Middle Tennessee, TN · Member since 2015 · 102 posts · 17 votes
I just finished watching The Big Short, a movie about the real estate bubble. I enjoyed the information in the movie but I was very let down by the fact that they never acknowledged the fact that subprime mortgages were pushed on the American people under the tired guise of racial and minority discrimination. It was this trump card (no pun intended considering today's political climate) of discrimination that allowed the no-contest argument against solid reasoning, labeling anyone against such subprime mortgages a racist or prejudice. I feel this would have been an immensely important lesson to learn so that it could be applied to so many facets of society and politics today.
Well I was in the thick of it back in the day.. both as a HIGH volume real estate agent ( owned and office and had a team) and HML in the Deep south. so I think I can speak to this a little.
For the CA borrowers it was all credit score driven... and just like today were you see posts I live in LA but need to invest other places.. lenders made those loans far to easy for folks who eventually lost the assets..
in the DEEP SOUTH and I mean Mississippi can't get any more deep south than that I was the largest hard money lender in the state for many years doing 300 plus loan in Jackson a year. for fix and flippers who sold not only to investors for rental purposes ( see above almost all out of state) to homeowners..
the issue that caused much of this is CRA never mentioned and most don't know what it is .. its the Community Reinvestment ACT that Clinton put in.. it basically forced banks if they wanted to work in certain areas they MUST provide loans for the citizens who live there... Now you take Jackson which is 70% or more AA and average credit score of 600 state wide.. and you force banks to make loans to those in the communities and you had a bunch of folks that probably did not know enough about finance's and homeownership and had a history of not being able to manage their personal finances buying homes when they should not have in the first place. I got one line of credit from Community bank in Jackson for 1 million dollars to use for my HML's and I got it because they could book at as CRA because I was lending on Jackson properties it worked great for them they could book a big fat CRA loan and lend to a guy like Me.. LOL which is not a sub prime borrower but funds were going to sub prime neighborhoods.
The banks know were the foreclosure clusters are.. a friend of mine works for company that that is all they do is analyze risk by demographic and geographic areas they can tell a bank up front basically what they will deal with with defaults and how much to put aside.
There were PLENTY of high wage earners 700 plus ficos in CA that got wiped out.. and they also borrowered as Chris pointed out ( crappy loans) because of the RE craze.. it was all over the place.
No one got paid more for issuing a loan to a Latino, Asian American, or African American just based on race. EVER. But thank you for bringing that notion up, so I could shoot it out of the sky like a duck flying directly towards me.
They got paid more for originating sh-ttier loans with "features" that screwed the consumer. You put 10 beers in anyone originating loans 2005-2007 (I was not doing this at that time), and you will learn that VERY quickly when they start talking about getting paid three times as much on a $200k "ghetto loan" deal as they did on a million dollar 30 year fixed loan (after including all the bonuses for all the sh-tty "features" of the $200k "ghetto loan").
Folks that are self-conscious about their credit and how their work history will be viewed, for various historical reasons, are more likely to either be persons of color or folks often termed "trailer trash." So these older loan originators would beat them up about how "you know, I'm trying to work with you, but blablabla means we have to have this sh-tty feature in your loan..." - and the more you beat them up, the more you got paid!!! (Again, I was not in lending back then, this is what the old guys tell me when I lubricate their voice-boxes with alcohol)
So LOs could f-k persons of color and "trailer trash" waaay more easily with garbage loan features, and get paid more. That is what happened, in the trenches. In my part of the country it was generally persons of color and Wells F or BofA, in your part of the country it was generally persons often termed "trailer trash" and XYZ Home Mortgage or ABC House Funding.
So.... I'm afraid that you've got it exactly backwards, my friend.
You are of course entitled to whatever ideological belief that you wish.
Middle Tennessee, TN · Member since 2015 · 102 posts · 17 votes
10y
If by ideological belief, you mean truth, then yes, I do subscribe to that. There were seemingly endless articles and stories run on how many loans were "turned down" to some and "approved" by others and the reasoning given was racial statistics, which were skewed. So you may be talking about what went down after all the cogs were moving, but what prompted the motion of those cogs is what I'm referring to, but thank you for the insulting, disrespectful and dismissive attitude, it lends a lot to your character and credibility.
