Lets get this party started: The Bush Mortgage Bubble

Started by Vern, January 26, 2013, 10:53:58 AM

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kramarat

Quote from: Solar on January 29, 2013, 05:03:46 AM
And now we have his administration dictating who banks should loan to, even well established business.
To not see that Husein is destroying the economy is, makes a person a special kind of stupid.

I wasn't able to buy a house until I was 40. Took a long time to save up the down payment. That's just the way I was taught that things worked.
As long as democrats are stuck on fairness and redistribution, we're gonna have problems. Giving people money doesn't make them responsible; it has to be taught and learned. It's the notion that people of color are incapable of learnng those things, that is racist.

Solar

Quote from: kramarat on January 29, 2013, 05:28:51 AM
I wasn't able to buy a house until I was 40. Took a long time to save up the down payment. That's just the way I was taught that things worked.
As long as democrats are stuck on fairness and redistribution, we're gonna have problems. Giving people money doesn't make them responsible; it has to be taught and learned. It's the notion that people of color are incapable of learnng those things, that is racist.
I too was raised that you don't buy it unless you can afford it. I bought my place with a third down and the land owner carried the paper at 10% interest, came to around $400.0 per month, which is cheaper than rent, lived in my motor home till I could afford to build, which I did, all by myself, hired no one, no friends chipped in, but again, self sufficiency is how I was raised.
I have no bills to this day.

It's beyond me why a couple would buy a 6 bedroom home that never planned on having kids, only makes $2000.0 per month between them, house payment of $1800.0 per month.
And this couple loses everything and files bankruptcy.

That too is a special kind of stupid.
Official Trump Cult Member

#WWG1WGA

Q PATRIOT!!!

supsalemgr

When lenders began lending money with no equity on the part of the buyer it was a known loser. Not to worry for the lenders because Freddie and Fannie said we will back the loans. Why not? The lender gets to collect all the fees and then rids themselves of any loss. Wow, what a deal.

Along those lines there is another different issue from past recessions. Many of us remember the 70's and there were a lot of folks in trouble then. I spent my entire career in insurance and saw this first hand. Back then we had a lot of fires and this time we did not. Why? Back then the ownwers had equity and a fire allowed them to collect and pay off their mortgage. This time folks just walked away because there was no equity to be had. It is not bad we didn't have the arson, but it is a lesson in human nature.
"If you can't run with the big dawgs, stay on the porch!"

TowardLiberty

#138
Quote from: Vern on January 29, 2013, 03:41:31 AM
can someone tell boo that the policies that caused the Bush Mortgage Bubble were policies.

the credit expanision in no way explains why banks lowered their lending standards in late 2004 and Bush's regulators let them (see the first post for the link).  Greenspan did turn out to be party hack.  He couldn t pop the tech bubble fast enough for the 2000 election. he claimed not to see the housing bubble.

You are right about Greenspan being a hack. But he was a FED chairman- so what do you expect?

You dont get that job without genuflecting to the banksters.

The lowered lending standards would not have been possible without credit expansion for these new standards allowed marginal borrowers access to credit that was previously cut off from them. From the laws of supply and demand, we know that increasing demand will increase price. In this case, the new borrowers would drive up interest rates as their demand for loans bid up the price of credit.

Rising interest rates cool or pop bubbles- so this was resisted with credit expansion. Lowering lending standards could not produce a housing bubble, merely on their own, for the inevitable rise in interest rates would prevent the kind of reflexivity needed for bubbles to form.

The housing bubble is only part of the story. The bigger story is the credit bubble in the derivatives markets.

TowardLiberty

#139
Quote from: kramarat on January 29, 2013, 04:28:45 AM


If we assume that the drop in interest rates was solely to blame, we would be experiencing a boom today. What changed?
Lending standards have been tightened back up.

Even with the low interest rates, if everybody would have had to prove that they could pay back the loans and make the payments, there would have been no boom; and if there had been, it only would have involved people that could pay back the loans, therefore, there would have been no bust.

