The Foreclosure Five

Instapundit links to an article about the "foreclosure five."In other words, five states have high foreclosure rates and some other issues in common not shared by the other forty-five for the most part. One of those factors is speculation in real estate, or re-fi's driving a high number of sub-prime mortgages. Read that all, as I'm not addressing all of that.

Three of those states also have high unemployment, contributing to their problems. I had a hunch about that. Michigan is one and we know that's the Rust Belt and linked to the auto companies. The other two are Nevada and California. So why do they have unusually high unemployment? Construction. And a side note, 3 of those five are in the top five per capita for illegal residents, who often do construction work.

What I'm wondering is if the very high unemployment rates below aren't linked to the very same thing - a housing boom built on air? Point being, it may be possible to make the case that if certain states hadn't experienced the behavior leading to the foreclosures, their unemployment rates might be no worse than anywhere else. That might leave them high, but not in double digits, or near some crisis zone. In the end, all I'm really suggesting is that this is all about housing speculation in a handful of states and without that we'd experience a typical recession and eventually move right on.

California: The construction sector, hit hard by the housing slump and foreclosures, accounted for the most job cuts over the past year-- 92,600 positions, a 10.8 percent annual drop.

And Nevada: Construction continued to lead the job-loss pack in December. Builders slashed 19,400 jobs statewide and 11,300 positions locally.

Don't forget to read the foreclosure five. Then maybe you want to re-think the notion of letting Mexico have California, Nevada and Arizona back before we bail them out.

Comments

[Twok]

Don't bail them out! Letting home prices in CA crash will actually SAVE Silicon Valley, which is just too expensive to live in relative to Asia, resulting in tech jobs going to Asia.

Don't bail them out! Remember, a crash in home prices is actually great for first-time buyers, like young people and new immigrants. By subsidising home 'owners', you are penalizing prospective buyers. Period.

[wombly]

Read why government is on a path to irrevocably destroy Silicon Valley, and with it, American technological dominance.

http://www.singularity2050.com/2009/01/why-government-is-set-to-extinguish-silicon-valley.html

[Dirk Deppey]

Actually, if you gave Cali and Nevada back to Mexico, Arizona's problems would sort themselves out in fairly short order, I suspect. Our residents aren't the problem; it's out-of-staters buying second/vacation homes here, jacking up housing prices for the rest of us and then defaulting that's the problem.

[Lala]

Here's my limited take on it all from a New York point of view.

1. The tax change. In the past the profit on a house had to be reinvested in another house of
at least equal value within two years, or be taxed. The law was changed allowing a couple to take $500,000 in profit tax free. This started it all, IMO.

2. Prices shot up. The value of my house doubled from the year 2000 to 2004 and then rose again by half by 2007. I was house rich and my property taxes skyrocketed.

3. Lots of people, also house rich, took equity loans or re-mortgaged (rates had dropped quite a bit) to make their houses bigger and better. Construction boomed

4. Older people sold their little cottages for amounts beyond their wildest dreams and moved to Florida, causing a boom there.

5. Builders and contractors couldn't get enough help (everyone goes to college these days) and
started hiring illegals. The more they hired, the more they came. I hired a contractor to put a new roof on my house. The following morning, much to my surprise, 8 Spanish-only
speaking workers showed up and did the job in one day. One day.

6. Speculators were flipping houses like crazy. Buy a run-down house, no money down, cheap credit, hire some illegals to fix it up, resell it for a big profit, then do it again.

7. Then the prices started to drop. I'd say it was late 2007 and I'd say the economy was being talked down. There's a housing bubble, they said, over and over. It's going to collapse just like the tech bubble, they said. And so it did. Maybe it was time, maybe there were no buyers because the prices were too high (they were).

8. Meanwhile, I was reading on message boards that American construction workers couldn't get jobs because the illegals were taking them all.

[Boyd]

"re-think the notion of letting Mexico have California, Nevada and Arizona back before we bail them out."

Down Boy! Realize that those figures for Nevada all come from Southern Nevada - Las Vegas. We here in Northeastern Nevada have an unemployment under 5% with foreclosures almost non-existent. Draw the line at Highway 50 and cut the urban South loose from the rural North and I'm on board.

[rrr]

I wonder if the AZ and NV problem isn't also due to the fact that Californians are migrating there and overbuying. It seems anywhere Californians end up, they wreck the place, stand back, hold up their hands and wonder how the dumb-hick Arizonans or Nevadans or whatever ruined their new paradise not once noting that THEY are the problem. Make California secede and patrol the border like it was Cuba. I'd bet that would solve more problems than we know. If there's one group of people I've come to despise, it's Californians.

[johnmccain]

What caused the bubble to pop is not mystical. It is the same thing that causes all bubbles to pop. The law of supply and demand has not been repealed.

On June 7, 2007, the United States Senate voted down comprehensive immigration reform. The President of the United States then ordered the Immigration and Customs Enforcement service to begin enforcing the law in the workplace.

The resultant effect this had on approximately 12 million apartment renters (and illegal aliens were also buying homes) was entirely predictable ... many were jailed awaiting deportation and thus didn't make their next month's rent; the rest got the message and began the great migration South that continues even today. I suspect many decided that it wouldn't be prudent to continue making their mortgage payments on the house they bought in Vegas, since hey, they'd be back in Tijuana soon.