I wasn't dismissive. I was stating facts. Re-read my post, it was a series of factual statements.
It is unfortunate that you have decided to believe that it's "dismissive" or "disrespectful" to observe that you (apparently) hold the ideological belief that persons of color and those commonly called "trailer trash" have not been f-cked hard, repeatedly, by the financial services sector, but your choice to hold an ideological belief has... nothing to do with reality or "truth".
Buddy, I'm in the financial services sector. When there was f-cking to be done, my friends were the ones that did it. I hear the things said after you pour a bunch of booze down their gullets. Persons of color and white trailer trash are the ones that get screwed. Period.
You can ONLY make this into a "vote trump!" race thing if you can prove that white trailer trash does not exist.
Can you prove that white trailer trash does not exist? I didn't think so.
Middle Tennessee, TN · Member since 2015 · 102 posts · 17 votes
10y
I think you've missed the point entirely. Of course bad loans were given to everyone, regardless of race, social status or credit rating. Of course poorer people were preyed upon. That's because it wasn't actually about race, social status, or credit rating. Of course the poor and financially uneducated were taken advantage of. You see, wall street had run out of good, solid mortgages to package and they needed more mortgages to bundle and sell and so they need to get banks to start issuing supprime, risky loans that will still be rated highly. How did they get this ball rolling (rhetorical)? How did they sell millions of really, really stupid loans right in front of everyone's faces? Because it was handled, on the macro level, by saying that certain sections of people were being rejected for loans on the basis of race, creed and economic status. The "trailer trash" and "people of color" were being discriminated against, so they MUST be given loans too in order to make the world equitable. That was the pill that was sold. Once it was swallowed and bad loans were being sold to everyone with a pulse, of course it didn't matter the race or social status of who wanted a loan, because it wasn't REALLY about that. I'm not sure how else to explain this. We are talking about two ends of the same horse. I'm talking about the hay that went in one end and you're talking about the fertilizer that came out the other.
Contractor · Round Rock, TX · Member since 2013 · 767 posts · 389 votes
10y
I don't think there was a concerted effort to offer loans to any certain racial segment of our population. More to a certain financial segment. Unfortunately, there is a larger percentage of the population of color that fall into this lower financial segment. Sadly people of all colors in this segment do not have the education or understanding to see that they were getting screwed, they were sold on the American dream of home ownership and played into their emotions to buy a home even though they could not afford it and didn't do simple math. When you have a house payment of $1500 a month and your income is $2000 a month, it's not going to take long until you can no longer afford it. Or one of my favorites, the 2-1-1 buydown loan. Unfortunately, the income didn't rise as fast as the property taxes did and they were soon sunk within 2-3 years
Real Estate Agent · Brooklyn, NY · Member since 2015 · 231 posts · 66 votes
10y
Brandon G.
Chris M.
I didn't read through your comments more than twice but it didn't seem like you guys are arguing. Brandon, I read about half of that article and it definitely got my mind thinking. Thanks for sharing.
Have a good one!
Real Estate Agent · Brooklyn, NY · Member since 2015 · 231 posts · 66 votes
10y
Brandon G.
Chris M.
Ok. So maybe you guys are arguing a bit. But I would like to lend credence to the belief that the government may have unwisely pushed the banking institutions to lend in unsafe practice. If the government creates a quota, then surely banks will do all that they have to to meet those quotas.
That being said, Chris seems to have come into contact with people who immorally took advantage of specific segments due to their lack of knowledge. I find that very believable. It doesn't take more than the abilities to screw someone for people in the business world to go ahead and act unethically.
Thank you all for sharing your opinions. Let's try and keep BP the upbeat forum it is.
Have a great Day!
I just finished watching The Big Short, a movie about the real estate bubble. I enjoyed the information in the movie but I was very let down by the fact that they never acknowledged the fact that subprime mortgages were pushed on the American people under the tired guise of racial and minority discrimination. It was this trump card (no pun intended considering today's political climate) of discrimination that allowed the no-contest argument against solid reasoning, labeling anyone against such subprime mortgages a racist or prejudice. I feel this would have been an immensely important lesson to learn so that it could be applied to so many facets of society and politics today.
