<p>This will come as no surprise to anyone who has any actual knowledge of what drove the real estate boom and bust which led to the current economic morass. It wasn’t beleaguered lenders being forced by the government to loan money to unqualified homeowners, as some would insist; it wasn’t Barney Frank, the Community Redevelopment Act, or even Fannie Mae and Freddy Mac. It was private lenders loaning money to non-owner occupants - real estate speculators, who were in it for a quick buck and walked away en masse when prices collapsed. </p>
<p>I know this won’t do anything to offset the din of the “politically correct” version of events, which was that it was all the fault of government and poor people somehow, but facts are facts. It was investors what killed the economy, guv’nor.</p>
<p>Yes, investors had a role, but as the tables in that article show, non-investors (i.e., homeowners) still account for the large majority of loan originations, and large majority of defaults.</p>
<p>And there’s no real evidence provided that it was all people looking to flip the properties, especially among the people with only two mortgages.</p>
<p>More disturbing is the outright fraud on the applications, where a large percentage of buyers were lying about whether the property would be their residence. This can only be done with the tacit knowledge and cooperation of the mortgage person, and there was plenty of this going on on the FNMA side of the table too.</p>
<p>I believe I read the OP’s article as referring only to data on home purchases. Also fueling the crisis was the fact that a huge amount of the loans made by Fannie and Freddie during the last two years before the crisis hit were for refinancing, not for first time homebuying (which was supposedly the purpose of the Community Redevelopment Act and lax government standards in the first place). Due to rising prices, people took more money out of their home than their original purchase price! These people had homes; they used the increase in their homes’ value to fuel consumption. </p>
<p>I haven’t got time to look for a better reference, but this one from the 3rd quarter of 2007 states that 45% of all the mortgages given by Freddie Mac were refinances, with 87% of refinancers taking out new mortgages for at least 5% more than the old balances. I remember reading somewhere else that an even larger percent of all nonprime mortgages during the last two years before the crisis (80-85% over 2006-2008???) was for refinancing on homes. [Cash-Out</a> Refinance Share Rises in Third Quarter. - News Archive - Freddie Mac](<a href=“http://www.freddiemac.com/news/archives/rates/2007/3qupb07.html]Cash-Out”>http://www.freddiemac.com/news/archives/rates/2007/3qupb07.html)</p>
<p>The evidence - taken as a whole - is compelling.
Non-prime loans with small down payments drove the bubble. While there was some participation by first-time homebuyers, the driving force was investors. The safest loans, with more than 20% down, are disproportionately owner-occupant loans. The 35% of first mortgages nationwide (45% in CA, NV, AZ and FL) taken out by people who already owned a home were actually the driving force behind the expansion of the bubble.</p>
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<p>Almost everyone who bought a house in 2005-2007 is “upside down” now - homeowner or investor. Since there’s still twice as many homeowner occupied homes than homes owned by investors there are more homeowners upside down than investors. But it was the flippers who inflated the bubble and bailed when it popped who drove the boom-bust cycle, not struggling homeowners.</p>
<p>it was the banks which needed zillions of mortgages to turn into securitized debt. They didn’t care who the mortgage lenders lent to and neither did the mortgage lenders as neither were going to hold the loan. </p>
<p>Fannie and Freddie were not the problem. They came very late to the game and the dice had already been rolled by then. </p>
<p>I suggest anyone interested in this topic read Matt Tiabbi’s Griftopia.</p>
<p>I will tell you this: We were conservative retirement fund investors who put a lot of our IRA s into large cap-balanced fund (banks, GM, GE, FNM, AIG, etc) and where the banks/financial houses, inturn invested in the GSEs for the fact they were GSEs and giving nice dividends. LOST a bundle and ticked off far beyond mad. </p>
<p>I knew/saw/witnessed, what was happening. People would go to their bank for a refi or mortgage. Get a competitive bid from a Broker, WaMu, Countrywide, to discover that these firms were a 100+ basis lower than credit unions and local banks. And if the client said that broker found a even lower proposal, you can be guarantee that some document changes and misstatements were being made. All in the name of competition and nonregulation. </p>
<p>Your Bank that had a higher financing rate was just following good banking practices but their Trading Desk was buying as much of this faulty paper from the brokers/CW/WMU, as they can get.</p>
<p>“I don’t know the root of the problem, but I’ll bet $10,00I that it had something to do with the attractiveness of ARM’s.”</p>
<p>Pushed to be allowed by Greenspan, among other things he pushed through for the banks (like getting rid of Glass Steagall.) He played a huge part in the making of the financial meltdown.</p>
<p>Longprime - yes, investors got screwed but Fannie and Freddie were barred by law from bundling mortgages until very late in the game. The other banks were doing it years before. </p>
<p>Anyone who puts the blame on Fannie and Freddie doesn’t know the history of this debacle.</p>
<p>Kluge, your conclusion is nonsense. Where did the flippers get the money? Oh yea, the banks. Why did the banks lend the money? Oh yea, they had little choice but to lend under existing regulations at that time. </p>
<p>The cost of buying a house is often 3 to 5 percent of the purchase price or more. The cost of selling the house is 6 to 9 percent or more. No rational investor would buy a house, let it sit empty and then try to flip it a few months or even years later. The transaction costs would destroy the profit.</p>
<p>Real real estate investors buy distressed properties, rehabilitate the properties and then re-sell them based on the enhanced value. If the market price direction is upwards it simply reduces the risk of failure.</p>
