The Mortgage Mess Explained Simply

[Hooper]

I caught this on NPR today

http://thisamericanlife.org/Radio_Ep...px?episode=355

It is an excellent in that it explains the frenzy that the world of mortgage backed securities became over the last 5 years. If anyone is confused about the how and why we are in this catastrophe today, and wants s simple, interesting understanding of it, this is well worth your time to have a listen.

[ProfessorM]

Love this American Life. One of my favorite public broadcasting shows. I like to get it as a podcast on my IPOD. I will check it out as I have not heard it yet. Thanks

[Hooper]

Originally Posted by ProfessorM

Love this American Life. One of my favorite public broadcasting shows. I like to get it as a podcast on my IPOD. I will check it out as I have not heard it yet. Thanks

I am in my car all day long and I have become a recent convert to NPR from "regular" talk radio, I don't think you'd ever hear an anaylsis like this one on any other station.

[RIJIMMY]

I read the transcript, great stuff - thanks hooper

[justplugit]

Good stuff, Hoop, Thanks.

I liked the quote-" Everybody deluded themselves,thinking they could throw out the old rules of banking."

We never,ever, would been involved in this mess if the old rules weren't thrown out, imho.

My understanding of the old rules of needing 20% down to obtain a mortgage and a limit on the amount you could borrow determined by your income was part of the Glass-Spigel act.

That act was thrown out during the Clinton Administration, allowing no down payment and inerest only payment loans. From what i see it was to make houses affordable to everyone and therefore a political move to get votes.

Looks to me like we were sold out for votes.

I would still like to know who initiated and threw out the Glass-Spigel act.

Can anybody shed any light on that? I have sent my congressman the question of who and why,but feel it will be awhile before i get an answer.

[striperman36]

Phil Gramm

[Mr. Sandman]

I have not listened to it yet but I will... but the one thing I don't understand, I have read in several places...while the amount of mortgage failures is large, the percentage of "bad" mortgages compared to the total is not. It is something like 10% of the mortgages which are bad, many of which could be restructured and only about small % are really bad. I don't understand how something less than 10% of the bad mortgages can cause this total collapse of these huge banks.
Also,they write off these as worthless...which they are not. There is a house that is worth something, it is not zero. It may be 20-50% less than a few years ago but it is not zero.

[spence]

Originally Posted by Mr. Sandman

I don't understand how something less than 10% of the bad mortgages can cause this total collapse of these huge banks.
Also,they write off these as worthless...which they are not. There is a house that is worth something, it is not zero. It may be 20-50% less than a few years ago but it is not zero.

The issue is that as the loans were lumped together and sold off in a bundle, they don't really know where the risk specifically is.

The government plan looked like it meant to buy blocks of risky loans to take the liability off of the lenders and sort it out themselves.

-spence

[Mr. Sandman]

Yeah, I understand the intent of the rescue package but I don't understand how when 90+% of the loans are sound how it could get to the point where you loose big banks like this. IMO this is largely psychological...probably a "vast left-wing conspiracy" to gain votes somehow
Honestly though, I hope this ship can be righted and sail on. It is very unnerving to watch play out... I am trying to concentrate on important things, like fishing.

[spence]

Originally Posted by Mr. Sandman

Yeah, I understand the intent of the rescue package but I don't understand how when 90+% of the loans are sound how it could get to the point where you loose big banks like this.

Well, it looks like the ones who were holding a large % of the riskier loans are getting hit the hardest. People were looking for new investments, and the credit default swap allowed for investments into securities that wouldn't normally be attractive.

Additionally the scheme gave companies false confidence that they didn't need to protect themselves from a large percentage of defaults.

So the economy slows down, foreclosures skyrocket, and the lenders don't have the resources to pay the bills for those holding the liability on the loan. It's like any business, at the end of the day you either need to have a black balance sheet or credit to get a loan. Lacking either and you can't keep the lights on.

At least, that's how I think it happened.

-spence

[striperman36]

Sounds about right to me.
I still don't think a 'shoot from the hip' bailout is the best way to go, glad to see some step back and think about it.

[spence]

Originally Posted by striperman36

Sounds about right to me.
I still don't think a 'shoot from the hip' bailout is the best way to go, glad to see some step back and think about it.

The risk of course is that investors, who need confidence, just were reminded that our government is inept. My fear is that we could spiral down quickly further and make solving the problem more difficult.

McCain sure looked stupid claiming a personal victory before it was all said and done. But my real anger is toward the House Republicans. The fact that they would submarine the bill because Pelosi made a silly partisan comment is absolutely pathetic. She also needs to get control of her own side of the House.

-spence

[Slipknot]

Originally Posted by justplugit

Good stuff, Hoop, Thanks.

I liked the quote-" Everybody deluded themselves,thinking they could throw out the old rules of banking."

We never,ever, would been involved in this mess if the old rules weren't thrown out, imho.

My understanding of the old rules of needing 20% down to obtain a mortgage and a limit on the amount you could borrow determined by your income was part of the Glass-Spigel act.

That act was thrown out during the Clinton Administration, allowing no down payment and inerest only payment loans. From what i see it was to make houses affordable to everyone and therefore a political move to get votes.

Looks to me like we were sold out for votes.

I would still like to know who initiated and threw out the Glass-Spigel act.

Can anybody shed any light on that? I have sent my congressman the question of who and why,but feel it will be awhile before i get an answer.

http://www.investopedia.com/articles...603.asp?Page=1

Conclusion
Although the barrier between commercial and investment banking aimed to prevent a loss of deposits in the event of investment failures, the reasons for the repeal of the GSA and the establishment of the Gramm-Leach-Bliley Act show that even regulatory attempts for safety can have adverse effects.