For references, I refer anyone interested to this book, which itself cites sources for its source material for statistics. http://www.amazon.com/Housing-Boom-Bust-Revised/dp/0465019862/ref=sr_1_1?s=books&ie=UTF8&qid=1457247632&sr=1-1&keywords=the+housing+boom+and+bust
(edited because I linked to the wrong book)
Check out a flick called, "The Inside Job". I'm sure you'll find it enlightening, at the least, possibly even enraging...
Google it. You should find multiple links to watch it on-line, possibly even download it.
It's on YouTube: https://www.youtube.com/watch?v=D9ub25WjEK0 If you have Real Player Downloader, you should be able to download it and convert it to MP4 (plays in Windows Media Player) if its not in that format already.
Watch the banksters squirm as they confess - on camera! - to causing the crash.
David J Dachtera
"Success is not a destination. Failure is not an event. Success is a process, failure is a choice." - DJ Benedict
I just finished watching The Big Short, a movie about the real estate bubble. I enjoyed the information in the movie but I was very let down by the fact that they never acknowledged the fact that subprime mortgages were pushed on the American people under the tired guise of racial and minority discrimination. It was this trump card (no pun intended considering today's political climate) of discrimination that allowed the no-contest argument against solid reasoning, labeling anyone against such subprime mortgages a racist or prejudice. I feel this would have been an immensely important lesson to learn so that it could be applied to so many facets of society and politics today.
For references, I refer anyone interested to this book, which itself cites sources for its source material for statistics. http://www.amazon.com/Housing-Boom-Bust-Revised/dp/0465019862/ref=sr_1_1?s=books&ie=UTF8&qid=1457247632&sr=1-1&keywords=the+housing+boom+and+bust
(edited because I linked to the wrong book)
The good doctor himself, Thomas Sowell.
I agree, that it played a part, a large part at that.
But from a movie stand point, it's just not enough time. Honestly, it'd be better off as a mini-series, and could get into the meat of the situation.
Keep in mind they HAD to use clever tricks of explaining the features and nuances of the instruments being used for lay people. Adding predatory lending, which they pretty much gleamed over besides the Florida scenes (which were exaggerated, if not fictional all together; not in the book), would have made it too inside baseball for lay people.
It was very much a us vs. them type movie. Racial predatory lending would have lost that.
You have the right idea, but it wouldn't have fit with this specific movie, but it is deserving of some type of expanded viewing in a different movie, or medium all together.
Well I was in the thick of it back in the day.. both as a HIGH volume real estate agent ( owned and office and had a team) and HML in the Deep south. so I think I can speak to this a little.
For the CA borrowers it was all credit score driven... and just like today were you see posts I live in LA but need to invest other places.. lenders made those loans far to easy for folks who eventually lost the assets..
in the DEEP SOUTH and I mean Mississippi can't get any more deep south than that I was the largest hard money lender in the state for many years doing 300 plus loan in Jackson a year. for fix and flippers who sold not only to investors for rental purposes ( see above almost all out of state) to homeowners..
the issue that caused much of this is CRA never mentioned and most don't know what it is .. its the Community Reinvestment ACT that Clinton put in.. it basically forced banks if they wanted to work in certain areas they MUST provide loans for the citizens who live there... Now you take Jackson which is 70% or more AA and average credit score of 600 state wide.. and you force banks to make loans to those in the communities and you had a bunch of folks that probably did not know enough about finance's and homeownership and had a history of not being able to manage their personal finances buying homes when they should not have in the first place. I got one line of credit from Community bank in Jackson for 1 million dollars to use for my HML's and I got it because they could book at as CRA because I was lending on Jackson properties it worked great for them they could book a big fat CRA loan and lend to a guy like Me.. LOL which is not a sub prime borrower but funds were going to sub prime neighborhoods.
The banks know were the foreclosure clusters are.. a friend of mine works for company that that is all they do is analyze risk by demographic and geographic areas they can tell a bank up front basically what they will deal with with defaults and how much to put aside.
There were PLENTY of high wage earners 700 plus ficos in CA that got wiped out.. and they also borrowered as Chris pointed out ( crappy loans) because of the RE craze.. it was all over the place.
