Oct 11th, 2008 at 8:22 pm
McClatchy Has The Facts
You expect a certain amount of dishonesty in politics. But you would think that amidst a bona fide emergency situation whose consequences threaten everyone’s well-being that conservatives would try to pay some attention to what’s actually going on. Instead, conservatives have decided to make up a story in which Fannie Mae and Freddie Mac somehow single-handedly brought down the world financial system. David Goldstein and Kevin G. Hall have a great corrective article for McClatchy headlined “Private sector loans, not Fannie or Freddie, triggered crisis.”
Read it. Send it to your friends and colleagues.
97 Responses to “McClatchy Has The Facts”
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October 11th, 2008 at 8:28 pm
Tino has now calculated the numbers from the federal database for total dollars borrowed on subprime mortgages (purchase and refinance) from 2004 to 2007 and it turns out that minorities got 50% of the dollars.
I’ll bet minorities have accounted for 60% or more of the defaulted dollars.
You can read all about it here:
http://isteve.blogspot.com/2008/10/my-new-vdare-column-big-enchilada.html
October 11th, 2008 at 8:30 pm
This isn’t exactly right, they don’t say it’s _all_ Fanfreddie’s fault: the Right have also decided that the Community Reinvestment Act was also responsible, abetted by “community” (we know what that means) “organisers” (trouble-makers)like…well, who have thought it?!
October 11th, 2008 at 8:31 pm
Errata:
“)like” —>”) like”
“who have thought it” —>”who’d have thought it”
October 11th, 2008 at 8:32 pm
Something amazing happens in the linked story:
It’s nice to see an MSM outlet go beyond the usual ‘Republicans claim/Democrats counter’ BS and actually call bullshit.
October 11th, 2008 at 8:36 pm
Matt,
You have to make up your mind whether or not you just want to be a partisan hack who punches holes in the spin of partisan hacks on the other side, or whether you intend to fulfill your potential and actually start to learn how the world works.
The economic disaster was the work of a bipartisan consensus, of government and the private sector, everybody who was anybody working together. When you finally understand what, almost nobody in public life comes out looking good.
If you want to understand what happened, you can read my link above. Then, for the Bush Administration’s particular culpability, see
http://www.vdare.com/Sailer/080928_rove.htm
October 11th, 2008 at 8:37 pm
Then, for the background to the disaster, see:
http://www.takimag.com/site/article/the_diversity_recession_or_how_affirmative_action_helped_cause_the_housing/
October 11th, 2008 at 8:47 pm
Holy Shit!!!
Looks like Steve has a friend on Fox News.
October 11th, 2008 at 8:47 pm
Steve, you are one hell of someone to talk about being a partisan hack vs. learning how the world works.
Before you write anything, no matter what the subject, it’s incredibly obvious that you have figured out some reason why whatever problem exists does so because non-white people fucked up the white people.
I know that’s me establishing my dominance over you somehow, and you are a big victim. I also know that you are absolutely impervious to facts that counter your ever present racial narrative. I’m also really, really, posivitve a month ago you had no idea what a CDS, the TED spread, the commercial paper market, etc… was. You may not even know now, but you are the “expert” who always figures out who fucked something up, and the answer is always a generic form of “nigger”.
How about you be the contrarian for once and buck that trend?
October 11th, 2008 at 8:47 pm
Re: I’ll bet minorities have accounted for 60% or more of the defaulted dollars.
Remember: for federal affirmative action programs women (who comprise slightly more than half the population) count as “minorities”. So even if your statistic is true, if you add the whole female population (or every race) plus Black, Hispanic, Asian, Native American, disabled and veteran males you’ve got more than 60% of the population in the group to start with.
Meanwhile the stats on CRA compliant loans (which look at income not race) show that default rates are lower than the general rate.
October 11th, 2008 at 8:50 pm
Oh noes! The dark peoples made the moneys go away!!! Including all the black peoples who put together bunches of singles with a twenty on each end and sold it as a roll of fives, and all the Meskins with the ratings agencies who happily labelled it “shinola”-grade. And all the community 0rg4n1×0rz who reinsured those debt-collateralized instruments, dusky folks all….
If only we had kept our precious polity free from this contamination. On third though, we shouldn’t have let those damn Irish in…and the Germans, and the Scotch-Irish…and in fact anyone without a good, solid, Midlands accent. Then we could have been happy.
And Matt is an partisan hack, especially when compared to writers who fix the blame firmly where it deserves be: on the shoulders of a bunch of people he doesn’t like too much anyway.
My apologies: I’m not the troll this line of reasoning deserves. Just pack it into the wahmbulance, send it away and have done with it.
October 11th, 2008 at 8:53 pm
Of course, Steve Sailer’s right and everyone else is a hack. How do I know? Steve Sailer told me so.
On cursory reading, Steve Sailer’s numbers conflict radically with those in the McClatchy article. And presumably those from the numerous reputable and easy-to-follow sources for that report. But if Steve Sailor says they’re hacks, he must be right.
October 11th, 2008 at 8:56 pm
So, did the n***ers and spics also create the whole credit default swap market that allowed unregulated financial devices to trade on unverifiable, non-market-risk-presented future bets of future values of mortgage-backed securities and derivatives?
‘Cause if so, them’s some damn powerful-a** negroes who forced that sh*t onto Wall Street and into the December 2000 budget bill.
October 11th, 2008 at 9:01 pm
By the way, how come Jimmy Carter let the negroes create the greenhouse effect? Hmph. Libruls.
Also, I know nothing of cosmological physics, but my awesome skills in racial prejudice has allowed me to come to some striking conclusions in the question of “dark matter” and “dark energy”.
October 11th, 2008 at 9:06 pm
Steve, I clicked on your first link and all I got were complicated statistical claims from some dude named ‘Tino’ that weren’t explained in any clear way, even when I checked out the links.
Statistics about how subprime borrowers are disproportionately black or Hispanic don’t show much of anything either. Of course they’re going to be minorities — poor people are disproportionately black/Hispanic and vice versa, so subprime borrowers are going to be minorities, even if bankers don’t do what they did and give them worse credit terms than a comparable white family.
The last five paragraphs of the article Matt links basically wipe out any claims that lending to minorities as per the CRA caused the disaster. Big parts of the banking industry that have been devastated were exempt from the CRA. I guess I’ll just quote the article:
October 11th, 2008 at 9:07 pm
The truth is, we were never as rich as we thought we were. The last decade’s growth was largely driven by huge flows of lending dollars to dubious borrowers. At the bottom of an unknown but frightening number of convoluted new-fangled debt instruments were homebuyers who had no chance in hell of paying the mortgages back when the music stopped and the price of houses in California (and a few similar states) stopped heading toward infinity.
Federal Home Mortgage Disclosure Act data dug up by reader Tino suggests that the recent American Housing Bubble was, more than anything else, a Hispanic Housing bubble, as total mortgage dollars handed out to to Hispanics more than septupled from 1999 to 2006! (Is “septupled” even a word?)
Moreover, in 2006, according to Tino, 51% of subprime and other “higher priced” mortgages (for purchasing homes and for refinancing older mortgages) went to minorities. The higher priced mortgages are, of course, where most of the unexpected defaults have shown up.
UPDATE: Tino has added up all the subprime mortgage dollars for the entire disastrous 2004-2007 period. Among borrowers whose ethnicity is unambiguous, he comes up with $900 billion subprime dollars going to non-Hispanic whites, $887 billion to minorities. So, that’s 50% of subprime dollars during the worst years of the Bubble went to minorities.