<p>Nothing wrong with ARMS in themselves. The ARMS that are bad are the ones that were 100 LTV. </p>
<p>Dad at 84 got an ARM, consolidation loan, refi. What save him is the fact that the current libor interest rate is so low that his payments are less than the fixed interest period of his mortgage. If you really want to see a financial collapse, raise the 10 year bond prices up.</p>
<p>Dad, today, if he was again 84, could never get a refi/consolidation, not because of the LTV but because of his income, which is of course pretty much unchanged (retirement pension and SS).</p>
The “banks” (and the quotes are there because we’re not talking just about commercial banks, but also Wall Street investment firms) loaned the money because they were making a profit doing it. Many of the big players were not subject to any “regulations” which required or even encouraged them to have any involvement in residential lending at all. They did it for the profit, plain and simple. “The government made them do it” is a classic “big lie” that was invented to advance an agenda. </p>
<p>
Again, reality trumps theory. I know one investor who flipped a house before closing escrow on its purchase. He owned it for about 5 minutes and made a $30K profit (even he thought that was crazy, but what was he supposed to do?) Maybe he wasn’t a “real” real estate investor by your standards, but he bought and sold lots of houses, and made a lot of money doing it (up until 2007, anyway.) But it’s true most investors do plan on renting their houses out for a period before selling them; so what? That doesn’t change the fact that lots of houses were bought by investors with small down payments, subprime mortgages and a negative cash flow - and then walked away from when it became economically rational to do so.</p>
<p>It wasn’t the government. It wasn’t poor people. The people who caused the economic meltdown look a lot like most of us - affluent, entrepreneurial Americans, taking advantage of what appeared to be a good business opportunity, buying, lending, and facilitating both processes, with everyone making a profit.</p>
<p>It was not against the law for a bank to do its job and underwrite mortgage applicants.</p>
<p>The problem was not the government, but rather that the banks had no downside. The mortgage brokers made money if a loan went through; the bank made money if the loan went through; and the loans just kept getting packaged and resold upstream. The money was being made on the transaction itself, not on the quality of the loan.</p>
<p>Ultimately it is the “GREED” that caused the down fall. Either the owner occupiers or the flippers think Real Estate never will lose, the broker is happy to make the commission, the bank knows he can kick the can down the road, the developer knows the client is waiting on the line, the investment banker knows big money is in hand once the package is sold and the CMBS paper buyer likes the high interest he receives and it is SAFE…</p>
<p>Everyone became so GREEDY…American or non-Americans</p>
<p>The way I heard it:
The Big Bank that my brother is associated with made good mortgage loans with good underwriting. However, Big Bank had a subsidiary that did “proprietary trading” for its own account. Originally this subsidiary was to hedge BigBank’s loans/positions (reduces risk) or to facilitate transactions on behalf of banking clients. Proprietary trading is outside of banking regs, not in SEC jurisdiction, comptroller of the currency, Fed Reserve, and definitely not FDIC’s. So when proprietary trading was only packaging the Bank’s own loans-there just wasn’t enough loans and not much of a profit. So when the Head of Proprietary was told by the CEO to make more money, what does he do?</p>
<p>—He starts buying loans from other banks whose loans don’t make A grade, brokers who the Bank made business loans, brokers who inturn must make riskier loans at higher interest rates to cover the bank loan. This was a nice closed loop, that fed upon itself. The Propriety Traders eventually off loaded the packages unto Bank’s clients who wanted a higher return than Bank’s CDs but with A quality or better. The Paper however had a guarantee-If paper had too many defaults, the investor client could return the bad mortgage/paper back to the Propriety Trade, which was of course the Bank, which now had to place these bad and good mortgages on Bank’s books. When the loans made the Bank’s asset ledger, there had to be a Reserve account for bad loans. Of course there wasn’t enough bank depositors or investors to cover the flood of returning paper. </p>
<p>Greed, yes. But the Bank’s conclusion was that The CEO was outside his competency and wanted to prove he was a Banker. That the Head of Proprietary didn’t have the stuff to say No, and wanted a big bonus as he had in the previous years. Eventually everyone who was affected had a conclusion and remedy-and we still get MF Global, 8th largest bankruptcy, and sovereign state debt problems which was of course financed by commercial and investment banks/institutions.</p>
<p>A bubble can’t happen unless there is cooperation between buyers, sellers and facilitators (banks, agents, etc.). The bubble is fueled by the greed and delusion of many.</p>
<p>Many of the “big player” crooks at banks and Wall Street who contributed to our present day financial woes are still operating because maybe they are “too big” for understaffed and inexperienced federal prosecuters to successfully go after.</p>
<p>[Outclassed</a> feds should worry about Wall Street’s Too Big to Prosecute - St. Petersburg Times](<a href=“Business news”>Business news)</p>
Bring back Glass Steagall to limit speculative, unskilled risk-taking activity and to be able to regulate and monitor what is happening
Break up the banks from their non-lending subs; then they won’t be too-big-to-fail, and too complicated to monitor, run, or understand
Use reserve-setting requirements to limit bank’s activities
Limit inter-bank ownership, lending, investing, and—securities made of securities insured by securities re-sliced into new securities ad infinitum=way too much leverage and way too confusing too rate or monitor…</p>