If you remove 12 million renters from the market, you should not be surprised when the supply of homes on the market goes from a 4-month supply, to a 10-month supply and your housing market bursts. You should not be surprised when people abandon their homes, since hey, you just threw them out of the country.

I'm not saying we should have passed immigration reform. But rightly or wrongly, the illegal alien presence in these states represented a huge economic force. When we began kicking these people out of the country (and when they began kicking themselves out to avoid arrest), the effects were fairly easy to predict.

Maybe they should never have been allowed to get to 12 million in the first place, that's a debate for another day, but when you look at the states with the problem, it's nicely correlated to the states where the illegal presence was the biggest.

[red]

the illegal alien presence in these states represented a huge economic force. When we began kicking these people out of the country (and when they began kicking themselves out to avoid arrest), the effects were fairly easy to predict.

--Yeah. Democrats were getting a two-fer with this set up. More political power coming from illiterate, unskilled labor imported from Mexico. And the image of being for the little guy by forcing bank companies to make loans to unqualified, even undocumented (pun intended) borrowers. Oh and plenty of nannies - just pay the tax before you get nominated to Treasury Secretary...

[templar knight]

That's some interpretation there, john. But I call bullshit on it. And the illegal alien presense hasn't dropped here in Texas, and I doubt it has dropped substantially anywhere. I just wish it had. I wish the whole bunch would be kicked out before they suck us dry, but I know it won't happen. The US is a dead elephant headed for the graveyard, soon to be picked apart by all comers. The buzzards and vultures are circling as we speak.

[ThomasD]

I know a slumlord (for lack of a more polite but equally accurate descriptor) in Southwest Florida - same town where ObaMao made a recent 'campaign' stop - the one with the enormous default/forclosure rate.

He never got in over his head, stayed at the low end of the property market, but always made really good money, right up until the housing bust. Then half of his tenants evaporated. Those tenants all being illegals or shadow workers directly linked to the construction industry. When construction jobs dried up they all packed up and moved on. It wasn't anybody 'kicking' them out. It was simply a matter of migrant labor migrating away from a jobless region.

Now he's competing in a market where there is much less demand, and a super abundance of supply since many speculators are willing to take renters for peanuts in an attempt to stay afloat. the only reason he has not gone under is that he owns the majority of his properties free and clear.

This was a bubble, fortunately unlike the tech bubble which wasn't worth the pixels it was printed on, this one has left behind some real tangible value. If you have the cash you can get a luxury condo for a song now in many parts of Florida and actual human beings can again afford to buy a home.

[Ctmom]

I am all for giving California back to Mexico - and make it a part of the deal that they have to keep everyone in Hollywood and Nancy Pelosi.

[R. McElmurry]

The states and cities with the most mortgages underwater are blue states and cities. Most of the individuals receiving help are democrats.

[Lala]

WOULD JOBLESS AMERICAN YOUNG ADULTS TAKE A 4-MONTH JOB?
First, Schumer is keeping up the H1-B visas, now Specter is doing this -

Sens. Mikulski and Specter

Sens. Mikulski and Specter

Mikulski and Specter argue that H-2B visas are necessary to fill peak labor needs for amusement parks, ski resorts and other hospitality and entertainment functions. To them, young Americans would have no interest in working in resort/vacation locations since the full-time jobs tend to last only 3-6 months.

http://www.numbersusa.com/content/nusablog/beckr/february-18-2009/sens-mikulski-specter-push-bill-more-less-educated-foreign-workers-k

[GK]

Why is anti-Californian bigotry acceptable? You people are just as bad as radical leftists.

It is the CONSERVATVE Californians that are leaving California's high taxes. Left-wing Californians are staying, liking the fact that CA is drifting further to the left, and a new underclass of Aztec Mexicans is available to subjugate.

CA was a red state as recently as 1988. It still has a Republican Governor.

But anti-Californian bigotry is just as bad as a San Franciscan saying that Southerners are 'rednecks'.

[13yankeebravo]

The common sence thing to do would leave it alone and let the market ajust to where it is profitable again.

[Carolynp]

I have to point out that in Oregon, we never experienced the "up" portion of the housing bubble. Directly due to liberal policy, we have had record unemployment. Everyone here seems shocked that taxes are going to go up while employment is evaporating. At least those states got to experience the "high" portion of the bubble. Californians are awesome! Come here and retire!

[Herb]

Wow. A curious mix of bile, ignorance, and hatred in this thread.

Anyone joking about giving California, Nevada, and Arizona back to Mexico should be ashamed. Would a true patriot even consider that? No way. That's OUR country, man. Why would we do that? Because a bunch of liberals and Mexicans live there? So what? A country built on freedom and liberty for all, that stretches from sea to shining sea isn't big enough for liberals and Mexicans? Come on...

And to bash California, our most populous state with an economy that dwarfs many sovereign countries, just seems...well, anti-American to me.

It's time to put up or shut up, and if all you're going to do is complain about your countrymen...then perhaps the latter is the route you should go.

[Anon]

Forget about CA bashing, the salient point is that more than 90% of mortgages are current and the majority of the remaining 10% of mortgages that are in jeopardy are in only 5 states. The housing bubble never went nationwide, prices in nowhereville, Missouri or Maine were never rising at the same crazy rate.

This to me is a HUGE point for conservatives in terms of their arguments against the stimulus and all its pork as well as the foreclosure plan. Not targeted at all, talk about seeing everything as a nail when all you have is a hammer....

