Posts Tagged ‘the great minority mortgage meltdown’


Monday, September 10th, 2012

A lot of people, including pretty much everyone in academia, including supposed libertarians in academia, agree that deregulation has been happening.

Everyone agrees that the US banks were “deregulated” – in that a seventeen page law governing their permitted activities was replaced by three thousand pages of laws governing their activities, which three thousand pages were not so much laws, as headings for regulators to title their decisions. It is impossible to say how many pages of regulations were created, since the extraordinary flood of regulations bypassed the normal mechanisms such as the federal register, and consist of all manner of document categories – not only does no one know how much regulation there is, no one even knows how to find all the regulations that there are.

This was indeed “deregulation” in that activities that banks were previously forbidden to do, were now permitted under the supervision of regulators. (more…)

What would have happened if no bailout in 2008?

Thursday, June 9th, 2011

Steven Horwitz has the experiment.

A golden oldie on the minority mortgage meltdown

Wednesday, June 8th, 2011

Ann Coulter rarely gives links, and frequently employs hyperbole and humorous exaggeration, so when she reports entirely ridiculous real events, it is difficult to be sure whether she is engaging in humorous hyperbole, or things really are that outrageous.  Vdare has helpfully annotated one of her posts with links, and I have added a little more annotation.  And yes, Ann Coulter was not making this up. The government really is as ludicrous as she depicts it: (more…)

The Wallison dissent

Wednesday, February 16th, 2011

Steve Sailor, is as always great reading, and he issues some comments that on the Wallison dissent that everyone who wants to understand the financial crisis should pay attention to.

Peter Wallison tells us

Profit had nothing to do with the motivations of these firms; they were responding to government direction.

Rather than direction, they were responding to government pressure and persuasion.  Basel gave government not so much the power and authority to dispense off budget funds to friends and voter blocks, but rather to heavily influence and pressure banks to dispense off budget funds to friends and voter blocks.  Since government, or those authorized by government, decide what is risky and what is not, rather than those actually making the loans, any loan that is politically correct is unlikely to be deemed risky.

Steve Sailer tells us:

Among profit-seeking lenders there will always be optimists and pessimists about the ability of marginal borrowers to pay back their home loans. Government policy from 1991 onward was heavily biased toward being nice to optimist lenders and not nice to pessimists lenders This nurtured a climate in which the businesses of the optimists grew and people in the middle shifted toward optimism, while pessimists moved toward other lines of work.

Consider Angelo Mozilo of Countrywide, who on January 13, 2005 catastrophically pledged $1,000,000,000,000.00 in mortgages by 2010 to minority and lower income borrowers. The government can’t force anybody to lend a trillion bucks to bad risks. A billion dollars, sure. But a trillion? The lender has to want to do it.

That doesn’t mean that politicians weren’t intimately involved in cultivating Mozilo’s delusional state of mind where he thought he was doing well by doing good and vice-versa.

There’s no question that Mozilo was first prodded down this path by the hoopla over the stupid early 1990s Boston Fed “study” of discrimination in mortgage lending. Crucially, the Clinton Administration’s threat in 1994 to extend the Community Reinvestment Act paperwork requirements to nonbanks like Countrywide led Mozilo to sign a treaty with Clinton’s HUD secretary Henry Cisneros promising to lend like Countrywide was covered by the CRA.

But, Mozilo became infatuated with Cisneros’s “vision” and put Cisneros on Countrywide’s board. They both became convinced that lending vastly more to Hispanics was a great business idea.

If you didn’t believe that, well, you’d better keep your mouth shut because you could be sued for discrimination, and regulators could make your life hell. So, the government helped change the culture of mortgage lending in part by selecting more credulous people like Mozilo for favorable attention and giving more skeptical people a hard time.

Another example is Kerry Killinger of Washington Mutual. He survived 29 Community Reinvestment Act reviews as he bought up other lenders by making huge pledges of minority and lower income lending , up to $375,000,000,000 for the acquisition of Dime Bank. So, there is a selection effect. The government gave the thumbs up to optimists expanding and the thumbs down to pessimists. So, the culture of lending shifted toward credulity.

On Steve Sailer’s blog you can find much useful research you cannot find anywhere else, because it is just too horribly politically incorrect, but he does suffer from the fallacy of seeing jooz everywhere, and therefore believing the market is rigged by jooz against people like Steve Sailer. I hope some day to debate him on this topic – I argue that Jews are converts to progressivism, rather than progressivism being a sect of Judaism, (the Mencius Moldbug theory that progressivism is crypto calvinism) and that progressives were ruling the system and stealing all the money back when progressives were still nominally Christians, and did not allow any Jews to get in on the vig.