I think it's always funny when I see some study or whatever that defines FICO > 640 or FICO > 680 as "good credit" and then starts comparing borrowers to borrowers from there, or infers that some neighborhood is being targeted for higher interest rates.
Erm, excuse me, pardon me? *raises hand,* ya, call on me. Thanks. I hate to be the bearer of news, but 640 and 780 FICO scores are not both "good credit" that you can apples to apples compare Mr Academic.
Lenders do still, more or less, target regions with interest rate pricing. I've seen rate sheets that say "Bay Area and Hawaii Rates" and "Bay Area and LA/SD Rates" and things like that. I think it's more for the larger loan amounts = more profit = less need to require discount points for the same rate/FICO/purpose/DP scenario.
Funny thing is they look at where my branch is, not where the house is, so I get to do some pretty sexy things lending in rural CA. :) They spank me if I out-compete a local branch of my same company, though, and it's not hard to figure out that Loan Originator Joe in the Eureka branch pulled Sally's credit two weeks before I did from my Bay Area office, so I have to be careful.
Taken to the extreme, I have a coworker that used to be at Wells, and thus could lend nationally (big banks excluded themselves from all blame for the recession, so they have zero education/training/testing requirements and can all lend nationally, which is bonkers but that's another story). Same basic thing with the regional interest rate pricing though, but on a national scale, and again they looked at where her branch was and not where the homes were. So she did a LOT of business in the midwest and in the South when she was at Wells and could do whatever she wanted with no licensing or testing requirements.
Middle Tennessee, TN · Member since 2015 · 102 posts · 17 votes
10y
Hey Jay, that's essentially what I was referring to. The second link I listed specifically mentioned the Community Reinvestment ACT (CRA). I never really mentioned who the loans were actually loaned to. I don't think race or anything else mattered to the people actually making the loans other than the fact that once those junk loans were allowed to be made many of them were required to make a quota, as mentioned above, to certain "minority groups." I don't think it really matters what part of the united states you look at, in as much that Chris seemed to think that race and location in the united states were linked to who was target for bad loans. I think everyone was targeted, but nationally speaking, it was the government that used it's power to push loans on people and specifically minorities. So, again, the people making money from giving the loans could care less what color or section of society the loan was going to as long as they money, except for the quotas they had to fill in order for the government to allow their bank to continue to play ball.
Brian, I'm going to have to respectfully disagree that the movie couldn't have included the portion of what happened concerning government forcing racial quotas on banks. I agree it was an us versus them, but I think this would have been a good way to extend the "it's the government and the banks versus us" angle. I may be wrong about this, but I feel that I can see it as entirely possible, and in my opinion, I think it would have been a very important part of the movie because if they could have linked how damaging those racial quotas were then perhaps we could have shed some light on other areas where these quotas are also damaging.
I don't think it really matters what part of the united states you look at, in as much that Chris seemed to think that race and location in the united states were linked to who was target for bad loans. I think everyone was targeted, but nationally speaking, it was the government that used it's power to push loans on people and specifically minorities.
The pre-recession sharks would 100% target whoever they deemed easy "marks," more or less using stereotypes in that determination, local to wherever they happened to be.
Again, no one got paid more because of anyone's race. They got paid more for issuing crummier and crummier loans, and it coincidentally happened that "white trash" socioeconomic status, and many persons of color, were often deemed easier to target because of stereotypes.
If it just so happened that some government quota was met, that's fine and dandy.
It could very well be the case that senior management folks figured out that by paying loan originators bonuses based on how trashy their loans were, government quotas might be easier met. That 100% could be the case, so I think there are both "push" and "pull" factors at play here.
Certain groups would "pull" loan originators in by virtue of being easy targets for garbage loan features, so it's pretty clearly "more money for crap loans" pulling originators into those neighborhoods. Management would "push" loan originators on those groups by paying bonuses for crappy loans, and in turn it could be the case that the CRA nudged them in that direction.
