Revisiting the mortgage crisis

Blaming the other side for the mortgage crisis is an ongoing game, though at a lower pitch than before. A newly published economic study is again focusing attention on the causes, though the study fails to look at the whole picture.

The good thing about this study is that it's gotten people commenting again. That's given me the chance to learn more. This post was my gateway to looking at the issue again, and deserves a mention. However, it is also too narrow in scope-- it focuses only on the thesis that banks should have priced risk better, and it's not the fault of CRA that they didn't.

The real feast is in the comment page of this brief post. Especially worthwhile are the comments of Steve Sailer, a journalist/blogger who frequently writes about the preferable outcomes and values of white American culture and provides evidence to back it up. To some, that makes him a racist. Maybe he is, but he still has points that are important to consider.

These are some facts (or possible facts) that I learned from his comments:

1. The Clinton administration "threatened" Countrywide, a mortgage lender, with heavy regulatory pressure if they didn't lend to more low-income borrowers. 
2. The regulatory environment favored robust low-income lending when mergers were evaluated for approval. Bankers who were sceptical were effectively weeded out.
3. Steve Sailer isn't an ideologue who is trying to put all the blame on one quarter.

These comments discuss how CRA and similar policies changed mortgage lending practices to make it easier for low-income and minority borrowers to get home loans. These changes are part, but only part, of the huge developments in mortgage lending, including all kinds of new mortgages and the packaging of mortgages as securities.

It is clear that the Democrats liked the outcome of more minorities getting home loans. Republicans liked it too, and "the ownership society" became one of their slogans. It was good that more minorities and lower-income people were able to become homeowners and enjoy those benefits such as building equity.

What is unfair is how some conservatives are now trying to place all the blame on Democrats and their policies. This is a lie. Though there definitely was pressure from Democrats, including the Clinton administration, to increase minority lending, it is hardly the largest cause of the crisis. A fair accounting looks at many factors, not just CRA, Fannie, Freddie, and what Dems did. This was only part of the action, not even close to the whole rotten edifice.

We should be trying to figure out what policies were good or neutral, while identifying others that were problematic. This applies to all areas, including low-income lending, underwriting standards, rating agencies, and securitization. However, we may not be able sort the good practices from the bad because the horribly overheated housing market confounded everything.

Most important, let's all learn some lessons from this horrible crisis. And please, let's not use it just to bash "the other side."

Untold suffering

Image: washingpost.com

Update 1/24/14. "The Dems caused it" is still a favorite claim. So in arguing it yet again, I found this great article about how the Bush administration and the Supreme Court hampered states from trying to prevent the crisis they foresaw. Also, here's a good exchange between two data heavyweights, though there's no resolution of their differences. [Sadly, those comments are no longer available.]

Let me say clearly: Dems made this worse, Republicans made this worse, Fannie and Freddie made this worse, but most of all it was the Wall Street banks. Anyone who ignores some of the players is lying and it's probably for political reasons.

Update 3/27/14. Still a favorite claim. I tried to find out how 'liar loans' [stated income loans] started. I didn't find the answer, but I found this testimony from 2006.

Update 3/28/14. More great testimony here, but don't stop at the title because it's misleading. Follow-up post here.

The pulse of Republican regret 2008

In researching the roots of the Tea Party movement, I read many blogs. More illuminating than the posts were the comments. This is a selection, but often they are best read in context, with counterpoints, insults, and disagreements aired in a long stream. One comment can be egregious, next a thoughtful one. Most comments come from HotAir, a conservative multi-blogger site that excludes casual commenters. I highly recommend clicking on the links to get the flavor of discussions.

Here are some of the comments I found significant.

Disappointment with McCain as Nominee Apparent

When we lose in November it will teach us a lesson. We need to nominate a candidate who represents all 3 legs of the stool next time, none of our candidates did that convincingly this time around, not even Fred in reality... We need to get behind guys like Coburn and Demint, they are the future. - HotAir comment 2/5/08

Dirty Tricks on Hated Dems

The Dems are faced with two fantastic options:  If he wins, they will run this boob against an experienced, established, generally liked Senate leader. And The Obama will lose. If the Super Delegates back Hillary they will face riots and that will make me so happy I’ll have to dance around my front yard.
I’ll vote for Hill-rod on the 5th! - HotAir comment, 5/24/08, when Hillary was staying in the race.

Traitors

I DO question his Patriotism, his Judgement, his Americanism, etc. I consider him, and most of the “Democratic” “leadership”, nothing but out, and outright Traitors for their disgraceful conduct during the past 7 years, against this President, the Troops, etc. But Hey, what would I know, I just served in Iraq the first time around in the Marine Corps, lived over their, speak their language, and have analyzed them for the last 30 years. - HotAir comment 7/25/08

Bailout Mania

Harry Reid’s statement shows me that the DEMS are scared $hitless. They don’t have the confidence to say we are/or are not voting for this and Barack believes this and he’s voting this way. NO! He’s telling us what McCain is going to do. He has no idea what McCain’s going to do! Someone else above said it right… I’ll believe it when McCain or at least someone from his own party or campaign tells us he’ll support it.
I repeat… the problem is, we don’t know the details. Who among us has read the bailout plan and would understand it if we read it? I would appreciate getting the chance to read it however. - HotAir comment 9/23/08

