There isn't one single cause of this crisis. Everybody throughout the mortgage system got it wrong from the homeowners to the bankers to Congress (and lots more actors), save for a few whistleblowers, such as Paul Krugman on the left, and Bush, McCain, and the WSJ on the right. Gross also doesn't mention that housing was bubbling all over CRA-free, Republican-free Europe and lots of other places, too.

But that doesn't let CRA or the GSE's off the hook. Their well-intentioned influence was malign, as compassionate policies so often are. Yes, a lot more people got to live in "their own homes" than before, and that's a good thing.

But CRA amendments steadily increased pressure on banks to lend to subprime borrowers, requiring ever-riskier terms (otherwise borrowers couldn't qualify during that era of zooming prices.)

And the GSE's were heavily pressured by Congress to compete with the inebriated investment banks for market share in the same deep end of the pool. My favorite quote along these lines was Barney Frank demanding that they "roll the dice a little" on mortgage terms, against the strong advice of people like Fannie's chief risk officer who got tossed for trying to spoil the party.

The SNL skit did a pretty good job of highlighting the incredible misfeasance of "all" of us during this period. Woe is us.

But that doesn't let CRA or the GSE's off the hook. Their well-intentioned influence was malign, as compassionate policies so often

Simply wrong. If the CRA were the problem we would have seen the problem manifest within 5 years of the CRA going into effect. Why? Because the cause of the current problem is complex interest and payment "resets" and baloon payments that kick in sometime between the 3 and 5 year period. Furthermore in mortgages longer than 5 years, enough equity has accumulated even at 3%/annum (and the real estate average is 6%) on a zero down Mtg, that the drop caused by the bubble bursting makes it a wash. You don't declare bankruptcy or "walk away" if your house investment is simply a wash.

The reality is that the CRA worked for 5,10,15 even 20 years with NO PROBLEM. BUT if we subtract out 4-6 years (foreclosure takes about 1 year+ reset period) from the current crisis, it puts the genesis of the problem into 2001-2003.

Now what changed in 2001 that was DIFFERENT than the 20 year succes history of the CRA? Well Glass-Steagal was repealled by the GOP in 1998/99. And the GWB administration appointed new regulators in 2001. And the regulators they appointed ignored many of the existing regulations. AND a GOP Congress with a GOP POTUS passed laws that ALLOWED the GSEs to be pressured (previously they were forbidden by law from investing in sub-prime loans).

Now many of us objected to this orgy of dergulation. Precisely because we understood how this undermined the system by destroying the free market.

So no, it isn't "woe is us". It is Woe to the GOP and the "greatest deregulator you will ever meet".

Simply wrong. If the CRA were the problem we would have seen the problem manifest within 5 years of the CRA going into effect. Why? Because the cause of the current problem is complex interest and payment "resets" and baloon payments that kick in sometime between the 3 and 5 year period.

So all the loans caused by the CRA were made a few hours after the law was passed?

There's something called momentum. People who grew up under the old rules and mind sets kept making good loans even after the rules were changed... but relaxing standards could (and did) have long term side effects.

It took a while for people to really learn how to exploit the rules, and Congress (i.e. Freddy and Fanny) figured that if a little was a good thing then more could only be better. So yes, the system didn't break when Congress pushed for home ownership... but suborning economics for politics isn't a good thing in the long term.

What we're seeing is like the Chicago flood in 1992(?). They'd cut maintenance and *nothing* happened for a long time, years I think... but eventually it catches up with you.

And yes, I'd say that the CRA was far from the *only* problem... but relaxing standards for home ownership helped set the stage.

It took repeated lawsuits and additional legislation to get even a fraction of the CRA intent to work as it was intended.

But of course not, CRA loans did not go into effect hours after the law passed. But 5 years? 10 years? yeah that's enough time. But that still puts us no later than the late 1980s. which means that by 2006 the AVERAGE CRA based loan had 15 years of equity growth in it. So lets assume that because they were depressed areas they only appreciated at 3% instead of the national avg for real estate of 6%. That means there is about 60% equity in the average CRA based loan (not counting the paydown of principle which adds roughly another 25%).

Loans with 60%-80% equity in them are not loans that trigger re-evaluations of the SIVs within which they are structured.

