Fed Reserve Knew Housing Bubble In Making in 2005

[roo_ster]

Government programs do not explain why a bank would loan, say, $300,000 on an asset that was obviously going to be worth less than that in a few years' time.  That happened with everyone's loans, not just government-promoted low income loans (which, btw, have a lower default rate than loans outside the auspices of the CRA).

There's no Government program that made it financially sensible to loan more money on an asset than the asset could possibly secure; the only possible explanation is either that the bankers were too dumb to realise it was a bubble, or they expected to be able to saddle someone else with the losses in the marketplace.

It's all well and good to say that the market corrects this, but when "correction" means ruining the entire financial system and impoverishing the country for the foreseeable future, it's time to reassess your chosen economic model.  That is precisely what was going to happen were it not for government intervention into the mortgage/security scam, which, again, had nothing to do with government-sponsored loans.

You're not being in the USA and only getting some info via the MSM and a few web sites has skewed your understanding.

For instance, my house has appreciated since the housing slump.  At roughly the same rate as before.  The kicker is twofold: my house did not appreciate as much as the houses in the CA & FL & Vegas markets did before the bust and our neighborhood has very few home owning low-income minorities of the sort the CRA (& associated gov't programs) tried to "help."

The housing bust is mostly in CA, FL, Vegas and a few other markets.  Not only that, foreclosures are concentrated in a a few zip codes in the effected states.

In my area, there are a few places where the housing values have slumped and it is predictable that they are in CRA-"helped" minority enclaves and McMansions at the edge of development, where one can drive 1/4 mile further and build new.

All causes lead back to gov't:
1. CRA & regulatory bullying
2. Capture/Corporatism with gov't (think Dodd & Bawney Fwank)
3. Fannie & Freddie
4. Risk evaluation of F&F bundled crap loans by entities pressured to rate them cheap
5. Land use regulation & construction regulation driving up cost to build locally

Accusing bankers & the market for this is like accusing Krupp & BMW for WWII.  They had no power to make national policy and had no gov't goons to threaten violence if they did other than the gov't desired.  They ended up instruments of gov't power & policy.

[De Selby]

Rooster, your latest post seems to contradict the point of the OP, which was that there was a housing bubble.  Now you're claiming there wasn't really, it was just a few areas and CRA loans (which were never a large percentage of the market, and, incidentally, have lower default rates than other loans.)

I was in the United States for the crash, but yeah, the widespread crash in home values is not an MSM invention, as your OP plainly states.  Neither is the percentage of homes which are now under water on their mortgages.  All of those homes whose mortgages are under water represent loans where the banker lent more money than the security could support.

The idea that banks couldn't influence policy, but poor minority neighbourhoods could, is simply preposterous.  It is so unreasonable as to be beyond discussion.

[Monkeyleg]

...have lower default rates than other loans.)

Source?

[De Selby]

Source?

http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf

Compared to other lenders in their assessment areas, CRA Banks were less likely to make a high cost loan, charged less for the high cost loans that were made, and were substantially more likely to eschew the secondary market and hold high cost and other loans in portfolio. Moreover, branch availability is a key element of CRA compliance, and foreclosure rates were lower in metropolitan areas with proportionately greater numbers of bank branches.

http://traigerlaw.com/publications/The_community_reinvestment_act_of_1977-not_guilty_1-26-09.pdf

Instead, our analysis of 2007 data indicates that the percentage of LMI applications that were originated by CRA-subject banks remained stable even in the climate of heightened scrutiny and wariness that prevailed. This finding contradicts the notion that compliance with the CRA is dependent on imprudent lending.

[Monkeyleg]

Thank you.

[Headless Thompson Gunner]

Government programs do not explain why a bank would loan,

Yes, actually, they do.

There's no Government program that made it financially sensible to loan more money on an asset than the asset could possibly secure

Yes, actually, there were, multiple of them.

That is precisely what was going to happen were it not for government intervention into the mortgage/security scam, which, again, had nothing to do with government-sponsored loans.

Yes, actually, it did have something to do with government intervention.  Quite a large something, in fact.

We've been over this before.  Your repetition of these same errors don't make them any more true.

