That alone wasn't the problem, though. The big problem was the fraud.  People were outright lying on their loan application  because they were doing "no docs" and the mortgage brokers weren't questioning them at all because they wanted the big commissions.  I saw it all the time.  Also, people were getting back to back home equity loans since a recording can take a month or so...we had one case where this guy got 4 home equity loans on his property in a two month period.  Needless to say, even as the second in the chain we had to walk away.  The biggest problem, really, was lack of oversight.  Everyone was just passing the loans through because the market was hot and they were making lots of money.

headkicker_girl wrote:

The biggest problem, really, was lack of oversight.

Hooey. From beginning to bailout, the biggest problem is predictable fraud, and doesn't require a genuis, a psychic or a NYTimes reporter to explain grade school math and school yard behavior - the devine right to fuck  credulous losers. The house always wins.

Last edited by choad (2008-09-29 10:27:45)

The actual lenders were lobbying hard to get Fannie Mae and Freddie Mac to buy subprime and Alt A mortgages.  Until the GSE's got into that game, subprime and Alt A represented about 5% of the mortgage market in the US.  After that, because the biggest buyers were now accepting what the lender's had wrought, the percentage grew sharply over the next decade.  By 2006, they represented about 20% of all new mortgages. 

Clearly, by participating in the market Fannie Ma and Freddie Mac aggravated the situation because they are such big players.  However, they did not make the loans.  Mortgage lenders did.  The GSE's were complicit in, but not the creators of, the problem, which of course was compounded because of the plethora of mortgage backed securities, which bundled large numbers of mortgages together, including prime, Alt A and subprime mortgages.  We may only be scratching the surface of the "disease" fostered by the explosive derivatives market, and especially credit default swaps, which are now a $60+ trillion market. 

Fraud is one explanation for the high number of mortgage defaults, but so is the fact that the loans were most frequently adjustable rate morgages.    The low income borrowers could make the payments for a year or two, but with each ratchet up their position deteriorated.  Subprime ARMs alone reached about 7% of the total mortgage market.  Perhaps the borrowers assumed they could always sell or could refinance to a fixed rate mortgage.  Perhaps they were just morons.  Who knows.  In any event, since so many of them had zero, or even negative equity in their homes, the incentive for continuing to make the monthly payment is weak. 

Another explanation is the corruption of the whole originations system.  Lenders just wanted to churn out loans and then sell them off quick before a default could occur.  They even issued the infamous "Ninja loans" - no income, no job, no assets.  They knew how bad the paper was but still believed they could sell it fast.  It was like a game of financial musical chairs, just hoping that when the music stopped they wouldn't be holding too much of it and could find a chair quickly.  F them all.

Last edited by Fled (2008-09-29 12:57:04)

choad wrote:

If there's one real change over time it's now the real villains are all 'elected' public servants and the seamless integration of capital, industry and govt is almost complete.

I love that you're all-ways there to "jump in," and "brighten up" an other-wise depressing thread.

Decadence wrote:

I love that you're all-ways there to "jump in," and "brighten up" an other-wise depressing thread.

I'm a full-service cynic. Happy to oblige.

Fled,

I need to look up the figures but beyond the increase in subprime loans to underqualified buyers, I wonder what the increase has been in loans to credit worthy borrowers that are ARM/defered interest/low equity percentage/low money down/etc. And how the prevelence of these loan products have impacted the crisis.

The above anology  to offerring babes unrestricted access to candy surely plays a factor. I suspect many who could qualify for more safer, fixed rate, better secured  loans, opted to go for ARMs and succumb to the hoopla over the newly favorable and competetive market for refinancing with very low borrower costs.

Even though the  "traditional" loans have had historically favorable interest rates for an amazing period.

Still I ran across many people who had decent credit ratings that went with ARM and such loans that exposed them to risk.

headkicker_girl wrote:

choad wrote:

headkicker_girl wrote:

The biggest problem, really, was lack of oversight.

Hooey. From beginning to bailout, the biggest problem is predictable fraud, and doesn't require a genuis, a psychic or a NYTimes reporter to explain grade school math and school yard behavior - the devine right to fuck  credulous losers. The house always wins.

Exactly...lack of oversight.  Oversight should have prevented the fraud.  The fraud was so blatant and obvious that it should not have been allowed to go on unchecked for years.

The government should jump in and get involved to prevent companies from being cheated by consumers?  How the world has changed...

No zookie,

But the companies that trade these loans shouldn't be allowed to make dubious claims about their quality and pawn them off on others thereby facillitating,  even emboldening the mortgage industry in the lack of due diligence in valuing these types of loans

Last edited by Johnny_Rotten (2008-09-29 16:03:20)

Zookeeper wrote:

headkicker_girl wrote:

Zookeeper wrote:

The government should jump in and get involved to prevent companies from being cheated by consumers?  How the world has changed...

The consumers weren't the ones doing the cheating.  It was mainly the mortgage brokers, underwriters and appraisers.

The fraud HKG was hanging most of this on was consumer fraud:

People were outright lying on their loan application  because they were doing "no docs" and the mortgage brokers weren't questioning them at all because they wanted the big commissions.  I saw it all the time.  Also, people were getting back to back home equity loans since a recording can take a month or so...we had one case where this guy got 4 home equity loans on his property in a two month period.

No, that was only part of the problem.  Brokers were actually encouraging people to lie on their applications.  I know because a few of them tried it with me when I was looking to refinance, and then they would explain it like it wasn't actually lying because it was based on "prospective income," or some such nonsense.  There were willing to say or do anything to get a commission.

headkicker_girl wrote:

No, that was only part of the problem.  Brokers were actually encouraging people to lie on their applications.  I know because a few of them tried it with me when I was looking to refinance, and then they would explain it like it wasn't actually lying because it was based on "prospective income," or some such nonsense.  There were willing to say or do anything to get a commission.

This was part of the problem that led to the defaults, but the reason why this hurts so bad right now is that it's not just the value of the defaulted loans that was lost.  One of the bills that Phil Gramm got passed increased the amount that you could leverage to up to 60 to 1 in some areas (previously the limit was 12 to 1).

This article has a pretty good, concise description of how leverage works:

Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.

Leverage can create huge windfalls. Suppose you buy a stock for $100. It goes to $110. You made 10 percent, a decent return. Now suppose you borrowed $90 of the $100. If the price rises to $101, you've made 10 percent on your $10 investment. (Technically, the price has to exceed $101 slightly to cover interest payments.) If it goes to $110, you've doubled your money. Wow.

Once assembled, these components created a manic machine for gambling. Traders and money managers had huge incentives to do whatever would increase short-term profits. Dubious mortgages were packaged into bonds, sold and traded. Investment houses had huge incentives to increase leverage. While the boom continued, government remained aloof. Congress resisted tougher regulation for Fannie and Freddie and permitted them to run leverage ratios that, by plausible calculations, exceeded 60 to 1.

Add on top of the extra leverage the fact that these mortgage-backed securities were being used as collateral for other loans even though they've been sliced and diced to the point that nobody is actually sure when you unravel it all how much any individual one of these securities is actually worth because in some cases they can't even figure out which mortgages are backing which securities, and you start to see the extent of the clusterfuck we're actually in.

Last edited by tojo2000 (2008-09-29 21:18:15)