Unemployment Drops To 8.6% – How Numbers Lie

@Dawn K, actually it was brought up in comments # 6, 7, 8 and 23. However for many, you have t0 keep pounding the obvious into their heads… LOL Meaning your repeat of the obvious is very welcomed.

Larry: You didn’t refute any of what I said. You didn’t refute any of the cited statistics. You didn’t come up with a single banker who blamed his bank’s failure on the CRA, Fannie, Freddie, or government policy.

I’m sorry Larry. I’m not much of a herd animal myself. I don’t need substantiation for the obvious from multiple sources. I read the legislation passed, the history of the regulations changes, and figure it’s pretty darned obvious. And, of course, I’m not alone in my conclusion.

What “statistics” are you referring to, Larry? Are you talking about McClatchy’s version were “84%” of that loans “*that year” were made by private industry? Did it ever occur to you to even read the Wallison article? If it had, it would have answered your own supposed expert citations.

You can stand by your scribblings as much as you want. Play the fool… okay by me. Here’s the reality, based on how the lending world works.

If Fannie and Freddie don’t have guidelines that accept the primary loan origination applications, the likelihood of them getting thru is about 1 in 10. Because if Fannie/Freddie won’t buy the loan originated, they have to find a private entity that will.

Fannie/Freddie have been buying them, and lowering criteria, all thru the 90s. Therefore they are 3 times saturated with these loans that Wall Street private financial institutions only started buying in 2002. To be relatively close in figures, that’s 7 trillion private to 27 trillion Fannie/Freddie.

So Fannie/Freddie takes on the subprime load primarily, and slows down when the private also starts mimicking them. McClatchy decides to take a single year and use that as an “example”. Why? Because the uncurious, like you, buy into it lock stock and barrel.

I’ll say it again in the simplest of terms. If Fannie and Freddie weren’t going to buy the loan, that loan package wasn’t going to exist in the primary lending market. Period. Can’t be any more clear than that.

Oh yeah… what do you want a banker to do? Say it’s all his fault? Who cares whether they say the GSEs or he is the cause. Neither were the only cause.. they were just the herd, playing the “game” by the “rules” that Congress set…. just as you noted above.

Stand by your opinion all you want. You still are the fool.

@openid.aol.com/runnswim: You didn’t like the 2008 McClatchy article. You didn’t refute any of the statistics (which covered the three most impacted years of the subprime debacle, not simply a single year). You came up with an American Enterprise essay which used misleading statistics. I countered with a 2011 Bloomberg article, written by a member of the official US government panel (bipartisan) which thoroughly investigated the causes of the meltdown and which specifically addressed the claims made by AEI’s Wallinson and which refuted those claims.

Larry, if you bothered to read the GPO report, and the commissioners on that staff, you’d see that Wallison *is* one of those, along with Angelides. Therefore you cannot elevate Angelides to a status above Wallison using that quasi logic. In fact, the GPO report upon which the Angelides bases his August article was very similar to a SCOTUS opinion… out of the 10 commissions, six voted to adopt the report while four dissented from it’s conclusions. Wallison was one of those in the dissent.

The reason I call you the fool is that you insist on focusing on only a few years in this event that spanned decades, and you continue to try and dissect types of risky mortgages (or NTMs) as a defense for your opinion. And you always turn to those that do the same. I’ve repeatedly provided links proving that the GSEs have been involved in this risky loan business far longer than what you … and those that put out the GPO/FCIC report… were willing to look at.

The MBA graph I linked above shows you of the subprime foreclosures spike… all which happened prior to 2001’s first quarter. This is further documented in the graphs shown on pg 69 in the original commission majority report… the sources of funding and how they have been distributed over the decades.

As Wallison has pointed out, the private financial institutions did not seriously jump on the mortgage funding bandwagon until 2002, giving the GSEs (most especially Fannie) a decade head start loading up on these risky assets on the books.

First, let me restate this, in case you don’t remember. I don’t believe there is a single cause you can finger for the crash of 2008. It is, as my post back then is titled, a “perfect storm of events”. Therefore I’m not saying the GSEs are the sole cause, nor that private institutions share no responsibility. And it gets quite frustrating to hear generally smart people, like you, try to finger point *only* private greedy banks as the reason, while ignoring reality which obviously shows that to be patently false.