[makattak]

Rooster, your latest post seems to contradict the point of the OP, which was that there was a housing bubble.  Now you're claiming there wasn't really, it was just a few areas and CRA loans (which were never a large percentage of the market, and, incidentally, have lower default rates than other loans.)

I was in the United States for the crash, but yeah, the widespread crash in home values is not an MSM invention, as your OP plainly states.  Neither is the percentage of homes which are now under water on their mortgages.  All of those homes whose mortgages are under water represent loans where the banker lent more money than the security could support.

The idea that banks couldn't influence policy, but poor minority neighbourhoods could, is simply preposterous.  It is so unreasonable as to be beyond discussion.

Every time we discuss this and every time I have to say:

It's not just CRA. It's three government sponsored "corporations" that buy up bad mortgages: FNMA, GNMA, FHLBB.

A bank is more than willing to give out a bad loan when it knows some sucker will buy that bad loan.

Government doesn't have to force people to do things with regulation such as CRA. It can also just tell the banks, "Hey, we'll buy all those bad loans and give them government backing!"

And, lo and behold, lots of bad loans result.

There's a reason we're looking at over half a trillion dollars to bail out Fannie and Freddie. (But of course, let's just keep demonizing the banks for responding to incentives.)

Again, and again, and again, incentives matter.

(And looks like HTG said things more succinctly than I did.)

[Headless Thompson Gunner]

I'd advise anyone reading shootinstudent's law firm studies to think critically before accepting what they say as correct or relevant.  He's posted them before, but repetition doesn't improve truthiness.

[P5 Guy]

I knew that and was asking "Where is all this money coming from?" in 02. My house for tax purposes went to 185k and is now down to 64k? I paid, too much in 1989 when I bought this house for 49k.
And I'm not the sharpest knife in the drawer.

[TommyGunn]

Rooster, your latest post seems to contradict the point of the OP, which was that there was a housing bubble.  Now you're claiming there wasn't really, it was just a few areas and CRA loans (which were never a large percentage of the market, and, incidentally, have lower default rates than other loans.)

I was in the United States for the crash, but yeah, the widespread crash in home values is not an MSM invention, as your OP plainly states.  Neither is the percentage of homes which are now under water on their mortgages.  All of those homes whose mortgages are under water represent loans where the banker lent more money than the security could support.

The idea that banks couldn't influence policy, but poor minority neighbourhoods could, is simply preposterous.  It is so unreasonable as to be beyond discussion.

DeSelby, the GOVERNMENT did the "arm-twisting,"  not the "poor minority neighborhoods."  When Janet "Sterno" Reno threatens to come after you if you don't start making more loans, you pay attention.
All this "bad debt" or "empty debt" got bundled with other financial devices and passed around.  Eventually, the house of cards all came down.

[Headless Thompson Gunner]

The idea that banks couldn't influence policy, but poor minority neighbourhoods could, is simply preposterous.  It is so unreasonable as to be beyond discussion.

This is priceless, the notion that bankers are all powerful and that it's inconceivable that politicians would use public policy to seek favor from poor people.

I think your remark, and the world view it embodies, sums up the overall error in judgment quite nicely.

[roo_ster]

Rooster, your latest post seems to contradict the point of the OP, which was that there was a housing bubble.

Not contradictory, but elucidatory.

Not too complex to begin with, but I'll boil it down:
Places that had fewer folks who got high-risk loans had less of a bubble to burst.

In my case, not only was there no bubble of the neighborhood's housing prices, but land-use regulation is relatively easy, there is more land to build on, and the state's economy is doing better than 48 or 49 other states. 

Localities that had the perfect storm of gov't interference in the many aspects of the housing market got to take it in the face, good & hard.
 
When newscasters with important hair state that, "Housing prices have fallen 26% since the housing bubble burst," that is across the nation as a whole.  In my neighborhood, they are up 10-20%.  In some neighborhoods in California, they are down 50+%.  Some condo blocks that have even lost their condo association, they are down 75%-90%. 

[roo_ster]

One reason that there is talk of a "nationwide housing bubble" is becasue the newswhores all live on the coasts, where there really was a monster bubble.  Places like Texas, Iowa, N Dakota...not so much.  We just get to pay for the moral & financial incontinence of the coasts.