One interesting, and positive, consequence of the Great Recession was the Loan Originator Compensation rule. Now, it's illegal to pay loan originators any sort of bonus or incentive based on profitability of the loan or type of loan or any of that. Fines are in the hundreds of thousands of dollars, per violation (so if you're caught with your pants down on 500 loans...). Most companies switched to compliance with that rule, knowing it was coming, before they were required to. Including mine. I am very grateful that I've never had to face the moral hazard of management trying to bonus me for writing loans with garbage features, so thanks to everyone in this thread that is the voting sort, for helping make that happen.
So that's a "positive" thing that happened as a result of the Great Recession, for whatever it's worth.
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y
Some of the realtors I work with that I most admire, are former lenders that said "this is nonsense, unethical, immoral, and dishonest, I can't compete and be an honest player in this environment" and thus... quit lending and became realtors.
If you ever stumble upon a realtor that is a former lender, and you ask when she made the switch, and she says 2005 or 2007, that should be a huge item in the "Pro" column in your head!!!
If he says, by contrast, 2013 or 2011, that might be something worth asking about. Was he too stupid to pass the new written test (a LOT of former lenders, it turns out, were too stupid to pass a test related to lending... please re-read that statement :P )? Are the "no more crappy loans" guidelines just to difficult for him to navigate? Not smart enough to talk to people with FICO scores over 575? Etc.
I'm just not much of a conspiracy guy. The very definition of conspiracy being more than one person damned near makes it impossible. It's hard to find 2 people who can keep their mouths shut. I think race is thrown out there entirely too often as a way to sensationalize a story and get the headlines. I agree with Jay about how banks had to make loans available to certain areas to do business there and those areas had high concentrations of minorities. Were there some unscrupulous guys out there taking advantage of people? Hell yeah.
Brandon G.
Chris M.
Ok. So maybe you guys are arguing a bit. But I would like to lend credence to the belief that the government may have unwisely pushed the banking institutions to lend in unsafe practice. If the government creates a quota, then surely banks will do all that they have to to meet those quotas.
As far as I know there were no quotas. What there was was a lot of deregulation which allowed for these kinds of predatory loans.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
10y
Your not going to regulate away greed or corruption, you are just going to redirect it through more convoluted avenues making it more sophisticated. Locally our boneheaded senator Jeff Merkly brags about adding another 2,000 pages to Glass-Steagall, do you think that adding more rules than anyone can adhere to is going to help or just facilitate more incidious fraud?
Residential Real Estate Broker · Beaufort, SC · Member since 2016 · 53 posts · 41 votes
10y
Confirmation Bias --- The tenancy to search for and consider information that confirms one's beliefs
Put another way: If you go looking for Big Foot with the belief he exists......chances are you're going to find evidence he does.
Brandon, IMO, for whatever reason you're afflicted with a case of Confirmation Bias related to racial/minority discrimination. Are you trying to save society by teaching them "an immensely important lesson" by playing the "race card" while using the dynamics of the housing boom/bust as your lesson vehicle??? If so....then you hitched your wagon to the wrong lesson vehicle.
Over the years I have thoroughly enjoyed reading and learning about the housing boom/bust and the related financial crisis. It's one of my favorite subjects. The Big Short and The Housing Boom and Bust, are just two of the many books I've read and also own. Mr. Sowell has written an excellent book that I've read multiple times. It's a book that never finds it way back to the book shelf. I keep it nearby and refer to it often. With that in mind I recommend you go back and re-read Mr. Sowell's book again. Because it appears you missed the boat the first time around and failed to read Chapter 2. To begin with, pay close attention to the following:
Page 30, Chapter 2, The Politics for the Housing Boom
Page 31, the section titled "Affordable Housing"
Page 36, the section titled "Lowering Lending Standards" >>>>> The Community Reinvestment Act of 1977
In reading your 2nd post (in response to Chris M) you speak to..... endless articles and stories run on how many loans were "turned down" to some and "approved" by others and the reasoning given was racial statistics, which were skewed >>>> I'm pretty darn sure your comments are related to the housing boom/bust of the 2000's.....correct? If so....then you're late to the party, so to speak >>>>> see below......
Page 37, paragraph 2..... Mr. Sowell does write about the "approval rates" for blacks and white. HOWEVER, that information came from studies in the early 1990's !!!! Almost a full decade before anyone had even heard of a so-called housing bubble. He goes on to write: "pressures began during the George HW Bush admin and escalated during the Clinton admin, when AG Janet Reno threatened legal action against lenders whose racial statistics raised her suspicions".
