(07-20-2015 08:16 AM)Machiavelli Wrote: We had a Memphis poster just blow this zombie lie out of the water a couple of years back. I'm pretty certain he took Owl #'s to task on it rather hard. I didn't care for the tone of the conversation but it was a take down none the less. This zombie lie that keeps being repeated here is just that a lie.
It is not a zombie lie, not even a lie at all. Nobody blew it out of the water ever. And I responded to the post that I think you are referencing by pointing out then exactly what actually happened. Since you obviously don't remember that, I will repeat it here.
What was said then, and what is being said now, is that the law, as written, does not require banks to make bad loans, only to make loans to qualified buyers who happened to be minorities. That is factually correct. It is also irrelevant.
It is irrelevant because the law as written is not what actually got enforced. The problem is that the law as written was very generic, and the bank regulators were directed to write regulations to implement the provisions of the law. Those regulations took the wording of the statute and twisted it significantly to require banks to make X number of loans in specific ZIP codes, without regard to whether or not borrowers were qualified.
Banks started out complying with the wording of the law, intensifying their efforts to make loans to qualified minority applicants. That was a good thing, and if things had stayed there, we would have been fine. Enter the regulators to tell the bankers no, that's not good enough. We don't care whether you had enough qualified applicants or not, you have to make X loans in ZIP code 55555 or else we are going to write you up as out of compliance. So bankers started making loans to non-qualified applicants, enough to hit their regulatory quotas. Enter second and third sets of regulators, from the states and other federal agencies, to tell the bankers, you're making loans that don't conform to your underwriting standards, and that's introducing too much risk into the system, so we are going to write you up if you don't tighten your underwriting. At this point the banks were in a no-win situation. My bank clients kept complaining that they wished they could get all the different sets of regulators into the same room at the same time, so they could get some definitive guidance that they could follow. Some of them even jokingly said that they tried to invite them all to lunch without telling each other that they were invited. Enter the Countrywides of the world. They went to the banks and said, don't worry about your X loans in ZIP code 55555, we'll write the mortgages and sell them to you. Only now the problem is that Countrywide has no skin in the game. They're going to sell the mortgage so they don't give a damn about whether it's any good or not. My proposal (based on my work on the 1990 S&L bailout) was a requirement that you couldn't write a mortgage and sell it without keeping at least 25%. There was a bill to do exactly that. Countrywide didn't like that, so they gave Chris Dodd a sweetheart deal on a castle in Ireland in exchange for killing it. Anyway, the banks ended up with a bunch of loans in their portfolios that they knew nothing about, and had no idea what was their quality. When they started checking it out, they realized that they had a bunch of absolute crap. The investment bankers came along and said, "We're in the business of laying off risk. We can package them up and sell them, we can do other derivative instruments to shift the risk, and for a healthy underwriting fee (got to make payments on our Maseratis) we will help you out." The problem was that they based their economics on the assumption that the loans would perform the way they had in the past, and of course these loans couldn't and wouldn't and didn't. Then Fannie and Freddie got into the business of buying loans to try to make things work. Folks like Gorelick and Raines got huge bonuses for expanding their portfolio, then got out and never got put in jail for malfeasance. So you ended up with a system full of bad paper that had been through 3 or 4 hands and nobody knew exactly what they had. Now, in order to make a lot of these loans look better than they were, they had been structured with teaser rates and amortization schedule for the first 3 years or so, then be adjusted to higher interest rates and real amortization schedules. When those adjustments started kicking in, people started defaulting left and right. The impact of those defaults hits everyone. When the family down the street gets their house foreclosed, it sells for maybe 70% of market, and guess what, your house just lost 30% of its value. What else happens is that because of something called "mark to market," when enough borrowers default then the banks have to write down the value of their portfolios. The way that lending regulations work, that basically shuts them down from lending. That is what is called a liquidity crisis. That's the way the system works. That's a summary of about 15 years of mortgage lending in America.
I was there. I was in the meetings with my clients and the regulators. I was at conferences with bankers and their lawyers and accountants where it was a major topic of discussion. It is not a lie. I know it is not a lie because I lived it and experienced it first hand. You did not and neither did the Memphis poster you referenced, so neither you has more than a superficial understanding of what happened. And superficial understandings are usually wrong, as in this case.
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Peter Schiff on the US, Greece, EU, and Puerto Rico