Someday, we’ll get a count of defaulted dollars by race. The government hasn’t been very interested in collecting that information!
At their bubblicious peak, American homes were theoretically worth $24 trillion. The amount of wealth that has evaporated in the popping of the American real estate bubble so far appears to be in the $5 trillion range, to pick a very round number. Dr. Housing Bubble recently estimated the loss to be $4.68 trillion using Case-Shiller data. Another source estimates $6 trillion.
And we haven’t necessarily hit bottom yet.
My very rough estimate is that half of the American loss in home values so far has occurred in California, with Florida being next in line.
How big is 5 trillion simoleons? How does it compare to the total wealth in the world?
At the peak, the total “assets under management” (i.e., financial instruments, but not including real estate, private businesses, and marketable luxury goods such as Van Goghs) globally reached $110 trillion, according to the Boston Consulting Group. In North America, “assets under management” were $39 trillion; let’s figure $36 trillion in the U.S alone.
If we add $36 trillion in financial paper and $24 trillion in homes we get $60 trillion in wealth in America between them.
Compared to $60 trillion, a fall of $5 or $6 trillion doesn’t sound so bad. But the problem is that literally countless trillions of these “assets under management” consisted of a mountain of leverage concocted by high IQ idiots on Wall Street balanced on a pebble of probability that recent mortgages handed out to Californians (and the like) would ever get paid back. The Clinton and Bush administrations were egging the lenders on to increase minority and low-income home ownership.
There were lots of other bubbles going on in the world, such as in Spain, England, and Iceland, but the California-centric American housing bubble was the big one.
The only way many recent borrowers could hope to get out from under their giant mortgages was if they found even Greater Fools to sell their houses to. In other words, California home prices had to grow to infinity for this movie to have a happy ending. CNN reported in 2006:
“More than 90 percent of homes in [Indianapolis] were affordable to families earning the median income for the area of about $65,100. In Los Angeles, the least affordable big metro area, only 1.9 percent of the homes sold were within the reach of families earning a median income for the city of $56,200.”
By 2007, a 500 square foot one-bedroom house in Compton, CA, the spiritual home of gangsta rap but now majority Latino, went for $340,000.
Thus, a year or two ago, when the interest rate on adjustable subprime mortgages started to reset after the typical two year “teaser” period of low interest rates began ending, housing prices slowed, then started to fall as everybody rushed for the exits.
Granted, trillions were also lost in the popping of the Internet stock bubble in 2000, but the collateral damage was milder because shares in Pets.com were considered “investments.” Ever since the New Deal there have been certain limits on how much you could leverage stock investments “on margin” since the presumption is that “investments” go up and down in value.
In contrast, a half million dollar loan for a house in a slummy California neighborhood handed out to a drywaller from Chiapas who obviously must have added an extra zero to his undocumented annual income on his mortgage application is considered an “obligation” and the presumption is that it will be paid back. Defaults on “obligations” are assumed to be the exception rather the rule. After all, as they would say in the City of London when figuring out where to park some Kuwaiti oil money, mortgages for Californians were “safe as houses.”
Obviously, in reality, investing in Pets.com and lending a half mil to the drywaller were both equally stupid financial transactions, but, traditionally, they’ve been considered different breeds of activity.
Therefore, the Wall Street geniuses felt justified in constructing vast Rube Goldberg schemes of leverage on the back of this kind of “obligation.” They had data showing that borrowers in 2004 and 2005 weren’t defaulting on ridiculous mortgages, but that’s because there were still Greater Fools around to hand the hot potato houses to. Ignoring that, the financial wizards attempted to obtain Reward Without Risk.
Well, you can’t do that. You just can’t.
Of course, they were simply delaying the return of Risk until it all came rushing back in at once this autumn, just like the “portfolio insurance” schemes of the mid-1980s led to the October 1987 one-day crash.
Underneath too many of these market insurance schemes that would take a 300 IQ to understand was the assumption that out in the slums of California, laborers with fifth grade educations would pay back $4000 per month for most of the rest of their lives. Maybe they would quit their day jobs, learn to read English, go to medical school, and become doctors. (We wouldn’t want to be guilty of the “soft bigotry of low expectations,” now would we?) Either that, or they would find a Greater Fool who would pay even more for the privilege of living in the barrio.
Over the last year, the world’s financial institutions started to wake up to the reality that underlying some uncountable but possibly terrifying fraction of all the baroque financial instruments they had been selling each other were pieces of paper “obligating” drywallers to pay each month more than their monthly income for their cruddy California houses.
Today, nobody in the financial world has much of a clue who is solvent and who will crumble tomorrow, so nobody wants to lend to anybody.
October 11th, 2008 at 9:10 pm
There needs to be a short, clear soundbite that wipes this new Republican subprime myth from the minds of average voters. An article like this won’t kill the zombie.
October 11th, 2008 at 9:16 pm
The culprits were less CRA and Fannie/Freddie than a regulatory failure that allowed ridiculous mortgages with no money down and interest only payments to proliferate. Everybody was for it, but Bush and Rove were most culpable in this.
George W. Bush made several speeches rallying enthusiasm for his October 15, 2002 White House Conference on Increasing Minority Homeownership. For instance, there was his classic Bushian effort on June 18, 2002:
“The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. … So I’ve set this goal for the country. We want 5.5 million more homeowners by 2010—million more minority homeowners by 2010. (Applause.) … ”
… “And so what are the barriers that we can deal with here in Washington?”
“Well, probably the single barrier to first-time homeownership is high down payments. ”
Uh-oh.
Traditional standards requiring “high down payments” existed for, as we see now, very good reasons. Being able to pony up 20 percent, or even just 10 percent, was cold, hard evidence of borrowers’ credit-worthiness. It showed you hadn’t spent every penny you ever earned. And a big down payment meant you instantly had substantial skin in the game. That you had paid out tens of thousands of dollars meant you were likely to do whatever it took to avoid losing your house by failing to pay off the loan.
To Bush and Rove, however, old-fashioned down payments were just keeping minorities from their fair share of the American Dream. Bush burbled on:
“People take a look at the down payment, they say that’s too high, I’m not buying. They may have the desire to buy, but they don’t have the wherewithal to handle the down payment. We can deal with that. And so I’ve asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)
Bush’s initiative sent the message to federal underlings to NOT take away the punchbowl just when the party gets going.
October 11th, 2008 at 9:23 pm
All this led to huge flows of money to minority homebuyers with little chance of paying it back. Here are the numbers for all purchase mortgages (both prime and subprime aggregated together) from the federal Home Mortgage Disclosure Act database comparing 1999 to 2006:
Compared to 1999 (the first year in the federal database), which was before the Housing Bubble, it’s striking to note how much more mortgage money has flowed to Hispanics. The growth in mortgage dollars for home purchases by Hispanics grew 691 percent from 1999 to 2006! Hispanics originated only $21 billion in purchase mortgages in 1999 v. $163 billion in 2006.
Not surprisingly, four heavily Hispanic states—California, Florida, Arizona, and Nevada—account for 50 percent of the mortgage defaults in America in 2007, and, due to California’s ridiculous home prices, no doubt an even larger share of defaulted dollars.
Blacks also received far more mortgage dollars in that seven-year stretch from 1999 to 2006, up 397 percent from $17 billion to $84 billion. Both Hispanics and blacks participated heavily in the subprime market, with two to three times higher percentages of their mortgages being subprime than among whites. So much of this breakneck expansion in borrowing among Hispanics and blacks must have been due to subprimes, which is where the financial collapse started.
