Old Sammy Wrote:

Hambone10 Wrote:case-in-point... CRA and expansion of FHLMC/FNMA powers. It told banks to make loans at non-economic rates, or face penalty... so they did... then they contacted wall street to get them out of these loans earning 6% that SHOULD have been earning 10% to be economically practical... and wall street put silk lining on a sows purse... and the irrationally exuberant economy allowed everyone to believe that happy days were going to be here forever... until they weren't... then suddenly its the rich man's greed for trying to make a profit for fixing a problem that never needed to exist, were it not for Franks et. al.

Your blame for CRA and FNMA is misplaced. Most of the nonperforming loans are not in low income areas, and they're not made by banks subject to CRA, they're made by unregulated private mortgage companies. FNMA loans are a very small part of the problem.

Once again, I'll go to the columnist Mallaby (of the Washington Post), who tends to hew left of center (but usually pretty rationally) on most topics. His summary of where much of the blame lay certainly implicates Freddie and Fannie (among others), in part because they were late to the game but ultimately committed hundreds of billions of dollars to purchasing these loans for repackaging. Without that demand and ability to purchase, where would the credit have come from to make the loans at attractive rates?

texd Wrote:Does anybody here truly think either man would do what he thinks is NOT right as president?

I think each of them is far more concerned about winning the next election than about doing the right thing. When push comes to shove, I don't believe either one of them would let right or wrong stand in the way of political expedience. I absolutely believe the same thing of Reid and Pelosi (and to set the record straight, I believed it of Tom DeLay as well), and I question whether Obama is strong enough to stand up to them, even if he thought they were wrong.

I have yet to see or hear Barack Obama say or do one thing to cause me to think differently about him. I used to think differently of John McCain, but his performance in this campaign, going back to the primaries, has convinced me that I can't count on him any more. If you have reason to think differently about either one, please educate me.

If you truly have no doubt that Barack Obama or John McCain will do what they think is right once they are president or that various members of congress will do the same, then you are far more of an optimist than I. If you really think that, then I believe you are living in a dream world.

texd Wrote:Does anybody here truly think either man would do what he thinks is NOT right as president?

Yes. Me.

I think any President has to give some thought to how actions will affect the midterm elections, and then how they will effect HIS re-election, and lastly, his "legacy".

It doesn't take a lot to look throughout the history of the presidency to find examples of presidents making choices to do what they know or think to be wrong for political expediency.

My impression (and I admit, it is an impression) of BO is that he cares much more about what makes the crowds roar. Also, McC, at 72, may be less focused on re-election.

But if the question from the pollster is "which candidate do you think is more likely to resist political pressure and instead will follow his own beliefs in what is the right thing to do?", then my answer is McCain. He has a track record of doing so. The only similar time I know of when BO took a stance was on his vote re medical care for babies born from a botched abortion. Maybe you know of others.

I agree with your point about whether or not President X and I will agree on what is right, but I know which is most likely to agree with me.

Now I'm not saying that BO will be guided in all things by public opinion, but i do think he will more readily cave in to pressure to do something he thinks is the wrong thing to do, rather than resist and be unpopular.

JMHO. You asked the question.

gsloth Wrote:

Old Sammy Wrote:

Hambone10 Wrote:case-in-point... CRA and expansion of FHLMC/FNMA powers. It told banks to make loans at non-economic rates, or face penalty... so they did... then they contacted wall street to get them out of these loans earning 6% that SHOULD have been earning 10% to be economically practical... and wall street put silk lining on a sows purse... and the irrationally exuberant economy allowed everyone to believe that happy days were going to be here forever... until they weren't... then suddenly its the rich man's greed for trying to make a profit for fixing a problem that never needed to exist, were it not for Franks et. al.

Your blame for CRA and FNMA is misplaced. Most of the nonperforming loans are not in low income areas, and they're not made by banks subject to CRA, they're made by unregulated private mortgage companies. FNMA loans are a very small part of the problem.

Once again, I'll go to the columnist Mallaby (of the Washington Post), who tends to hew left of center (but usually pretty rationally) on most topics. His summary of where much of the blame lay certainly implicates Freddie and Fannie (among others), in part because they were late to the game but ultimately committed hundreds of billions of dollars to purchasing these loans for repackaging. Without that demand and ability to purchase, where would the credit have come from to make the loans at attractive rates?