This point should work to the advantage of GOP governors as well. Hey, we managed our state fairly well, and these out of control few states are not only sucking your tax dollars but forcing on your children generations more of entitlements and taxes...

[Todd]

What I'm wondering is if the very high unemployment rates below aren't linked to the very same thing - a housing boom built on air? Point being, it may be possible to make the case that if certain states hadn't experienced the behavior leading to the foreclosures, their unemployment rates might be no worse than anywhere else. That might leave them high, but not in double digits, or near some crisis zone. In the end, all I'm really suggesting is that this is all about housing speculation in a handful of states and without that we'd experience a typical recession and eventually move right on.
----------------------------------
Well, yes absolutely the housing boom was built on air built on 4 major legs, at least:

1. Lala is 100% correct that a major factor was the tax change allowing $250,000/$500,000 exemptions on capital gains exemptions for primary residences held for 2 years. That was bubble-encouraging legislation. (And a lesson to be learned that should the government enact a policy of zero capital gains on equities investments as some on the right like Larry Kudlow suggest, it would merely be another example of legislation leading to yet another bubble to invest in that would eventually reach vast overvaluation at some point in the future, based upon nothing more than tax-incentivized greed.

2. Greenspan bringing rates down to an artificially low 1% in his post-9/11 panic and keeping them extremely low for a period of 3 years, creating the opportunity for very low teaser ARM rates, which Greenspan actively encouraged Americans to use to finance home purchases.

3. The total lack of regulation by the Fed or other government institutions allowing the immense proliferation of private mortgage companies offering NINJA loans to anyone with a pulse. NINJA ("no income, no job, and (no) assets.) These loans are also known as "liar loans" - mortgages approved without requiring proof of the borrower's income or assets. Predatory lending abounded, only to be matched by the greed and ignorance of the borrowers.

4. The securitization process, aided and abetted by the complicit and corrupt ratings agencies, that allowed these garbage loans to be bundled by Wall Street investment houses and offloaded to unwitting investors as AAA paper.

In short, that's a perfect storm for a bubble. What proves that it was built entirely on air is that incomes weren't rising anywhere close to rising prices, and the cost of renting vs cost of owning ratio was going parabolic. And, it's why housing still has much more room on the downside because those 2 ratios are still abnormally high vs historical norms.

If you consider that in the last 13 years starting with the Telecommunications Deregulation Act of 1996 (which led to the bubble in internet/telecom/technology stocks) and the housing bubble, it can be argued that the U.S. economy has become hooked on bubbles and much if not most of the
prosperity of the last 13 years was totally illusory and artificial and served mostly to enrich a small amount of individuals on Wall Street (and elsewhere) while impoverishing many people in the middle class who fell hook, line and sinker for the bubbles. That's a vast transfer of assets from the many to the few. It's no wonder the economy is in free-fall, and in my opinion, will be a basket-case for many years to come. There is no magical cure for deflating bubble economies, no elixir from either liberal economic thinking or conservative ideology. It just has to play out, like a Cat 5 hurricane or a tsunami.

I think the lesson to be learned is that having some intelligent, well-constructed regulation and tax policy is absolutely critical to a sound, functioning economy. The deregulation in 1996, the real estate tax changes in 1998, the zero regulation of morgage lending - these are major reasons, not the only ones but major reasons, why we find ourselves in this economic morass.

[Todd]

Just to illustrate my point about the 2 ratios - incomes vs home prices, and cost-to-own vs cost-to-rent - having gone parabolic vs historic norms and why the deflating housing bubble has more to go on the downside, Barrons has an article this weekend explaining it and displaying the graphs.
It clearly shows nothing the government does here is going to abate the regression to the mean. And, as markets tend to overshoot, maybe it goes even further than the mean.

Thanks to Barry Ritholtz's blog, as always, for providing such interesting, unbiased and critical knowledge for the average American to understand: http://www.ritholtz.com/blog/2009/02/no-housing-recovery-before-further-declines/

[Lala]

But Europe seems to be worse off than we are - Spain, especially. Here's an article about Great Britain's mess -

"The other moral: Throughout the Bush years, Democratic critics spoke as if every problem would be dealt with smoothly under different leadership. But in the United Kingdom - one of Our Betters in Europe, with European higher taxes and commitment to liberal regulation, their very European Union oversaw the same credit craze that occurred under the bumbling, right-wing, go-it-alone Bush."

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/02/22/INSC1611QS.DTL

[torabora]

Herb...Commiefornia has been invaded. Parts of the central valley don't even speah English in the stores. 40% of LA works under the table. Gangs rule parts of cities. You don't get it. If Commiefornia is to be a part of the USA again, it needs invaded by Federal troops.

[templar knight]

Todd, to say the markets weren't regulated is silly. There were plenty of regulations that could have been used to stop or put a halt to the speculative bubble in real estate, but millions were being made by the players. Serious dollars always has the regulators looking the other way, especially since politicians were benefitting.

Rather than a lack of regulation, it was a lack of caring. And you can pass all the regulations and laws you want to, if they are not enforced, well, they don't work. For instance, it is against the law for people to cross our borders without the proper documents, but....we see how that has worked out. The laws are there, no enforcement. Same with the mortgage crisis. I'll bet incomes were not verified, and jobs were not verified, and citizenship was not verified, and applications were not checked for accuracy, and on and on. I'll bet you money on it. I'll bet numerous regulations were overlooked for the sake of expediency.