Despite rapid immigration, Asians were up only 218 percent in total new mortgage dollars from 1999 to 2006, from $24 billion to 77 billion. We know they mostly stuck to prime mortgages, at about the same rate as whites. Prudent Asians mostly avoided the subprime follies.
Total minority purchase mortgages taken out in 2006 were $360 billion, compared to $678 billion for non-Hispanic whites. So, minorities were slightly over-represented in purchase mortgage dollars relative to their share of the population.
My estimate for non-Hispanic whites is that mortgage dollars flowing to them increased about 100 percent over those seven years.
If you looked just at subprime mortgages, the increases in subprime dollars going to Hispanics and blacks from 1999 to 20006 were no doubt even more astronomical.
October 11th, 2008 at 9:28 pm
“Someday, we’ll get a count of defaulted dollars by race.”
Yeah, let’s do that. But we should include the effects of the microloan institution abroad. They don’t seem to be failing right now. Nor do the Muslim banks. I wonder why all those brown skinned people didn’t cause a problem. Maybe it’s because they pay their loans back. But Steve, what I really want to know is what’s up with Iceland. They are simply as white as it gets, and they are in serious trouble. No doubt there is one Indian restaurant owner that you will blame the entire collapse on. But I really have to hear how you spin that. That will probably be the all time classic Steve Sailor rant. Seriously, your fascination with skin color is really comical.
October 11th, 2008 at 9:30 pm
Hispanics grew 691 percent from 1999 to 2006! Hispanics originated only $21 billion in purchase mortgages in 1999 v. $163 billion in 2006.
I’ve quit reading. This is a stupid human trick. If you don’t understand why what you typed right there was stupid, what’s the point of it all?
What the hell does $163 billion dollars mean at all?
October 11th, 2008 at 9:35 pm
Steve- There are about 25 million minority (African-American/Hispanic) households in the US, and most of them are in urban rental stock (NYC, Chicago, DC) or very poor owner-occupied housing (e.g. North Philly, the rural South). How many millions of minority households could possibly have taken mortgages of any kind, much less subprime mortgages, during a four-year period? I’m not hearing of an influx of house-holding minorities into new parts of the country–rather, I’m hearing about NC, IA, and other places where we’ve had an influx of very poor Hispanics, a mix of legal and illegal residents, who are in rental and frankly transient properties….no subprime mortgages there!
Seriously, Steve, that’s a shitload of money, so where the heck are the people? We should be seeing a new (if spurious) black and Hispanic householding middle class, and nobody is seeing it.
October 11th, 2008 at 9:37 pm
Not that I expect an answer, but I have to ask: who the fuck is “Tino”?
October 11th, 2008 at 9:39 pm
or whether you intend to fulfill your potential and actually start to learn how the world works.
’sfunny: Darth Vader was a white guy with the voice of a black guy in a black suit, but Popeye is a whiny white guy in a white sheet with a white hood.
October 11th, 2008 at 9:39 pm
Thank god I no longer need read the economists who have been getting this story right the past 5 years and instead can draw my knowledge from the copied & pasted versions of a racial obsessive.
October 11th, 2008 at 9:49 pm
“but I have to ask: who the fuck is “Tino”?”
If you have to ask, you probably don’t want to know. But I’ll make a guess: Mitt Romney’s dog. Granted, that’s a little too high on the IQ scale, but I’m sticking with it.
October 11th, 2008 at 9:53 pm
Rich in PA asks a serious question: Where did the money go?
We know that in 2006, 35% of all new mortgage loan dollars (prime and subprime) for home purchases and 33% of refinance dollars went to minorities.
A huge fraction of it went to California. 29% of the foreclosures in the U.S. are in California, and I would guess about half of the dollar value of all foreclosed mortgages are in California. California is 57% minority.
California, Arizona, Nevada, and Florida account for 50% of the foreclosures, and maybe 70% or more of the dollar value of defaulted mortgages. They are all heavily Hispanic states.
The Dr. Housing Bubble blog has long run a salute to California’s “Real Homes of Genius.” My favorite is the $340,000 paid in 2007 for a 500 square foot pre-WWII one bedroom house in Compton, where NWA came straight outta. But, there are countless more. See:
http://isteve.blogspot.com/2008/10/real-homes-of-genius.html
October 11th, 2008 at 10:06 pm
A lot of foreclosures have been on working class families, white, black, and Hispanic, well-intended strivers who bought too much house in the exurbs trying to insulate their kids from falling in with underclass classmates. To get their kids into a decent school district, they bought into quasi-McMansion neighborhoods where the sizable houses and high prices would keep the riffraff out of the school district.
But no downpayment mortgages, teaser adjustable loans, no documented income needed, etc etc meant that just about anybody could buy into some of these exurban neighborhood … for a little while. Further, speculators could pick up a few homes by lying on their mortgage application that they were going to live in the houses, then, while waiting to flip them, rent them out to undesirable neighbors like construction workers just up from south of the border and Section 8 subsidized rental folks evicted from urban housing projects being torn down. (Section 8 is popular with short-term landlords because the rent checks come from the government — you don’t have to go knock on doors to collect them from surly tenants.)
Speculators renting unoccupied 3000 sf homes out to undesirables can turn an exurb into a slum fast, further driving down home prices.
October 11th, 2008 at 10:08 pm
Okay Steve, it seems you’re still here. So answer this:
Why are banks run by white people failing while banks run by brown skinned people not failing? Think about it, I just googled “India bank failures”, and what do I get? Stories from the Indian press about American bank failures. If those brown skinned people are really the problem, then why aren’t they causing the problem?
October 11th, 2008 at 10:10 pm
fostert: Why’d you have to go and rub the turd lamp? You know that no matter how many times you try, the sh*t genie appears.
October 11th, 2008 at 10:15 pm
Sweet Jesus, Sailer, the problem is not the fucking mortgages! Let’s say this was the scary brown and black people who lack the moral fiber of the lily whites to pay back their loans, but the banks were forced to lend to them because of the meddlesome government. Let’s grant all of that patent bullshit as true. (Can we get the gays involved too? Someone help me get the gays in on this as well.)
Net effect on the economy: negligible.
A chunk of people lose their homes, a chunk of mortgage lenders get Darwinned out of existence. Bargains abound, others start moving in to scoop up profits. Garden variety market correction.
What to AIG, Goldman Sachs, Lehman, and Bear Stearns have in common? They don’t have to play by the rules that Sailer’s fascist color-loving government apply to the banks. They didn’t have rules at all. AIG is a fucking insurance company. As Daniel Gross said:
It’s the multi-leveraged securities. It’s not the loans themselves.
October 11th, 2008 at 10:17 pm
Steve (26): Now we’re getting somewhere. You’ve identified two states, CA and FL, which have very large Hispanic populations that aren’t overwhelmingly poor, and which are the states with the most egregious real estate speculation…it all comes down to whether you think there’s a connection between those two features. I don’t, because (among other reasons) those states had the most speculative-bubble markets long before Hispanics became significant players for any kind of mortgages. So I suspect that to the extent Tino has discovered anything, it’s a statistical artefact–maybenot bullshit, but not what it’s being marketed as. As if we needed more stuff that’s not quite as marketed!
October 11th, 2008 at 10:43 pm
Rich,
If you follow my links above, you’ll find all the data you need to understand what really happened.
There are basically two major foreclosure phenomenon that account for about 70% of the foreclosures: the increasingly Hispanic sunbelt states of California, Nevada, Arizona and Florida. And the Greater Detroit Rustbelt, which has hit really hard working class blacks in neighborhoods where people used to have decent union jobs. The latter is a tragedy, but the former is a self-inflicted farce.
