/business/la-fi-calif3-2008oct03,0,5726760.story?track=rss%22)
quote:
SACRAMENTO -- California Gov. Arnold Schwarzenegger, alarmed by the ongoing national financial crisis, warned Treasury Secretary Henry M. Paulson on Thursday that the state might need an emergency loan of as much as $7 billion from the federal government within weeks.
The warning comes as California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.
So credit for everything -- not just for houses -- is going bye-bye. The article is about short term payroll loans, but car loans have been taking a big hit, and credit card companies are closing or tightening credit to consumers.
And then there college and university investment funds: (//%22http://www.ktul.com/news/stories/1008/558411.html%22)
quote:
An investment fund that serves about 1,000 colleges and private schools has partially frozen withdrawals amid the nation's credit crunch.
That move is forcing many schools and colleges to develop new plans to pay bills.
Wachovia Bank is the trustee for a 9.3-billion dollar Short Term Fund offered by Commonfund, a Connecticut-based nonprofit that advises colleges and schools on money management. Wachovia announced plans this week to terminate the fund and establish a process to ensure the orderly liquidation and distribution of the fund's assets.
Among other things, this crisis has pointed up just how important lending and credit is to the smooth function of our economy. Without it, EVERYBODY -- consumers, institutions, government, and business -- is out in the cold.
Here's my take, Wevus:
Lending and credit is important to the healthy GROWTH of the economy.
When it's needed for the smooth operation of our economy, that's an indicator it's been over-used for expansion and/or we've over-expanded.
Check this out. Even, former President, Bill Clinton knows exactly who is to blame. Now if only Clinton would speak up about how dirty Obama's hands are, on this issue. [}:)] He's just as guilty as Barny Frank.
http://www.foxnews.com/story/0,2933,432501,00.html (//%22http://%22)
quote:
WASHINGTON — Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank's efforts to deregulate Fannie Mae throughout the 1990s. So did Frank's partner, a Fannie Mae executive at the forefront of the agency's push to relax lending restrictions. Now that Fannie Mae is at the epicenter of a financial meltdown that threatens the U.S. economy, some are raising new questions about Frank's relationship with Herb Moses, who was Fannie's assistant director for product initiatives. Moses worked at the government-sponsored enterprise from 1991 to 1998, while Frank was on the House Banking Committee, which had jurisdiction over Fannie. Both Frank and Moses assured the Wall Street Journal in 1992 that they took pains to avoid any conflicts of interest. Critics, however, remain skeptical. "It's absolutely a conflict," said Dan Gainor, vice president of the Business & Media Institute. "He was voting on Fannie Mae at a time when he was involved with a Fannie Mae executive. How is that not germane? "If this had been his ex-wife and he was Republican, I would bet every penny I have - or at least what's not in the stock market - that this would be considered germane," added Gainor, a T. Boone Pickens Fellow. "But everybody wants to avoid it because he's gay. It's the quintessential double standard." A top GOP House aide agreed. "C'mon, he writes housing and banking laws and his boyfriend is a top exec at a firm that stands to gain from those laws?" the aide told FOX News. "No media ever takes note? Imagine what would happen if Frank's political affiliation was R instead of D? Imagine what the media would say if [GOP former] Chairman [Mike] Oxley's wife or [GOP presidential nominee John] McCain's wife was a top exec at Fannie for a decade while they wrote the nation's housing and banking laws." Frank's office did not immediately respond to requests for comment. Frank met Moses in 1987, the same year he became the first openly gay member of Congress. "I am the only member of the congressional gay spouse caucus," Moses wrote in the Washington Post in 1991. "On Capitol Hill, Barney always introduces me as his lover." The two lived together in a Washington home until they broke up in 1998, a few months after Moses ended his seven-year tenure at Fannie Mae, where he was the assistant director of product initiatives. According to National Mortgage News, Moses "helped develop many of Fannie Mae's affordable housing and home improvement lending programs." Critics say such programs led to the mortgage meltdown that prompted last month's government takeover of Fannie Mae and its financial cousin, Freddie Mac. The giant firms are blamed for spreading bad mortgages throughout the private financial sector. Although Frank now blames Republicans for the failure of Fannie and Freddie, he spent years blocking GOP lawmakers from imposing tougher regulations on the mortgage giants. In 1991, the year Moses was hired by Fannie, the Boston Globe reported that Frank pushed the agency to loosen regulations on mortgages for two- and three-family homes, even though they were defaulting at twice and five times the rate of single homes, respectively. Three years later, President Clinton's Department of Housing and Urban Development tried to impose a new regulation on Fannie, but was thwarted by Frank. Clinton now blames such Democrats for planting the seeds of today's economic crisis. "I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president, to put some standards and tighten up a little on Fannie Mae and Freddie Mac," Clinton said recently.
