Should the US Government subsidize homeownership even more?

[Metaliturtle]

I work for a smaller financial institution (A Credit Union) that has always had very conservative lending policies, particularly in the case of mortgage lending. We haven't had a foreclosure since the 1980s because of some basic principles.

1. Prove you can afford the monthly payment (afford means that you don't need to run up a credit card to survive) we use pay stubs or W2s for income verification.
2. Prove you can save money (by having savings on deposit, or by putting a substantial down payment on the home)

It's larger institutions that gave $500,000 loans to people who had no business with them that caused the trouble.

Can government legislate sound lending policies? No. There will always be loopholes and exploits, or else there will be no lending. It would be better to allow the large banks that took the risks to fail, causing every financial to review its policies and create better practices.

As far as home-ownership is concerned. It should be viewed as a privilege and not a right. People who can afford them will have them and people who can't afford homes will get to learn what it takes. Giving irresponsible people more money is just irresponsible.

[chequita guevara]

It's not about giving irresponsible people money. It's not like scam artists thought, oh, I'll go convince some lending company to give me a half million dollars, without a credit check or proof of income. The scam was on your industry's side of things. Especially when you had companies like Countrywide which were duping people into taking out loans they couldn't afford and throwing out documents allowing customers to refi without penalty. The worst was forcing people who could afford regular mortgages into subprime ones.

[Victor Galis]

The problem was that certain disreputable lenders made loans they knew would not be repaid, then sold them off to unsuspecting third-parties, thus eliminating their own risk. Essentially they started making money on a transactional basis with no risk based on the long terms performance of the loan.

[Ben Kenobi]

Based on these recent responses, combined with the statements by many, in dozens of other threads here, I am forced to conclude that the terms "Republican" and "Ben Kenobi" can be used interchangeably.

I suppose I should post in this thread now?

C'mon Jrabbit. I know you don't like me, but can you at least confine it to threads that I've posted in?

As for the topic at hand, it's a mix of deregulation and over regulation. They would have been fine, had they not induced banks to do sub-prime loans. They would also have been fine had they retained some of the depression-era regulations that were built to prevent some of the abuses that we've seen. Oddly enough, I'd blame Bush for not undoing the Clinton-era messes he inherited in both these aspects, as well as for the earlier stimulus.

As for the bill in general, Porkulus has no benefit for the American taxpayer other then increased debt which will eventually have to be repaid.

[Darius871]

We haven't had a foreclosure since the 1980s because of some basic principles.

I call BS, even good borrowers occasionally have unforeseeable disasters. Unless you've just gotten a ton of deeds in lieu of foreclosure in that timeframe.

[Kuciwalker]

Or they could be really, really small.

[Kuciwalker]

The problem was that certain disreputable lenders made loans they knew would not be repaid, then sold them off to unsuspecting third-parties, thus eliminating their own risk. Essentially they started making money on a transactional basis with no risk based on the long terms performance of the loan.

This was equally the third parties' fault. They used massively incorrect models for the risk, and got their comeuppance.

[Velociryx]

This was equally the third parties' fault. They used massively incorrect models for the risk, and got their comeuppance.

You mean...they got their bailout.

-=Vel=-

[Kuciwalker]

[Naked Gents Rut]

There were however, a number, of acts passed which greatly loosened regulations on banks and financial institutions.

Name them.

[Victor Galis]

This was equally the third parties' fault. They used massively incorrect models for the risk, and got their comeuppance.

That's true to a certain extent, but the people selling stuff to them misrepresented what they were selling and got ratings agencies to back them up with unwarranted ratings for said securities.

As I said, there's plenty of blame to go around. I would lay a lot of it on ratings agencies, originators of terrible loans, and the borrowers that knowingly took on loans they had no means to repay.

[Dinner]

John McCain and Barack Obama's presidential campaigns are pointing fingers at each other's political camps over who were the architects of a 1999 banking deregulation bill many cite as reasons for the current financial and mortgage lending mess on Wall Street.

The 1999 Gramm-Leach-Bliley Act broke down barriers between banks, securities firms, mortgage lenders and insurance companies. That deregulation repealed Great Depression-era bank regulations with the approval of former president Bill Clinton.

The Gramm bill encouraged lending during the strong housing market but has put banks, investment houses and insurance companies in peril since the housing bust which started two years ago. The measure allowed those lending money to sell off those loan portfolios to other companies, thus disconnecting the lending risk.

