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09/26/2008

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Interesting, and I really have no insight into this other than to point out that foreclosures are clustered in Cali, the sun belt and Florida. In each of these locations three hundy will get you a burned out double wide, with a big satelite dish in the front yard.

They're also places where the cost of home ownership was rising fastest, which generally means the most "creative" mortgage structures and a willingness of lenders to be lax in standards, since repossession in an inflationary market usually means higher profits. (The houses repossessed are worth more than the mortgage.)

An interesting statistic I've yet to find is the average size of a subprime mortgage.

Hmmm.

But the question isn't one of what economic class these people live in, is it? It's merely a question of whether high-risk loans were made because of government pressure.

Many high-risk applicants are the kind of people who live well beyond their means and would likely buy a house they couldn't afford. A relative of mine has two fully-grown children who still live like kings, took a cruise just this year, and then go and ask her for money to help them make ends meet.

(BTW, not that I'm arguing the Republican case. The Republicans can put a sock in their criticism of Big Government Democrats after these eight years; I understand that.)

Still, I'm with you: I want to know the average subprime loan now.

The fact of the matter is that Democrats, when they were in control of the Executive and Legislative branches, changed the rules. They threw sound business practices out the window and replaced them with political correctness. What banker in his right mind would accept welfare payments and unemployment benefits as mortgage-qualifying income sources? Nary a one--but under the Democrats' rules, both are A-OK! Oh, and required to be considered.

While Democrats were crowing over their Affirmative Action "achievement" in raising black and Hispanic home ownership to record highs, Cassandra-like economists were warning that as soon as the housing market slowed, those who defaulted on their mortgages would no longer be able to escape by selling their houses, leading to a debacle.

And here we are.

This is not to discount ignorance on the part of investors, the rise of gurus promoting flipping and the ownership of rental houses as routes to riches, and greed on everyone's part--but liberal social engineering is responsible for probably about 3/4 of the blame.

Hi,

Truly interesting post. Thanks a lot for the update...

Republicans are blaming the financial crisis on high risk loans, you are the one claiming high-risk loans=minorities.

I see it every day, people are buying way more home than they can afford. You have morons dropping $30k or $40k on an interest only mortgage of $350,00+. When the adjustable rate goes up, suddenly they can't afford those interest payments, and their home is worth a lot less than when they bought it, so they can't sell it to get out from under the debt.

Yes, there are a lot of unscrupulous lenders out there, but ultimately every customer has to sign the paperwork that they understand the terms of their loan, including the fact that they may have to pay more should rates increase.

When I bought my first home several years ago, it was a modest 1500 square feet for $72,500 (yay for living in the rural south). The lender we dealt with approved us for up to $185,000. There is no way in hell we could have afforded payments on that much if we wanted to still be able to eat out every once in a while or leave the house for any reason other than going to work. We pleasantly declined the opportunity to go that much into debt and bought our modest home. There are far too many people that automatically think that because they are approved for that much money than they can afford it. They can't.

Now, why did all this come about? Because lenders were forced by the likes of Barney Frank to lend more money because, just as you said above, liberals believe that actually using a person's credit score to justify whether or not to loan them money is somehow racist. Which led to all sorts of rules to do away with the alleged racism in lending, such as when a lender is taking your application they aren't allowed to ask you whether you are male or female or what race you are, even though those are things the government requires lenders to report. So they take their best guess. Also, when you open a new deposit account they make copies of your driver's license and run an OFAC (Office of Foreign Asset Control) check on you to make sure you're not on the list as a supposed terrorist. When you borrow money, the lender is forbidden from asking for your driver's license, let alone making copies of it. Because apparently if the loan committee sees a copy of a license with a black man on it, they won't lend you money.

It's all a load of bureaucratic horse shit designed to make things more "fair" while making it as difficult as possible for a business to actually, you know, do business.

What is really going to end up hurting us is if community banks lose the ability to borrow money. Most community banks are at or above 80% loan to value, meaning they've lent out at least 80% of the deposits they have on hand and borrow fed funds to fund new loans. When that source of money dries up, community banks are screwed and then the shit is really going to hit the fan.

Also, I'll be out of a job and have a lot more time to comment, so pray this doesn't happen.