[templar knight]

And, it is always the way of the liberal to offer more laws rather than insisting the laws already on the books are enforced. Why is that?

[Todd]

Todd, to say the markets weren't regulated is silly. There were plenty of regulations that could have been used to stop or put a halt to the speculative bubble in real estate, but millions were being made by the players. Serious dollars always has the regulators looking the other way, especially since politicians were benefitting.....Rather than a lack of regulation, it was a lack of caring.
------------
tk, you should watch David Faber's documentary entitled House of Cards, on CNBC. They replay it often. The documentary focuses a lot of on the epicenter of the subprime lenders, in Orange County where most of the lenders were headquartered. Faber interviewed a former exec from Quick Loan, a major lender, and he described their lending policy as they would "lend to anyone who could create fog on a bathroom mirror with their breath." Faber interviewed a former Wall St exec in mortgage backed securities and asked if the SEC had ever come in to examine the business, understand it, ask questions. He said "no, not at all." It's what happened. Watch the documentary.

Please tell me what market regulations were fully intact and were ignored on the non-CRA regulated private mortgage lenders like Quick Loan, New Century, Argent, American Home Morgage etc. And, by whom? And, who specifically is to blame in those regulatory bodies? And, how this could go on for 5 years and be ignored, as you say?

[Todd]

But Europe seems to be worse off than we are - Spain, especially. Here's an article about Great Britain's mess -

"The other moral: Throughout the Bush years, Democratic critics spoke as if every problem would be dealt with smoothly under different leadership. But in the United Kingdom - one of Our Betters in Europe, with European higher taxes and commitment to liberal regulation, their very European Union oversaw the same credit craze that occurred under the bumbling, right-wing, go-it-alone Bush."

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/02/22/INSC1611QS.DTL

Posted by: Lala | Sunday, February 22, 2009 at 12:16 PM
----------------------------------------------------------
Yes, Europe's banks are in worse shape than ours. It's particularly dangerous because of the liabilities-as-a-%-of-GDP in those countries, with European countries being smaller than ours and with smaller GDP's. Countries such as the UK, Ireland, Belgium, the Netherlands, Switzerland have probles that amount to 400% of the problems that we have here on the scale of a % to GDP. It's frightening.

A good deal of European bank's problems stem from their having bought a great deal of toxic American mortgage paper. The IMF says European and British banks have 75pc as much exposure to US toxic debt as American banks themselves, yet they have been much slower to take their punishment. Write-downs have been $738bn in the US: just $294bn in Europe. Obviously, the regulatory bodies in Europe leave a lot to be desired, too.

The other very imminent, very dangerous shoe to drop is European bank's exposure to the collapsing economies of Eastern Europe. Huge loans by Swiss and Austrian banks to the Ukraine, Hungary, Poland, Latvia are all in great danger of default, exacerbated by the fact that these countries have seen their currencies devalue significantly while the loans are denominated in Swiss Francs, making the loans in local currency 50% more expensive. This may threaten the solvency of Switzerland and Austria, a la Iceland. There was an article in a Swiss newspaper this week on the subject of the risk of Switzerland going bankrupt.

Spanish banks have their own problems having made a lot of bad loans into Latin America.

So obviously, global regulation was terrible. Still, a lot of the toxic paper they bought was American mortgage backed paper that was rated Triple A by American ratings agencies.

[Lala]

It's like the harsh gun laws in New York City, Templar. Harsh penalties that are never enforced, except for Bernie Goetz who was defending himself.

[jobseeker]

Once the foreclosure crisis really gets going there will be plenty of rehabilitation construction work. Foreclosed home tend to thoroughly smashed and trashed, so somebody will have get the structures ready to go back on the market.

[North Dallas Thirty]

Perhaps you're not aware of what really was going on, Todd.

"American Home Mortgage Investment Corp., the bankrupt Melville-based lender, has struck an agreement that will allow it to continue servicing a crucial portfolio of $5.2 billion in government-backed mortgage loans.

According to a settlement agreement filed Friday in U.S. Bankruptcy Court in Delaware, American Home and Fannie Mae agreed that American Home will continue to service 36,700 loans with a total unpaid balance of $5.2 billion -- about 10 percent of American Home Mortgage Servicing's unpaid balance, and about 15 percent of its total loan value."

http://www.courant.com/business/ny-bzahmi0828,0,5718735.story

Notice that? "GOVERNMENT-BACKED MORTGAGE LOANS".

And why were Fannie and Freddie engaging in this type of loan backing?

"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1

[templar knight]

Well, Todd, you tell me how illegal aliens are crossing our borders by the millions, and settling in cities that refuse to enforce laws. Hell, man, the people who are supposed to enforce the law don't. I can't make it any more simple than that. I gave you specific examples. I know for a fact that original documents either never existed or were lost for thousands of these bad mortgages. And people who mortgaged their homes are now getting to stay in them because banks don't have the paperwork on these mortgages when they are supposed to produce them in court. I know these to be violations of regulations on the books. I guess the people who were supposed to enforce the regulations didn't enforce them. I don't know for sure, but I'd be willing to bet regulators were told by their bosses to look the other way.

[Todd]

"Perhaps you're not aware of what really was going on, Todd."
------------------
I'm perfectly aware of what was going on, North Dallas Thirty. It is you who don't know what was really going on.