What we are seeing is nothing like the Chicago flood. Instead it is more like the Khmer Rouge. A catastrophe that follows the gutting of infrastructure due to misbegotten policy.

(i.e. Freddy and Fanny) figured that if a little was a good thing then more could only be better.

The historic facts contradict this belief. Fannie and Freddie did not get involved in the sub-prime mess until AFTER GOP deregulation under a GOP Congress and a GOP POTUS.

THE CRA was not even PART of the problem.

The historic facts contradict this belief. Fannie and Freddie did not get involved in the sub-prime mess until AFTER GOP deregulation under a GOP Congress and a GOP POTUS.

Let's just review history.

In 1995, Fannie Mae began receiving affordable housing credit for buying subprime securities. In 1999, the Clinton administration and Fannie Mae shareholders encouraged the lender to increase the number of mortgage loans offered to those of low and moderate income, both to improve rates of home ownership among those groups and to increase profits. <link>

Subprime borrowing was a major contributor to an increase in home ownership rates and the demand for housing. The overall U.S. home ownership rate increased from 64% in 1994 (about where it was since 1980) to a peak in 2004 with an all-time high of 69.2%.

The share of subprime mortgages to total originations was 5% ($35 billion) in 1994,[38] 9% in 1996,[39] 13% ($160 billion) in 1999,[38] and 20% ($600 billion) in 2006.[39][40][41]

So this mess seriously got moving in the mid 1990's, and yes, it was certainly *part* of the problem although there were certainly other multiple issues. Oh, and note that the CRA was a mutating animal. It changed several times.

If memory serves, the GOP tried a few times over the years to reform this but could never muster enough votes. Which isn't to say that Fanny didn't buy GOP Congressmen, they did... but ideologically this is more of a Dem thing. If we want to get all political, McCain was one of the voices in the wilderness trying to stop this (in 2005 I think). Vaguely I recall Obama was still a Fanny backer in early 2008, but that's from a biased source.

Blame the CRA all you want, the mortgages themselves have little to do with what actually went wrong on Wall Street. The rising foreclosures set off a much bigger-than-themselves avalanche through the financial sector. Mortgages of all kinds were pooled together, sold off and bet upon (I refuse to call non-ownership-based payout-policies "insurance," you have to own something to insure it) over and over again, so that one pool's defaults let to multiple payouts on that same set of mortgages--all while not having been regulated in those bets or even having the reserves to pay out if your bet was called.

So, you can lose a house once if you're the person with the unpaid mortgage, no matter what program got you that mortgage, but apparently you can pay out on the loss over and over again if you were on the wrong side of the bet.

Oh, and look at the number of foreclosures that are second homes in CA or FL or AZ. Here's one article about it: <link> . Doubt many of those were brought to you by the CRA.

Blame the CRA all you want, the mortgages themselves have little to do with what actually went wrong on Wall Street.

Yes and no. *HUGE* amounts of capital simply don't exist any more. Whether that's because a million dollar Tulip is suddenly worth only a few dollars, or because housing prices drop a lot, *someone* was invested and they lost money.

Given that most people buy and build houses on credit, popping this bubble was always going to kill some banks. Granted, slicing and dicing has made matters much worse by hiding who owns what, and also granted, the speculators also made matters worse.

But I don't see a way to prevent people from acting on greed. However lots of people thought that relaxing standards and ordering economic outcomes based on political desires was a bad idea.

First off, for this sort of issue, Wikipedia is not a sufficient citation.

Secondly there are multiple types of sub-prime mortgages. The definition of sub-prime is someone who has less than Good+ credit. The historic rate of default on this for CONFORMING loans is very low.

The problematic sub-prime mtgs were the ones that allowed more than 80% LTV, had 3 or 5 year "rate resets" and similar mechanisms where the actual mortgage itself was one in which the borrowers lacked sufficient cashflow to service the loan outside the initial introductory "teaser" period.

The CRA, nor Fannie Mae/Freddie were permitted to issue or acquire such loans prior to 1998/9. Prior to the deregulation of the mortgage industry, such loans DID exist but they were rare and were typically held and serviced by the specialized lenders that created such mtgs (HFC aka Beneficial, and special subsidiaries of Countrywide etc).