As you say, lots of investors have made lots of money in the 20th century in investing in housing in California and similar states, so investors kept pouring in money as population kept going up in those states. A financial institution made a nice profit on the mortgage my father, an aeronautical engineer, took out in 1952 on his San Fernando Valley house.
But, what nobody took into account was that the makeup of Californians was changing rapidly, which had huge consequences on their ability to pay off huge mortgages. According to the United Way, 53% of the adult population of the Los Angeles area is functionally illiterate in English. California’s school children always now rank between 44th and 49th out of the 50 states on the federal NAEP tests. You’ll notice above that the median income in the LA area is now 15% lower than the median income is undistinguished Indianapolis, even thought the cost of living in LA is dramatically higher than in Indianapolis.
California has 37 million people, and 57% are minority. Some of those are chip designers at Intel, but the Latino plurality in California is not at all well represented in Silicon Valley, is not making the big bucks in Hollywood, is not discovering new pharmaceuticals in La Jolla. Most of them work hard, but they aren’t very interested in higher education. A new study from the UCLA Chicano Studies center found that only 6% of fourth generation Mexican Americans (whose grandparents were born in the USA) have a college degree (compared to 35% of NH whites.)
Wall Street, in turn, built insanely overleveraged financial instruments on the back of California subprime mortgages that turned out, at their base to be pieces of paper theoretically obligating, say, a drywaller to pay $4000 per month for the next 28 years or to find a Greater Fool who will pay even more for the privilege of living in a barrio.
Are you starting to see how it worked?
Bush and Rover were all for this ridiculous no money down lending because they hoped that easy credit would turn Hispanics into homeowners because homeowners vote Republican, and their top longterm political priority was to bring Hispanics into the GOP.
October 11th, 2008 at 10:44 pm
The McClatchy article says that Fannie and Freddie only owned a small portion of the sub-prime loans during a key period. Maybe so but they guaranteed a huge number that they didn’t own. Is McClatchy trying to mislead us?
October 11th, 2008 at 10:48 pm
I will try to debunk the right wing “lending to minorities caused the meltdown canard one more time. The mortgage meltdown came about because of lending industry deregulation. Before 1995, profitable and performing loans were the same. Deregulation led to fragmentation of the industry which gave a financial incentive to everyone in the mortgage origination-to-sale chain to create profitable as opposed to performing loans, which are loans that people pay every month. In 1995 the Republicans in control of Congress changed the RESPA anti-kickback rules for mortgage brokers, thereby allowing lenders to pay brokers a yield spread premium (also called a par plus payment). In a nutshell, this is a payment made by the lender to the broker if the broker originates a loan that is a higher than par rate for that borrower. For example if a broker has an “A” rated borrower based on his loan application, and now his FICA/Fair Isaac score, that qualifies for the lender’s best 6% loan, the lender will pay the broker a premium if the broker can close that “A” borrower into a higher 8% loan. That 8% loan has more value to the lender than a regular “B” borrower’s 8% loan because an “A” borrower, who is less likely to default, is paying an interest rate that a “B” borrower would pay, who is more at risk of default. I and several other consumer lawyers around the country argued that this payment was a kickback for the referral of business, the higher par loan, made illegal under RESPA because the broker does no more work to close the loan at 6% than he does at 8%. The broker is being paid by the lender to refer the lender the higher than par rate loan, which is an illegal kickback for the referral of business. The mortgage industry got Congress to eliminate this anti-kickback rule so that consumers had to prove the overall broker compensation was unreasonable, an impossible task because most states allowed lenders to charge up to 10% of the loan amount for his commission. The non bank lenders led by Countrywide, Ameriquest, Home Eq., etc., saw this as a means to eliminate the overhead and management issues of having an office in every city. Countrywide created a nationwide network of brokers who they would pay yield spread payments for originating higher than par loans. Countrywide would get short term money to fund the loans, which had to be “qualifying loans” (meet minimum underwriting guidelines for credit and loan to value rations) for Fannie and Freddie to buy, then turn around and sell them on the secondary market. The broker would qualify the borrower by giving him an adjustable loan with a 1 year discounted teaser rate and qualify the borrower at the lower monthly payment. So, for a simplified example, an “A” borrower goes to a mortgage broker and says “I need a $100,000.00 loan”. Since he is an “A” borrower he qualifies for 6%, but the broker would search for the lender who would pay him the highest yield spread, usually Countrywide and tell the borrower: “all you can get is a 8% loan, but I can discount that to 4% for the first year.” The broker would also tell the borrower to pay down non-secured debt to make the loan more attractive to the lender i.e. the credit cards and car loan, thus driving up the total principal and their yield spread payment. Now the loan is $125,000.00. At closing Countrywide would draw $125,000.00 on its short term line of credit and fund the loan, paying the broker the yield spread. Countrywide would then sell these qualifying loans in the secondary market. The loan was “teased” to 4% for the 1st year so the borrower qualified under that lower rate. If the borrower questioned the ability to pay the higher rate on adjustment, the broker would tell the borrower “Do not worry about the increase, just come back when the loan increases and I will refi you.”
Allowing interstate banking, then Gramm-Leach-Bliley that eliminated the wall between investment banks, deposit banks, and insurance companies, with a boost from the parity statute created a huge pool of money to lend from investment banks - the shadow non-regulated banking industry. The Countrywides of the world did not have to sell the originated mortgages as qualifying loans eligible for purchase by Fannie or Freddie. They could sell to the newly deregulated investment banks with no “qualifying” requirements. This allowed Countrywide to lend money at 100% loan to value to borrowers who could not afford payments, then take this pool of loans, a mixture of “A” “B” “C” and “D” grade borrowers and go to someone like Merrill Lynch and say “I have 1,000 loans average $125,000.00 each with an average 10% yield over 30 years with a present value of $150,000.00 (consisting of 100% LTV loans and very risky borrowers). I will sell you the loans for $140,000.00.” Countrywide would then pay back its credit line and just made $15,000.00 per loan less its yield spread less its costs of money for 1,000 loans, or say $10,000.00 per loan which is $10 million. Meanwhile Countrywide kept the servicing rights for these loans which also generated another income stream for Countrywide. Merrill Lynch before deregulation was prohibited from entering the mortgage business. Gramm’s bill made the investment banks an unregulated lender, with an income stream from Countrywide as the servicing agent. Merrill would then securitize and sell the pool of loans to Bank of America as Trustee (after buying Countrywide and Merrill Lynch, BOA has a vertical monopoly in the mortgage business from Countrywide’s network of brokers, to BOA’s ability to short term fund the broker’s loans, to Countrywide’s mortgage servicing business to Merrill Lynch who would securitize the pool, to BOA who acts as Trustee for the securitized loans), as a non-regulated security. They in essence sold shares of stock in the pool of mortgages. The rating of these pools of loans was privatized, which means that a company like Moody’s was given the rating task. Moody’s had no idea how to rate a pool of loans which had a mix of “A” through “D” loans, all with greater degrees of risk of default because these borrowers were now paying slightly higher interest rates than they would be expected to pay, and would probably not pay when the rates changed. Moody had no idea if the homes, the collateral, were properly appraised and had sufficient equity to cover a default. Moody’s essentially saw a pool of loans with “A” to “D” borrowers with 15%-20% of the pool as “A”, and so rated the pool as AAA which was its highest degree of safety. In other words, Moody’s rated a pool of junk loans as AAA rated securities, which entities like Bank of America, as Trustee for “ABC” asset backed securities bought and sold as great investments. (As I understand it they later divided these pools into tranches or 3 different degrees of safety and sold them accordingly).
