May 6, 2012

12 “facts” that “may” “surprise” you about the “housing bust”

While the parent company of the Wall Street Journal, News Corporation, is getting a proper punching across the pond, let’s see how Rupert Murdoch’s business-as-usual cheerleader reports on the causes of The Second Great Depression.

Twelve Facts That May Surprise You About the Housing Bust

By Nick Timiraos, The Wall Street Journal, May 4, 2012

120505-foreclosure-sign-wsjWhat if the conventional wisdom about the mortgage crisis is all wrong?

That’s the implication of a new paper from economists at the Federal Reserve Banks of Atlanta and Boston that’s bound to spark debate because, if their premises are correct, it sharply undercuts the justification for much of the new regulation that’s been erected over the past two years.

Three economists, Christopher Foote,Kristopher Gerardi, and Paul Willen, present two narratives of the financial crisis in trying to answer why so many people made so many dumb decisions.

The first view is that the financial crisis was an “inside job” where various industry players, from the mortgage lenders to mortgage traders, took advantage of unsophisticated rubes, from homeowners to mortgage investors.

They largely discard that view for a second one—the “bubble theory” where delusional attitudes about home prices, not distorted incentives, fueled poor decision making.

120505-mcmansion-broken-windowsThis is the Wall Street Journal.  Does anyone think for a New York minute that they’d get behind the Inside Job view of the housing debacle?  Of course not.  It was obviously the fault of strawberry pickers, the Community Redevelopment Act of 1977, Barney Frank, and undeserving minorities who never should have been allowed to own property ever ever ever.  (Uppity rabble might then expect the vote, too.)

And as for the origin of this paper?  The Boston Federal Reserve?  Everyone working there is hoping to get hired by one of those market manipulators, so don’t look for their facts to bear much relation to what really happened.

Here’s the authors’ abstract of the excuse for wrecking the whole economy report:

This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.

Translation: if we blame the meltdown on irrational exuberance, then none of our friends will have to give up their bonuses. Or their freedom.

120505-fed-theoriesThe above diagram is from the research paper, and it neatly blames the victims for believing housing prices only go up.  Notice who’s missing from the picture?  Realtards.  You know, the people who tell you that housing prices only go up.

Fact 1: Resets of adjustable-rate mortgages did not cause the foreclosure crisis.

120505-mortgage-ratesBanks weren’t wrong for issuing adjustable rate loans, borrowers are the problem for having crap credit.  Bad credit meant those borrowers could have an adjustable loan or remain renters. 

Hey, what do you expect when you loan to a bunch of deadbeats?

We’ve got 11 more of these delightful “facts” waiting for you after the break.

Fact 2: No mortgage was “designed to fail.”

Of course they weren’t designed to fail.  They were designed so it didn’t matter if they were paid back or not.  If they couldn’t “sustain a drastic decline in prices” then whoever designed and approved the mortgages were drinking their own Kool-aid.

Fact 3: There was little innovation in mortgage markets in the 2000s.

120505-mortgage-no-docThat’s right! 

Just because bankers and loan brokers discouraged the usual loan type (20% down, fixed interest rates, no balloons) doesn’t mean they were actually innovating anything.  Banks always had a way to loan money to deadbeats.

It’s just in the 2000s, banks were just aggressively marketing their products for subprime markets Special sectors so that everyone could enjoy the benefits!  Remember miss-a-month loans?  These were even better!

Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005.

120505-piles-of-moneyYes, yes, yes, it’s ALL Big Government’s fault!  Why blame the bankers for writing loans that never would have been permitted before Glass-Steagall got repealed?  And deregulating markets means more innovation!  Which, um, according to Fact 3, there wasn’t any of!  Really!

Also VA loans are low down payment and therefore evil.  So there.

Fact 5: The originate-to-distribute model was not new.

Of course, if it isn’t new, therefore it isn’t a bad idea.  And if selling 5% of your loans to secondary mortgage markets or insurance companies is a good idea, then selling 100% of them to investment banks is sheer awesomeness.

120505-cdoFact 6: MBS, CDOs, and other “complex financial products” had been widely used for decades.

Again, it’s not a matter of new products, just new marketing, new volumes, new collateral, and new customers.  By a factor of several million.  And also the commodities market was deregulated.  But we won’t mention that.

Fact 7: Mortgage investors had lots of information. 