Clinton relaxed the lending standards, low rates came under Bush, and old fashioned human greed took over from there.

Not necessarily.

Artificially low rates are the key factor for mispricing risk, time and capital. This mispricing is how phantom profits are created, which leads to an investment boom, which later turns out to be a bust, as people discover the actual price of risk, time and capital, and the boom collapses.

Right now the same thing is happening. Capital, Risk and Time are mispriced and this is leading entrepreneurs and investors to put capital into projects that will later be found to be uneconomical and unprofitable.

Another bust is coming.

And in many ways, monetary and fiscal policy have been attempts to re-inflate the economy along the old pattern. The pattern of the bubble.

And these policies have led some growth to occur, in places like housing, again as people are misled through mispricing, to invest in things people dont really want.

If relaxing lending standards was the major issue here then why did the boom not occur much sooner? Why did it "wait" for Greenspan to lower interest rates?

kramarat

#140
QuoteIf relaxing lending standards was the major issue here then why did the boom not occur much sooner? Why did it "wait" for Greenspan to lower interest rates?

When rates were lowered, it brought out people that otherwise weren't in the market for a loan. But like I said earlier, once it was realized that anybody could get a no doc loan, the floodgates were opened. I saw it with my own eyes.

It was no longer about getting poor people into home ownership. The combination of low rates and loosened lending standards created a frenzy. Normally sane people were taking out multiple loans for investment properties, and way overextending themselves. For a while it made sense; housing prices were going up so fast that they could roll over properties in two years and make a killing. It worked for a little while; the early birds did pretty well. The ones that got in late got burned, but they brought it upon themselves, as far as I"m concerned.

I bought my house during the early part of the frenzy. I can't tell you how many people told me I was stupid for buying my crappy, abandoned fixer upper. I was being pushed by both the realtors and the lenders to buy more house than I needed or could realistically afford. It sounded to good to be true, and it was.

So, I got a 2000 sq ft house on an acre of land, no close neighbors, a yard full of 100+ year old oak trees, for $103 K. Over time I have cleaned the place up and improved it with my own time and labor, and although I'm not finished, it appraises at $170 K.

The trick was not following the crowd and going stupid. :wink:

Everybody seems to want to leave the stupid, greedy borrowers out of the equation. Nobody was forced to take out a loan, and being a renter is not something to be ashamed of.

Vern

Quote from: kramarat on January 29, 2013, 04:28:45 AM
As I've already shown, lending standards were lowered in 1994 in order to get people into home ownership, that otherwise couldn't afford it. Banks were forced to give out shakey loans, as a part of doing business. Ir's just a fact.

sorry kram, you posted a housing policy from 1994.  You, just like every pub editorial, has to overlook the documented fact that the Bush Mortgage Bubble started in late 2004 when banks lowered their lending standards and Bush's regulators let them.  You have to overlook it because there is no way to connect it to the Bush Mortgage Bubble.  Like a drowing man, you'll cling to anything that floats your way. 

Toward Liberty at least posted something from the timeframe of the Bush Mortgage Bubble. However, low interest rates dont cause banks to stop checking peoples income and Bush's regulators to let them.  Also, with  "interest only", "teaser rates" and "5 and 10 year ARMs", interest rates were not really a concern and your graph proves it. The bush mortgage bubble started late 2004 and interest rates climbed throughout 2005 snd 2006. 2006 was the peak of the bubble.  And get this, in 2006, subprime loans peaked at 40 % of all mortgages (from 10 % in 2003).  They pay higher interest for that.  In 2006, over 50 % were No Doc loans (from 4.3% in 2004). they pay higher interest for that too. 

so people were not 'rate sensitive'.  And if they couldnt afford the loan, why would they be?

(and taxed is funny, I post one of Bush's toxic housing policies that preempts all state laws against predatory lending for the explicitly stated purpose of "increasing credit to subprime borrowers" and he conveniently says "what legislation"? )

TowardLiberty

Quote from: kramarat on January 29, 2013, 09:19:24 AM
When rates were lowered, it brought out people that otherwise weren't in the market for a loan. But like I said earlier, once it was realized that anybody could get a no doc loan, the floodgates were opened. I saw it with my own eyes.