No one had a financial incentive to make sure the originator closed a performing loan - a loan that the borrower would pay back, and if not, that the collateral had sufficient equity to pay back the principal. The Broker and Countrywide as originator, only had an incentive to close profitable loans - loans they could sell. They could care less if the borrower made his first mortgage payment. All loans were “sellable” as long as the pool was sold before too many of the loans started to default. They were very likely sold before any default because mortgages are paid in arrears and closing agents collected the 1st fragmented month’s interest at closing. So the first payment was not even due until anywhere from 30 to 60 days after closing - a window in which the mortgages were often sold twice.
There were no underwriting rules because the originators and lenders, Countrywide and Merrill, were unregulated, and did not have to sell to Fannie/Freddie, so the loans were also non-qualifying. The industry then began to originate non-income qualifying loans i.e. stated income. Many people gave the correct income info to the broker, who then submitted an application to the lender with false income information. These loans were justified because of the values of the properties. The brokers would get friendly appraisers to give a high-ball appraisal then submit the loan package. The appraiser would either give the broker a higher appraisal or he would lose that broker’s business. This was the first wave of foreclosures that went through the courts. These sub-prime loans defaulted because they were based on one or all or a combination of these factos: 1) borrowers who qualified for lower (teased, discounted rates, or interest only loans); 2) inflated income by the broker who wanted to close the loan and get paid; 3) high-ball appraisals, 4) and all the borrowers were paying higher interest than they should have paid after their discount expired because of the yield spread.
Around 2001, post-deregulation, the non-deposit banks like Merrill and Lehman and Goldman were buying up all of the non-qualifying mortgages from the Countrywides that sprung up across the country, securitizing them and selling the securities, completely cutting Fannie/Freddie out of this lucrative business. The loans were all non-qualifying because they were more profitable than qualifying loans sold to Fannie/Freddie. No one was selling to Fannie/Freddie because brokers were originating “non-qualifying” loans that Fannie and Freddie could not buy - they were too risky. As quasi public companies, Fannie and Freddie had to drop their qualifying standards via regulatory changes. Fannie and Freddie then had to lower their “qualifying” standards so they could buy these otherwise non-qualifying mortgagees and join the securitized gravy train. If they did not, the now deregulated investment banks would force Fannie/Freddie out of the mortgage business and into bankruptcy. The Republican majorities in the Senate and House along with a Republican president were more than glad to deregulate Fannie and Freddie so they could compete with the unregulated investment banks. So Fannie and Freddie wound up with a lot of these toxic mortgage pools.
The next wave we will see is because deregulation compounded the problem by allowing lenders to devise and close the 4 option mortgage. This mortgage allows a borrower to elect to pay on 1 of 4 options each month: 1) ½ of the interest that was due on the loan with the remaining ½ put on the back end of the loan. At the end of a fixed period, usually 3 or 5 years the borrower would have to amortize the full mortgage principal plus back end interest at whatever the rate was; 2) interest only; 3) amortize over 30 years; 4) amortize over 15 years. The Countrywide broker now could qualify a borrower if his income allowed him to pay ½ of the interest on a 30 year mortgage. This opened up a whole new category of borrower who could not otherwise qualify for a 30 year amortized loan. The broker would sell this 4 option mortgage to the consumer by telling him “just come back in 3 years or 5 years when the loan adjusts and we will refinance you because the house will go up in value” The broker used the same appraiser to over-appraise the value. Here is an example of how that loan works. A $100,000 10% mortgage would require $10,000 per year interest or about $850.00 per month. The broker would qualify the borrower at $425.00 per month which is ½ of the interest. After 3 years, the $100,000 principal is now $115,300.00 and costs about $1,200.00 per month to fully amortize over 27 years. The borrower’s payment almost triples. These are the loans that we are starting to see come through the foreclosure division. We will see this wave for a few years.
You have to remember, too, these are amateur borrowers who have maybe 1 or 2 mortgages in their lifetime, relying on professional lenders who are closing 1 or 2 mortgages a week. The borrower usually relies on the lending professional to give good advice because the borrower thinks the broker is working for the borrower when he is not.
No one has an incentive to close a performing loan, just a profitable loan. This is the Republican free market working perfectly to cause this problem and why it needs to be strictly controlled. The Broker is working to maximize his yield spread payment. The incentive for the broker is to close as many loans to maximize his profit. He has no stake in getting the best loan for the borrower nor in making sure the loan performs as long as he gets paid. If he worked for a bank that kept the loan and he closed too many loans that defaulted he would be fired. Countrywide had an incentive to pay brokers large yield spread premiums and originate as many loans as possible, then sell the loans as fast as possible. They did not care if the loan performed, so they closed an eye to the bad underwriting that went on and in fact encouraged its employees to qualify everyone - who cares at Countrywide as long as the loan is sold before it defaults. If Countrywide were a bank that kept the loan, a performing loan is paramount to keep them from failing. Merrill Lynch does not care if the loan performs as long as the pool is AAA rated and can be sold. This is why we are where we are.
October 11th, 2008 at 10:58 pm
There should be a rule saying that a comment can be no longer than 87 times longer than Matt’s original post.
October 11th, 2008 at 11:03 pm
James,
Thanks for filling in details.
The key point is that Everybody Who Was Anybody was in on the Housing Bubble scam. And they way they justified debauching traditional credit standards was that they were Extending the American Dream to Minorities. (Read Bush’s 2002 speech above calling for 5.5 million new minority homeowners and denouncing down payments as a barrier to the American Dream.)
This lowered credit standards not only for minorities but also for whites — whites got half the subprime loan dollars in 2004-2007.
And, political correctness and discrimination lawsuits made it almost impossible to take a stand against this debauch. Look at the kind of frothing at the mouth fury that my points arouse in other commenters. I am a heretic who doubts the sacred verities and must be denounced in the most unhinged language possible.
If some crusty old banker had sent a memo asking “How come we’re writing such huge mortgages in Compton? Isn’t Compton full of blacks and Mexicans? How can they afford to pay them back? Who will pay even more money to move to Compton?” The email would have been discovered in an anti-redlining discrimination lawsuit and the bank would have fired the old SOB and promised LA Raza, ACORN, and NAACP to write even bigger mortgages in Compton.
October 11th, 2008 at 11:11 pm
No, You just suck ass at math, Steve. I’m willing to give some slack to college dropouts but you just really, really, suck. Someone is paying you anyway, be glad there is welfare for White idiots.
October 11th, 2008 at 11:14 pm
Actually, the apparent 700% rise in annual Latino mortgage-loan dollars between 1999 and 2006 probably reflects something entirely different, namely the very rapid—but almost totally unreported!—rise in Latino economic success. Here’s a link to about the only mention I’ve ever read anywhere in the MSM:
http://www.nytimes.com/2007/10/01/opinion/01besharov.html
Basically, between 1994 and 2006, the percentage of skilled, blue-collar jobs held by Latinos more than doubled, the median income of Latino individuals rose by 32% in constant dollars, and the poverty rate of Latinos dropped by 1/3.
The most remarkable aspect of this very rapid economic advance it that occurred despite a gigantic simultaneous influx of initially impoverished Latino immigrants, most of them illegal, which continued during nearly every year in this period.
Taking that into account, I wouldn’t be too surprised if the median family income of the Latino population cohort already present in 1994 actually doubled during this 12 year period.