Of course they did.  Lots and lots of information in 9,000 page prospectuses printed in 4 point type. A small percentage of it might have even been true. 

There was also fraud, but let’s not spend too much time on that point.  And nobody would have expected the investment banks to game the ratings agencies into giving AAA to crap. 

120505-mrhousing-bubbleFact 8: Investors understood the risks.

It wasn’t the banks’ fault!  It was those stupid investors buying the toxic products they were advised to buy!  It’s morally wrong to allow suckers to keep their money!

Fact 9: Investors were optimistic about house prices.

No doubt because Suzanne researched this.

Fact 10: Mortgage market insiders were the biggest losers.

Yeah, those 4 million people who lost their homes to foreclosure?  Who cares about them?  But all those out-of-work bankers?  What a shame!

Fact 11: Mortgage market outsiders were the biggest winners.

Goldman Sachs is a mortgage outsider?  One would think creating, packaging, marketing and selling bets on mortgage market motion implies otherwise.

120505-toxic-wasteFact 12: Top-rated bonds backed by mortgages did not turn out to be “toxic.” Top-rated bonds in collateralized debt obligations (CDOs) did.

Wait, what about the synthetic CDOs where they sliced up the same package of mortgages, backed by various credit default swaps, a million different ways?  That should have diluted the poison to a safe level.

And what do these geniuses conclude after announcing that the dog ate all the bankers’ homework?

For policymakers, the important question is whether the economic events of 2002 to 2008
were more like malaria or more like an earthquake. Was the crisis a “preventable disaster,”
resembling a disease whose pathology is well-understood and for which we can administer an
effective treatment?52 Or, to draw on the Nocera quotation from the introduction, was the
crisis instead caused by a poorly understood “mass delusion” that we can neither predict nor
prevent? Proponents of the conventional wisdom on the crisis clearly view it like malaria.
A great deal of policy since the crisis has focused on improving disclosure and changing
incentives for financial intermediaries. But we are skeptical that this approach will work.

120505-loma-prieta-epicenterMalaria’s spread is understood and can be eradicated.  Earthquakes are also understood but cannot be predicted.  But the authors compare the 1989 Loma Prieta earthquake to the 2010 quake in Haiti, and note that fewer people died in the former one because of better building codes.  Based on that they suggest more mortgage industry regulation and disclosure is unnecessary.

Yes.  They really said that.  Because mortgages aren’t buildings.  They’re just securitization of buildings.  So if people are going to keep securitizing houses, all these economists think is necessary to prevent another financial Armageddon is remind banks and borrowers that house prices can indeed go down.

Yeah, like NAR’s going to stand for that.

Comments (16) -- Posted by: madhaus @ 5:15 am

16 Responses to “12 “facts” that “may” “surprise” you about the “housing bust””

  1. nomadic Says:

    You find the funniest shit.

  2. PK Says:

    How about the unfair hatred that 5/1s, 7/1s and other ARMs got (considering most reset down post-bubble, thanks to some pretty extraordinary rate-forcing). The crap we probably shouldn’t see again, at least not for residential buyers are negative amortization and no amortization loans. The only thing I’m surprised we didn’t see? Japan style 100 year mortgages (Pass that mortgage on to your grandkids!). By comparison, ARMs are tame, yet I know people that blame ARMs for the downturn… really?

    WSJ blogs has some weird stuff sometimes…

  3. sunnyvalerenter Says:

    The problem for the crisis in my view is that the ‘Real Estate’ itself has become the economy at many places. Once RE busted, a lot of people lost their incomes due to the fact that ‘RE’ itself can’t be the economy.

  4. SEA Says:

    Housing bust? Not in the RBA.

  5. madhaus Says:

    You bring up a good point, sunnyvalerenter. The report doesn’t mention the culture of mortgage equity withdrawal (MEW) as a lifestyle. That was pervasive in Southern California (Irvine Housing Blog pretty much wrote the book on that kind of financial stupidity), but the Bay Area wasn’t completely immune to it.

    And with the need for more mortgages to fuel the new mortgage products, anyone with a pulse could get one, or refinance over and over and over and over, pulling out more equity each time.

