The Housing Bubble: Whose Fault?
Now that the housing bubble is starting to burst, it's time to address the really important questions: whose fault was it? And who will wind up paying the bill? Congress has begun to line up on this issue.
It is now becoming clear that a substantial fraction of the mortgages issued over the last few years will go into default, along with the issuesrs. Foreclosures are increasing and the mortgage lender implode-o-meter is currently at 55.
Bloomberg reports that the bond holders should be liable:
- The top Democrat and Republican on the House Financial Services Committee said investors in mortgage bonds should be liable for deceptive loans made by banks.
Democratic Chairman Barney Frank of Massachusetts and Spencer Bachus of Alabama, the committee's highest-ranking Republican, said such legislation would discourage lenders from extending loans to people with poor credit histories by making it more difficult and expensive for the banks to sell the mortgages.
If you don't think that the bond holders should be left paying the bill, the tax payer is always a popular choice. Bloomberg reports that a bailout is being proposed:
- U.S. Senator Charles Schumer and other members of a key banking committee said the federal government should spend ``hundreds of millions of dollars'' to bail out subprime mortgage borrowers facing foreclosure.
Non-profit groups would distribute the money to help homeowners refinance loans they can't repay, Democratic Senators Schumer of New York, Robert Menendez of New Jersey and Sherrod Brown of Ohio said today at a news conference in Washington. All three are members of the Senate Banking Committee.
``We are just making a general proposal here that the federal government step in and help refinance'' delinquent home loans that ``would be in foreclosure soon if nothing was done,'' Schumer said.
Comments (18)
Joe D.
Lets see.......
Some less than ethical subprime lenders have or are going broke.
People who lied to get a loan are losing their homes because they couldn't afford the loan.
Investors didn't do due diligence and bougnt the securities supported by these loans are taking a huge loss.
Looks to me like the market is well into the process of cleaning up this mess.
I can't think of anything intellignet and civil to say about congressional bailout plans.
Sorry 'bout that.
Published: April 12, 2007 11:25 AM
Tom Rapheal
Less than ethical? How do ethics apply? These guys made investments under the influence of easy credit and lost when the Fed was forced to tighten up credit. I believe it is called malinvestment.
Published: April 12, 2007 11:32 AM
hz
Schumer said last month he will introduce legislation to establish a "suitability" standard to shield borrowers from unaffordable loans that are mathematically doomed to fail.
How about legislation to shield taxpayers from government schemes that are mathematically doomed to fail?
Published: April 12, 2007 11:53 AM
Brad
Certainly no tax bailout is an answer. My wife and I live in less of house than we can afford, not more. This is due to trying save as much as we can to be prepared when the ponzi goes broke. I certainly don't want to deprive myself to serve myself only to have it diverted to some spendthrift. The government inverst the whole tortoise and the hare, rewarding the hare even though it failed. I'm simply sick of trying to build real equity only to have endless games being played with it. I really don't have the feeling that I am building anything - it's all callable and reallocatable at any time.
Truth be told, we might as well join the party if where the ones who end up paying for it.
Published: April 12, 2007 12:01 PM
Harry Wood
How many industries would like to get the same treatment as Banks and Insurance? Socialize all losses (that means that the taxpayer pays) and privatize all profits. I will bet that Detroit would love to have this kind of arrangement right now.
Published: April 12, 2007 12:41 PM
Yancey Ward
Wow, it will only cost taxpayers "hundreds of millions" to bail out the parties involved.
LOL!
Published: April 12, 2007 2:02 PM
Yancey Ward
To be serious, now. The parties involved, the lenders and the borrowers, are the ones that should bear the costs of the malinvestments.
Of course, the problem is that the lenders are likely to be found everywhere, in pension funds, in 401Ks, etc. These people will demand a government bailout, as will the homeowners under water. I figure about a trillion or two dollars of new money will suffice.
Published: April 12, 2007 2:05 PM
David C
Lets set the record straight. 98% of the blame rests directly on the shoulders of the Federal Reserve banking cartel. They put an economic gun to the peoples head and effectively said "go into debt to buy a house now or get slaughtered by inflation". Money is not only for setting prices, but is a means of communication. And the Federal Reserve sent the message loud and clear "go into debt to buy a house now or else!". Maybe some individual borrowers and financiers lied to make a deal, but those lies are white lies compaired to the big huge gigantic one called the US dollar. And all the financial instruments that the EZ credit led to that lie to people about the risk they take too.
Published: April 12, 2007 10:37 PM
Mike Davis
So there is a problem in sub-prime lending. Does anyone believe that more government regulation is the answer? Does anyone believe that Chuck Schumer,whose economic knowledge is based on the old Soviet Union where there was no private ownership of housing, or Barbara Boxer, whose financial acumen does not extend to balancing a checkbook, can achieve a better solution than the market?
So a government bailout is a good idea? What about moral hazard?
The idea that investors were not informed of the risks does not really hold water. The securitization process involves rating by an independent agency, such as S&P, Moody's and Fitch.