The financial crisis inquiry report

Saturday, January 29th, 2011

The government has investigated the “2008” financial crisis and released a detailed report.   (Actually it was the 2005 crisis, in that the panic set in towards the end of 2005 , but the government successfully covered things up and managed to get all the major players to pretend that everything was normal until 2008.)

The summary and conclusions are of course, piles of lies, intended to divert attention from those actually guilty.

Overall, it sticks to the cover story that hardly anyone noticed anything out of the ordinary until 2007.  It correctly observes that regulators failed to use the authority that they had, and to the extent that they used their authority, used it corruptly in ways that worsened the crisis – from which it concludes that the regulators need more power and to exercise that power more forcefully.

It correctly observes that

The kings of leverage were Fannie Mae and Freddie Mac, the two behemoth government-sponsored enterprises (GSEs). For example, by the end of 2007, Fannie’s and Freddie’s combined leverage ratio, including loans they owned and guaranteed, stood at 75 to 1.

So the next time you hear someone say that leverage caused the crisis, that is actually a euphemism for saying that government-sponsored enterprises were the major players causing the crisis, not an explanation of the crisis. After all, as the Republicans on the committee point out, leverage only produces bad results if you lose money, and the question therefore is how such large amounts of money were lost. So what, then, did Fannie and Freddie do to piss away large amounts of money?

It also tells us that

As early as September 2004, Countrywide executives recognized that many of the loans they were originating
could result in “catastrophic consequences.”

Yet fails to quote that testimony or document in full.   Surely those who saw the crisis coming, knew what was causing the crisis, yet we don’t hear what they said back then.

The report is overcooked, presenting conclusions without the data from which those conclusions were drawn.

Crabtree testifies to large numbers of abandoned houses in 2006, of entire neighborhoods collapsing, of the lawns unmowed, the houses empty except for homeless people squatting. If the mortgages were busted in 2006, surely the crisis was in full swing in 2006? Why then is every commissioner telling a story that has the crisis suddenly manifesting in 2007/2008?

In November 2005 I said “Now is the time to panic”, and it appeared to me that everyone did panic, within a few days of me saying it. People gave the commission the same testimony.

Warren Peterson, a home builder in Bakersfield, felt that he could pinpoint when the world changed to the day. Peterson built homes in an upscale neighborhood, and each Monday morning, he would arrive at the office to find a bevy of real estate agents, sales contracts in hand, vying to be the ones chosen to purchase the new homes he was building. The stream of traffic was constant. On one Saturday in November 2005, he was at the sales office and noticed that not a single purchaser had entered the building. He called a friend, also in the home-building business, who said he had noticed the same thing, and asked him what he thought about it. “It’s over,” his friend told Peterson.

Why then does the commission stick to the story that this crisis happened in 2008?

Bad loans were made. The money was lost in bad loans. Why were those bad loans made?

The Democrats on the commission conclude that bad loans were made for profit:

We find that the risky practices of Fannie Mae—the Commission’s case study in this area—particularly from 2005 on, led to its fall: practices undertaken to meet Wall Street’s expectations for growth, to regain market share, and to ensure generous compensation for its employees. Affordable housing goals imposed by the Department of Housing and Urban Development (HUD) did contribute marginally to these practices.

Peter J. Wallison argues that affirmative action and affordable housing contributed massively to these practices, in particular the HUD “Best practices initiative”

If a financial entity was failed to follow HUD “best practices” it was likely to be sued for racism, redlining, and any number of vague crimes that can never be disproven, so everyone had to follow “best practices” and if a company followed HUD “best practices” it was bound to make huge numbers of bad loans.

“Best practices” required that the lender accept “non traditional” evidence of ability to pay – and the reason such evidence was non traditional is that it is not evidence.  If a mortgage business followed HUD “best practices”, as in practice it had to do, best practices meant in practice that they were allowing borrowers or their loan officers to make $#!% up.

Minority mortgage meldown and diversity recession

Monday, June 7th, 2010

People are starting to realize wonder where all the money was pissed away to.  The answer, of course, is that most of it was pissed away on affirmative action loans to members of protected minorities.  Whose fault is this?

Steve Sailer blames primarily Karl Rove and George Bush

There is much truth in this, but I would primarily blame Basel.

Under Basel, what matters to a financial institution is not whether its assets are safely invested, but whether they are officially declared to be safely invested.  The people in charge of deciding what is officially safe have no incentive to make their estimates accurate, but powerful incentives to make their estimates politically correct.