First Crash...
He wasn't "a top executive", he was an assistant director of product initiatives. That is like saying he was the assistant to a middle manager.
Secondly, Barney Frank and your "suspect" broke up ten years ago. These two government finacial institutions were in pretty good shape back then.
Thirdly, what part of this "foxnews" story mentions Obama? You just throw in his name with this story hoping posters associate them together?
First of, they were still together when this went down.
Second off, even clinton said he was obstructing regulation.
Thrid, I'm just mentioning Obama because he IS tied to Freddie and Fannie. I didn't say it was this particular issue. if you don't know how dirty his hands are in this mess, go find it yourself.
quote:
Originally posted by Crash Daily
First of, they were still together when this went down.
Second off, even clinton said he was obstructing regulation.
Thrid, I'm just mentioning Obama because he IS tied to Freddie and Fannie. I didn't say it was this particular issue. if you don't know how dirty his hands are in this mess, go find it yourself.
Kinda like the lobbyists working for McCain still taking money up until August *cough*RickDavis*cough*
alright, I don't want to play, but I'll play, you lazy bums. Y Can't even go get your own facts, geez!
No, not kind of like an associate of John McCain, kind of like Obama himself, taking the second largest pay off/hush money of any Senator in congress, even though he's new to the game.
quote:
Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.
quote:
The collapse this week of Lehman Brothers' is traced back to Fannie Mae and Freddie Mac, the two big mortgage banks that got a federal bailout a few weeks ago. It turns out that the Freddie Mac and Fannie Mae used huge lobbying budgets and political contributions to keep regulators off their backs, and the #2 recipient of these funds was Barack Obama, according to Center for Responsive Politics. It's jaw-dropping that Obama has collected such a sum in his short four years in office, as this tally covers all of contributions to politicians over the past 20 years.
quote:
Originally posted by Crash Daily
alright, I don't want to play, but I'll play, you lazy bums. Y Can't even go get your own facts, geez!
No, not kind of like an associate of John McCain, kind of like Obama himself, taking the second largest pay off/hush money of any Senator in congress, even though he's new to the game.
quote:
Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.
quote:
The collapse this week of Lehman Brothers' is traced back to Fannie Mae and Freddie Mac, the two big mortgage banks that got a federal bailout a few weeks ago. It turns out that the Freddie Mac and Fannie Mae used huge lobbying budgets and political contributions to keep regulators off their backs, and the #2 recipient of these funds was Barack Obama, according to Center for Responsive Politics. It's jaw-dropping that Obama has collected such a sum in his short four years in office, as this tally covers all of contributions to politicians over the past 20 years.
Obama quit taking contributions from those donors once the problems came out. Davis STILL took that money from the company he was vested in UP UNTIL AUGUST.
You do your own searching. I'm not talking about past. We're talking about damn near right now.
McCain is sinking, and sinking fast. Unless he's got a helluva October Surprise, he'll be back in the Senate chamber come November.
I almost forgot to mention his ties to ACORN.
http://noquarterusa.net/blog/2008/07/05/obamas-acorn/
Now let's put a neat little bow on it! Must see TV.
http://hotair.com/archives/2008/09/30/video-stanley-kurtz-on-obama-acorn-and-the-cra/ (//%22http://%22)
quote:
Obama quit taking contributions from those donors once the problems came out. Davis STILL took that money from the company he was vested in UP UNTIL AUGUST.
So what? Obama quit taking hush money, once that cat was out of the bag? Give me a freak'n break. Davis may be associated with McCain, but HE IS NOT MCCAIN, get the difference? Probably not.
quote:
Originally posted by Crash Daily
I almost forgot to mention his ties to ACORN.
http://noquarterusa.net/blog/2008/07/05/obamas-acorn/
Now let's put a neat little bow on it! Must see TV.
http://hotair.com/archives/2008/09/30/video-stanley-kurtz-on-obama-acorn-and-the-cra/ (//%22http://%22)
[}:)]
McCain supporters are scared....keep on spinnin!