Same Story, Different Names

There is already a strong vocal populist opposition, Gingrich adds to it, and the democrats are instictively inclined to not do anything Bush wants done. The democrats have been effective in deflecting any responsibility for their own actions, and the democrats have so effectively destroyed the Bush Administration’s credibility that the democrats could just adjourn congress without being blamed for the results.[emphasis added] - HotAir comment 9/23/08

 The Long Confidence Game

Obama's 'Organizer' Buds Pushed for Bad Mortgages - NY Post 9/29/08

Obama and the Strategy of Manufactured Crisis
... He can be tied directly to a malevolent overarching strategy that has motivated ... the most destructive radical leftist organizations in the United States since the 1960s.... I submit to you that they [Democrats] understand the consequences... the goal is more malevolent - the failure is deliberate. Don't laugh. This method not only has its proponents, it has a name: the Cloward-Piven Strategy. - James Simpson, blogger and former White House economist 9/28/08

The Irony of a 2008 Dream Candidate

My Dream: President Bush appears on national television to give a speech. Standing next to  him are Dick Cheney, Mitt Romney, and Warren Buffett. Dick Cheney says, “I resign.” President Bush says, “I thank Vice President Cheneyfor his service. I appoint Mitt Romney to be Vice-President. He is a skilled financial manager. Just the guy we need right now.

Romney is sworn in as Vice President. President Bush starts talking again. “Right now America needs a leader. Due to my standing in the polls, regretfully, I have lost credibility with the American public. I hereby resign.

Romney is sworn in as President. Mitt Romney starts talking. “Secretary Paulson has done a good job, but people just aren’t listening to him. I hereby fire him. In his place, I appoint Warren Buffett as acting Secretary of the Treasury. I thank Mr. Buffett for serving his country in its hour of need.” Romney and Buffett then get the Paulson plan passed and FDIC insurance limits increased. Romney appoints Ed Morrissey as Vice President. America is saved." - HotAir comment 9/30/08

Too Late to Criticize

Oh, and NOW you want McCain to criticize GW Bush? Where were you when McCain bashed Bush and Rumsfeld in 2004 and 2005? Saying that was proof of what a horrible guy he was, for daring to criticize Bush? How about a few months ago when McCain visited LA with Gov Jindal, and (correctly) said that the Bush administration civilian response to Katrina was incompetent? How about when McCain criticized Chris Cox? Were you one of the people calling McCain a traitor for those criticisms? But you now expect him to take your advice and go on a full on crusade against Bush/Paulson/Pelosi?
Yeah, you want him to win." HotAir comment 9/30/08

Doomed

McCain seems to be resigned not to win. Just this morning, I woke up with the realization that he will not win this thing, no matter what we do. But we MUST vote for him nonetheless. The enemy is too strong to overcome. The Big Temptation of the Pied Piper is too strong to break. And America will follow him to the cave, and then, to Marxist servitude. Yet, we still have to make a stand. We MUST make a stand. - HotAir comment 10/5/08

Equal Opportunity Delusion

Why do the libs always believe that voting out irresponsible repubs automatically means wholesale acceptance of every whackjob democrat plan ever devised? Guess what, Rahm, 2000 and 2004 also saw two consecutive elections where the people “voted for change”, yet you and the rest of the left cried foul.
The libs ALWAYS make this mistake, this time it will cost us plenty before they are done.
Bend over, here it comes. - HotAir comment 11/19/08

Their Mess Now

And just what are you going to say when it all falls apart? “It’s all George Bush’s fault”? What is striking is how smug and clever these people sound right now. Come January, we’ll see how they face reality when it comes up and kicks ‘em right in the nuts.- HotAir comment 11/19/08

The Trouble With Voters

Remember that the voting public are practically brain dead zombies with an average 70 IQ... they go by impressions alone not policies.  - HotAir comment 11/19/08

Pre-Emptive Blame, Before Inauguration

High unemployement.
Low dollar value.
Low consumer confidence.
Gob’ment control of corporations.
I blame Obama. And on 1.20.09, I’ll blame him even more." - HotAir comment 1/9/09

Bambi’s got lots of super lefty ideas to choose from, we’ll all be up to our armpits in a glorious economy before long, I tell you. - HotAir comment 1/9/09

I wonder if the Obama supporters understand that the “you” might include your boss or employer whose company makes over $250,000? ...Wrap that all up in a pretty socialist bow and it’s no wonder that with the messiah in control the pink slips are flying out in record numbers. - HotAir comments 1/9/09

Extra. Over the top Tea Party video. Long on fear, very short on policy.

The Political Lie Machine: Dems caused the mortgage meltdown

I scoffed at this one at first. The idea that it wasn't the likely suspects (greedy bankers, greedy Wall Street execs, greedy mortgage brokers, useful fraudulent applicants, and pliant bond rating agencies), but those do-gooding Democrats, seemed ludicrous. Perfect for conservatives, since it moved blame off allies and potential donors and onto their favorite scapegoat. But ridiculous. But I heard it so many times, I had to find the truth.

