Bad Advice, Rewarded Posted by: Dale Franks
on Saturday, November 29, 2008
Austan Goolsbee is slated to become Barack Obama's chief of staff at the Economic Recovery Advisory Board. Mr. Goolsbee is a respected economist, but in this particular situation, may not be the best choice, considering his views on the lending practices that got us into this mess.
One form of intervention that Goolsbee favored was extending mortgage loans to the the uncredit worthy. In a March 29, 2007 op-ed for "The New York Times," he said that it was good that financial institutions were being prodded to lend money to those who would not meet normal standards for home loans.
Why? Because people should be evaluated on the basis of what their future income is likely to be in deciding whether or not they can offord to buy a house and meet the monthly payments, not their present income status.
Banks and other lending institutions were clearly misjudging who, therefore, was a "good risk" by only looking at someone's ability to make a reasonable downpayment and meet those montly payments today.
Thus, Goolsbee was delighted that political and regulatory tools were being used to get those uncredit worthy into new homes. The private sector was not thinking far enough ahead, and that's what the government needed to get them to do, Goolsbee said.
OK. Well, we did that. How'd that work out for us? And by "us", I mean, all of us who aren't Austan Goolsbee. for him, it appears to have worked out fine. His reward for advocating the policies that led us into this mess appears to be increased power and responsibility.
That's all you need to know about how government works right there.
But Captain Sarcastic thinks Obama’s appointments are the bees knees! What with the staggering constellation of "idealogies" and competing interests represented.
But Captain Sarcastic thinks Obama’s appointments are the bees knees! What with the staggering constellation of "idealogies" and competing interests represented.
I do think his appointments are pretty good.
But to the topic at hand. The problem with mortgage lending was not credit worthiness per se, it was the structure of the loans. It’s okay to have an adjustable rate mortgage, I have one, and my payment went down last year and will go down again in April, but the maximum change is 1% and a little over $100 in monthly payment, which I could easily afford even if it went up for years. These mortgages that had 3 years of low fixed rates and then jumped $300 monthly or more were ridiculous. They were a disaster waiting to happen, and no one forced banks to structure the loans like that. They may have sold fewer mortgages if they made more rational decisions, and we can certainly blame the people who borrowed money on these terms, but the fact is that a lot of these borrowers were paying no more than rent during the "introductory period" and with falling real estate values, and rising payments, no one should be surprised that they are walking away.
Makiing loans to people with lower credit scores is not a bad thing, if you do it with higher fixed rates, or adjustable rates that don’t balloon, you will end up with the same rate return you get on prime mortgages. It’s not rocket science, the mortgage debacle was caused by bad business decisions, or, more precisely, very, very short term business decisions.
And Goolsbee also did a "wink wink" to Canada on the NAFTA issue. Remember that one?
How this fool, who reminds me of Paul Slugman, is going to be in charge of anything dealing with federal economic policy, tells me how badly The Clown™ has already mucked up any chance of this thing fixing itself.
He is starting to make Jimmy Carter look like an economic whiz.
Makiing loans to people with lower credit scores is not a bad thing, if you do it with higher fixed rates, or adjustable rates that don’t balloon, you will end up with the same rate return you get on prime mortgages. It’s not rocket science, the mortgage debacle was caused by bad business decisions, or, more precisely, very, very short term business decisions.
Your reasoning here is putting the cart before the horse. The banks were being pressured to loan to individuals that they would have never loaned to in the past. Therefore, the only way to make that happen was to use nonconventional ways that allowed these individuals to qualify for the loans. Hence the lowering of the loan qualification standards and the heavy use of ARM vehicals to get to lower interest rates and lower payments. Bad business decisions yes, but also bad involvment by government to pressure it to happen.
Bad business decisions yes, but also bad involvment by government to pressure it to happen.
For the widespread, long term bad business decisions required to create the financial crisis, you had to have government driving the bad business decisions. Thanks, Democrats.
The banks were being pressured to loan to individuals that they would have never loaned to in the past.
Bad business decisions yes, but also bad involvment by government to pressure it to happen.
Hey look, I know it’s fun to play the politics game, "it was the Demoncrats", "it was the Rethuglicans", but the fact is, regardless of regulations, pressure, or politics, banks did not make these loans in fear, they were positively giddy. The banks had lending practices in place in 2001, and over the period of five years, had gone completely wild with their depositers money, and the government, NEVER, EVER told them they need to reduce the spread between prime borrowers and subprime borrowers by half at the same time subprime borrowers credit worthiness was dropping. The government NEVER told banks that they should offer Ninja loans (no income, no job, no assets). The fact is that that banks were speculating in real estate as much as the borrowers, all believing that the value increase of the properties would make everything okay.