No doubt.

And a major reason why these no doc or NINJA loans were possible is because a bank somewhere was willing to buy them, slice and dice them, bundle the bits, and sell them in securitized form.

The market for these securities was a awash in credit.

These markets allow these securities to be pledged multiple times against lines of credit, in effect "pyramiding" loans after loans on top of dwindling pool of highly risky assets serving as collateral.

This highly leveraged shadow banking system is where the demand for those risky mortgage securities came from, allowing banks to make the risks they did.

And none of that highly levered money would exist without obscene low levels of interest, and continual credit injections.

It is not the stock of credit that matters, but the flow of credit, which means credit has to be continually created.

This "bubble" in the derivatives market is where the true story is- what happened in housing was a mere symptom.

TowardLiberty

#143
Quote from: Vern on January 29, 2013, 03:16:27 PM
Toward Liberty at least posted something from the timeframe of the Bush Mortgage Bubble. However, low interest rates dont cause banks to stop checking peoples income and Bush's regulators to let them.

Well in a way they do.

Low interest rates fuel the credit bubble in the derivatives market which fuels demand for mortgage securities.

Having a market with an insatiable demand for bundled mortgage loans means that more risky loans can be made, for they do not need to be held on the bank's books.

So banks took more risks.

This is what is known as moral hazard.

In a low interest environment, traditional income streams, like interest income from fixed investments, such as bonds, is diminished.

So investors look for yield and in the process take on more risk.

Though the mis-pricing of risk is one of the keys to any boom and bust cycle.
Quote

Also, with  "interest only", "teaser rates" and "5 and 10 year ARMs", interest rates were not really a concern and your graph proves it. The bush mortgage bubble started late 2004 and interest rates climbed throughout 2005 snd 2006. 2006 was the peak of the bubble.

Which confirms my story.

The historic low rates of 01-04 led to a boom in housing that became visible in 2004. Then the rates increases of 05-07 led to the re-pricing of risk, and this led to losses. Thus the collapse.
Quote

And get this, in 2006, subprime loans peaked at 40 % of all mortgages (from 10 % in 2003).  They pay higher interest for that.  In 2006, over 50 % were No Doc loans (from 4.3% in 2004). they pay higher interest for that too. 

so people were not 'rate sensitive'.  And if they couldnt afford the loan, why would they be?

People are rate sensitive. Thus the interest deduction on mortgage payments. And the teaser rates we all know so much about!

Being rate sensitive is just being price sensitive.

And it makes sense that sub-prime loans peak with the bubble, a mature bubble will have already enthralled the smart money long ago. You know a bubble is coming to an end when the investment asset in question has saturated the market and even amateur investors come into the fold and start speculating. (or perhaps become real estate agents!)

The stock boom of the 1920's is a good example.

Tulipmania in 16th century Holland being another.


Vern

toward, at least you make intelligent points and use well thought out rhetoric (solar, taxed, boo, kram, kari take notes) . But you keep avoiding the elephant in the room:  banks lowered their lending standards in late 2004 and Bush's regulators let them.  Any financial product based on a bad mortgage was going to be a bad financial product.

Even Bush told you it started in late 2004 when banks lowered their lending standard. He sorta left out the part that his regulators not only let them but encouraged them.


TowardLiberty

#145
Quote from: Vern on January 29, 2013, 04:09:46 PM
toward, at least you make intelligent points and use well thought out rhetoric (solar, taxed, boo, kram, kari take notes) .

But you keep avoiding the elephant in the room:  banks lowered their lending standards in late 2004 and Bush's regulators let them.

I dont dispute that.

I just dispute that this act "caused" the housing bubble.

It certainly prolonged it and played a significant role.

But ultimately it was the market demand for these risky securities which enabled the loans to be made in the first place. Without a market for securitized subprime paper there wouldn't be subprime loans.