As these more established Latinos moved into the solid middle class, they obviously tended to buy homes, which explains the huge rise in Latino mortgage dollars.
Since so many Latinos live in CA, FL, AZ, and NV, they were clearly a major factor in driving up the sale price of homes, and helping to inflate the unfortunate Housing Bubble in those locations.
But I still haven’t seen any evidence that they had foreclosure rates significantly worse than the Anglos and others also buying homes for wildly inflated prices in those regions. In fact, there’s even a tantalizing bit of evidence that Latino illegal immigrants may actually have unusually LOW mortgage delinquency rates:
http://www.latimes.com/news/local/immigration/la-me-immighome6-2008oct06,0,1279877.story
October 11th, 2008 at 11:15 pm
One thing I’ve noticed over and over, which we’re seeing here in the incomprehension with which my statistics about the vast scale of mortgage lending to minorities during the Bubble is symptomatic of the fact that minorities don’t really exist in the mental universe of many white liberals, except as tokens to demonstrate the moral superiority of white liberals over white conservatives.
There are 100 million minorities in the U.S., almost half of them Hispanic, but white liberals and white conservatives don’t think about them much. Whites spend all their time thinking about how they are better than other whites, and so they miss the really huge changes happening in this country due to demographic change.
October 11th, 2008 at 11:19 pm
Dear RKU:
The “rise in Latino economic success” during the Housing Bubble is unsustainable and is already vanishing. It largely consisted of getting construction jobs building Bubble Homes, or in other parts of the economy inflated by mortgage refinancing Bubblenomics.
October 11th, 2008 at 11:23 pm
I am perfectly willing to admit that some of the octupling from 1999 to 2006 of total mortgage dollars for home purchases flowing to Hispanics was economically justified. If you looks at Asians, who mostly stayed away from the subprime follies, you’ll see that the total money flowing to them slightly more than tripled.
As a very rough and ready measure, we can subtract the tripling seem among Asians from the octupling seen among Hispanics to get a rough estimate of the Bubble Effect on Asians — that leaves a quintupling, roughly similar to the sextupling of mortgage money flowing to blacks over 1999-2006. As you well know, there was nothing much going on among blacks in that period to justify a sextupling of credit extensions to them.
October 11th, 2008 at 11:25 pm
“to get a rough estimate of the Bubble Effect on Asians”
should be
“to get a rough estimate of the Bubble Effect on Hispanics”
October 11th, 2008 at 11:35 pm
Dear RKU:
Indeed, the Housing Bubble may have slowed the cultural maturation of Mexican-Americans by providing them with ample construction and service jobs that don’t require education. Over the last number of years a lot of Mexican-American kids dropped out of high school and college to work construction or take other dead-end jobs in a Sunbelt economy bubbling along unsustainably due to ludicrous increases in home values.
October 11th, 2008 at 11:41 pm
What’s up with Matt citing ‘conservatives,’ or ‘right-wingers,’ when he means Steve Sailer? Isn’t it bad blogging etiquette not to link to your interlocutors? I’m getting sick of Steve publishing important info and predictions (e.g. on Rev. Wright), be read by all sorts of media people, and then have his ideas copied or replied to without attribution. If it’s good enough for Matt, then it’s good enough for the readers.
October 11th, 2008 at 11:43 pm
Or you could have just read Bainbridge’s post 2 weeks ago:
http://www.stephenbainbridge.com/punditry/comments/they_make_you_embarrassed_to_be_a_conservative/
October 11th, 2008 at 11:53 pm
The data Bainbridge cited was from a survey done between January 1996 and June 1997, so it’s awfully out of date compared to Tino’s data which he calculated yesterday for the years 2004-2007.
Here is Bainbridge’s the situation in the mid 1990s:
“When you look at the data, it’s true that minorities are slightly over-represented in the sub-prime mortgage market. Yet, whites (non-minorities) received 72.5% of subprime mortgages. Blacks got 16.2% of subprime mortgages, which isn’t all that different from the 12.4% of the general population that blacks comprise. The Hispanics about whom Malkin is so hysterical got only 6.2% of subprime mortgages, significantly less than their 14.8% of the general population. But you don’t find an analysis of that data at blogs like those of Malkin or Krikorian.”
So that’s the situation more than a decade ago.
Notice the huge change since — by 2004-2007, minorities got 50% of subprime mortgage dollars, with Hispanics accounting for a huge fraction of the growth. Besides the relative change in minority share of subprimes, the absolute dollar value of subprime mortgages grew enormously, especially between 2003 and 2005.
October 12th, 2008 at 12:03 am
Anon asks:
“What’s up with Matt citing ‘conservatives,’ or ‘right-wingers,’ when he means Steve Sailer?”
Well, it’s more complicated than that. Obviously, Matt reads my stuff all the time.
But on this particular issue, he has studiously avoided engaging my analysis. Instead, he has spent his time putting down less sophisticated analyses from less sophisticated conservatives (e.g., The CRA in 1977! It was all Fannie’s fault!) because they are so much easier to call into doubt. Moreover, while my analysis has had a lot of influence, it isn’t directly cited by many Republican pundits because it shows that both parties were hugely to blame, with Bush and Rove being particularly guilty of not only not removing the punch bowl when the party got going, but pouring in a few more bottles of Everclear.
What good would it do Republicans at the moment to cite my explanation of how Rove’s desire to bring Hispanics into the GOP contributed to this mess when John McCain is as enthusiastic as Bush for Rove’s Hispanic initiative?
Anyway, I’ve repeatedly challenged Matt to try to debunk my long analyses (linked to above), but he has repeatedly chickened out. I can’t say I blame him. Either, he’d have to say:
1. Sailer is right
And then he’d get torn to bits for being an evil racist and his career would be in jeopardy.
Or he could say
2. Sailer is wrong for these precise reasons
And then I would logically dismantle his reasons in the comments.
It’s a no-win situation for Matt.
October 12th, 2008 at 12:03 am
You’ll never see the New York Times quoting “Tino’s data.” That’s how we can tell they’re in on the liberal media conspiracy.
You’re right, Sailer. If some shithead banker had said, “why are we making loans to blacks and Mexicans?” he’d be run out of town, because that’s a retarded thing to say. If he said, “why are we making loans to people who probably can’t pay them back?”, I don’t think you’d have seen any PC umbrage.
It wouldn’t suprise me if illegal immigrants had low default rates. The cost of a mortgage default is fairly low for most people, if they’re upside down. It screws up your credit, but you don’t have to declare bankruptcy and you can just walk away from the house. If you’re an illegal immigrant, you’d probably be afraid it would get you deported.
October 12th, 2008 at 12:06 am
You know what’s an awesome blog? The one at the Atlantic by Matt’s replacement, Ta-Nehisi Coates. His comments are a no-Sailer zone, I suppose because Sailer is afraid of TNC.
October 12th, 2008 at 12:10 am
Dear Too Many Steves:
If you don’t believe me, go look up the numbers yourself on the federal website at
http://www.ffiec.gov/hmdaadwebreport/NatAggWelcome.aspx
Table 11-1 gives you the dollars amounts on “higher prices” (i.e., subprime loans) by race
Table 4-2 gives you the dollars amounts on all (prime and subprime) mortgages by race
Table 4-3 gives you refinancings by race
The federal database covers 1999 through 2007.
Have fun crunching the numbers yourself.
October 12th, 2008 at 12:51 am
Shorter Popeye: the tailoring on my white sheet is exquisite.
(Also, nice of you to link to Taki Takealotofcokeupthenos, who is a bona fide old-school racist piece of shit, without the layers of makeup preferred by yersel’.)