So I understand it’s fun to toss around the old, "it’s the Democrats" thing, because politically, why not, the Democrats have been blaming Republicans. But you’d have to be a kool-aid drinking moron to actually believe it. (on either side)
" banks did not make these loans in fear, they were positively giddy"
Now, now. That is just not possible. I distinctly remember all the CEOs of these financial institutions screaming and wailing that this was a very bad idea. Don’t you remember all the full page ads taken out in newspapers, the constant complaining on all the talk shows and congressional hearings, and of course all that junk mail I received warning me not to avail myself of the opportunity to refinance my mortgage with these dangerous new mortgage products. I am also sure that these concerned CEOs, cognizant as they were of the risks involved, limited their exposure and took other steps to protect their shareholders. I distinctly remember constantly hearing the words ’risky scheme’. What else could that have referred to? Why else were they given all those big bonuses, if not for doing such a great job of resisting those dangerous financial practices?
Hey look, I know it’s fun to play the politics game, "it was the Demoncrats", "it was the Rethuglicans", but the fact is, regardless of regulations, pressure, or politics, banks did not make these loans in fear, they were positively giddy
Amazing how certain things suddenly become "can’t blame either side, it’s just the politics game", isn’t it?
Amazing how certain things suddenly become "can’t blame either side, it’s just the politics game", isn’t it?
As I said, Democrats ARE blaming Republicans, so I get it why, and how, Republicans are blaming Democrats.
My point is that this stuff is nothing but politics, and neither side has room to blame the other (evewn though they have, and will continue to do so).
But if we talk to our friends who happen to be politically opposite of us, we know better. We know that what I am saying is more accurate than anyone who is blaming Democrats or Republicans, even if you refuse to actually type out the words acknowledging that agreement.
I am also sure that these concerned CEOs, cognizant as they were of the risks involved, limited their exposure and took other steps to protect their shareholders.
I love well delivered sarcasm. Good job!
Why else were they given all those big bonuses, if not for doing such a great job of resisting those dangerous financial practices?
I wish I could believe your side of it, but then there’s this:
What bothers me about the whole situation is this. Why would any rational business or persons in a lending business make loans to people that they knew were high risk, and stood a big chance of defaulting?
Are all these CEO’s nuts or morons? Are they all greedy and evil?
I can’t get past the idea that without some sort of coercion or muscle, these lenders would not have given out these loans at the level they were given.
Why would anyone risk their business and livelihood on unsound lending practices unless someone was leaning on them to do it?
"Why would anyone risk their business and livelihood on unsound lending practices unless someone was leaning on them to do it?"
Hannah Arendt had a phrase for it; ’The banality of evil’.
"It describes the thesis that the great evils in history generally, and the Holocaust in particular, were not executed by fanatics or sociopaths but rather by ordinary people who accepted the premises of their state and therefore participated with the view that their actions were normal"
http://en.wikipedia.org/wiki/Banality_of_Evil
It is so much easier to accept the common wisdom than to think for oneself, and certainly easier than actually acting against the flow, even if you know the flow is going over a cliff.
Are all these CEO’s nuts or morons? Are they all greedy and evil?
They were simply poorly informed about the real risks and some VERY clever MBA’s put these instruments together, showed how they were statistically sound, and not very risky at all.
I can’t get past the idea that without some sort of coercion or muscle, these lenders would not have given out these loans at the level they were given.
They were coerced by financial analysis that showed a relatively low risk for an above average return, but the analysis was flawed.
Why would anyone risk their business and livelihood on unsound lending practices unless someone was leaning on them to do it?
Same answer, some very clever people within the organization created a way to make huge profits, and showed their leadership that the risk was far less than it really was.
To me, it just doesn’t make sense
You have to remember that the CEO isn’t always the smartest guy in the room, in the case of these instruments, the first people to do it made it a lot easier to sell to other CEO’s. Hey, they’re doing it, and making a killing, and if we don’t do it, we’ll be left on the ash heap of lender history.
The fact is that 80% of the subprime loans were made by institutions that were not subject to the Community Reinvestment Act. They simply CHOSE to make these loans. It was the wave of the future, bundled risk equals less risk, and MUCH more profit.
Community Reinvestment Act — enacted in 1977 — applies only to depository institutions, such as banks and savings and loan associations. In testimony before the House Financial Services Committee, Michigan law professor Michael Barr stated that while problems in the subprime lending industry were a driving force behind the housing crisis, he estimated that only 20 percent of subprime mortgages were issued by depository institutions under the CRA. In his testimony, Barr stated:
Despite the fact that CRA appears to have increased bank and thrift lending in low- and moderate-income communities, such institutions are not the only ones operating in these areas. In fact, with new and lower-cost sources of funding available from the secondary market through securitization, and with advances in financial technology, subprime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005. More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts.
Even banks covered by the CRA had the choice of how to structure subprime loans, they did not HAVE to offer teaser rates with payments that doubled in three years, they chose to. If they offered higher up front rates, and milder adjustments, they may have made fewer loans, but they would have had a better experience.
I personally blame it the amazingly short term thinking in our business community. CEO’s are all about the next quarter’s results, instead of thinking five years ahead, ten years ahead, and even twenty five years ahead.