IMO:
The housing boom/bust and related financial crisis resulted from a "Perfect Storm" of numerous dynamics. Such as:
Governmental Policy (laws, acts, committees, and "affordable housing")
The Fed (monetary policy, interest rates and easy money)
Federal Agencies (Fannie/Freddie/HUD)
Lending (easy money, non-conforming loans, No Doc loans, Ninja loans)
Fraud (everywhere? Ahhh, pretty much)
Wall Street (Derivatives...especially new esoteric CDS's, CDO's, etc., and ALWAYS GREED)
Rating Agencies (not understanding how to rate CDS's, CDO's, etc., beholding to WS Banks)
As you can see, there's plenty of blame to go around. With that in mind, the more you read and study this subject the more you'll come to realize this was not a story about race. Lastly, should you decide to continue to focus on race you'll miss out on the lessons learned and doomed to repeat it.
Your not going to regulate away greed or corruption, you are just going to redirect it through more convoluted avenues making it more sophisticated. Locally our boneheaded senator Jeff Merkly brags about adding another 2,000 pages to Glass-Steagall, do you think that adding more rules than anyone can adhere to is going to help or just facilitate more incidious fraud?
Right now, the pendulum is 100% opposite of where it was during the events depicted in that film.
I've got a doctor out there house-hunting right now. He has a contract that says he makes $20,000 per month even if he just sits around doing nothing, and gets a crap ton of bonus on top of that, that I can prove he's been getting on a consistent basis for over a year. His real income is about $45k/month, consistently and conservatively.
The max number on his preapproval letter is based on about $14k/month in income, because it just so happens that his employer felt that 1099 would be more tax beneficial for them than W2. That is literally the only reason, because his employer wanted a tax benefit.
Now, that's a freaking high-earning doctor with a black-and-white contract saying "$20k/month + monthly bonus" and a FICO score north of 800. Reality: $45k/month. "Qualifying" income: $14k/month.
How do you guys think it is for the struggling single parents out there, that make decent money & want some stability for their family that you can't get as a tenant in the Bay Area? It's tough to walk into my office with all the paperwork I asked for, and leave with a preapproval letter, in hand! Way harder than it needs to be.
And I'm not even talking about all the BS paperwork I have to hit you up for once your in contract! A "letter of explanation" to explain that you got a new cell phone 2 months ago because they pulled your credit? Yes, I really need that. You guys get a lot of mortgages, have you ever thought about just how completely ridiculous we've gotten with this stuff?
As landlords, it's good for our forum members that those decent income struggling single parents are forced by dumb regulations to permanently be tenants, but as people I think we could all agree we need to chill the F out with our regulating the mortgage industry. We can't let it go back to 2007, I 100% agree, but we've gone too far in the other direction in 2016.
Brandon thanks for starting a great thread and even bigger thanks for recommending a Thomas Sowell book @Brian Lacey. If I could give one piece of advice to anyone in the world, real estate investor or not, it would be read every Thomas Sowell book. It's basically like taking the red pill in the Matrix. Start with "Basic Economics" and go from there.
Regarding an accurate depiction of the causes that fuelled the housing bubble... I always like to point out the fact that the US had never had a prior housing bubble. Many factors potentially went into creating it:
1. greedy bankers?
2. greedy mortgage brokers?
3. CRA?
4. no more Glass-Steagall?
5. fed/interest rates?
6. Fannie Freddie?
7. ratings agencies?
Since we never had a previous housing bubble something had to of changed to cause this one? Although it's popular for people and films to blame "greed" it's tough to argue that caused the bubble because that would mean people just all of a sudden became exponentially more greedy.
So what did change? Glass-SteagalI and CRA. I'm not saying low interest rates, ratings agencies, FF didn't play a role I'm saying they existed long before so I'm not sure they were the catalyst.
I'd say it started with the CRA, then was fuelled by the fed lowering interest rates. Then FF, Glass-Steagall and the ratings agencies came on board to assist. Finally the animal spirits kicked it into high gear.