The Obama camp points out that former U.S. Sen. Phil Gramm was a key architect of the banking and lending deregulation. Gramm is a McCain economic adviser eho could be in the Arizona Republican's cabinet. Since his Senate days ended he has also worked for investment bank UBS.

http://www.bizjournals.com/phoenix/stories/2008/09/15/daily81.html

In the autumn of 1929, a frenzied decade of stock speculation came to a dramatic conclusion when companies on the New York Stock Exchange lost roughly 40 percent of their value in a two-month period. At the time, only two percent of Americans held equity positions in public companies.

So why did the banks collapse?

Because the mostly unregulated American banks used their uninsured deposits on equity bets in the stock market. When share prices collapsed, the savings of depositors evaporated. By 1932, one-fourth of American banks no longer existed, and nine million Americans had lost every dime. During the Great Depression, national unemployment reached 26 percent.

In 2000, outgoing Sen. Phil Gramm (R-Texas) attached a 262-page rider to an appropriations bill to deregulate derivatives trading and other complicated financial instruments like collateral debt obligations.

This was the effective nail in the coffin for the FDR-era Glass-Steagall Act, which put into place a number of banking regulations and created the Federal Deposit Insurance Corporation. The purpose of the Glass-Steagall Act was to prevent a repeat of the crash of 1929.

http://www.charlestoncitypaper.com/gyrobase/Content?oid=oid%3A52634

The first quote deals with the Financial Services Modernization Act of 1999 which allowed banks to own insurance companies and other financial companies such as credit rating agencies. Why is this important? Because it resulted in situations where the people selling dodgy Mortgage Backed Securities ended up also owning the credit rating agencies who inflated the ratings on these MBS give them an investment grade AAA rating when they really, really didn't deserve such a rating. In essence we had institutionalized conflict of interests where the sellers were rating the credit worthiness of the crap they were selling so the higher they rated their crap the more said crap was worth thus the company had a financial incentive to inflate the rating of their own products. A clear problem and an old one which the Glass-Seagal Act tried of 1929 tried to prevent.

Next we have Phil Gram's massive 262 page rider attached to an unrelated appropriations bill which specifically deregulated and put outside of the control of the SEC a whole host of "innovative financial instruments" including collateralize debt obligations which MBS are one of. This is important because it prevented standardized best business practices among issuers of MBS so buyers often misunderstood or were deliberately deceaved by what was exactly in their AAA rated MBS. Some of those AAA rated MBS only had 0.1% AAA rated debt and a huge slice of low quality subprime debt while others had up to 30% high quality debt but because there was no standardized way of presenting exactly what the mix was and in fact since there was no legal obligation to even disclose what the exact mix was it got abused. In deed some bad actors deliberately attempted to hide what low quality crap they had bundled together and then gave an AAA rating and sold for top dollar. This is all the direct result of the deregulation Phil Gram snuck in to an unrelated bill in the dead of night. The man should be shot.

[Dinner]

BTW this unregulated market in MBS was THE KEY reason why institutions started offering No Income No Job No Asset (NINJA) loans because the company originating these low quality loans would make a fat fee they would charge the guy taking the NINJA loan but then they could totally get out of the risk of the guy defaulting simply by bundling it into a MBS, have their in house ratings agency declare it AAA, and then sell it on to some foolish investor. Since there was no transparency in what was in the MBS or how it got rated AAA investors were just left to either accept the AAA rating or not. Most did thinking they were still protected by some sort of regulation not knowing these items were completely unregulated.

That's how a middle man could originate lots of NINJA loans and then pass the risk on to someone else while they kept the profits. Because of the complete lack of transparency in a deregulated market and because the captive in house agencies were handing out high credit ratings to what was essentially junk debt. All of this is the result of deregulation.

[Naked Gents Rut]

How is a bill that passed in 1999 the fault of Bush and the Republicans? Clinton was President then.

You're also wrong about derivatives. They were never regulated, so "deregulation" can't be blamed for the problems with them.

Because it resulted in situations where the people selling dodgy Mortgage Backed Securities ended up also owning the credit rating agencies

This is also incorrect.

in fact since there was no legal obligation to even disclose what the exact mix was it got abused.

As is this.

[Dinner]

Proof please. I have cited real newpapers not blogs so please do the same.