Fannie and Freddie did not buy any subprime loans until 2005, when they changed their lending standards. That means that you can't blame any of the billions of subprime loans written from 2002-2004 on Fannie and Freddie. David Faber's documentary covered that aspect, with the former exec of QuickLoan saying that scandals at Fannie and Freddie in 2001 left the market that Fannie and Freddie formerly dominated wide open, and this space became dominated by the Quickloans, New Centurys and Countrywides of the world. The buyers of those securitized loans were Wall Street and not Fannie and Freddie, who did start buying them in 2005. To quote Barry Ritholtz, "by then the die was already cast." Meaning, game over, destined to crash and burn.

Barry Ritholtz also covers that here with this money quote:

"I would clarify this by noting that the change in loan standards by Fannie Mae and Freddie Mac occurred in 2005 -- by that time, housing sales (but not prices) had peaked, and the die was already cast."

"But "they weren't the leaders in lowering credit standards," said Andrew Davidson, a mortgage industry consultant in New York who has done work for Fannie and Freddie and also criticized them for taking excessive risks. He noted that the worst-performing mortgages are those that were originated by subprime lenders and packaged into securities sold by Wall Street, rather than by Fannie and Freddie. And while loans for low-income people -- programs championed by Democrats as well as many Republicans -- have contributed to Fannie and Freddie's losses, they aren't the biggest part of the problem."

http://bigpicture.typepad.com/comments/2008/10/who-were-the-le.html

[Todd]

Once the foreclosure crisis really gets going there will be plenty of rehabilitation construction work. Foreclosed home tend to thoroughly smashed and trashed, so somebody will have get the structures ready to go back on the market.

Posted by: jobseeker | Sunday, February 22, 2009 at 05:41 PM
-----------------------------
That's highly debatable. In Stockton, California and areas around Phoenix where there are tons of foreclosed homes, much of the local economy was built upon a booming housing market. Now that that industry is dead, there is no abundancy of jobs in other sectors to replace those lost housing related jobs. So, a place like that will not see much of any money spent on rehabilitating homes that few people want to live in. Who wants to live in a place where there are no available jobs to match the available houses, other than retired people? And, who wants to drive 1 1/2 hours to work? You could probably extrapolate that out to quite a few of the formerly booming areas.

[Todd]

Well, Todd, you tell me how illegal aliens are crossing our borders by the millions, and settling in cities that refuse to enforce laws. Hell, man, the people who are supposed to enforce the law don't. I can't make it any more simple than that. I gave you specific examples. I know for a fact that original documents either never existed or were lost for thousands of these bad mortgages. And people who mortgaged their homes are now getting to stay in them because banks don't have the paperwork on these mortgages when they are supposed to produce them in court. I know these to be violations of regulations on the books. I guess the people who were supposed to enforce the regulations didn't enforce them. I don't know for sure, but I'd be willing to bet regulators were told by their bosses to look the other way.

Posted by: templar knight | Sunday, February 22, 2009 at 07:31 PM
--------------------------
Inotherwords, tk, you're saying you're sure there were laws on the books but don't know for sure. When you come back with some links to prove that, I'll take it as fact.

I'm sorry but you're in total denial about this. Here is what Alan Greenspan admitted in his October, 2008 congressional testimny about banking regulation: The Federal Reserve’s former chairman says he’s in a state of “shocked disbelief” that self-regulation didn’t work in the banking sector. He now admits regulatory changes must be made in the areas of fraud, settlement and securitisation, “as much as (he) would prefer it otherwise”.

Self-regulation. Period. End of story.

http://www.telegraph.co.uk/finance/breakingviewscom/3249947/Greenspans-admits-flaw-in-hands-off-approach-pity-its-a-decade-too-late-financial-crisis.html

[Todd]

Furthermore, North Dallas Thirty, the NY Times link you provided about Fannie's pilot program in New York is from 1999. It was in 2001 that scandals took Fannie and Freddie out of buying loans such as those, opening the door for the private mortgage lenders in Orange County to take over the market.
Those subprime loans in 1999 that were bought by Fannie were not done with the low teaser rates, the specialty of the Orange County lenders. That is because the Fed Funds rate in 1999 was in the range of 7% at the time, peaking at 7 1/4% in early 2000. All those ultra-low teaser rates started in 2002 when Greenspan cut the Fed Funds rate to 1%. Which all means that the pilot program you linked to were loans to people who were better qualified for their mortgages because it wasn't being offered with artificially low rates.

For info about the 2001 scandal that took Fannie and Freddie out of the market, here's the money quote from naked capitalism:

"Then Mr Greenspan, the GSE regulators and their geeky allies got lucky. A management compensation scandal broke at the GSEs that quickly turned into a more general accounting scandal. The reformers had the political wind at their back, and as the accountants and lawyers sifted through the books, the portfolio growth reversed. Even better from a systemic stability point of view, the GSEs' share of the interest rate derivatives markets dropped by more than two-thirds by 2005. As homeowners took on more adjustable rate mortgages, they assumed some of the rate risk the GSEs shed."

http://www.nakedcapitalism.com/2008/03/systemic-risk-from-outsized-fannie-and.html

[North Dallas Thirty]

I do so love it when the desperate libbies like Todd who are trying to spin the disaster their Obama Party's policies create so blatantly contradict themselves.