You're confusing who originated the loan, with WHY the loan was originated at the rate it was. Of COURSE banks didn't originate the loans.. they were bad loans (economically). The problem is that 5% down and liberal documentation didn't just apply to the "honest" poor, but also to the not so honest of all incomes.

ANOTHER problem was that Congress encouraged (by punishing non-compliance) lenders, including FNMA et al, to buy mortgages from smaller, poorly capitalized mortgage bankers... SIMPLY because they were owned by certain groups they wanted to encourage. While this is a noble cause, it leaves the cupboards bare when things go wrong... and I don't believe that small companies are by an definition any more or less honest than big companies... but big companies have more to lose... and are thus generally more concerned with compliance, and are generally audited more frequently... or by more experienced auditors.

The loans were originated because they were "special". They filled a special need, and banks were more interested in owning FNMA guaranteed CRA eligible pieces than non-securitized loans.

This "unfair competition", and the resulting reduction in due-diligence and/or credit work didn't just apply to low income loans. If Joe the Plumber can get a loan at 6% by simply saying he makes $50,000 a year when he really makes $35k, then Joe the CEO can get a loan at 6% by saying he makes $500k when he really makes $350k.

These sorts of loans should have been made at 8%, or 10%... if at all... rather than 6.

Congress made the rules, then the're "surprised" when people take advantage of them.

Hambone - it's not that I don't agree with you, and both of us are simplifying (even the columnist had to), but I will say this - without the excess liquidity being loaned out at 2% or less (depending on whether the Fed, the yen carry trade, or other currency "games" were used), then it never made sense to loan out at 6% or less (on fixed mortgages) or some of the insane rates offered on all sorts of ARMs and similar products. And you can guarantee that these banks fully expected these loans to reset at higher levels and customers to pay them, just like they have in the past - the problem was, in many cases, so many people could no longer afford them and it took out one of the legs supporting rising housing prices. (Boy, when I read that, it's simplistic. I hope I at least get some of the concepts rattling around in my brain out.)

I also think the fees that these things generated at every step of the way was intoxicating, in that it generated cash (or at least earnings) now to show excellent growth, but then these companies had to continue to meet those high rates of return. Pretty tough to do. Nothing like trying to manage earnings through the quick buck.

I see lots of blame to go around on this one. The inflation had to show up somewhere, because tons of liquidity was being pumped out around the world. In this case, it was a big chunk of US real estate. (There are other places where the money wound up, but that's for another discussion.)

Yes... we're both over-simplifying a very complex discussion... but I think we understand eachother and GENERALY agree... your point about fees is absolutely correct... but didn't that "greed factor" create thousands of small businesses?? Mom and Pop mortgage companies?? Is it really a surprise that when you take banks, with generations of experience in lending money out of the equation, and turn lending money into a "fit this box, get a check" process... that credit analysis suffers, and historical comparisons get thrown out the window???

I agree 100% that there is plenty of blame to go around... in many cases, the culprit is the same... good intentions corrupted by the realities of the world. CRA is perhaps 10% of the problem... but IMO, things LIKE CRA are to blame for perhaps 30% of the problem... and that if far more than anything else. I've listened to morons like Franks talk about how McCain was in favor of deregulation... and deregulation caused this problem... NOTHING could be further from the truth. REGULATION, not deregulation caused this problem. Our tax code is regulation... and most of the problems caused by Enron et al were the result of people trying to deal with the pages and pages of unclear tax code. When things are unclear, there is room for argument. If one argument is advantageous, and another disadvantageous, why are we surprised when people make the argument advantageous to themselves? Sure, it can be taken too far, and that is fraud... and fraud is a part of the problem... but if there were no question of right or wrong... then there would be no question of responsibility. Franks has been the biggest arguer of this point... especially in re FNMA... and he is knee deep in the cause.

When Congress mandated CRA, they didn't put banks on notice to be fair in lending... they created a moral hazard that the government (meaning taxpayers) might have to step in... at least to some degree. In recebt years, this has been done by making rates low to help people qualify for loans, keeping rates low to stop adjustments from hurting as many, and now fixing rates at artificial levels.