Frankly, I wish someone with better financial chops than me would look into this question and give a definitive answer, apportioning blame fairly and accurately. However, there hasn't been a high-profile 9-11 type commission, so it's been open season for the usual political spin apparatus.

For the Republican lie machine version, let me paraphrase Kevin Hassett: Fannie and Freddie, pushed by the Democrats, sponsored huge numbers of sub-prime mortgages that allowed unqualified borrowers, many being minorities, to buy properties way more expensive than they could afford.

"Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans... Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened."

According to Kevin Hassett, Wall Street banks were just "bystanders injured in the blast" even though they originated sub-prime loans through legions of mortgage brokers and then securitized and sold them to unwary investors. Sure, bystanders. Hassett himself doesn't point out that there were large numbers of minorities, because he's wearing a Republican uniform, but sites like RenewAmerica.com do. Other mouthpieces trace the blame back to Jimmy Carter and the Community Reinvestment Act that tried to reverse banks' practice of red-lining.

For a rare balanced explanation, I had to search a lot, and finally found a readable one at FactCheck.org. They blame a long list, most of them on my suspects list: Federal Reserve, Alan Greenspan, Wall Street firms, Congress, the Bush Administration, Clinton Administration, mortgage brokers, buyers, real estate agents, certain accounting rules, and collective delusion that this wasn't a bubble. They absolve the repeal of Glass-Steagal, and don't even comment on the Community Reinvestment Act.

FactCheck.org doesn't discuss how the mortgage meltdown migrated to affect the entire financial industry, but that's where AIG and other speculators get involved. They sold the slice-and-dice packaged mortgage-backed securities, wrote insurance on the poorly vetted mortgage securities churned out by Wall Street firms, and betted on one or both sides using credit-default swaps.

Based on my research, this is what I think happened:

• The Carter through Clinton Administrations had programs to help lower-income buyers purchase homes. To support these programs, there was some relaxation of lending standards.
• Selling sub-prime mortgages became very profitable. Selling mortgage-backed securities was very profitable. Selling insurance on these securities was very profitable. Buyers of these securities didn't know what was in them, but knew that they paid higher returns than most bonds. Profit motive all around.
• So, these small programs opened the doors a crack, and Wall Street firms rammed their trucks through.
• Yeah, sounds like it was the Dems.

Fairly Balanced Sources: Mortgage Explanation Site, economics paper and Andrew Sullivan
Left and left-leaning: Barney Frank, Southern Poverty Law Center, NYRB, and McClatchey News
Right: Forbes, The Sun, House Republican, FreedomWorks
Non-expert right and far right: Yahoo question and white nationalist

Update 10/7/11: Per a comment from the Atlantic website: "Let's not forget the SEC saying okay to the banks to go with a 30-1 leverage..." Agree! How did FactCheck.org miss that one?

Update 12/18/11: Per a new report, house flippers also had a role.

Update 9/15/12. I'm still reading that it was the Dems' fault. I've had unsettled questions about how much the government was responsible for lowering mortgage underwriting standards. The answer is that government goals for lower income house ownership did loosen standards. However, it was the profitability of securitizing subprime loans that pushed and expanded those loose standards within the private sector:

More sources:  A short, readable summary from Wikipedia; a history of Fannie, and the source of the graph above; a conservative blames Barney Frank again using the same complaint that Fannie invented subprime securitization so everything afterwards is their fault.

Another update on 12/12/12 here. A few more facts, but nothing that shakes up the story. The Dems did more than "opened the doors a crack." But all the other factors are still also to blame.

History for Amnesiacs: Obama's recession

It irks me when conservatives say that Obama owns this economic mess. He came into office during the deepest recession since the Great Depression. The job losses were staggering. I don't know how an honest person can forget this. I thought the stimulus was the right thing to do, and I think it prevented an even deeper recession, though we can't be sure.

No one can turn our economy around on a dime. A deep recession like this, with a crisis in our entire financial sector, is not going to be fixed in one year or a couple years. This cancer grew for years, throughout Bush II's presidency, and for a while before that. This rot was characterized by dodgy mortgages and many other financial instruments like credit default swaps. It flared up in Enron's bankruptcy and the manipulation that caused the California power crisis in 2000 and 2001. How Obama could be responsible for all this is beyond me. Consider this: Roosevelt didn't own the Great Depression, even though it stretched through two of his terms.

If anyone owns this recession, it is Bush and the Republicans. They didn't rein in the financial and housing sector. There was plenty of evidence that fraud was permeating the sector years before the crash. I knew it based, amazingly, on reports on NPR and internet news. Anyone could get an income statement for any amount from an internet company, and use that fake statement to get a mortgage. If it's on NPR, why weren't there congressional hearings and congressional committee tightening up regulation and oversight? This is why I'm bitter when diehard Republicans or tea partiers blame Obama for the economy. I know it was screwed before he took office.

What's the fix for this financial dallying that has wreaked so much damage? It takes people with more financial knowledge than me to say. I can't analyze Dodd-Frank, and this blog isn't the place. Analyzing the blame-game, that I can do. So, I call bullshit on "it's Obama's fault."