First Todd claims this:

"Fannie and Freddie did not buy any subprime loans until 2005, when they changed their lending standards."

Followed by:

"David Faber's documentary covered that aspect, with the former exec of QuickLoan saying that scandals at Fannie and Freddie in 2001 left the market that Fannie and Freddie formerly dominated wide open, and this space became dominated by the Quickloans, New Centurys and Countrywides of the world."

Todd is stating that Fannie Mae and Freddie Mac NEVER bought or had anything to do with any subprime loans before 2005 -- but then states that the subprime loan originators that he is attacking went into the market THAT FANNIE MAE AND FREDDIE MAC PREVIOUSLY DOMINATED.

Another thing that Todd leaves out is what he and the Obama Party were demanding of banks at the time, as spelled out nicely here:

"AHC has developed a body of underwriting standards which have increased the access of low and moderate income people to home ownership. Food stamps and public assistance can now be used as income under ACORN CRA agreements. People without traditional credit histories can use rent, utilities, and child care to prove consistent payment patterns. Single parents can use voluntary child support from ex-partners as income. Families where incomes are pooled will qualify, which is common in Mexican-American and other communities. Savings clubs, common in West Indian, Mexican-American, and Korean communities, can be used as source for down payment and closing cost moneys. Families who have an excellent history of paying high rents on time can qualify for similar mortgage and insurance payments, even if they would not qualify under traditional payment standards.

Early on AHC recognized the need to bring in the secondary market and private mortgage insurers, if these new underwriting standards were to succeed. In response to ACORN pressure, Fannie Mae created the Fannie Mae/ACORN Pilot, which allows Fannie Mae to purchase AHC counseled mortgages using the more flexible AHC style underwriting."

http://www.acorn.org/index.php?id=689

Also, Todd tries to duplicitously absolve his Obama Party of blame by talking only about "subprime" mortgages, which are a tiny fraction of the US market -- while ignoring the vast exposure to alt-A, the loans that are made without disclosure of income, that Fannie Mae and Freddie Mac had.

http://www.forbes.com/2008/05/06/fannie-mae-closer2-markets-equity-cx_md_0506markets50.html

Meanwhile, Todd makes some intriguing claims in this statement.

"That is because the Fed Funds rate in 1999 was in the range of 7% at the time, peaking at 7 1/4% in early 2000."

That would be news to everyone else.

http://www.wsjprimerate.us/fedfundsrate/federal_funds_rate_history.htm

In addition, adjustable-rate mortgages are not in the vast majority of cases based on the Federal funds rate; they are based on LIBOR, which is a different animal entirely and not under the control of the Federal Reserve in the first place.

In short, the only consistency in Todd's argument is his attempt to shift blame away from his Obama Party and its policies of demanding banks accept reduced underwriting standards and forcing Fannie Mae and Freddie Mac to take unnecessary risks.

[Lala]

The "lost documents" is a game that's being played -

http://www.nypost.com/seven/02222009/business/the_loan_ranger_156356.htm

While the Obama administration battles to keep people from losing their homes, one Florida lawyer said she has a better answer to the toxic mortgage epidemic sweeping the country - fight back against the loan servicers and banks that are improperly pressing the foreclosure actions.

"The loan servicers bringing most of the foreclosure actions in the country don't own the mortgages and have no standing to take away a person's home," said the lawyer, April Charney, who has stopped scores of foreclosure actions in Jacksonville, Fla., where she works as a Legal Aid lawyer.

In essence, Charney has forced scores of plaintiffs in foreclosure actions in Jacksonville to admit they don't have legal ownership of the securitized mortgage they are trying to foreclose upon - stopping the home takeover battle in its tracks.

[steveaz]

Todd,
The tip-off to readers on Dan's site (and we're a pretty well-informed bunch) that a commentator's dissertation about the causes of the housing bubble is severely lacking is, the comment omits all mention of Freddie and Fannie.

I noticed that your first explanatory post assiduously avoided mentioning them. This subtracts from your very literate presentation.

The Federal government mediates the mortgage market with Fannie and Freddie. This is common knowledge to anyone working in the mortgage industry. To not mention either one in your first explanatory bullet suggests you are either blind to these mediators' roles, or that you would distract Dan's readers from the servos and wires that coerced banks to loan to dead-beats in the first place.

For obvious reasons, the latter, distraction from the puppet-stings, appeals to the Left's media mavens right now, so I suspect it is your intent, too. To wit, your heated exculpation of Fred/Fan in subsequent retorts has only reinforced my initial perception.

"Don't look at what this hand is doing,...look at what that hand is doing." 9/10 of any illusionist's trick is distraction. "The Greatest Heist" now underway in DC is no different.

[rustbelt]

I don't have hard numbers in front of me, but I'd like to note that while MI may have a large number of foreclosures (along with Ohio), I'd guess the total amount at risk is a small fraction of the total of the other states because home values are comparatively very low, and those most affected by the downturn (outside of direct UAW employees) have very low value houses/mortgages, most likely with an average value under 60,000.

[submandave]

"If you remove 12 million renters from the market, you should not be surprised when the supply of homes on the market goes from a 4-month supply, to a 10-month supply and your housing market bursts." - johnmccain

I have a hard time imagining all 12 million illegals evaporating overnight, as you seem to suggest. Further, as far as I've seen illegal migrant-working renters tend to bunk enmasse. In fact, I've seen them living in partially finished appartments while they complete construction on the other units, effectively adding nothing to the housing/renting market. I think you're stretching to tie the housing bust on mean old Bush getting tough on the poor little illegals (something that never really happened in any meaningful sense, anyway).