Basically, the market said, "we want to buy assets of a riskier nature," and the regulators said, "ok."

So the real elephant in the room is that question: why was there such demand for securitized subprime paper?

And that answer can be found in those low interest rates- which destroy fixed income or "conservative" income streams and therefore sends investors (read hedge funds and banks) into the hunt for yield, which means taking on more risk.
Quote
  Any financial product based on a bad mortgage was going to be a bad financial product.

Even Bush told you it started in late 2004 when banks lowered their lending standard. He sorta left out the part that his regulators not only let them but encouraged them.

Sure.

If you are knowingly blowing a bubble in the economy, with full knowledge of the inevitable bust and bailouts of banks that will follow, it makes sense to include some fuzzy notion of acting with "the best intentions" and in the interests of the "working classes," from a political standpoint.

It is just good politics.

kramarat

#146
Quote from: TowardLiberty on January 29, 2013, 03:47:49 PM
No doubt.

And a major reason why these no doc or NINJA loans were possible is because a bank somewhere was willing to buy them, slice and dice them, bundle the bits, and sell them in securitized form.

The market for these securities was a awash in credit.

These markets allow these securities to be pledged multiple times against lines of credit, in effect "pyramiding" loans after loans on top of dwindling pool of highly risky assets serving as collateral.

This highly leveraged shadow banking system is where the demand for those risky mortgage securities came from, allowing banks to make the risks they did.

And none of that highly levered money would exist without obscene low levels of interest, and continual credit injections.

It is not the stock of credit that matters, but the flow of credit, which means credit has to be continually created.

This "bubble" in the derivatives market is where the true story is- what happened in housing was a mere symptom.

No arguments with any of it. All you had to add, was that no doc loans never would have existed without Clinton's policies. I'm not trying to excuse what took place during the Bush years.

Vern is not interested in facts at all, so his posts have become irrelevant.

When government makes attempts to manipulate markets, it doesn't matter what the excuses are, it always turns out badly. This includes Clinton's insistence that people with no steady income, become home owners.

Banks started with the no doc loans in 1994. They were forced to by Clinton, in the interest of fairness to minorities that didn't have any way to become home owners.............but anyone could get them.

TowardLiberty

Quote from: kramarat on January 29, 2013, 06:01:24 PM
No arguments with any of it. All you had to add, was that no doc loans never would have existed without Clinton's policies. I'm not trying to excuse what took place during the Bush years.

Vern is not interested in facts at all, so his posts have become irrelevant.

When government makes attempts to manipulate markets, it doesn't matter what the excuses are, it always turns out badly. This includes Clinton's insistence that people with no steady income, become home owners.

Agreed.

That is the funny thing about economics.

Real economic theory is nothing but the analysis of how tinkering with markets creates distortions.

But one wouldn't know that studying mainstream economics, taking college econ classes, or by reading the majority of academic journals..


redlom xof

I can't believe I missed this thread. Is a good one.

Before I post about this directly, for I have 10 pages of info to go through properly, has anyone seen the documentary " Inside Job". I think it tells the story of the Global Financial Crisis very accurately.

Blaming government, wall st and the federal reserve for the majority of the problems.


Also, some people's responses so far have been hilarious.

"Christians are expected to pacify angry Muslims, Communist brats and homosexual radicals and Mexicans who convinced themselves that they own our land. That tells me the Christians are the better people among brutal and violent beasts."  Yawn - 15th May, 2013

kramarat

#149
Quote from: TowardLiberty on January 29, 2013, 06:11:58 PM
Agreed.

That is the funny thing about economics.

Real economic theory is nothing but the analysis of how tinkering with markets creates distortions.

But one wouldn't know that studying mainstream economics, taking college econ classes, or by reading the majority of academic journals..

I think I understand now how Vern is getting himself confused. Ironically, every chart on the housing bubble starts in 2000, the year Bush took office.

The following links on home sales, clearly show when the party got started:

http://piggington.com/historical_home_sale_volume_measured_in_dollars