It’s an interesting side effect of the lower tax rates on income and capital gains. Time was, a CEO was married to his company for life, because he couldn’t afford to take a huge salary or sell stock, so he accumulated wealth to pass on with one major tax event(estate taxes), which could be planned around as well. CEO’s in those times were often the founders, and were unremovable, and they didn’t care about the next quarter and keeping their job, they cared about the next lifetime, and building a great company.
There is no doubt that short term thinking is the main problem, but as to its cause, that is pure speculation and opinion on my part.
Is it wrong that it makes me giddy to think Obama and his liberal illuminati team is going to crash and burn? I think it is........I should work on that.
Is it wrong that it makes me giddy to think Obama and his liberal illuminati team is going to crash and burn? I think it is........I should work on that.
Hey, if more people out of work, more businesses failing, and a general downturn for America is of less consequence to you than the personal joy of seeing a guy you don’t like fail, then I guess giddiness is the order of the day.
For a lot of people, saying I told you so from the unemployment line is a hollow victory, so as mcuh as they may not have supported Obama, most Americans REALLY, REALLY want him to be successful.
Even banks covered by the CRA had the choice of how to structure subprime loans, they did not HAVE to offer teaser rates with payments that doubled in three years, they chose to. If they offered higher up front rates, and milder adjustments, they may have made fewer loans, but they would have had a better experience.
Not really.
CRA forced these banks to make loans to poor people.
The Fed’s low interest rates drove a housing boom. The boom drove up the cost of housing.
The poor people banks were forced to lend to were even less able to pay, given increased prices, so low initial rates were the ticket . . .
Besides, the loans were bundled and resold. Freddie and Fannie, and all of that. So the initial lender didn’t care and the final lender was "protected" by the bundle . . .
Hannah Arendt had a phrase for it; ’The banality of evil’.
The problem was market distortion. The banality of evil has nothing to do with it.
Hey, if more people out of work, more businesses failing, and a general downturn for America is of less consequence to you than the personal joy of seeing a guy you don’t like fail, then I guess giddiness is the order of the day.
Actually, if Obama fails we will all probably be better off long term. Success for Obama means altering our medical care system, etc., and what he does will end up hurting this country for a very long time. If the financial crisis prevents Obama "reforms", it may on balance be a good thing.
Kinda like the CA financial situation killed medical care reforms recently . . .
More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision;
Independent mortgage companies? In most cases, isn’t that a small company that actually gets the loan from the bank? In other words, CRA is still involved from the bank’s perspective, even if the "independent mortgage company" may not care about CRA.
More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision;
Independent mortgage companies? In most cases, isn’t that a small company that actually gets the loan from the bank? In other words, CRA is still involved from the bank’s perspective, even if the "independent mortgage company" may not care about CRA.
another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision,
Ahh, but then CRA still applies, doesn’t it?
Sure, the government might not be looking, but groups like ACORN were. The CRA was "improved" in ’95, so that community activists (organizers?) could shake down banks for big bucks for violating CRA.
CRA forced these banks to make loans to poor people.
That’s just not true, 80% of these loans were not covered by CRA, it ONLY applied to banks and thrifts.
Acorn could not "shake down" any lender that was not a bank or thrift for violating the CRA because they were not covered by the CRA.
Lending to the less-well-off didn’t cause the financial meltdown, lending to them through rotten mortgage products did.
Independent mortgage companies? In most cases, isn’t that a small company that actually gets the loan from the bank? In other words, CRA is still involved from the bank’s perspective, even if the "independent mortgage company" may not care about CRA.
No, independent mortgage companies is the descriptor of companies like Countrywide that were NOT banks but made mortgage loans, their revenue sources were irrelevant to the CRA because the CRA did not cover independent mortgage companies. Banks and thrifts, were judged on CRA criteria for the loans they originated, only.
Interestingly enough, two of the largest Independent Mortgage Companies were owned by Banks, CitiMortgage and Wells Fargo Mortgage, but as affiliates, they were not subject to CRA, and more importantly for them, they were not subject to the regulations put on real banks and thrifts.
Let’s clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act:
• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?
• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA?
• What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA?
• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?
• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?
• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?
• How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?
• What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time?
• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an "Iffy" loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)
• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?
• Did the CRA require banks to not check credit scores? Assets? Income?
• What was it about the CRA that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood
• What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?
• Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages — was that a CRA requirement too, or just a grab for more market share, and bad banking?
The answer to all of the above questions is no, none, and nothing at all
.
As I said before, there is plenty of blame to go around, Democrats and Republicans are responsible for this mess, but CRA is a made up talking points boogeyman, not a valid argument.
"In most cases, isn’t that a small company that actually gets the loan from the bank? In other words,"
No. I am not sure why you insist that banks are involved in every real estate deal. I have been party to several home sales, and some of them never went near a bank. Why should they? If you can get a better deal from a mortgage broker, the seller or buyer doesn’t care where the money comes from, nor does the real estate agent. Any good real estate agent will give prospective buyers a list of sources for mortgages, and not all of them are banks.
