What prompted the "financial institutions" to invest in bad mortgages?

[BuyingThyme]

It's my understanding that they've had the "right" to "speculate" since 1999, when the Glass-Steagall Act was repealed by Gramm-Clinton.

But, from what I'm hearing, the "financial institutions" didn't really decide to invest aggressively in garbage loans (no-down etc.) until just a few years ago. Is that right?

If so, what happened just a few years ago that made them so "speculative" all of a sudden?

Was it the Fed's persistent cutting of interest rates? Was it a wink-wink lack of oversight?

(Give me a break. I don't understand this stuff.)

[dmallind]

1. the more house prices increased

the more attractive these speculative gambles were.

Peak acceleration in home prices was a bit after 99 IIRC (although not definitive - just a guess on this part of it - might just have been that they needed time to assimilate the opportunities and jump in. Financial markets are quite faddish and bandwagon-driven)

[BuyingThyme]

7. So, they way you see things, there were two bubbles?

And the no-down bubble was stacked atop a pre-existing legitimate market bubble?

(What's 99 IIRC?)

[dmallind]

No - just a different rate of bubbling

I really should check this as it's based entirely on my own subjective experience and that was of course market specific, but I've moved 5 times in last ten years in 4 different cities and I saw prices rise much more quickly say 2001-2006 than 1996-2001.

I'll dig around when I have a minute or two to see if I can find objective data.

Oh and IIRC means "if I recall correctly" - an admission I'm relying on memory not references for now. Darn text speak.

[no_hypocrisy]

2. From my limited understanding, there were commissions for getting

mortgages and then another commission for selling them. So whether it was a good or a bad mortgage was irrelevent. Volume, volume, volume. Plus the larger the amount (properties were hyperinflated for their appraisal), the more interest, etc. came into the mortgage holder.

[BuyingThyme]

12. Sounds like some kind of new-math economy

where supply and demand are determined completely independent of any legitimate market forces. It sounds like the properties (the supply) and the "buyers" (the demand) were the least important variables.

But what about the timing? What prompted them to do this? A legitimately good market?

[YOY]

3. Short-term gain with lack of long-term consideration

Funny because in Biz School they always lean towards the latter for company longevity. Then again most of the MBAs in the high levels of those companies got there because they were the best weasels of the lot. Honesty and sensible comparision gets stepped on by sexy sexy money.

In a word "greed".

[BuyingThyme]

14. Yes, it seems that today's CEOs get paid for whatever happened last quarter.

Once they get theirs, it doesn't seem to matter what happens in the next quarter.

[YOY]

17. You get a promotion by showing "What you can do for me today?"

Not "What can you do for the company in 10 years?"

[Cassandra]

4. The garbage loans were "paying" so much higher returns...

than anything else out there that they looked tempting in this era of low interest rates and endless pressure from Wall Street to produce. Actual companies making stuff have had 30 or so years of producing short term results that their long term goals have suffered.

[BuyingThyme]

15. But where did the garbage loans start?

Were Freddie and Fannie the models?

[Cassandra]

33. I think they were made up of the mortgages...

that weren't good enough to qualify for Freddie and Fannie, which do have some standards.

[dkofos]

5. This has been going on since the bush coup of 2000.

GREED is the only reason.

[BuyingThyme]

34. Thank you.

[The Velveteen Ocelot]

6. As i understand it,

somewhere along the line, when real estate values started taking off and the housing market was hot, these greedy fucks decided they could make a pile of cash by marketing exotic mortgages (interest only, ARMs, etc.). And the reason they knew they could make money is that they never intended to hold the mortgages; they were just going to bundle and sell them as a security to investors. Since it didn't matter to the original mortgage companies whether the buyers could actually keep making their house payments, they gave them to just about anybody. Then it got even more complicated: the investment banks sold other securities that were a sort of insurance on the original bundled mortgage securities, by means of which they could make money if mortgages actually failed. But then too many of the mortgages went unpaid and the whole house of cards collapsed.

I suspect that is way oversimplified, but that's the explanation I've heard, dumbed down for the likes of me.

[Phoebe Loosinhouse]

9. I think that's about it. There were multiple layers of profit to be had

from the mortgages, whether they were good or bad.

[question everything]

18. I think this is pretty much it, with two more points

First, the 9/11 attack, which prompted Greenspan to start lowering interest rates to support the economy. These lower rates made many expensive houses more affordable.

Two, the subprime mortgages carried higher risks with meany higher return to investors who purchased those "derivatives" - securities based on them.

These investors should not be bailed out, which I think they will not. Neither should all the "flippers" who took their chances and lost.

[BuyingThyme]

19. Thank you.

[LSK]

35. also, mortgages have traditionally been safe

Until the recent past years where all the sudden they are risky.

[depakid]

8. Short term profit at the expense of sustainability

There were big short term profits to be made- and kind of like a dog who eats until it barfs- that's basically what some banks did.

Others, like Westpac (an Aussie bank with very little exposure to this mess) had their economists take a look at what was going on- both on the ground in terms of lending practices, as well as with securitisation of these loans and reckoned that they would end up toxic.

A fair analogy of the role of regulation is not allowing the dogs to gorge themselves- which as anyone who's ever owned a dog know that they will, given the chance.

[BuyingThyme]

20. So, did the Bushes call off the... umm... dogs?

Or would any administration have done the same thing. (Nothing.)

[kentuck]

10. Because they knew they could sell them elsewhere...

and that they were covered by Fannie and Freddie. There was no gamble involved, in their eyes. But, all good things come to an end. Now many firms are stuck with these bad loans out in the middle of the river and they either have to turn them loose or drown. They want the taxpayers to throw them a rope and pull them to shore. They simply do not want to write off those huge losses. There is no guarantee that they would drown if they turned them loose but they would lose a lot of value. That is why they are panicking and begging for help.