It is this concept that I will argue to the death. And I will also argue that these bubbles that formed (credit and housing) happened to be fueled by government. Investors then engage in the feeding frenzy, which inflates the bubble. So is the fault of a bubble the air inserted into the ballooon? Or the existence of the balloon itself… who’s sole purpose is to be filled with air?

The GPO report agrees that Fannie/Freddie were heavily involved. In this aspect, both sides of the commissioners agree. The majority merely compare it too late in the crisis and ignore what was on the books prior to their focus. Which is why Wallison was public with his view that the scope of the report was too narrow, and that the premise from which they started was flawed.

The American Spectator posted the major dissent between the two.

Here is the commissioners’ summary of their view of the GSEs:

We conclude that these two entities contributed to the crisis, but were not a primary cause. Importantly, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis.

The GSEs participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders in the rush for fool’s gold. They purchased the highest rated non-GSE mortgage-backed securities and their participation in this market added helium to the housing balloon, but their purchases never represented a majority of the market. Those purchases represented 10.5% of non-GSE subprime mortgage-backed securities in 2001, with the share rising to 40% in 2004, and falling back to 28% by 2008. They relaxed their underwriting standards to purchase or guarantee riskier loans and related securities in order to meetstock market analysts’ and investors’ expectations for growth, to regain market share, and to ensure generous compensation for their executives and employees-justifying their activities on the broad and sustained public policy support for homeownership.

And here’s Wallison:

…on June 30, 2008, immediately prior to the onset of the financial crisis, the GSEs held or had guaranteed 12 million subprime and Alt-A loans. This was 37 percent of their total mortgage exposure of 32 million loans, which in turn was approximately 58 percent of the 55 million mortgages outstanding in the U.S. on that date. Fannie and Freddie, accordingly, were by far the dominant players in the U.S. mortgage market before the financial crisis and their underwriting standards largely set the standards for the rest of the mortgage financing industry.

Where the FCIC and Wallison disagree, then, is whether Fannie and Freddie “followed” Wall Street or “set the standards” for others involved in mortgage finance. The fact that they were heavily involved in the mortgage industry during the run-up is not in dispute.

To convey the framing of this report, as it relates to the GSEs/Fannie, Wallison speaks of an meeting between Larry Summers and a “few” of the commissioners (he was not invited), where Summers uses the metaphor that the financial crisis was like a forest fire and the mortgage meltdown like a “cigarette butt” thrown into a very dry forest. Was the cigarette butt, he asked, the cause of the forest fire, or was it the tinder dry condition of the forest?

The commissioners decided to adopt the position that the “cigarette butt” was but incidental the to tinder dry forest, believing that “30 years of deregulation” had “stripped away key safeguards” . This is absurd in the wake of the FDIC Improvement Act in 1991… extremely strong regulation following the S&L crisis.

As Wallison accurately points out, that little “cigarette butt” tossed into the forest was, by that time 27 million high risk non traditional mortgages, with a total value over $4.5 trillion.

I might add, why exactly was an Obama Treasury appointee doing, meeting and interceding in what was supposed to be an independent study?

Let’s use a little common sense here: $4.5 trillion in high risk loans was not a “cigarette butt;” they were more like an exploding gasoline truck in that forest. The Commission’s report blames the conditions in the financial system; I blame 27 million subprime and Alt-A mortgages-half of all mortgages outstanding in the U.S. in 2008-and a number that appears to have been unknown to most if not all market participants at the time.

No financial system, in my view, could have survived the failure of large numbers of high risk mortgages once the bubble began to deflate, and no market could have avoided a panic when it became clear that the number of defaults and delinquencies among these mortgages far exceeded anything that even the most sophisticated market participants expected.

They did not acquire these mortgages only between 2001 and 2008.

From Wallison’s 108 pg dissent on the report:

One of the many myths about the financial crisis is that Wall Street banks led the way into subprime lending and the GSEs followed. The Commission majority’s report adopts this idea as a way of explaining why Fannie and Freddie acquired so many NTMs. This notion simply does not align with the facts. Not only were Wall Street institutions small factors in the subprime PMBS market, but well before 2002, Fannie and Freddie were much bigger players than the entire PMBS market in the business of acquiring NTM and other subprime loans. Table 7, page 65, shows that Fannie and Freddie had already acquired at least $701 billion in NTMs by 2001.