Here’s the deal, Popeye: you’re a fucking plague carrier, and we don’t want to go within wafting distance of you. So fuck off to the Jörg Haider wake your friends have organized.
October 12th, 2008 at 12:58 am
Steve Sailer, you have an Internet niche, and this ain’t it. Take your doctored numbers, Aryan Nation values, filthy prose style and colossally uncool personality off this hang, okay? Based on the kind of research you’re comfortable with, your point of view cannot seriously be advocated anywhere but among people who don’t read or think much. Perhaps worse, you’re not even outrageous enough to be entertaining. So it’s lose/lose all the way. Please — how much energy do you want to put into being merely wearying?
October 12th, 2008 at 1:02 am
Uh, Steve-o, who do you think you are? Compare your two careers. Matt doesn’t have to condescend to respond to you.
October 12th, 2008 at 1:23 am
All this, and we still don’t know who the fuck “Tino” is.
October 12th, 2008 at 2:24 am
Follow up interview with poor old lady that thinks Obama is an Arab! Sad on so many levels
October 12th, 2008 at 3:01 am
As the economic situation worsens, be on the look out for racist scapegoating of minorities.
October 12th, 2008 at 3:07 am
Steve, you ought to write a book.
October 12th, 2008 at 3:14 am
Yes, the economic crash sparked by the subprime mortgage collapse does pull together and make palpable much of what I’ve been talking about for years. It would make a good book.
October 12th, 2008 at 4:25 am
One moment in this thread that deserves massive contempt, and which is a little tricky to pick up on, is the moment where Steve tries to co-opt James’ explanation for his racist purposes.
As James explains, the deregulated entities originating mortgages could just issue rapid-fire mortgages to homeowners, and then throw bonds that weren’t properly labeled to investment banks. Nobody with any effect on the process cared whether they were loaning to blacks or Hispanics or whites. The key thing is that deregulation set up a racket in which crappy mortgages could be securitized and turned into awesome bonds. Race and racial attitudes play no role whatsoever in explaining this.
October 12th, 2008 at 4:41 am
Sailer’s links in his blog post are to a table of *FHA* data, not subprime data. FHA is not subprime - FHA loans are 3% down, no ARM, no no-doc. They are already guaranteed by the government, so cannot affect the solvency of a bank.
…
Lending to people who cannot afford the payments is a bad idea. This bad idea was driven by many things, but rich white people feeling compelled to lend to poor brown people is pretty much last in line there - CRA doesn’t compel banks, and by bubble peak the majority of the activity was from non-banks anyhow.
So Sailer leaves us with an impressionistic smear on minorities. Sketch the picture, lead the audience to fill it in with their own racism … no thanks.
October 12th, 2008 at 4:51 am
Traditional standards requiring “high down payments” existed for, as we see now, very good reasons. Being able to pony up 20 percent, or even just 10 percent, was cold, hard evidence of borrowers’ credit-worthiness. It showed you hadn’t spent every penny you ever earned. And a big down payment meant you instantly had substantial skin in the game. That you had paid out tens of thousands of dollars meant you were likely to do whatever it took to avoid losing your house by failing to pay off the loan.
It was also a good way to keep the price of housing reasonable. If you had to put 10% down to buy a house, then it would not make sense to market to you any house costing more than 10 times what you could come up with on short notice. And it would not make sense to build houses whose building cost would make it unprofitable to sell them for that amount.
October 12th, 2008 at 5:24 am
Dear The Wesson:
No, you want to aggregate all the dollars in all the Tables that begin 11-*, not just 11-1 at
http://www.ffiec.gov/hmdaadwebreport/NatAggWelcome.aspx
October 12th, 2008 at 6:40 am
Obviously this clearly means that we have a problem.
No matter how anthropologically, sociologically, and census-wise informed we may be, if we fail to babble on relating every major social issue to changes in the status of white demographics, it’s obviously we who have the problem, right?
I mean, at least, I want to say such a thing, but maybe I should check with ‘Tino’ first. Or Binky. Or maybe I should check with ‘Haha.’
October 12th, 2008 at 7:08 am
By the way, here’s an IMF study showing that in the U.S. one of the surest ways to ensure tougher immigration policies is stronger U.S. labor unions (PDF).
I expect all the right wing opponents of illegal immigration to jump on board that train post haste.
But maybe I ought to check with ‘Tino’ first.
October 12th, 2008 at 7:16 am
Emailer Spanky tells me that we could’ve increased per capita GDP by 22% if we’d banned mortgages to Italians who like the circus.
October 12th, 2008 at 7:17 am
The world was living in a dream world, pouring hundreds of billions into California mortgages that Californians could never pay off.
California doesn’t have the human capital to support median home prices that peaked at $580,000. Less than one out of ten students who enters a Los Angeles public high school will score 1000 or higher on the SAT (and that’s under the easier post 1995 scoring system. For the oldtimers out there, a 1000 on the Math + Verbal today is equal to an 890 under the old scoring system).
October 12th, 2008 at 7:22 am
“By the way, here’s an IMF study showing that in the U.S. one of the surest ways to ensure tougher immigration policies is stronger U.S. labor unions (PDF).”
Of course.
Labor was the biggest force behind Congress passing the 1924 immigration restriction. Labor leader Samuel Gompers campaigned for closing the borders for decades. Everybody should know that (although they don’t).
Similarly, Cesar Chavez had his brother organize UFW vigilante patrols of the border and beat up illegal immigrants, like a violent version of the Minutemen.
These guys weren’t living in a dreamworld.
October 12th, 2008 at 7:33 am
Matt thanks. I’ve been looking for the perfect article to send to my father-in-law about this. This was it. I also sent it to others I know who might have their own fathers-in-law etc. in need of the article. Thanks again.
October 12th, 2008 at 7:37 am
Hey — credit where credit is due. Another way to slow or even reverse illegal immigration is to run the U.S. economy into the ground while simultaneously crashing the dollar value, such that there’s little net gain in having people flee Mexican impoverishment only to find it here. Yay!
October 12th, 2008 at 7:44 am
Cool! I get to use my high SAT score as downpayment on the house I couldn’t previously afford! Yay!
October 12th, 2008 at 8:18 am
Re: Traditional standards requiring “high down payments” existed for, as we see now, very good reasons.
There have always been mortgages that required small downpayments. That’s what the FHA is for (and loans made under this program are failing at much lower rates than the general population of loans). The real culprit, IMO, is the failure to verify income and asset numbers provided by the borrower, often inflated with the complicity of th lender, combined with the abandonment of sensible debt-to-income standards.
I beleive you are also fovusing only on first-time mortgages, and not looking at refis and HELOCs, which are the vast majority of subrpime loans.
Re: The mortgage meltdown came about because of lending industry deregulation.
I have to disagree here too. the fact is the mortgage industry was never regulated in a way that would have prevented the current disaster. There were never federal regulations requiring a given downpayment, or income verification, or debt-to-income ratios. The mortgage industry may have needed such regulations, but before this decade simple prudence induced them to (usally) follow good lending practices.
Re: No one had a financial incentive to make sure the originator closed a performing loan
Not quite true: lenders were almost always required to repurchase a loan that defaulted within six months of its origination, the logic being that any loan that defaulted that quickly should never have been made since the borrower could not afford it (loans defaulting later were probably due to changes in the borrower’s circumstances– job loss etc). This is why New Century and many other lenders went bankrupt as they originated too many loans that went bad practically from the first payment, and the MorganStanleys and GoldMann-Sachses forced them to take the loans back.
