The Conservative Origins of the Sub Prime Mortgage Crisis

Discussion in 'Money Talk$' started by JustChristian, Sep 21, 2008.

  1. JustChristian

    JustChristian
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    MOST OF THESE PROBLEMATIC LOANS WERE MADE DURING THE BUSH ADMINISTRATION:

    Only a decade ago, sub-prime loans were rare. But starting in the mid-1990s, sub-prime lending began surging; these loans comprised 8.6 percent of all mortgages in 2001, soaring to 20.1 percent by 2006. Since 2004, more than 90 percent of the sub-prime mortgages came with exploding adjustable rates.


    Who Benefited and Who Got Hurt?

    Mortgage brokers, who occupy an unregulated niche of the lending world, made a commission for every borrower they handed over to a mortgage lender. These brokers are like the drug dealers on the street corner. They are the smallest link in a lending chain that includes some of the largest and most respectable Wall Street firms.

    Large mortgage finance companies and banks made big bucks on sub-prime loans. Last year, 10 lenders -- Countywide, New Century, Option One, Fremont, Washington Mutual, First Franklin, RFC, Lehman Brothers, WMC Mortgage, and Ameriquest -- accounted for 59 percent of all sub-prime loans, totaling $284 billion.

    Wall Street investment firms set up special investment units, bought the sub-prime mortgages from the lenders, bundled them into "mortgage-backed securities," and for a fat fee sold them to wealthy investors around the world. According to The New York Times, China's second-largest bank, Bank of China Ltd, held almost $9.7 billion of securities backed by U.S. sub-prime loans. These investors, who bought the collateralized securities, were happy as long as they got paid their higher interest on the bonds or other investments.

    The executives and officers of some mortgage finance companies cashed out before the market crashed. The poster boy is Angelo Mozilo, the CEO of Countrywide Financial, the largest sub-prime lender. He made more than $270 million in profits selling stocks and options from 2004 to the beginning of 2007. And the three founders of New Century Financial, the second largest sub-prime lender, together realized $40 million in stock-sale profits between 2004 and 2006. Paul Krugman reported in The New York Times that last year the chief executives of Merrill-Lynch and Citigroup were paid $48 million and $25.6 million, respectively.

    The hardest hit are the innocent borrowers of sub-prime loans. Many of them are working- and middle-class families who fell victim to the country's economic squeeze, a hardship not of their own doing but a symptom of the Bush years. They faced layoffs, stagnant wages, and rising costs of home heating, gasoline, utilities, food, and child care. For those without health insurance, one serious medical problem wiped out their savings. At a time when soaring housing prices were out of whack with the rest of the economy, sub-prime loans were the only way they could purchase a home. But when they could no longer keep up their mortgage payments, they had no safety net. They began skipping their monthly mortgage payments, especially after the adjustable-rate mortgages kicked in with higher interest rates, as high as a 30 percent spike for some borrowers.

    In the 1970s, when community groups discovered that lenders and the FHA were engaged in systematic racial discrimination against minority consumers and neighborhoods -- a practice called "redlining" -- they mobilized and got Congress, led by Wisconsin Senator William Proxmire, to adopt the Community Reinvestment Act and the Home Mortgage Disclosure Act, which together have significantly reduced racial disparities in lending.

    But by the early 1980s, the lending industry used its political clout to push back against government regulation. In 1980, Congress adopted the Depository Institutions Deregulatory and Monetary Control Act, which eliminated interest-rate caps and made sub-prime lending more feasible for lenders. The S&Ls balked at constraints on their ability to compete with conventional banks engaged in commercial lending. They got Congress -- Democrats and Republicans alike -- to change the rules, allowing S&Ls to begin a decade-long orgy of real estate speculation, mismanagement, and fraud. The poster child for this era was Charles Keating, who used his political connections and donations to turn a small Arizona S&L into a major real estate speculator, snaring five Senators (the so-called "Keating Five," including John McCain) into his web of corruption.