    The problem is, few of them were willing to realize that debt is not wealth, and you don’t become wealthy by spending all “your” money. Spending someone else’s money, when you’ve signed a promissory note to repay it, though…

  6. sunnyvalerenter Says:

    Madhaus, I beg to differ. I am from India originally and I really believe that ‘debt is wealth’. However you need to have either of the 2 scenarios for the debt to become wealth. First is the arrival or continuation of massive inflation. Second is the willingness of people to take up debt for higher amounts and/or longer periods. We all know that these things don’t end well, but the question is who loses at the end. The thing I learned is that people who act conservative (live within their means, save some income) are always slaughtered at the end.

  7. SEA Says:

    “few of them were willing to realize that debt is not wealth”

    Debt is wealth if positively leveraged. When housing price appreciation was far in excess of the cost of capital, plus many measures of inflation, housing debt was favorable. Was it risk-free? Of course not, even if too many considered it to be so.

    As to the issue of mortgage equity withdrawal, who really thought that every property was in the RBA?

  8. 100 percent financing home loan Says:

    [...] For policymakers, the important question is whether the economic events of 2002 to 2008 were more like malaria or more like an earthquake. Was the crisis a “preventable disaster,” resembling a disease whose pathology is well-understood and for which we can administer an effective treatment?52 Or, to draw on the Nocera quotation from the introduction, was the crisis instead caused by a poorly understood “mass delusion” that we can neither predict nor prevent? Proponents of the conventional wisdom on the crisis clearly view it like malaria. A great deal of policy since the crisis has focused on improving disclosure and changing incentives for financial intermediaries. But we are skeptical that this approach will work.Source: burbed.com [...]

  9. madhaus Says:

    Massive inflation makes debt become trivial. Borrow, hold, pay it back with cheaper future dollars. Not entirely sure I see your point about people being willing to take on more debt making debt equal wealth. Debt is never wealth. Wealth is wealth.

    Debt can be a road to wealth, but it isn’t risk-free. Also bear in mind that massive inflation wasn’t an issue in the US during the oughts. You’d have to go back to the 70s and 80s for that.

    Now, the money supply keeps expanding (a component of inflation) but wages are stagnant for most people. That means home prices will only rise where it’s Special.

  10. Crissa Says:

    I thin an adjustable rate loan with a balloon payment that increases based upon your credit change from taking the loan is a bit designed to fail.

    Here, I’ll sell you this at market price, oh, wait, you owe a whole bunch of money to someone (me) so now you’ll have to pay their exorbitant price or give me the house!

  11. Crissa Says:

    Since the market rate of an ARM only changes a teeny bit and the largest change is via your credit rating… This probably has something to do with ARMs being a larger proportion of foreclosures than of the general market.

  12. sprezzatura Says:

    One of the scariest things I remember seeing from the MEW days was an article about colleges who were debating whether to require families to use their HELOCS as part of their student loan financing package.

  13. madhaus Says:

    That’s not how I remember the ARM market playing out, and the rate could change a lot more than a “teeny” bit. The authors of this paper note that most adjustable mortgages actually adjusted down as the credit bubble tightened (since they were based on interest rates, not credit ratings). They just blame the borrowers for not paying them back because they were rotten credit risks anyway, not because the payments exploded.

    Left unmentioned by the authors is how lending standards went from if-you-need-this-loan-you-don’t-qualify to can-you-fog-a-mirror. And there is no way they can claim that lending standards didn’t change.

  14. SEA Says:

    “Massive inflation makes debt become trivial.”

    By “massive” you mean that the cost of capital is less than the level of inflation. No matter how “massive” the inflation, if the cost of capital is higher than inflation, debt is not wealth.

    “Not entirely sure I see your point about people being willing to take on more debt making debt equal wealth.”

    This works great for the very elderly. A friend recently passed away at the age of 76. She was borrowing more and more–even executed a reverse mortgage at the market peak–and died with about $5 in her pocket. She timed everything perfect, but some people outlive this game.

  15. Dewane Says:

    There was a woman in my choir who was a mortgage broker in Half Moon Bay. I remember us taking a bus to a gig in 2008 or so, she was joking about selling houses to the local farmworkers there on the coast based on completely fradulent wage information on the app. She’s not smiling now, as she’s been poor, but it was short-sighted greedheads like her that are the cause of it, completely. Has anybody yet gone to prison? Didn’t think so.

  16. SEA Says:

    “Has anybody yet gone to prison?”

    A few have, but only the very worst.

    A recent example:

    HOUSING: Carlsbad mother and Orange County son convicted in $8 million mortgage fraud


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