"[The] tax change allowing $250,000/$500,000 exemptions on capital gains exemptions for primary residences held for 2 years ... was bubble-encouraging legislation. (And a lesson to be learned that [...] zero capital gains on equities investments [would lead] to yet another bubble to invest."

I agree that the capital gains exemption encouraged folks to flip, but it seems we learned different lessons. What I learned is that it is even more important for people who made bad decissions vis-a-vis flipping to suffer the financial consequences. If someone responsibly purchased a home, built up its value and then flipped it for capital gains good for them. The very problem with the various bailout plans is that people who didn't raise their property value and relied, instead, on the rising market are given a get out of jail free card. In that way you are correct, that they will probably behave bad (financially) in the future because what they have learned is that while they reap all the up side the risks are spread across all 350 million Americans. This is the bad policy you should be up in arms against.

[George]

I live in the northern suburbs of Dallas with no shortage of illegal aliens, a big slump in new home construction, but relatively low rates of forclosure. Why don't we have housing problems on the same scale as California, Nevada, and Arizona? I suspect the reason was home supply in Texas expanded to match demand, making it difficult to make money off home price appreciation. Without government or geographic restrictions on supply, home prices have a hard time rising rapidly to insane levels. Without the restricted supply and rapid acceleration of home prices there's little incentive to speculate on houses.

[Todd]

Todd,
The tip-off to readers on Dan's site (and we're a pretty well-informed bunch) that a commentator's dissertation about the causes of the housing bubble is severely lacking is, the comment omits all mention of Freddie and Fannie.

I noticed that your first explanatory post assiduously avoided mentioning them. This subtracts from your very literate presentation.

The Federal government mediates the mortgage market with Fannie and Freddie. This is common knowledge to anyone working in the mortgage industry. To not mention either one in your first explanatory bullet suggests you are either blind to these mediators' roles, or that you would distract Dan's readers from the servos and wires that coerced banks to loan to dead-beats in the first place.

For obvious reasons, the latter, distraction from the puppet-stings, appeals to the Left's media mavens right now, so I suspect it is your intent, too. To wit, your heated exculpation of Fred/Fan in subsequent retorts has only reinforced my initial perception.

"Don't look at what this hand is doing,...look at what that hand is doing." 9/10 of any illusionist's trick is distraction. "The Greatest Heist" now underway in DC is no different.

Posted by: steveaz | Monday, February 23, 2009 at 09:45 AM
--------------------
I believe you are missing my point, steveaz. My main point is there was a complete lack of regulation which directly allowed the proliferation of NINJA subprime loans (and therefore we need some well constructed, intelligent reform to prevent a redux in the future). Some posters on this blog seem to think that we have all the regulation that we need, which essentially would continue to allow unqualified borrowers to get loans. From the links I provided above from Barry Ritholtz's The Big Picure and Naked Capitalism - 2 well read and widely respected financial blogs - it is clearly stated (with links) that Fannie and Freddie did not buy subpriime loans from some date in 2001 to some date in 2005. The exact dates weren't provided. That meaans that 100% of subprime loans generated from 2002-2004 had nothing to do with Fannie and Freddie.

Of course, I am not absolving Fannie and Freddie of any responsibility in this crisis. Quite obviously they share significant blame otherwise they wouldn't have gone de facto Chapter 11 receivership with appalling losses. That speaks for itself about the inept, greedy and corrupt management at Fannie and Freddie (and any politicians who blocked GSE reform). But, let's recognize it is indeed a fact that for 2002-2004 the GSE's were not involved whatsoever in the proliferation of subprime loans, which posters on this blog are either not aware of, or in denial of. Nor, were the GSE's a regulatory body as far as I know so they are blameless from that point of view during this stated period of time when many doomed NINJA loans were made. Am I incorrect in stating that Fannie and Freddie are not regulatory bodies? Correct me if I am wrong, with links. Thanks

[Todd]

Okay, North Dallas Thirty.

"Todd is stating that Fannie Mae and Freddie Mac NEVER bought or had anything to do with any subprime loans before 2005 -- but then states that the subprime loan originators that he is attacking went into the market THAT FANNIE MAE AND FREDDIE MAC PREVIOUSLY DOMINATED."

To clarify, Fannie and Freddie had accounting scandals in 2001, subsequently vacated the subprime market and were not involved in buying subprime loans until they changed their lending standards in 2005 and began buying subprime loans again. The Orange County subprime lenders, who were not regulated by the Community Reinvestment Act, filled the void that Fannie/Freddie left. See the money quotes and links from my original post. Yes, Fannie and Freddie dominated in the prior period but it was during a period of much higher interest rates so there wasn't a proliferation of subprime loans at low teaser rates prior to 2001. Subprime loans accounted for just 8.6% of the mortgage market in 2001. Many of those subprime loans issued in 2002-2004 went bust and the taxpayer is taking the losses. All due to the unregulated lenders, and not due to Fannie and Freddie's malfeasance.