Was not the intent of the Federal Housing Authority created to aid home purchases under very controlled conditions.
Hasn't the National Debt increased for 57 trillion to now 10.7 trillion under the present administration?
Is it not true that much of the National Debt is held by foreign Governments, Banks, and foreign individuals?
Is it not true that large bundled mortgages, on our overpriced houses, is owned by these foreign government functions?
How would one like to see the sheriff carry your belonging to the curb and turn your home over to a foreign investor who had one half the investment that you had in the home. (remember the interest on the loan is collected first)
We have laws that require the value of the homestead be increased yearly. At the same time divide 350,000,000 live bodies into the now $10.700,000,000,000 authorized and you will see the need from each millions of dollars in hard cash, not Federal Notes, We need it today not a payday loan tomorrow. Listen closely as the other shoe to drops.
Can you see why our allies in the mid-east war are packing up to go home.
(Information comes from this highway of learning)
quote:
Originally posted by Conan71
Here's my take, Wevus:
Lending and credit is important to the healthy GROWTH of the economy.
When it's needed for the smooth operation of our economy, that's an indicator it's been over-used for expansion and/or we've over-expanded.
Why? Lending and credit have always been important to the "smooth operation" of the economy....
I've had tough financial times in my life when the economy was "strong." I've had better economic times personally when the economy was "in recession." Those people who consistently endorse laissez-faire capitalism really don't care too much for the innocent victims who lose the power to borrow/invest when banks pigeon-hole powerless people in times of economic stress.... far too many ivory-tower economists have traditionally stressed efficiency at all costs... over matters of simple fairness....
During "tough times," companies like Express Personnel Services will prosper.... discount retailers will prosper over the more "upscale."
France: Laissez-Faire Capitalism is OverPresident Nicolas Sarkozy declared the theory that the market "always knows best" is finished http://www.businessweek.com/globalbiz/content/sep2008/gb20080929_019959.htm?campaign_id=rss_eu
Examining the candidatesOct 2nd 2008 | WASHINGTON, DC
From The Economist print edition
In our special report on the election we analyse the two candidates' economic plans. Here, we ask professional economists to give us their viewshttp://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12342127
The economists also prefer Mr Obama's tax plans. Republicans and respondents who do not identify with either political party see
Mr McCain's tax policies as more efficient but less equitable. But the former prefer Mr McCain's plans—43% of Republicans say they are good or very good—and the latter Mr Obama's. Of non-affiliated respondents, 31% say Mr Obama's are good or very good.
------------------------------------------------
Blaming Barney Frank for the crisis of Freddie and Fannie when there was a Republican House of Representatives from 1994 to 2005 is giving the man too much power either way... maybe O'Reilly should have Phil Gramm on his show sometime and subsequently browbeat
him and call
him a coward... it'd make more sense...
Give him hell, Barney...
http://www.youtube.com/watch?v=yrfPMa3lONU
(http://images.huffingtonpost.com/gen/21836/thumbs/s-BILL-O-large.jpg)
Our economy is built on a flimsy foundation of debt, that is the cause of the economic crisis. As long as this is the case, we will have to bailout future mutations of the cannibalism that is credit market capitalism to keep this shell game going. The longer we keep playing this game the deeper the hole we are digging for ourselves is going to get.
There was an excellent article (//%22http://www.nytimes.com/2008/10/05/business/05fannie.html?_r=1&scp=2&sq=fannie%20mae&st=cse&oref=slogin%22) in the NYT this weekend about Fannie and Freddie Mac, describing in more detail its pivotal role in inflating the real estate and credit bubbles, but also laying out in clearer terms the pressures it faced both from within and without.
quote:
Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the critical juncture when Fannie Mae's new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation's financial health, to the brink.
Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.
"We didn't really know what we were buying," said Marc Gott, a former director in Fannie's loan servicing department. "This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears."
The article also points out how Democratic lawmakers, newly in power after 2006, sought to keep Fannie and Freddie buying mortgages in order to help absorb the exorbitant amount of subprime loans already out there. This was a contributing factor to Fannie and Freddie's insolvency, but by no means the only factor.
What seems to also have been the problem was it's quasi-governmental status, leaving it accountable to its shareholders but also vulnerable to the commands of Congress, not to mention being pummelled by the businesses that had come to rely on its unique function as the securitizer of these mortgages (in the article, Countrywide is especially aggressive with the Macs).
quote:
Originally posted by USRufnex
quote:
Originally posted by Conan71
Here's my take, Wevus:
Lending and credit is important to the healthy GROWTH of the economy.