    The deregulation of banking led to merger mania, with banks and S&Ls gobbling each other up and making loans to finance shopping malls, golf courses, office buildings, and condo projects that had no financial logic other than a quick-buck profit. When the dust settled in the late 1980s, hundreds of S&Ls and banks had gone under, billions of dollars of commercial loans were useless, and the federal government was left to bail out the depositors whose money the speculators had put at risk.

    The stable neighborhood S&L soon became a thing of the past. Banks, insurance companies, credit card firms and other money-lenders were now part of a giant "financial services" industry, while Washington walked away from its responsibility to protect consumers with rules, regulations, and enforcement. Meanwhile, starting with Reagan, the federal government slashed funding for low-income housing, and allowed the FHA, once a key player helping working-class families purchase a home, to drift into irrelevancy.

    Into this vacuum stepped banks, mortgage lenders, and scam artists, looking for ways to make big profits from consumers desperate for the American Dream of homeownership. They invented new "loan products" that put borrowers at risk.

    Thus was born the sub-prime market.

    At the heart of the crisis are the conservative free market ideologists whose views increasingly influenced American politics since the 1980s, and who still dominate the Bush administration. They believe that government is always the problem, never the solution, and that regulation of private business is always bad. Lenders and brokers who fell outside of federal regulations made most of the sub-prime and predatory loans.


    http://www.prospect.org/cs/articles?article=the_conservative_origins_of_the_subprime_mortgage_crisis
     
  2. Revmitchell

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    The origin of the sub prime loans started with Carter
     
  3. JustChristian

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    Who created the problem by allowing the bulk of the predatory loans? George W. Bush.
     
  4. KenH

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    It is now clearly unquestionable that unregulated free markets are a disaster waiting to happen.
     
  5. Revmitchell

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    Wrong. What is actually clear is that when the government forces the market to give loans to people who are not really credit worthy that is bad.
     
  6. JustChristian

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    The rise in subprime lending

    The subprime market began to bloom in the late 1990s, and then picked up steam after the 2001 recession (Figure 1). At the start of the current decade, subprime originations still only accounted for about 6 percent of total residential mortgage originations. By 2006, the subprime share of total mortgage originations
    had risen to about 25 percent.
    By one estimate, in late 2007, the number of outstanding subprime mortgage loans totaled about 7¾ million, or 14 percent of the
    overall mortgage market.5

    The President was responsible for overseeing through HUD and FM/FM this developing problem. He was asleep at the helm and allowed the subprime problem to develop into a full blown crisis.
     
    #6 JustChristian, Sep 21, 2008
    Last edited by a moderator: Sep 21, 2008
  7. KenH

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    Keep telling yourself that and you conservatives will continue your electoral slide. :laugh:
     
    #7 KenH, Sep 21, 2008
    Last edited: Sep 21, 2008
  8. JustChristian

    JustChristian
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    repost by mistake
     
  9. Revmitchell

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    The term "Predatory Loans" absolves people from their own accountability. It is an idiotic term that has no real basis. Blaming a liberal like Bush ignores all the rest of the history of this tragic government interference. And it began with your hero Carter.
     
  10. KenH

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    Government interverntion since we have been using the federal constitution began with George Washington.
     
  11. JustChristian

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    Then I suppose we don't need any police. We can just rely on roving vigilante groups. I know Bush isn't a fiscal conservative. That's obvious. He has destroyed our economy with his reckless spending on war and irresponsible oversight of the economy.

    Actually, Clinton was a fiscal conservative as was Jimmy Carter. In spite of their big talk both Reagan and especially Bush increased the size of government and the national debt as a % of GDP.
     