"AHC has developed a body of underwriting standards which have increased the access of low and moderate income people to home ownership. Food stamps and public assistance can now be used as income under ACORN CRA agreements. People without traditional credit histories can use rent, utilities, and child care to prove consistent payment patterns. Single parents can use voluntary child support from ex-partners as income. Families where incomes are pooled will qualify, which is common in Mexican-American and other communities. Savings clubs, common in West Indian, Mexican-American, and Korean communities, can be used as source for down payment and closing cost moneys. Families who have an excellent history of paying high rents on time can qualify for similar mortgage and insurance payments, even if they would not qualify under traditional payment standards.
Early on AHC recognized the need to bring in the secondary market and private mortgage insurers, if these new underwriting standards were to succeed. In response to ACORN pressure, Fannie Mae created the Fannie Mae/ACORN Pilot, which allows Fannie Mae to purchase AHC counseled mortgages using the more flexible AHC style underwriting."

No one forced AHC's hand to completely abdicate lending standards, reducing the standard to simply having a pulse. AHC through their own greed, and their own decision making process, proceeded to lend to people without any proof of a job, assets or credit score, and not requiring them to put any money down to buy a house. And, there was no regulatory body making sure AHC adhered to proper lending standards. ACORN and the CRA did not require the complete abdication of lending standards, but AHC was more than willing to do that on it's own.

"Also, Todd tries to duplicitously absolve his Obama Party of blame by talking only about "subprime" mortgages, which are a tiny fraction of the US market -- while ignoring the vast exposure to alt-A, the loans that are made without disclosure of income, that Fannie Mae and Freddie Mac had."

It's factually incorrect that subprime mortgages were a tiny fraction of the market unless you think that 20% of the market by 2006 is a tiny fraction. The American Prospect wrote " 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." (http://www.prospect.org/cs/articles?article=the_conservative_origins_of_the_subprime_mortgage_crisis)

"Meanwhile, Todd makes some intriguing claims in this statement.
"That is because the Fed Funds rate in 1999 was in the range of 7% at the time, peaking at 7 1/4% in early 2000."

That would be news to everyone else."

My bad. It was from memory and it peaked at 6 1/2% and not 7 1/4%. Still, it doesn't negate my point that those loans made in 1999 in the pilot program sponsored by Fannie were not made with low teaser loan rates, which would make them immediately tainted as irresponsible loans to unqualified homebuyers.

"In addition, adjustable-rate mortgages are not in the vast majority of cases based on the Federal funds rate; they are based on LIBOR, which is a different animal entirely and not under the control of the Federal Reserve in the first place."

LIBOR is an acronym for London Interbank Overnight Rate, and it closely approximates the level of Fed Funds that trade domestically. There weren't radical differences in the leve;s of LIBOR in dollars vs Fed Funds until the credit crisis began in 2007, when wide divergences occurred. Most loans were made with relationship to 3 month, 6 month and 1 year LIBOR and it trades freely, not under the purview of the Fed, as you note. Still, it trades similarly to the structure of short term rates that the Fed is in accord with through setting their Fed Funds policy. I don't understand what you are getting at here, anyways.

"In short, the only consistency in Todd's argument is his attempt to shift blame away from his Obama Party and its policies of demanding banks accept reduced underwriting standards and forcing Fannie Mae and Freddie Mac to take unnecessary risks."

I'm not shifting anything. I'm pointing out the total lack of regulation that facilitated the explosion of subprime NINJA loans. Fannie and Freddie were not involved from 2002-2004 in that market from 2002-2004. You seem to want to blame Fannie and Freddie for the entire thing, 100% on them. I have posted the links that shows that to be a specious argument.

You tell me, North Dallas Thirty, how you can support the total lack of regulation that allowed this to happen. You don't seem to find anyone to point fingers at but Fannie and Freddie. Why is that? Is it your way to shift blame entirely onto the Democrats, and absolve the Bush Administration of any responsibility? Does the Bush Administration bear any responsibility in YOUR opinion?

[Todd]

Finally, someone admits to being totally irresponsible and has the courage to accept blame in their total nonfeasance in regulatory oversight. Susan Bies, nominated to Fed Governor by George W. Bush in 2001. Essentially, she said the overarching principle of free market self-regulation failed, and they were totally unprepared for that. Free markets without regulation, essentially wild west capitalism. No mention of Fannie, Freddie, the CRA or ACORN as being principally responsible. Whowouldathunk?

Money quote: [Former Fed Governor from 2001-2007] Susan Schmidt Bies is having second thoughts about some of the votes she cast as a member of the Federal Reserve Board of Governors in the years leading up to the present crisis.
...
"I never, never would have guessed it was going to be like this, never," she said.

In an interview with The Greenville News, Bies reflected on her time at the Fed -- and expressed regret at not acting to raise interest rates faster or doing more to strengthen mortgage underwriting.
...
Bies said the bigger problem was lenders granting mortgages to people without the means to repay the loans. That concern fell to Bies, since she was the Fed's point person for bank oversight.

"As regulators, we didn't see the whole picture of how poorly the loans were being underwritten, because there's so many regulators in this country. None of us saw the whole picture, and we didn't tighten down enough, fast enough on it," Bies said.
...
"I think everybody just really lost touch with how much the underwriting of loans had deteriorated," Bies said.
...
Before the collapse, she said, "every bank risk model, every securitizer, broker dealer, all the rating agencies, were all basically where I was."

"I just didn't realize it was as bad as it was," she said.

http://www.calculatedriskblog.com/2009/02/former-fed-governor-feels-accountable.html