When it's needed for the smooth operation of our economy, that's an indicator it's been over-used for expansion and/or we've over-expanded.
Why? Lending and credit have always been important to the "smooth operation" of the economy....
I've had tough financial times in my life when the economy was "strong." I've had better economic times personally when the economy was "in recession." Those people who consistently endorse laissez-faire capitalism really don't care too much for the innocent victims who lose the power to borrow/invest when banks pigeon-hole powerless people in times of economic stress.... far too many ivory-tower economists have traditionally stressed efficiency at all costs... over matters of simple fairness....
During "tough times," companies like Express Personnel Services will prosper.... discount retailers will prosper over the more "upscale."
France: Laissez-Faire Capitalism is Over
President Nicolas Sarkozy declared the theory that the market "always knows best" is finished
http://www.businessweek.com/globalbiz/content/sep2008/gb20080929_019959.htm?campaign_id=rss_eu
Examining the candidates
Oct 2nd 2008 | WASHINGTON, DC
From The Economist print edition
In our special report on the election we analyse the two candidates' economic plans. Here, we ask professional economists to give us their views
http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12342127
The economists also prefer Mr Obama's tax plans. Republicans and respondents who do not identify with either political party see Mr McCain's tax policies as more efficient but less equitable. But the former prefer Mr McCain's plans—43% of Republicans say they are good or very good—and the latter Mr Obama's. Of non-affiliated respondents, 31% say Mr Obama's are good or very good.
------------------------------------------------
Blaming Barney Frank for the crisis of Freddie and Fannie when there was a Republican House of Representatives from 1994 to 2005 is giving the man too much power either way... maybe O'Reilly should have Phil Gramm on his show sometime and subsequently browbeat him and call him a coward... it'd make more sense...
Give him hell, Barney...
http://www.youtube.com/watch?v=yrfPMa3lONU
(http://images.huffingtonpost.com/gen/21836/thumbs/s-BILL-O-large.jpg)
Herb Moses Remember the name. He was an Assistant Director at Fanny May from '91 to '98.
He was also Barney's boyfriend. . .
quote:
Originally posted by waterboy
It took me a while to understand but it highlights that this was not the result of loosened lending requirements, was not the result of a Clinton/Bush era focus on an "ownership" society. It is the reflection of how a weak economy was masked with a hot mortgage market that was being grown and exploited by unsupervised bandits. These guys were smart but lacked any self restraint.
Actually President Clinton has recently verbalized his regret that he did not apply more focus to energy to balance out his housing initiatives. But you are right that the desire for increased home ownership was not the culprit in and of itself. For the most part it wasn't that the mortgage industry made loans to inherently risky potential home owners, its that they approved them for more house than the applicant could afford and then pushed risky loans that set them up to fail. Why would any sane person agree to an ARM? Because the lender on the other side of the desk was leading them that way.
quote:
Originally posted by carltonplace
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Originally posted by waterboy
It took me a while to understand but it highlights that this was not the result of loosened lending requirements, was not the result of a Clinton/Bush era focus on an "ownership" society. It is the reflection of how a weak economy was masked with a hot mortgage market that was being grown and exploited by unsupervised bandits. These guys were smart but lacked any self restraint.
Actually President Clinton has recently verbalized his regret that he did not apply more focus to energy to balance out his housing initiatives. But you are right that the desire for increased home ownership was not the culprit in and of itself. For the most part it wasn't that the mortgage industry made loans to inherently risky potential home owners, its that they approved them for more house than the applicant could afford and then pushed risky loans that set them up to fail. Why would any sane person agree to an ARM? Because the lender on the other side of the desk was leading them that way.
We are an aquisition society in the U.S. So many people are willing to hedge their bets that their financial condition will improve year after year so that they could afford their house as interest rates increased. Either that, or they figured they'd lock in when the loan eventually started adjusting, never realizing that it could get more difficult to "qualify" for the lock-in.
They also use a dizzying array of indices for ARM rates, that no one seems to be able to understand, including foreign fund indices.
This is nothing new. The question for me is, will lenders learn anything this time? There were tons and tons of foreclosures in the fall out of the S & L crisis in the mid to late 1980s. There was a lot of over-valued real estate in that debacle as well. I predict there will be another bubble as investors rush to snap up bargains on the FCL market, it will "correct" again in 10 years and within another 12-15 years this carnage will be but a memory. Next major real estate upheaval in another 20 years.