So the "sub-prime" loans in question with Fannie and Freddie were not the problem. Its not even given that we had a real "housing bubble". Its true that house prices started to exceed the ability of average income individuals to service the debt in 30 years, but that was more due to stagnation in the middle class wage than in any housing bubble. Construction costs currently are around $100/sq ft for average construction. That means a 2,000 sq ft house (not very big) costs $200,000 not counting the land. At the historic avg mtg rate of 6% and 20% down, that's around $1200/mo in payments. The gotcha is that the average income family with no other debts can theoretically afford $980/mo.

But that's necessarily a "bubble" because 10 years earlier, that same median income COULD afford exactly that house. The gotcha is that median incomes stagnated. Now if hat family is willing to foregoe some other expenses, they CAN afford that $1200. And that is what the change in Fannie lending allowed.

But what happened after banking dergulation in the late 1990s was that Solomon and others were allowed into the market. And they saw how lucrative the "hard money" part of the sector was (where HFC were playing). AND they were motivated by a huge influx of invesment cash from the booming APAC economies.

So they started rewarding banks and other lending organizations for packaging together CDOs without askeing the hard questions that HFC et al used to ask ( used a "hard money" loan in the early 1990s because of medical bills, and a deregulated "sub-prime" in 2002 as funding for a smalll business - paid off both). This resulted in a huge number of problematic loans: 100+% LTV, 3 and 5 year resets, Interest only, NINJA and Liar loans etc. These were packaged up and sold alongside the Fannie and Freddie "sub-primes" as equivilent.

But they were not equivilent. And as the 3 and 5 year resets kicked in, they caused a collapse of the CDO market. At which point Gresham's Law (that's what wikipedia is acceptable for as a reference, definitions), kicked in and essentially caused ALL SIVs (structured investment vehicles) to be valuated the same as the bad ones. This in turn caused some institutions to fail and others to simply lock up on short term lending.

Why lock up short term lending? Because banks are required to carry loan reserves. They typically carry this in "safe" interest bearing investments that can readily be converted to cash. Things like SIVs and other bond type vehicles. Except that as the SIVs have ceased to have a liquid market into which they can be sold, they cease to be able to be considered "loan reserves". Since the banks cannot call in their long term loans (mortgages) they can only make their reserves work by STOPPING LENDING on short term loans.

That means that Joe's Machine shop with 6 employees cannot get an Account's receivable loan to make its payroll with. So Joe's Machine has to lay off its employees. Who then cannot make their FANNIE mortgage payments, which then causes Fannie to get into trouble.

• IF the problem had been caused by the 1994/1996 relaxations on Fannie and Freddie, you would have seen the market die in 1999/2000. Yet that is when these problem mortgages only STARTED to boom.
• IF the problem had been caused by Fannie and Freddie, then bailing them out OVER A MONTH AGO would have fixed the problem.

NEITHER occured.

QED the problem was not caused by Fannie or Freddie or their 'sub-prime' mortgages.

The problem was caused by deregulation of banks and investment banks. This deregulation was a policy of, was pushed through by, and then subsequently mismanaged even worse by The GOP Congress and the GOP Bush adminstration.

Simply wrong. If the CRA were the problem we would have seen the problem manifest within 5 years of the CRA going into effect. Why? Because the cause of the current problem is complex interest and payment "resets" and baloon payments that kick in sometime between the 3 and 5 year period.

No. The balloon and other sub-prime loans could not cause a crisis until housing prices peaked. As long as housing prices went up, banks could absorb the comparatively few foreclosures. But once housing prices started to decline, the number of defaults accelerated and the bottom fell out of the derivatives market. Many, many analysts foresaw this problem. There was ample warning. Bush and the Senate Banking committee tried to address the issue in 2005. Greenspan, Volcker, and others recommended solutions as far back 1999. Even the partisan Paul Krugman identified the problem with lowered lending standards and runaway risk in the derivatives market.

And for the record, deregulation has NOTHING to do with the problem. The only significant deregulation in the last ten years has been the loosening of Glass-Steagall, and that has actually helped the current crisis by allowing investment banks to raise capital through conventional means.

The root of this problem is four-fold:

1. Democrats lowered lending standards in the primary consumer loan business.
   
2. Democrats and Republicans refused to regulate the mortgage derivatives market.
3. Democrats blocked any and all proposed regulation of the GSE's, most notably in 2005.
4. Democrats refused to allow Congress to clarify government's relationship to the nominally private GSE's, particularly with regard to guarantees.