  12. Major B

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    MONEYNETDAILY
    [FONT=Palatino, Georgia, Times New Roman, Times, serif][SIZE=+2]Guess again who's to blame for U.S. mortgage meltdown[/SIZE][/FONT]
    [FONT=Palatino, Georgia, Times New Roman, Times, serif][SIZE=+1]Analysts point not to greed, but to social activist politics[/SIZE][/FONT]
    [SIZE=-1]
    [/SIZE]
    [FONT=Palatino, Times New Roman, Georgia, Times, serif]By Drew Zahn[/FONT]
    [SIZE=-1]© 2008 WorldNetDaily [/SIZE]

    Stan J. Liebowitz
    While many pundits are pointing to corporate greed and a lack of government regulation as the cause for the American mortgage and financial crisis, some analysts are saying it wasn't too little government intervention that cased the mortgage meltdown, but too much, in the form of activists compelling the government to pressure Freddie Mac and Fannie Mae into unsound – though politically correct – lending practices.
    "Home mortgages have been a political piñata for many decades," writes Stan J. Liebowitz, economics professor at the University of Texas at Dallas, in a chapter of his forthcoming book, Housing America: Building out of a Crisis.
    Liebowitz puts forward an explanation that he admits is "not consistent with the nasty-subprime-hypothesis currently considered to be the cause of the mortgage meltdown."
    In a nutshell, Liebowitz contends that the federal government over the last 20 years pushed the mortgage industry so hard to get minority homeownership up, that it undermined the country's financial foundation to achieve its goal.
    "In an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s," Liebowitz writes. "The decline in mortgage underwriting standards was universally praised as 'innovation' in mortgage lending by regulators, academic specialists, (government-sponsored enterprises) and housing activists."
    He continues, "Although a seemingly noble goal, the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise."
    "As homeownership rates increased there was self-congratulation all around," Liebowitz writes. "The community of regulators, academic specialists, and housing activists all reveled in the increase in homeownership."
    An article in the Los Angeles Times from the late '90s praised the sudden surge in homeownership among minorities, calling it "one of the hidden success stories of the Clinton era."
    John Lott, a senior research scientist at the University of Maryland, however, claimed in a Fox News article yesterday that the success came at a great price.
    According to Lott, the Federal Reserve Bank of Boston produced a manual in the early '90s that warned to no longer deny urban and lower-income minority applicants on such "outdated" criteria as down payment or employment income.
    Furthermore, claims Lott, Fannie Mae and Freddie Mac encouraged and praised lenders – like Countrywide and Bear Stearns – for adopting the slackened policies toward minority applicants.
    "Given these lending practices mandated by the Fed and encouraged by Fannie Mae and Freddie Mac," writes Lott, "the resulting financial problems for financial institutions such as Countrywide and Bear Stearns are not too surprising."

    Liebowitz' contention that lenders were under pressure to loosen their standards for racial and political goals was confirmed years ago by the companies at the heart of today's crisis: Fannie Mae and Freddie Mac.
    A New York Times article from Sept. 1999 states that Fannie Mae had been under increasing pressure from the Clinton administration to expand mortgage among low- and moderate-income people and that the corporation loosened its lending requirements to comply.
    An ominous paragraph of the article reads, "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."
    Liebowitz likewise predicted in a 1998 paper the risk of sacrificing sound financial policy for social activism.
    "After the warm fuzzy glow of 'flexible underwriting standards' has worn off," Liebowitz wrote, "we may discover that they are nothing more than standards that led to bad loans. … It will be ironic and unfortunate if minority applicants wind up paying a very heavy price for a misguided policy based on a badly mangled idea."
    And though some have speculated that lenders in the '90s dove into sub-prime mortgages in an effort to gouge new markets, the president and chief operating officer of Freddie Mac in 1999, David Glenn, confessed his company was pushed by a federal agenda.
    "The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership," Glenn said in his remarks at the annual convention of the Mortgage Banker Association of America.
    "The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with Glenn said. "Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low- and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets."
    In that same year, Freddie Mac warned of the logical pitfalls of pursuing loans on the basis of skin color and not credit history.
    The Washington Post reported that the company conducted a study in which it was found that far more black people have bad credit than white people, even when both have the same incomes. In fact, the study showed a higher percentage of African Americans with incomes of $65,000 to $75,000 had bad credit than white Americans with incomes of below $25,000.
    Such data demonstrated that when federal regulators demanded parity between racial groups in lending, the only way to achieve a quota would be to begin making intentionally bad lending decisions.
    The study, however, came under brutal attack in the U.S. Congress and was ridiculed with charges of racism.
    A few years later, when Greg Mankiw, chairman of President Bush's Council of Economic Advisers, voiced a warning about weakened underwriting standards, Congress rebuffed him as well.
    The Wall Street Journal quoted Congressman Barney Frank, D-Mass., in 2003 as criticizing Greg Mankiw "because he is worried about the tiny little matter of safety and soundness rather than 'concern about housing.'"
    Frank, chairman of the House Committee, rejected a Bush administration and Congressional Republican plan for regulating the mortgage industry in 2003, saying, "These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis." According to a New York Times article, Frank added, "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
     