Anyone who didn't see this coming wasn't paying attention.
Hell, I qualified for a house loan in 2004 that was way out of whack from what any person with my income could reasonably pay. We were hearing stories all over the place, about how mortgage companies were giving out crazy-expensive loans willy-nilly without any regard of what would happen if the breadwinner was laid off, switched to a lower-paying job, suffered a catastrophic illness, etc.
We stuck to our guns and stayed with a small house.
I saw a study back in 2006 that warned about the housing bubble for this reason alone -- rental rates were not keeping pace with the skyrocketing housing values. That raised a red flag right there.
Mortgages weren't keeping pace with incomes, either. That was another HUGE red flag.
When mortgage offers started showing up in the mail along with credit card offers, I knew something was seriously awry.
Here's the problem with bubbles, and Conan you even said it: "Will lenders learn anything this time?" And if bubbles down through the centuries are any guide, the answer is an emphatic, "no they absolutely will not." (tulip mania, anyone?) (//%22http://en.wikipedia.org/wiki/Tulip_mania%22)
And so we're back to the old arguments. How do we protect ourselves from this kind of thing? Or are we at the mercy of idiots every time the Masters of the Universe get a bug up their donkey to go chasing easy money in tulips, or bad real estate loans, or what-have-you?
It's precisely this kind of thing that has made me a big Keynesian, and to appreciate the kind of economic politics that Roosevelt played during the New Deal. It's no accident that some of the tools created back in that era are the ones that Paulson, Bernanke and Co. are using today.
Oh, for a second, I could have sworn your post referred to Paulson and Bernanke as tools. [;)]
The unintended consequence anyone could see coming (it's now all the editorial and pundit fodder) is with the gov't stepping in to snap up a bunch of "toxic paper", that removes the entire concept of risk. Ergo, lenders learn nothing except that: if you keep sweeping a problem under the rug and do it collectively as an entire industry, and keep it concealed for long enough, the government will have no choice but to jump in and save your donkey.
No penalty- no lesson to be learned.
RW- Too bad many other people don't have your sense of restraint. That would have helped keep the real estate market from becoming so falsely-inflated in addition to so many other problems it helped create.
This forum has to be the most partisan forum on the Internet.
Nobody on this forum is willing to admit THEIR party is at any fault whatsoever, and that is sad.
Folks, the Republicans and Democrats are BOTH at fault.
I feel that the Democrats started the ball rolling, and neglected a couple of warning shots from the Republicans, but both parties are culpable.
Get off the party lines folks. They are both minor variations of each other.
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Originally posted by Conan71
No penalty- no lesson to be learned.
That's my point. Penalty or no, the lesson is NEVER learned. There will ALWAYS be bubbles, and they will ALWAYS end the way this one is ending. History is full of this thing happening over and over and over again. The question is not how do we stop it. The question is how do we protect ourselves from it when it happens again.
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Originally posted by we vs us
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Originally posted by Conan71
No penalty- no lesson to be learned.
That's my point. Penalty or no, the lesson is NEVER learned. There will ALWAYS be bubbles, and they will ALWAYS end the way this one is ending. History is full of this thing happening over and over and over again. The question is not how do we stop it. The question is how do we protect ourselves from it when it happens again.
I'm small government and I don't like Government getting involved in free enterprise. But, there are instances where the government needs to do what it can to protect consumers.
Everything might have been fine if growth in the Real Estate and investment markets had been more tempered and measured. Instead, it would appear there was a bunch of sociopathic greed surrounding construction, lending, real estate sales, and secondary and teritiary finance markets. There's plenty of money for everyone in the food chain to reap off it over a long time. Instead, everyone aspires to easy riches. They found ways to do it, but it's not sustainable at the growth rate their greed needed.
The individual should be the front line on protecting themself. But it's pretty hard for someone even with a legal degree to decipher the complications of mortgage docs. The only way I know to protect our society as a whole is with more regulation and adopted lending standards tied to some measure of credit score and objective forumulas across the board. The gov't also needs to step into the commodity markets again and regulate trade. This swashbuckling commodity trading has enrichened those lucky enough to hit their bets, but consumers are ultimately the ones contributing all these fabulous riches to the brokers, CEO's, etc.
Sounds like we are on the same page, Wev. Time for a beer yet?