First off, for this sort of issue, Wikipedia is not a sufficient citation.

Wiki had sub-citations on it, meaning they listed where they got that info themselves. And it's a bit crass to object to my sources and then provide *none* yourself.

The CRA, nor Fannie Mae/Freddie were permitted to issue or acquire such loans prior to 1998/9.

Source this, it conflicts with my (sourced) two minute research findings. ;)

Its not even given that we had a real "housing bubble".

Source this. It sounds like an absurd statement considering the growth in prices, the bubble itself, and numerous charts I've seen.

Construction costs currently are around $100/sq ft for average construction. That means a 2,000 sq ft house (not very big) costs $200,000 not counting the land.

The first problem with this line of reasoning it the percentage of people owning houses has gone up dramatically (see previous posts above). So on the face of it there are people getting loans and moving into houses that historically didn't.

The second problem is it assumes that house size hasn't gone up. I haven't checked but I'd guess that people are building bigger (and thus more expensive) houses.

The third problem is assuming that land prices haven't increased is problematic. Much of the building has been in more "desirable" locations, i.e. the coasts. Thus the increase in hurricane problems. Coast front land is expensive and has been getting more so.

IF the problem had been caused by Fannie and Freddie, then bailing them out OVER A MONTH AGO would have fixed the problem.

Unfortunately shooting the man who fired a gun doesn't do anything to the bullet he fired. F & F sold many of those securities to various banks, who in turn did their magic slicing and dicing.

IF the problem had been caused by the 1994/1996 relaxations on Fannie and Freddie, you would have seen the market die in 1999/2000. Yet that is when these problem mortgages only STARTED to boom.

Nonsense. This was a boom, when the first round of resets hit in 1999 it *didn't* *matter* because the underlying houses had "increased" in value and could be sold or refinanced without a problem. So it worked from 1995 to 1999.

This "success" attracted other people looking for more success, or encouraged the original people to recycle their money into the market (i.e. to keep refinancing their house to take money out).

Schufty: Bush and the Senate Banking committee tried to address the issue in 2005. Greenspan, Volcker, and others recommended solutions as far back 1999. Even the partisan Paul Krugman identified the problem with lowered lending standards and runaway risk in the derivatives market.

LeRoy: Some of us might be bemused by the fact that you label Krugman as 'partisan', but not Bush. It might be amusing to see what your definition of 'partisan' is. Krugman was almost certainly in line to get a Nobel Prize in Economics for his work in international trade theory, monetary crises, and economic geography, until he did indeed become highly politicized by the manifest failings of the Bush administration. [Many of us did.] Meanwhile, it has been amply documented that the Bush administration prevented many of the states from cracking down on predatory lending in the crucial period from 2003 to 2007.

First off, the wikipedia source you cited spoke of the 'conforming loans'. "conforming loans" did have a max size limit on them, but they also had 80% LTV and Good+ Credit requirements (and more than 1 year of employment etc.).

So your own source supports the fact that Fannie loans were not the problematic ones

>>Construction costs currently
>>are around $100/sq ft for
>>average construction. That
>>means a 2,000 sq ft house
>>(not very big) costs $200,000
>>not counting the land.

The first problem with this line of reasoning it the percentage of people owning houses has gone up dramatically (see previous posts above). So on the face of it there are people getting loans and moving into houses that historically didn't.

No. Cost of Construction has nothing to do with the percentage of people owning houses. Nor does the increase in percentage of people owning houses inherently mean that they could not afford those houses per se. Arguing this is arguing tautologically.

The second problem is it assumes that house size hasn't gone up. I haven't checked but I'd guess that people are building bigger (and thus more expensive) houses.

That's why I picked a 2,000 sq ft house. While that is a 500 sq ft increase over the houses of the 1940s, we could run the numbers for a 1500 sq ft house. Add in land and the $200k figure is where you come out at. And that means that the problem is not in the housing prices themselves, but the fact that median incomes have stagnated since the mid 1980s

The third problem is assuming that land prices haven't increased is problematic. Much of the building has been in more "desirable" locations, i.e. the coasts. Thus the increase in hurricane problems. Coast front land is expensive and has been getting more so.

Again, the land price is not germane. The Median House price in 2007 was $223k using cheap land prices of NON coastal places like the postage stamp lots of Levittown, that's still only a 1500 sq ft house - which is the historic size that you decry.