[an earlier version of this post incorrectly said Basel II, for which I was called out in the comments. Most of the problems started with Basel I]

How to fix the financial crisis

Friday, May 21st, 2010

Proposed reforms, both left and right, are unlikely to have any effect on the continuing massive misappropriation from the financial system.  It is absurd that people are discussing obscure details of the credit swap market.

To fix the financial crisis, we have to revoke, or at least denounce and denigrate, Marie Curie’s Nobel prize.

When they gave a Nobel prize to Marie Curie for being female, that did not hurt anyone except more deserving potential Nobel prize winners.  But handing out phony Nobels on the basis of sex, race, and nationality necessitated handing out phony degrees on the basis of race and sex, and handing out phony degrees on the basis of race and sex necessarily led to a crisis where these phony degrees were being ignored by employers, so employers necessarily had to be forced to give out well paid phony jobs on the basis of race and sex.

But being given well paid phony jobs on the basis of race and sex failed to result in recipients living a middle class lifestyle, so lenders had to be forced to give out a middle class lifestyle on the basis of race and sex.

Which has led to our present financial crisis.  It all began with Marie Curie.  Each lie required a new and bigger lie.  We need to start by acknowledging that genders and races tend to have different abilities – that if you are looking for people that are the best at something, whether the fastest runners or the greatest mathematicians, they will almost all be of one particular race and gender, and some races will be completely absent, and if you are merely looking for people that are acceptably good at something, for example accountants, basketball players, or donut makers, they will be mostly of one particular race and gender.

We cannot end the crisis unless we admit who is defaulting on their mortgages, we cannot admit who is defaulting without admitting that they cannot perform their jobs either, we cannot admit they cannot perform their jobs without admitting that their degrees are phony, and we cannot admit their degrees are phony without admitting that many Nobel prizes, starting with Marie Curie, were phony.

Yale Harvard and Basel style Free Enterprise

Sunday, May 16th, 2010

After the collapse of socialism, the elite support free enterprise – they support it the way they support free speech.

If anyone is allowed to disagree with the orthodoxy taught at Yale and Harvard, or even doubt it, this endangers the free speech of people from Harvard and Yale, and similarly if any enterprise run by people from Harvard or Yale could go bust, this endangers the free enterprise of people from Harvard and Yale.

Basel II is tens of thousands of pages of regulations, no one knows how vast it is, because not all the regulations can be found in any one place, but it could all be replaced by two simple rules:  Politically correct victim groups shall always find it easy to borrow money, regardless of their ability or intention to pay it back, and politically well connected businesses shall always make money, regardless  of whether they are competently run or not.

The seeds of the crisis were the CRA and the ratings agencies.  I have discussed the CRA at length, but the CRA would have been resisted had it not been for other changes in the system that insulated the players against the consequences of making bad loans.  These changes, guaranteeing that badly run businesses would succeed, started with the bailout of the ratings agencies in the seventies, forty years ago.

Back then, the ratings agencies were in trouble, because they had made a lot of bad calls.  It seemed that whenever an institution was going under, the guys at the credit rating agencies were the last to know about it.  Back then, they sold their assessments of credit risk to subscribers. So no one wanted to subscribe.

So in the seventies, the regulators stepped in to make people use the credit rating services. In 1975 the SEC created the Nationally Recognized Statistical Rating Organization (NRSRO) designation. Credit rating agencies so designated received what was in effect a grant of governmental power. The SEC then relied on the NRSRO’s credit risk assessment in establishing capital requirements on SEC-regulated financial institutions – which meant that for SEC-regulated financial institutions to borrow and lend, they had to get rated.  A cascade of regulatory decisions followed over the years, each decision forcing more and more reliance on the risk assessments issued by these demonstrably incompetent institutions – and less and less reliance on other people’s risk assessment.  For more and more organizations, it became illegal for them to make their own judgments about risk.

By the 1990s, as Levine and Partnoy tell us, the NRSROs were not selling assessments of credit risks, but licenses to issue securities.  The rating agencies did not genuinely assess risk, nor did anyone really expect them to.  Nor could repeatedly demonstrated incompetence reduce demand for their services, so the ratings agencies had no incentive to provide correct credit ratings.  Since their income was entirely dependent on the state granting them power, they did, however, have an incentive to make politically correct credit ratings.  If you lend to the poor, the oppressed, etc, and you are run by good old boys from Yale and Harvard, and you make donations to the right politicians, the NRSROs have a very powerful incentive to give you a good credit rating.  And if you have a good credit rating, you can borrow as much as you like – and if you go bust, the government will bail you out.