Re: minorities don’t really exist in the mental universe of many white liberals
Of course they do– hence, affirmative action and civil rights initiatives. In a truly colorblind society (which you also do not seem to favor) minorities wouldn’t exist in anyone’s mental universe and that’s what we ought to strive for. In financial matters like mortgages we should look at people’s income and assets and credit histories of course, but their skin color is perfectly irrelevant.
October 12th, 2008 at 8:31 am
JonF: I don’t think most are arguing that the deregulation most at issue was at the mortgage industry level — rather, at the credit default swap market level most immediately, and then at the level of keeping traditional banking vs. investment institutions separated as leading to the greater crisis.
October 12th, 2008 at 9:09 am
I bet minorities instigated 60% of the derivatives and over-leveraged debt swaps.
October 12th, 2008 at 9:43 am
James at 34, thank you for that extremely lucid analysis.
October 12th, 2008 at 11:50 am
Deregulation did in fact lead to the problem, not minority borrowing or the CRA, or any other right wing canard offered to blame everyone but the Republican free market philosophy. 20 years ago with community non-interstate banking, and no par plus payment to mortgage brokers, most mortgages originated with your local bank or S&L who had a loan officer that would hand (non-computer non-FICO score) cqualify a potential mortgagor based on income verification through tax returns, W-2s and loan to value ratio. Purchases had to be 90% LTV and refis had to be 75% loan to value ratios or they were not eligible for 2nd market purchase or guarantee by FANNIE/FREDDIE (these were called qualifying loans). Mortgage brokers were not paid par plus payments. There were no non-regulated non-deposit banks competing with FANNIE/FREDDI before 1999. If the local bank or S&L loan officer closed too many loans that went into default he was fired. If the bank or S&L had too many loans that defaulted (a default rate of 1% or more was considered insolvent and subject the institution to take over - think S&L crisis in the 80s - the default rate now is a little over 2%) FSLIC would take over the bank or S&L. Everyone had an incentive to create both a profitable and a performing loan because they were the same. During this time, mortgage brokers were a niche, somewhat exotic business. Even with par plus payments pre-1999, lenders and mortgage brokers still had to qualify borrowers because the non-deposit banks (Merrill, Goldman, etc.) were prohibited from entering into the mortgage business. However, the mortgage brokerage business for consumer home mortgages took off based on the Countrywide par plus model. Countrywide had no local offices so no local overhead, and borrowed short term to fund loans, then sold in the 2nd market within 30/60 days of closing. However, the loans still had to qualify, 90% LTV for purchase and 75% LTV for refis, and FICO scores with proof of income. After 1999, with advent of deregulation and interstate banking, the Countrywides of the world were no longer limited to originating qualifying loans - they could sell to the now deregulated investment banks who now competed with FANNIE and FREDDIE to buy loans. NOw you begin to see 100% LTV and non-qualifying “liars loans” based on stated income. Since they were non-qualifying FANNIE and FREDDIE could not buy them, but Merrill and Goldman and Lehman and all the investment banks ate up as many as could be originated. They even encouraged the brokers and showed them how to “cheat” the now computerized qualifying process so that they could originate and sell more loans. FANNIE and FREDDIE could not compete with the former investment banks because they could only buy qualifying loans - so the solution was to allow FANNIE and FREDDIE to lower their qualifying requirements. Thats how FANNIE and FREDDIE wound up with toxic paper.
October 12th, 2008 at 12:03 pm
THE FASCISTS linking to Anglo-American supremacist sites on this thread are the kind cheese-brained loons our grandfathers cheerfully riddled with bullets in the 1940s.
Memo to Steve Sailer & Co.: Your Mestizo/Mulatto, Spanish-speaking descendants will have Emperor Blackazoid on their dollar bills. And your pitiful white nationalist movement will be as forgotten as the brief braying of startled goats.
October 12th, 2008 at 12:14 pm
Evidently Mr. Sailer’s data is being provided by the never-seen character from My So-Called Life.
October 12th, 2008 at 1:41 pm
Steve Sailer:
I looked at some of the data you helpfully provided, including 11-1 (FHA), 11-3 (PRICING INFORMATION FOR CONVENTIONAL HOME-PURCHASE LOANS). FHA doesn’t really count for the financial crisis, but 11-3 does clearly. At section 8 of the 11-3 lists #new mortages:
WHITE NON-HISPANIC:
1722310 202022 108650 34599 25286 21630 9703 2154 4.41 3.86
OTHERS, INCLUDING HISPANIC:
548545 170259 76658 28957 28138 23808 10864 1834 4.66 4.23
From the latter columns 6-8 (corresponding to high-interest loans) minorities do have about 1/2 share, and a higher mean (column 9) and median (column 10) interest rate. However, these appear to come from those with reported pricing information (# reported in column 2). However, column 2 is much less than column 1 (which is loans without pricing data). There, the ratio of white:minority is about 3:1, not roughly 1:1.
The key ?: how were loans chosen for reporting? Loans for minorities were reported at an equal rate to those of whites. However, if not selected in an extremely skewed fashion, the data imply that the proportion of subprime loans was only slightly higher in minorities. (Using $ tables yields similar.)
October 12th, 2008 at 2:07 pm
Ok, thanks, PDS.
Remaining points …
First: Whatever % of subprime loans went to minorities, what bearing does this have? The essential lesson is “Don’t give loans to people who cannot afford to pay them back.” Or perhaps, “The system shouldn’t allow irresponsible lenders to give [expensive] loans to people who can’t prove their ability to pay them.”
Subprime concerns are so “last-month”. In large areas of the country (CA AZ FL) large numbers of people with prime loans (10% or 20% down, fixed-rate) are now underwater and paying 50% of their income to live in a place that they could rent for 25% of their income. I hate to say it, but it makes a lot of sense for those people to just walk away - anybody who bought a house in 2004 - 2007 in those areas. That’s a lot of people. This insight may be a strong reason for panic about MBS’s.
Last point: Is this a class thing or a race thing for Sailer? If uneducated immigration is the problem, then surely it would be a good plan to pretty much automatically grant immigration to anyone from anywhere with a college degree. This would also help reinflate the housing market somewhat, because these people would be likely to have $$ and be able to make $$, and would of course need houses.
October 12th, 2008 at 3:01 pm
Last point: Is this a class thing or a race thing for Sailer?
Based on the man’s published writings, I’m going out on a limb and guessing “race.”
October 12th, 2008 at 4:21 pm
I thought illegal immigrants were responsible for the current crisis because they caused the California housing boom by making California such a miserable place to live for ordinary white people.
October 12th, 2008 at 6:42 pm
Whatever % of subprime loans went to minorities, what bearing does this have? The essential lesson is “Don’t give loans to people who cannot afford to pay them back.” Or perhaps, “The system shouldn’t allow irresponsible lenders to give [expensive] loans to people who can’t prove their ability to pay them.”
I think that Mr. Sailer would agree with that assessment. He is not saying that minorities should not get loans. What he is saying is that a colorblind policy of “don’t give loas to people who cannot afford to pay them” would disproportionately prevent minorities from geting loans (because a disproportionate percentage of them cannot afford them). Part of the reason why loans were given to those who could not afford them was that not to do so would have “disparate impact.”
Steve isn’t advocating race-based policies; what he is advocating is that we do not assume that a colorblind policy will have colorblind results.
October 12th, 2008 at 7:42 pm
James from comment 34 and 75 — if you’re still reading, could you shoot me a quick email? My address is neiladri at gmail dot com.
Thanks for your amazingly detailed explanations of this stuff.
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