Here is a piece in that well-known conservative rag, The Village Voice, that helps to back up what I just asserted. It's actually quite an interesting read, and I recommend it to everyone.

"[Clinton appointee] Andrew Cuomo... made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that... helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration...into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why."

There's a lot in that, Frank, including some stuff that doesn't make sense. I marvel at how you can say "you are the one claiming high-risk loans=minorities" when I cite someone else saying it, but then I marvel at a lot of things.

Here's what I think, which isn't a lot because I haven't found the information I'm looking for: I think there are two root causes of this.

The first is the disassociation of risk and reward. That is, the people who were writing the loans were driven by fees rather than the long-term income generated by the loans. That made the performance of the loans irrelevant to them.

Second, people are idiots and borrowed too much money. The experience you had buying a house is exactly the same experience my wife and I had. We knew what we could afford, and the mortgage company calculated that we could afford almost three times as much. We bought what we thought we could afford -- and it's a damned good thing because I had a little career adventure a couple of years later and if we'd listened to the mortgage company we'd have lost our house.

The main bad guy, among conservatives, is apparently the Community Reinvestment Act and its updates. I'm guessing that's a lot of what you're referring to. The CRA was designed to, among other things, force banks to make mortgages in minority neighborhoods on the same bases as they did in primarily white neighborhoods. It did nothing, directly, to lower standards, though it did put pressure on banks to show statistical performance and you could argue that pressure caused banks to grow more prone to make high-risk loans.

The CRA as Bogeyman doesn't make sense to me, however, for two reasons. First, the type of take-more-money loans you're talking about didn't get made in they types of neighborhoods covered by CRA. And, second, because more than half of the subprime loans that kicked this whole thing off were written by independent mortgage companies not subject to CRA.

I think we're all on a search for "the thing" that caused all of this. Conservatives are latching onto one thing and liberals another -- "predatory lenders" makes no sense to me whatsoever, by the way. But when all is said and done, I'm betting we're going to discover that everyone is right; all the different causes contributed to what is, to resort to cliche, a perfect storm. Everyone pitched in.

"The CRA was designed to, among other things, force banks to make mortgages in minority neighborhoods on the same bases as they did in primarily white neighborhoods. It did nothing, directly, to lower standards..."

BULL!!! The CRA required lenders to ignore sound business practices, like verifying income sources, checking--and paying attention to--credit histories, checking for a valid Social Security number, and more. Commenter A. Zarkof decodes Fannie Mae's Newspeak:

1.Latitude in proving legal residence--give mortgages to illegal aliens

2. Low down payment--no down payment.

3. Higher qualifying ratios--ignore the fact that the borrower will spend most of his income on mortgage payments.

4. Alternative and nontraditional credit--ignore the borrower's dismal credit score if he even has one. Substitute meaningless or easily faked documents.

5. Waive the mortgage insurance requirement (page 55)--the killer item! As the handbook explains, this give the lender the ultimate say in the underwriting decision because the mortgage insurance company is out of the loop. This important safeguard is gutted. Is it any wonder you get a worthless loan? Americans are forced to pay for mortgage insurance, but illegal Mexicans aren't.

6. Closing costs assistance programs. Note these have been declared illegal by the IRS but that doesn't seem to bother Fannie Mae. It's important to understand how this works. In many cases the seller is actually paying the closing costs (he adds it to the price) by making a contribution to some community organization which in turn uses the funds to pay the borrower's closing costs. In effect the "community organization" is a money launderer.

The CRA is a kind of Affirmative Action for mortgages: give them to the under- and unqualified, and hope that it all works out. It didn't--yet the liberals will console themselves by saying, "at least we tried." Sometimes, what you tried is what made things worse--but that never occurs to liberals, because they are on a quest to improve the world, negative and harmful outcomes of their policies be damned!

CRA was not the cause of the recent problem. In an unregulated marketplace, loan originators sold mortgages quickly, sometimes within hours of making them, and they were securitized and traded on down the line, thus those lenders had no incentive to scrutinize the loans. In a properly regulated market, the original loan would not be 400,000 to a guy with 2 kids and a 20,000/ year job. Don't blame him for wanting the American dream when it was sold to him -- he just lost his house. Blame the folks who made money off him & the securitization mess. If you can unweave the network of exchanges and even find those folks.

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