IMO you've got to put the majority of the blame on the GSA/CRA and the fed. New laws were the only variables that didn't exist before and at the end of the day, it's an issue of excessive credit, and you can't have excessive credit without artificially low interest rates.
I don't know the secondary debt markets like @Jay Hinrichs and @Chris Mason so I'd be curious to hear their opinion on the roll Glass Steagall and Fannie/Freddie played.
I don't know the secondary debt markets like @Jay Hinrichs and @Chris Mason so I'd be curious to hear their opinion on the roll Glass Steagall and Fannie/Freddie played.
George
The repeal of Glass-Steagall was something a bit above my pay grade, so I'll stick to Fannie/Freddie.
For the longest time, Fannie/Freddie were the two queens. They competed with each other as for-profit private sector actors, as designed, and all was good for homeownership. No one else on the planet has, or has ever had, "30 year fixed, low interest rate" as the norm, that's an awesome American thing.
All was well in the Shire, the two queens competed. As a loan originator, I look at a borrower's credit/income/assets. If Fannie or Freddie will buy this loan on the secondary market, it's going to Fannie 90% of the time because she has slightly better rates most of the time - but the difference is minor enough that a consumer will never notice. There are niche situations where Fannie wont do it, so I go to Freddie. So I send business to Fannie, or Freddie, or maybe FHA or VA, as appropriate for the situation. All is well in the Shire, the hobbits are playing, everyone is happy.
And Freddie still has pretty respectable guidelines, to be clear, so there's nothing "toxic" about a Freddie Mac loan, it just means some stupid box is checked in a slightly different way.
Then all of a sudden there were other debt buyers on the secondary market, backed with MBS money. A stout dwarf suddenly arrives in the Shire. This MBS money had all sorts of crazy, stupid, and lax guidelines. Turns out that dwarfs like to drink, and do stupid things! And the MBS loans had crummier rates. But, boom, now all it takes is a pulse to get a mortgage! So the folks doing what I do sent business to them, and Fannie/Freddie started losing business, even though Fannie/Freddie had the better rates. Realtors loved that the originators had these 100% reliable loan products ("Pulse? Check, loan approved"), and they're just picking the lenders with the best reliability. And this MBS money would actually pay more money for crummy loans than for good ones! So it's quite the confluence of events.
Remember that we said Fannie/Freddie are for profit enterprises. And now they are losing business. The business referral sources, ie the loan originators, weren't sending them business! They could get paid 3-5x as much for doing a MBS loan with crummy features, with 30% of the work, so they just shoved everyone into MBS and away from Fannie/Freddie.
So Fannie/Freddie started lowering their standards to compete. But they still offered sexy Fannie/Freddie interest rates. And on, and on, until what started with a random dwarf appearing in the Shire became Smaug destroying your mother's home and biting your cousin's head off.
So, here's the question. Can we connect Glass-Steagall (or whatever else we want to blame) to that dwarf appearing, ie the arrival of MBS money offering to buy up loans, and pay more money for crappier loans? If we're following the money, we need to zoom in on the phenomenon of paying MORE money for CRAPPIER debt.
If you didn't have entities paying more money for crappier debt, I firmly believe that the Great Recession would never have happened.
To the best of my knowledge, there was no government edict that commanded the private sector to do this, nor was the government subsidizing any of this private sector MBS activity if a quota was met. Find some thing, and establish a firmcausalrelationship between that thing and the phenomenon of paying more money for a crappier product suddenly being a widespread practice. There, now we've resolved the question of what we can blame the recession.
So, BiggerPockets.com, I ask you: What is that thing?
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y
One caveat:
That MBS money could have just been used to purchase fannie/freddie debt. A lot of the secondary market consists of people saying "I've got $50m and will purchase the next batch of Fannie Mae loans, paying 2% more than Fannie" -- so obviously that next batch goes into that MBS pool.
That's what those people do now, but back then they decided it was more profitable to purchase crappy products than gold standard traditional Fannie.
Investor · Simpsonville, SC · Member since 2013 · 184 posts · 71 votes
10y
The repeal of Glass-Steagle made it possible. Unfortunately institutional MBS investors depended on ratings and were thus deceived having no way of knowing the debt was bad. The bubble was made possible by the repeal.