Dave, very good question
I bet they will be a while getting back to you
Maybe I should raise the question to my congressman as well
I don't think many around here have a clue what or how clueless Barney Frank is he is part of the problem, time for him to be part of the solution or join the unemployed

[justplugit]

Originally Posted by striperman36

Phil Gramm

Source ,and what cronies joined the fray.

[striperman36]

Originally Posted by justplugit

Source ,and what cronies joined the fray.

The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102, 113 Stat. 1338, enacted 1999-11-12, is an Act of the United States Congress which repealed part of the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

[justplugit]

Thanks, good stuff. Got some reading to do.

"Vote paves way for financial services modernization. " Pfttt- in this case it should of been -"No road like the old road."

[striperman36]

Originally Posted by justplugit

Source ,and what cronies joined the fray.

The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102, 113 Stat. 1338, enacted 1999-11-12, is an Act of the United States Congress which repealed part of the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.

[Nebe]

Originally Posted by spence

At least, that's how I think it happened.

-spence

Something else to consider is that the higher reevaluations in the housing market was a windfall tax income for just about every town in America and helped shore up major budget shortfalls across the nation. That being said, it was in everyone's interest to see house prices go up- the home owner felt rich and the towns were taking in more property tax.

I feel like someone just pushed the reset button......

[rwilhelm]

Originally Posted by Nebe

Something else to consider is that the higher reevaluations in the housing market was a windfall tax income for just about every town in America and helped shore up major budget shortfalls across the nation. That being said, it was in everyone's interest to see house prices go up- the home owner felt rich and the towns were taking in more property tax.

I feel like someone just pushed the reset button......

Yeah I remember in 2005 when my house was reevaluated and I my taxes took a big jump up. This year they just did the reevaluations and my assessment stayed the same. This is what sucks because there is no way I could get what my house is assessed for in today's market. But of course towns and cities will never lower your assessment! The only people the housing crisis helps right now is first time buyers. If your are a first time buyer you can get a great deal.

[fishpoopoo]

the repeal of glass steagall is irrelevent.

the types of instruments that initially got us into trouble were $2 trillion of sub-prime mortgages underwritten from 2002-2007. that's the countrywides, indymacs, and wamus that didn't have investment banking operations to speak of.

this is all a symptom of the money supply being ballooned by that idiot greenspan.

take a look at this chart. from 1987 to present, greenspan and his protege bernanke more than quadrupled one measure of the money supply, while at the same time, the economy (not pictured) only doubled.



this constant increase in the money supply - which was intended to lower interest rates, encouraged investment banks like bear stearns and lehman and insurance companies like AIG (neither of which had any commercial or home lending operations) to assume huge amounts of leverage - loans and derivatives contracts that were 30-60x a firm's capital. because the fed gave them a false sense of security by keeping rates low. if the fed had not meddled, you would have seen a natural deleveraging process (slow down loans and derivatives contracts) occur.

because leverage only works for you when the market is going up. on the way down, it bites you in the arse.

all this talk about regulation is really moot. the real culprit is the federal reserve.

[fishpoopoo]

as for the origins of the sub-prime mess, see attached. greenspan spiking the punch bowl was the monetary gasoline on the fire.

note date of article and presidential administration.

see paragraph 8. it is prophetic.

http://query.nytimes.com/gst/fullpag...gewanted=print

September 30, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

[Mr. Sandman]

I still think this is way over blown. There are 14 trillion in GOOD loans in which they are making money on. 2 trillion are bad...but they are BACKED BY REAL PROPERTY, they are not worthless. OK, I grant you they are not worth what they were but even discounted at 50% would be conservative. They are not worthless as they are being written off as. Did they just leverage the bad loans? if not they leveraged the good ones too.

IMO (clearly I am no economist) the real problem started with the 110% financing with no docs...that was insane. I never understood that logic...but then again I am no mortgage broker. I can tell you where I live every illegal on this island jumped on that...the good thing this event has flushed them out like bad water in a clogged toilet.

Frankly I am not a fan of the bail out. If I go to Las Vegas and loose who bails me out? I don't care about the fall out. Let them take it in the ass. If it caves in the entire global markets so be it, as long as they loose their ass. That is how I feel.

[fishpoopoo]

sandman, bad mortgage loans are a drop in the bucket compared to the $1.4 quadrillion global derivatives time bomb that is ticking away.

[Nebe]

quadrillion?? dang.

[fishpoopoo]

yeah, that's a thousand trillion.

now you know why the banks around the world are acting funny.

[Nebe]

amazing. I have learned a ton lately... lots from you and lots from simply paying attention.

simply amazing.

[fishpoopoo]

it's gonna cost $5 trillion to clean this up (on our shores).

not $700 B.

and you wonder why the stock market is tanking.

[Nebe]

wow.

no....double wow

[fishpoopoo]

yeah, i wasn't kidding when i posted a few days ago that i threw up thinking about this.

i don't think the american public gets the magnitude of the mess (but it seems to be reflected in the daily stock market carnage).

you know, this is a mess 20+ years in the making, largely perpetrated by the federal reserve. NOT CLINTON, NOT BUSH.

whoever ends up winning the election is gonna have their hands full.

i genuinely feel sorry for him, there's not much he can do, unless he hijacks the federal reserve and SHUTS DOWN THE PRINTING PRESSES.

[Nebe]