Obviously, the GSEs did not have to follow anyone into NTM or subprime lending; they were already the dominant players in that market before 2002. Table 7 also shows that in 2002, when the entire PMBS market was $134 billion, Fannie and Freddie acquired $206 billion in whole subprime mortgages and $368 billion in other NTMs, demonstrating again that the GSEs were no strangers to risky lending well before the PMBS market began to develop.

Further evidence about which firms were first into subprime or NTM lending is provided by Fannie’s 2002 10-K. This disclosure document reports that 14 percent of Fannie’s credit obligations (either in portfolio or guaranteed) had FICO credit scores below 660 as of December 31, 2000, 16 percent as of the end of 2001, and 17 percent as of the end of 2002.25

So Fannie and Freddie were active and major buyers of subprime loans in years when the PMBS market had total issuances of only $55 billion (2000) and $94 billion (2001). In other words, it would be more accurate to say that Wall Street followed Fannie and Freddie into subprime lending rather than vice versa.

At the same time, the GSEs’ purchases of subprime whole loans throughout the 1990s stimulated the growth of the subprime lending industry, which ultimately became the mainstay of the subprime PMBS market in the 2000s.

You can also add Congress’s creation of the Resolution Trust Corporation in 1989, which offloaded S&L losses on to Fannie/Freddie to the tune of $6.1 billion… *most* of which did not meet the GSE standards. A dubious start to what was going to become the norm as the years passed. (…that little tidbit is also in the majority commission’s 660 pg report).

Now if you’re willing to accept that using three years at the peak is not a full picture of the lead up to the event, and are interested in the three sides of the opinion vis a vis the report, you’ll find links to the two dissents and why at Commissioner Hennessey’s site. I say three because there is a majority report, three commissioners did another one together (27 pgs), and Wallison did his own with statistics and research (108 pgs).

Hennessey, Holtz-Earkin and Thomas tended to look for things in common with other nations because the housing bubble and crash was not confined to the US. While they criticize the report as being overly broad and merely reinterating things that went wrong, they focus on the fuel being the housing and credit bubble that started in the late 90s (shared with other nations).

As for Fannie/Freddie… the focus of this particular debate, and certainly not the sole cause of the event… they say:

The role of Fannie Mae and Freddie Mac in causing the crisis

The government-sponsored enterprises Fannie Mae and Freddie Mac were elements of the crisis in several ways:

 They were part of the securitization process that lowered mortgage credit quality standards.
 As large financial institutions whose failures risked contagion, they were massive and multidimensional cases of the too big to fail problem. Policymakers were unwilling to let them fail because:

o Financial institutions around the world bore significant counterparty risk to them through holdings of GSE debt;
o Certain funding markets depended on the value of their debt; and
o Ongoing mortgage market operation depended on their continued existence.

 They were by far the most expensive institutional failures to the taxpayer and are an ongoing cost.

As to too much or too little regulation, they also reject both sides of that as well, saying the amount of regulations should fit the particulars:

The amount of financial regulation should reflect the need to address particular failures in the financial system. For example, high-risk, nontraditional mortgage lending by nonbank lenders flourished in the 2000s and did tremendous damage in an ineffectively regulated environment, contributing to the financial crisis. Poorly designed government housing policies distorted market outcomes and contributed to the creation of unsound mortgages as well. Countrywide’s irresponsible lending and AIG’s failure were in part attributable to ineffective regulation and supervision, while Fannie Mae and Freddie Mac’s failures were the result of policymakers using the power of government to blend public purpose with private gains and then socializing the losses. Both the “too little government” and “too much government” approaches are too broad-brush to explain the crisis.

As for Wallison, the reason I settled in on his perspectives as being the most viable of the three reports is that his 108 pg dissent was chock full of data and statistics about the history of NTM (non traditional mortgages), and a more complete overview of the timeline that led up to the crash of 2008. (note the above excerpt)

There is no dissent among all that NTMs, taken on by the lowered criteria of the GSEs and securitized as MBSs (all with a triple A rating by Moody’s… another problem), lie at the heart of the crash.

Because Congress put together and paid this group to assess the events (tho they didn’t bother to wait for the results to pass ol Barney’s bill), Wallison kept his focus on the US, and not the global view his dissenting peers attempt to take.

But what the commission did was try to redefine what was a risky, subprime loan… calling the existing definition “deeply flawed” because they examined the intents of HUD (i.e. the CRA regulations). What they did, in essence, was attempt to separate Alt-As and Subprimes, most of which was a division in income.