They pay great attention to Loan-to-Value ratio, and penalize heavily no income documentation. Incidentally, the FICO score, the most commonly used credit score does not take income into account. Nor does it take into account race,gender or age given lenders the opportunity to turn down bad risk without fear of reprisals for discrimination or red-lining.
The investors (if they bothered to read the prospectus) new exactly what they were getting. They were just "yield pigs" who got slaughtered.
The key problem was not bad credit but the built in assumption that house prices (even in areas that had seen rapid growth in prices) would continue to rise annually at 5%. The idea behind interest only loans is that many borrowers want to cash out their equity. Many lenders do not want principal repayment - they have to turn around and reloan the money. So the market responds with a product that responds to the needs of lenders and buyers.
Of course - when the housing bubble burst (or even stopped inflating) the whole process ground to a halt, with borrowers unable to refinance (due to equity constraints) and unable to sell, and unable to make the increased payment.
Published: April 12, 2007 11:51 PM
Erasmus
The whole subprime mortgage fiasco has been blown totally out of proportion. While certain small segments of society use more subprime loans than average, the total percentage of all mortgages that are offered to subprime borrowers is only 15%. And of those 15%, not even the wildest estimates suggest that 4% will default. That's not 4% of all loans defaulting, that's just 4% of 15% or about .6% of all loans.
It probably won't come as any consolation to anyone who lost money, but the subprime element of the housing bubble is hardly the real problem.
Published: April 13, 2007 4:47 AM
David White
Erasmus,
So if the "subprime element" isn't the real problem, what is?
I say that it's the first evidence of a cancer that will eventually devour its host.
Published: April 13, 2007 7:21 AM
Ron Brown
Erasmus,
I think it's a mistake to believe that subprime borrowers will be the only problem.
With hugh amounts of money being thrown around for years at artificially low rates, with little or no prove of the means to repay, and believing that real estate values would always be increasing, there is every reason to think that significant numbers of middle and upper middle-class borrowers are in over their heads relative to their income and assets. As real or absolute home prices continue to fall more and more of these people will throw in the towel also.
After all, where does one draw an absolute line between subprime and the next tier of borrowers?
Published: April 13, 2007 9:56 AM
billwald
It was caused by people buying stuff they can't afford.
Published: April 13, 2007 11:05 AM
RogerM
The housing bubble itself isn't the problem. It merely reveals the real problem, which is the bad investments made as a result of the Fed's easy money policy. The problems in the sub-prime mortgage industry are just the first symptoms of malinvestment. As the rest of the economy reveals further bad investments and slides into the needed correction, or recession, neo-Keynesians will blame the sub-prime market because problems first appeared there, but sub-prime is not the cause of problems; it's a symptom of deeper problems. Legislators will propose remedies for the sub-prime problems when they should be looking for ways to rein in the Fed.
Published: April 13, 2007 11:51 AM
Michael A. Clem
It was caused by people buying stuff they can't afford.
But that's the whole point. As long as government can maintain low interest rates and easy credit, they CAN afford to buy. The trouble is that government can't maintain it because it causes malinvestment problems. What's the point of blaming the victims?
Published: April 15, 2007 11:27 AM
Bill Vernon
I say all private parties involved in such transactions, lenders, borrowers, investors, should be the responsible ones in this mess. Why should the taxpayer bail out anyone for their own stupidity. By not bailing out the responsible parties, we may begin to inject a sense of responsibility into the financial system.
Published: April 15, 2007 4:45 PM
Allan
This all comes down to Acorn and Barack Obama. Are you going to believe all the lies of his campaign or search for the truth?
Published: October 1, 2008 9:08 PM
Dave
Acorn and Barack Obama? You're not serious are you? Or are you just attached to the strings that John McCain and Sarah Palin want to pull you around by? Come on, look at it reasonably, and not how they "want" you to look at it. ACORN has been around for decades. I'll bet a person, such as yourself, can't tell anyone what ACORN does without Googling it or looking on Wikipedia. You're just shouting out the latest "campaign slogans" to suit your argument or point. ACORN is a community organizer's association that helps people register to vote. ACORN has been doing this since the 1970s. Now, don't forget, ACORN is the one that brought to light the fact that they had "questionable" registrations. Aside from all of that; voter registration fraud does NOT turn into voter fraud. Those are two completely separate things. Voter fraud is someone voting more than once, or producing a fake ID/IDs at various sites to vote more than once. Voter fraud is not voter registration fraud! Voter registration fraud is fake names filled out on a registration, and these "fake people" can never show up to vote; as they don't exist. So it does nothing to the actual voting process on election day except inflate the numbers that are on the rolls.
Of course, we're ignoring the biggest problem with your contribution to this forum....the fact that the issues with ACORN and Barack Obama's "campaign lies" have absolutely NOTHING to do with the housing crisis, the economic crisis, or the fact that you're a puppet for the Republican Party. That's right, stand up straight, say exactly what they want you to say, and leave your common sense and the ability to think for yourself at the door...you won't need it where you spew your Republican campaign talking points and incendiary rhetoric. "This all comes down to ACORN and Barack Obama". Yes, you truly are the revelation that we've all been waiting for. Thank you so much for setting the record straight.
Published: October 18, 2008 10:25 PM