[Fresh_Start]

11. I think nobody knows exactly why

clearly the relaxation of regulatory oversight is a contributor

the tech bust led to money on the move and settled on real estate as the next great investment

hundreds of companies were able to restate earnings without regulatory or market penalty which fueled the sense that the market rewards risk taking and doesn't penalize lack of transparency

additional legislation which decreased barriers to home ownership like American Dream Downpayment

the housing bubble led to irrational exuberance

mortgage lending became more statistical and less underwriting think FICO scores

there was outright fraud in the real estate industry and due to the huge piles of money being made there was little incentive to slow the gravy train to root out those problems

I'd say the wrist slap over ENRON made corporate honchos less fearful over shady practices

[BuyingThyme]

22. Oh, that can't be right.

I was told that everything changed after Enron.

[Fresh_Start]

24. I worked in regulated industries my entire life

and the last 7 years, we felt we owned the regulators

[BuyingThyme]

26. Who are "the regulators"?

Not in a general legislative sense, but in your world?

[Fresh_Start]

41. DOT, EPA, OSHA, and OCC

in my career.

[alfredo]

13. Housing was the only sector that was keeping the US afloat.

without it, the numbers would have looked bad, and it may have made it harder for bush to steal the 2004 election.

[BuyingThyme]

25. Was that the election where the Chimp declared that more

Americans then owned their own homes than at any other point in our country's history? The "ownership society" election?

Ownership society... Hmmm...

[alfredo]

44. bush was in on the scam from day one.

[greenvpi]

16. Carter's CRA didn't help

And Clinton's later expansion. It gave banks an excuse to give-out bad loans because they were legally required to. So rather than doing what was responsible, they did the irresponsible knowing the government would probably bail them out because the government put them in that position. We should let the banks pay for helping minorities. It's part of their debt to society.

[BuyingThyme]

29. I don't think this has anything to do with them minorities.

[Oak2004]

43. Listening too much to Rush Limbaugh?

Or someone else of his ilk? At least I hope that's what happened. I hope you're not yet another troll looking to earn his toaster.

Blaming it on the CRA is a Republican talking point. But it's nonsense. The CRA insures that (regulated savings) banks can't discriminate -- it does not in any way mean they should - or are even allowed to - give out bad loans to people who could not afford to pay them back.

CRA = can't deny a mortgage to a black person who qualifies for a loan.

Gramm-Leach = Try your hand at Ponzi schemes! Pyramids are fun! Just take the money, as much of it as you can, and run, 'cause no one is watching the store! Wheee!

[tama]

21. If I may

"If so, what happened just a few years ago that made them so "speculative" all of a sudden?"

What happened was the dotcom bubble bursting, recession and 9/11 threatening a real correction (=depression), so Greenspan dropped interest rates to unprecedented 1% to keep up and increase US consumption (70% of US economy, as they say, but seems more like 100%) by mortage switching (=more debt) and also all kinds of very fishy mortage types. Anything and everything for the preciouss US consumer - and especially the biggest spenders. Lot of other detail also.

Basically, for the standard US consumer it's allways THEM and never nothing wrong with himself.

[BuyingThyme]

30. Thank you.

But I don't think the big spenders are the ones being foreclosed on. It seems like the common folk who simply wanted a decent place to live are the ones in the middle.

[tama]

36. Of course

But then, some sense of proportion also helps. The so called "little guy" of American middle-class (wannabe) is a fat rich bozo with economic footprint many times the size of Earth compared to an indigenous farmer in the jungle of Chiapas. And guess which one is living the fullest, most satisfying life? It's the guy you consider poorest, but is in fact richest, since he does not have needs that he and his fellow man cannot fully satisfy. :)

[annabanana]

23. Democrats FORCED them to!

Weren't you listening?

:eyes:

[BuyingThyme]

27. Yes, the powerless, do-nothing Democratic minority

was apparently the most powerful financial force on the planet.

[L. Coyote]

28. Getting paid. You make money selling mortgages.

It is like a real estate transaction. The realtor gets paid in full on day one and the home gets paid off in 30 years. Likewise, commissions for selling mortgages gets paid. Likewise for car salesman, even if the car breaks down around the corner.

Once the mortgages are created, they are then traded and more commissions are earned. A lot of "profit" gets privatized. The money is removed from the balance sheets and goes into private hands. At the end of the day, the home is worth 70% of the sale price, 5% went to the realtor, ... etc., etc. And your car probably breaks down, so you have to repair it to get to work to pay the mortgage you can't afford. Suddenly, the foreclosure looms, and you owe more money than the house is worth. What can you do? Load your stuff in the car.

[Lydia Leftcoast]

31. They wanted to create life-long debt slaves as a source of steady income

However, this works only as long as the debt slaves have steady jobs and their other expenses don't rise too much.

[BuyingThyme]

32. Hmm... Maybe some hair-on-fire emergency legislation

could subsidize some of that debt if it just happened to come into jeopardy.

[Yavin4]

37. They Were Operating Under The Paradigm That Housing Always Appreciates In Value

Therefore, even if a mortgage fails, the house could be sold at a higher value. Thus, there was no such thing as a "bad mortgage".

[BuyingThyme]

38. When and why was this doctine adopted?

[Yavin4]

42. They Were Using Historical Data

And, at the time, the data was indeed correct. Housing had always appreciated in post-WWII.

What they dind't take into account is that the historical data was based on American wages keeping pace with inflation.

[gravity]

39. Everyone else was doing it

[BuyingThyme]

40. If everybody else were to jump off a bridge, would you

loan them money?