That’s not a viable approach since NTMs were issued to those of all income levels and credit worthiness. A NTM is a NTM… regardless of these two factors. But it makes for a convenient argument, when your quest is to absolve government policy/regulations of culpability. This is the only possible conclusion since the majority commission studiously avoided exploring exactly how so many NTMs came to be held by Fannie/Freddie.

As Wallison said in his conclusion:

Instead of thinking through what would almost certainly happen when these assets virtually disappeared from balance sheets, many observers—including the Commission majority in their report—pivoted immediately to blame the “weaknesses and vulnerabilities” of the free market or the financial or regulatory system, without considering whether any system could have survived such a blow.

BTW, INRE Kathleen Engel’s co-authored book. I always find it interesting that those who litigate for a living tend to place a lot of the blame for home prices inflating on what they think are unscrupulous appraisers. Congress does the same.

Naturally, there are some sleazy appraisers out there, as you are wont to find such nefarious types in any particular industry. However that is an unfair portrayal of appraisers.

Yes, they are required to have a copy of the purchase contract in hand… which gives them price and terms. This has been a practice that many criticize… which has some validity on both sides (how about that, Larry?).

On the flip side there’s a few realities about that business that those who make their living as faculty on campus, or litigate in courtrooms, do not know.

1: A lender secures an appraiser primarily as validation that the amount of investment the banks will be funding is sufficient for the value of the property. That isn’t an absolute number. Get three appraisers to the same property, and you will have three different values. Ultimately, the value of a home is precisely what a buyer is willing to pay, and justified that similar comparable properties note that the bank’s equity is not out of line with area market values. Also, an appraiser’s job includes making sure the contract terms are fulfilled prior to the bank funding the money… i.e. any repairs, demands, etc. (thus the need for the sales contract…. to insure all terms are met prior to funding)

2: Appraisers are not only called on the carpet for their comparisons used by underwriters (then and still), but have to go the extra mile to substantiate their values. While they can “cherry pick” comparisons to use, if they are too far out of the norm, banks do raise eyebrows more than a few times. They risk business, reputation and their licenses with fraudulent inflation of pricing. So it’s not a common practice.

3: Appraisers can only use what’s been happening with the comparisons. So when the bidding for homes was hot, fast and furious, with multiple offers, and a buyer purchased a home for $40K over the asking price, that had to become the new “norm” as a comparable. It was not appraisers driving up the prices. It was overbidding in a hot market, creating that new normal price.

For me, I think the latter is what the lenders should have addressed. If a buyer wanted to overbid for a home by an x amount, but the traditional value of the home prior to the overbidding did not justify that price, the lender should have said they would fund the market value only – demanding that the buyer bring in the additional cash on their own. This more realistic practice for valuation would have held abnormal price increases in check, and kept mortgage LTVs out of the toxic arena.

That said, banks and underwriters are distant and detached entities. They are not in the position to know area market values, and must depend upon the same statistics that appraiser and Realtors do when determining a fair market value. But it’s difficult to argue high prices when there are so many buyers, diving at an existing inventory – all possessing easy money and credit – driving up the prices.

Or put another way: easy money and lowered standards led to an overabundance of buyers for the supply, which then drove up prices for over bidding, which the appraisers had to reflect in their valuation of properties for the lenders. So is the last guy in line to blame? The buyers? Or the easy money/credit which created the huge quantity of buyers?

I really get irritated with outsiders, who do not work in the real estate industry, making such uninformed portrayals based on what may be a small percentage of scumbags in the industry. Being as Engle portrays herself as a former attorney, litigating for … and I quote from her Suffolk Faculty profile… “plaintiffs in civil rights, and housing and employment discrimination cases” she is likely to be exposed only to the small percent of scumbags.

On the other hand, she’s also a clone of Barack “Mr. ACORN” Obama. Considering her background, the tilt from her book is quite predictably towards an evil private banking industry as predators. Also interesting that her book seems to indicate that CRA covered banks were indeed having high defaults and foreclosures on the loans they made… something you continually insist was virtually non existent. This comes as Engel describes the loans being foreclosed upon as predatory. I might say they were not qualified borrowers to begin with.

Appraisers have some of the toughest gigs going in the business. And the majority are very ethical. This is just another example of scapegoating.