  13. Revmitchell

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    Carter and Clinton were not fiscal conservatives. Expanding the federal government disqualifies one from that category.
     
  14. LeBuick

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    In this case it means people who lacked knowledge in the area were taken advantage of by greedy lenders who came up with balloon concept. They told the people not to worry about the baloon part, "if you pay on time for two years your credit will improve and we can put you in a good fixed rate loan." Unfortunately that was false, the new fixed rate loan never came but the balloon interest rate did. And it came with a whopping payment.
     
  15. Revmitchell

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    Why did the loan never come? Because the homeowners never did what they needed to do. The responsibility is on the person who took out the loan. End of story.
     
  16. LeBuick

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    This analysis would hold more weight if it were only low to moderate income people who were in foreclosure. 4 years after Clinton left office which was at the end of Bush's first term, the problem was no where near this catastrophic. If what they conclude is fact, the problem would have surfaced soon after the loosening took place.

    I'm no economist but the problem is clear to me, if you send the American jobs overseas the consumers will have trouble paying their bills.

    Now that matches with when the problem occurred... On Bush's watch soon after they passed those stupid tax breaks to send the jobs away.
     
  17. LeBuick

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    No, because after two years of on time payments their credit still wouldn't qualify for the good fixed rate loans so they were stuck with the balloon loan.
     
  18. Revmitchell

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    Aside from the fact that this s wrong you can add to that the fact that the ballon comes after five years. Either way the responsibility is on the one taking the loan. No one is a victim here.
     
  19. TomVols

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    Historically, one of the biggest planks is Clinton's policy to allow negative amortization and expanding FHA/HUD backed increases in LTV margins for loans. The explosion of mfg housing foreclosures under the Clinton admin was ignored by the media but known to those of us in economics/finance.

    Unfortunately, Bush continued some of Clinton's abysmal practices. Wanting to establish his own mark, the American Dream came along to rob people of the American dream. Mel Martinez, Bush's 1st HUD secretary, pushed through measures allowing bundling of services. That gave big banks an advantage and took mortgage brokerages, responsible for up to 67% of mortgage originations in some areas, to the mat. That, coupled with caps on some costs and fees caused interest rates and hidden fees / yield spread to balloon (Ironically, a huge proponent of this was John Edwards who wanted to do this nationally).

    Add to all of this the Keynesian tinkering of Alan Greenspan, whose artificial lowering of interest rates caused people to start swallowing every drop of equity their homes could possibly sacrifice, and you have a bipartisan calamity that was enabled by the personal-responsibility shirking crowd, never at a loss to explain why the govt should both be the fox and the hen.

    The practice of mortgage lending is one of the most regulated practices in commerce today. And that didn't stop one scintilla of this mess.

    I know the partisan hacks aren't going to like this. But it's reality.
     

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