I place a lot of blame on bank regulation because the particular bill in question that established regulations for lenders passed the Republican controlled Senate on a virtual straight party line vote... 1 Democrat, probably Lieberman... voting with Republicans... but Clinton threatened to veto it... so they added CRA... social engineering, and the bill passed by something like 93-7. Home ownership was not the goal of the bill... market stability was... but all of the things added to it under the guise of "affordable housing" created the problem we have now (at least as far as that particular bill is concerned)

Banks never wanted to make 30 year loans because nobody takes out 30 year CDs. Mortgages were originally the territory of thrifts... but they all failed the last time we had rate shock. The FHLB was set up to allow banks to borrow longer term funding... and FHLMC and FNMA were set up to also ensure long-term funding to match the term of loans that were longer than banks wanted them to be... CMOs and the like were set up to also provide long term financing. Banks once again went away from offering 30 year fixed rate MBS because there were plenty of sources of funds for borrowers. They set up mortgage companies to access those sources. Teaser arms and the like were attempts by banks to make non-economic loans somehow economical. The competition from FHLMC and FNMA, and their subsequent push into other markets created an artificially low cost competitor for loans. If banks wanted to make loans... they had to compete. While this sounds good in practice... when the competition is making loans that shouldn't be made... you have almost no choice but to do so as well... and in fact, Congress was mandating that you do so... one way or another... either by originating or buying loans or securities backed by loans that served certain social purposes.

Making money is the goal of business. Like it or not, it is why they exist. It is the basis of our economy... it is what creates jobs. If someone wants to create a benevolent business, fine... That is their right... and that will serve a part of the market willing to pay more for it. MANDATING that businesses be benevolent simply encourages/forces them to seek additional ways to make money... in the case of banks, that usually means by paying lower depository rates, which discourages saving... or charging higher fees, borne mostly by those who can least afford it.... creating the need for more social engineering to solve the problem created by the first round of social engineering. The complex securities created by wall street were an attempt to make the non-economic, somehow economic. It was a musical chairs of risk, and the music finally stopped. Had it not been for the underlying social engineering, there would have been no need for the financial engineering that hid the facts...

This 700byn bailout, or whatever it will end up costing taxpayers is a reasonably foreseeable consequence of the actions of the past two decades or so. The wealth created by and for NOT just by a few CEOs, but the thousands of mom and pop mortgage companies and real estate agents and construction companies and home flippers and 'pimp this house 'ers" is now being paid for by the Taxpayers... by the ones furthest from the chairs.

The solution is not MORE regulation, and MORE government and MORE social engineering. It is CLEAR regulation, which GENERALLY means much less of it.

Not to reopen this one too much, but check out this blurb from the Clinton era modifications to CRA (found in this page):

Quote: Even without a no-down-payment policy, the pressure on banks to make CRA-related loans may be leading to foreclosures. Though bankers generally cheerlead for CRA out of fear of being branded racists if they do not, the CEO of one midsize bank grumbles that 20 percent of his institution’s CRA-related mortgages, which required only $500 down payments, were delinquent in their very first year, and probably 7 percent will end in foreclosure. “The problem with CRA,” says an executive with a major national financial-services firm, “is that banks will simply throw money at things because they want that CRA rating.” From the banks’ point of view, CRA lending is simply a price of doing business-even if some of the mortgages must be written off. The growth in very large banks-ones most likely to sign major CRA agreements-also means that those advancing the funds for CRA loans are less likely to have to worry about the effects of those loans going bad: such loans will be a small portion of their lending portfolios.

Looking into the future gives further cause for concern: “The bulk of these loans,” notes a Federal Reserve economist, “have been made during a period in which we have not experienced an economic downturn.” The Neighborhood Assistance Corporation of America’s own success stories make you wonder how much CRA-related carnage will result when the economy cools.

Want to know what's sad about this seeming Monday-morning quarterbacking? It was actually written in 2000. Now CRA loans are not all of the loans going into foreclosure, but this certainly shows a pattern (I'm broadening beyond just CRA here) that they knew things were going to be bad for giving below-normal-standard rates to those who really couldn't afford the payments (or the ultimate payments when rates reset much higher).

exactly sloth.

I've been involved in this business since the late 80's, and when CRA set the bar so low to encourage certain people, it left a HUGE hole between who banks wanted to lend to... and who they needed to lend to... and there were millions of people in that gap who said, hey... how about loaning ME money... Suddenly, it all became about "boxes" just like every other government program... if I can check this box, you get help... if not, you don't... so like the TAKS test, people started teaching to the test rather than learning. How can I make you SAY you earn 50k when you earn 35?? I'll say that you're going to rent this property for 15k/year... or I'll just lie... or I'll extrapolate that you'll make 15k by flipping this home and we'll call that income... it's not MY money I'm lending you afterall... and THAT is where the problems start... in business AND in politics.

OPM brother, OPM (other people's money)