Again, the problem is the stagnation of the median income, not the 'bubble" in the price of housing.

Unfortunately shooting the man who fired a gun doesn't do anything to the bullet he fired. F & F sold many of those securities to various banks, who in turn did their magic slicing and dicing

Simply untrue. Fannie and Freddie sold their own securitized MBOs directly on the market. They had been doing so since their inception. Once part of an MBO, those mortgages could not be disaggregated and "sliced and diced".

The "sliced and diced" mortgages came from mortgage aggregators like Indy Mac.

Nonsense. This was a boom, when the first round of resets hit in 1999 it *didn't* *matter* because the underlying houses had "increased" in value and could be sold or refinanced without a problem. So it worked from 1995 to 1999

The housing boom was not big enough except in particular areas, to absorb a 3 year reset. Furthermore the 3 year resets only became prevalent after 2000. Again the history of these mortgages doesn't support your claim. I bought and sold 5 houses from 1996-2006. I watched as the type of loans available changed dramatically in 2001/2002.

Fannie Mae "conformity" was a big issue in 2000 when we had to scrimp to get in under the conformity limit. A year later it was no problem.

the dramatic change had nothing to do with Fannie and everything to do with GOP deregulation.

degsme:

The reality is that the CRA worked for 5,10,15 even 20 years with NO PROBLEM. BUT if we subtract out 4-6 years (foreclosure takes about 1 year+ reset period) from the current crisis, it puts the genesis of the problem into 2001-2003.

Now what changed in 2001 that was DIFFERENT than the 20 year succes history of the CRA? Well Glass-Steagal was repealled by the GOP in 1998/99. And the GWB administration appointed new regulators in 2001. And the regulators they appointed ignored many of the existing regulations. AND a GOP Congress with a GOP POTUS passed laws that ALLOWED the GSEs to be pressured (previously they were forbidden by law from investing in sub-prime loans).

Funny that in all the major influential events from the 2001-2003 timeframe you specifically mention the Glass-Steagal modification in 1999 (passed by a GOP congress which lacked the partisan votes to block a filibuster or overturn a veto, and signed by Bill Clinton whose party affiliation escapes me at the moment....). Even funnier that you left out the reduction of the prime lending rate to 1% which loosened up lending at every level, especially mortgages and which most knowledgable people consider to be the primary factor (with an assist from non-regulation of derivatives) behind the creation and inflation of the housing bubble in the first place.

No. Cost of Construction has nothing to do with the percentage of people owning houses. Nor does the increase in percentage of people owning houses inherently mean that they could not afford those houses per se. Arguing this is arguing tautologically.

Lowering standards, gov pressure to expand loaning... tautological isn't the word I'd use. "Post hoc ergo propter hoc" perhaps but where there's smoke...

And that means that the problem is not in the housing prices themselves, but the fact that median incomes have stagnated since the mid 1980s...

Now who is arguing tautologically? Of all the causes out there, this seems the most off subject. What you're really saying is that home owner percentage rates should have been going down, not up.

The Median House price in 2007 was $223k

In 1994 the median was $130k (average $154.5K) and in 2007 the median was $248k (average $313.6K). <link>

The housing boom was not big enough except in particular areas, to absorb a 3 year reset.

And those "particular areas" would be the ones having (and causing) so many problems now, right? And a few posts ago you were claiming there was no boom.

And that means that the problem is not in the housing prices themselves, but the fact that median incomes have stagnated since the mid 1980s...

Now who is arguing tautologically? Of all the causes out there, this seems the most off subject. What you're really saying is that home owner percentage rates should have been going down, not up.

No, what I'm saying is that it was not surprising to see owners leverage themselves more highly to get houses. But that cost would have been transfered to the average person whether they owned the house or rented because the cost of construction went up, hence the cost of housing went up.

The housing boom was not big enough except in particular areas, to absorb a 3 year reset.

And those "particular areas" would be the ones having (and causing) so many problems now, right

Actually no. Those areas (Seattle, Hollywood, Northern Va, downtown Philly) are all doing pretty well. In the eastside suburbs of Seattle, housing prices are on their way back up even though 'time on market' is up.

The places suffering are the areas where the economy is either heavily financial, or heavily small business.