Badly run companies that had been empowered to borrow as much as they pleased got in trouble – and were bailed out for the same reasons as they had been empowered to borrow as much as they pleased.

In addition to corruptly favorably rating the politically correct, the NRSROs corruptly favorably rated those who simply gave them money, which is perhaps what those who complain about “deregulation” have in mind.  The banks creating structured financial products would first pay the rating agencies for “guidance” on how to package the securities to get high ratings and then pay the rating agencies to rate the resultant products – a glaring conflict of interest, though one less apt to lead to bailouts when the proverbial hits the fan.

Now since all this dirty dealing has cost the taxpayer trillions, you may well ask what measures have been taken to punish the NRSROs for bad conduct, or give them incentives for better conduct in future, or indeed restrain them from continuing to do this stuff?

All the strengthened regulation is regulation to make people continue to treat NRSRO ratings as true, even though it has become horrifyingly apparent that the ratings are generally false.  All the strengthened regulation is more of what caused this mess in the first place.  Any real reform would necessarily start by abolishing the legal privilege of NRSROs, would have to start by rolling back regulations to what they were in 1974.  Instead, compulsion and bailouts are being applied to make NRSRO ratings true, or to enable people to continue pretend that they are true.  Their power has been increased, their misconduct unpunished, and their incentives have become even worse.

Where the money went

Monday, February 15th, 2010

The government has been shuffling the money around to obfuscate who stole it.  It lends money, and then announces that there is no problem, the money has been paid back.

But after much fiddling, the money has mostly come to rest, in that the government is now the proud owner of about one trillion dollars of mortgage backed securities guaranteed by Fannie, Freddie, and the FHA, plus some Fannie, Freddy, and FHA debt.

The first graph in the above link is the money wizzing around in complicated circles to obfuscate who is at fault, the second graph is the bailout of private entities, other than General Motors, and the third graph is primarily the bailout of Fannie, Freddy, and the FHA.

That these Mortgage Backed Securities are “Fully guaranteed by Federal Agencies” implies that the vast majority of the crisis, the vast majority of the bailout, was dud mortgages rubber stamped Fanny, Freddie, and the FHA, that privately issued mortgage backed securities have been liquidated – that the dud mortgages underlying privately issued mortgage backed securities have been settled by foreclosure and bancruptcy, but the dud mortgages underlying Fannie, Freddy, and FHA issued mortgage backed securities are on the tax payers tab to the tune of about a trillion dollars.

Overtime, as the mortgages are resolved, the trillion dollars of mortgage backed securities will diminish with time.  In proportion as they were worthless, the agency debt will correspondingly increase.

The vast majority of defaults were black and hispanic

Friday, August 7th, 2009

Hat tip Steve Sailer who provides the breakdown of defaults.

The proximate cause of the international crisis is that the US$, the international reserve currency, lost much credibility.  The proximate cause of the US$ losing credibility was massive defaults by blacks and Hispanics, and the proximate cause of the massive defaults by blacks and Hispanics was affirmative action lending to people whom I could tell at a glance from twenty paces were highly unlikely to repay their debts.

In the last days before the crash, I saw in California a steady parade of people buying expensive houses no money down whose own mothers must have been reluctant to lend them ten dollars. Lax though credit standards were, not one of them would have been able to borrow money had he been non Hispanic white.

Laderman and Reid of the Federal Reserve Bank of San Francisco have done the unthinkably politically incorrect, and though they do not directly reveal the proportion of defaults that were affirmative action, they tell us:

We also find that race has an independent effect on foreclosure even after controlling for borrower income and credit score. In particular, African American borrowers were 3.3 times as likely as white borrowers to be in foreclosure, whereas Latino and Asian borrowers were 2.5 and 1.6 times respectively more likely to be in foreclosure as white borrowers.

They also argue that CRA loans were just fine:

a CRA lender significantly decreases the likelihood of foreclosure

They obtained this contradictory result by controlling for race – in other words, they are not saying CRA loans were unlikely to default, but that a CRA loan made to a non hispanic white is (unsurprisingly) unlikely to default – in other words, affirmative action loans have no harmful effect, indeed beneficial effect, to the extent that they were not in fact affirmative action loans.

They do not directly tell us what proportion of defaulters were black and Hispanic, but since the great majority of defaulters were subprime, and 77% of subprime borrowers were black and Hispanic, and blacks and Hispanics three times more likely to default than whites …