https://www.housingwire.com/articles/46335-wells-fargo-to-pa...

I’d recommend watching this bbc documentary that gives a wider perspective on “risk”: https://topdocumentaryfilms.com/all-watched-over-by-machines...

http://www.nber.org/papers/w20848

This just shows how poisonous it is when the government screws up a market by essentially mandating that banks throw away their normal risk assessment process.

If we look at the mortgage pipeline, the problems become obvious, but none of them have to do with the government, except in that the government should have regulated.

Start with the mortgage origination companies like Countrywide who could easily offload mortgages to the other banks to collateralize. Since these companies could completely offload their risk, they were highly incentivized to give a mortgage to everyone.

Move on to the rating companies and the big banks creating financial products of doom and you've got the whole mess. All without the government "creating the problem." I do agree, however, that the government giving these companies an implied put option via a bailout gave them every reason they needed to take huge risks.

Still amazes me that no one from the banks ended up in jail.

Secondly, the author of that article is pretty clearly shilling to privatize Fannie Mae.

Thirdly, nobody here seems to understand what the community lending standards actually were and just wants to use it as a post to rest their argument on.

This is a much better, though still critical of the CRA article that goes into actual detail on what the problems were: https://www.city-journal.org/html/financial-crisis-and-cra-1...

But it's still an overly reductive and misguided argument. As Noah Smith points out here: https://noahpinionblog.blogspot.com/2012/12/did-risky-mortga...

Another thing: monetary policy causing business cycles, or making them much worse. The recent money-printing by the fed is super scary to me, because it created a new bubble in the stock market.

Why couldn't the stockholders get wiped out when a TBTF bank gets bailed out?

To me, that seems like a fair compromise that protects the economy but still punished excessive risk taking.

I personally know two people that cashed out tens of thousands of pounds here in the UK by remortgaging and spent it. Plenty of consumers were behaving ridiculously recklessly too. It was a crazy time, and businesses need banks. People need banks. Should your bank holding you accounts and mortgage have been allowed to fail? How about the bank financing your employer? How about both at the same time?

Even people pulling their money out of money market mutual funds almost caused a collapse of the monetary system, which is why the Fed had to secure those.

Unwinding the mess of CDOs, etc. would have been long and tiresome but, with a little help from a convenient executive order or two perfectly do-able.

I guess we're doomed to repeat history, since this was upheld again in 2008.

How do you feel about Lehman's Repo 105 maneuver where they intentionally used a Tobashi scheme to hide their losses from their investors?

The state of New York went after Ernst and Young on fraud charges for helping facilitate the scam and E&Y ended up paying a $10mil fine.

Is this justice? It doesn't feel like it.

If the only problem were the bad actors it wouldn't have been a systemic collapse.

I don't know enough to say if your conclusion is true or false, but I dont follow your logic. Why can't bad actors, if they are pervasive, cause a systemic collapse? From what I heard, incomes were fabricated, risks downplayed, and policies ignored. The insurance against the risk was priced on false premises. How can these bad acts (by bad actors) not cause a risk of systemic collapse?

Poor people can’t afford homes and in many cases don’t have proper identification even to buy a home. That’s where the whole NINJA subprime thing came in.

But the actual problem was that those loans were being rated AAA when repackaged into a CDO.

From that point forward is where the problem began. Tha is, if they were properly rated ‘08 would not have happened.

The swaps and derivatives that nearly brought down AIG then took that bug in the system(the bad improperly rated mortgages repacackaged is high quality shit) and nearly collapsed the world economy.

There’s nothing wrong with helping poor people buy homes but don’t call those mortgages AAA otherwise you’re basically operating under false information from there on out and should expect unpredictable results.

I can remember a couple years later trying to buy a house and being surprised that the formula for loan size was so concrete. They didn't care what you actually spent your money on, just that your payments be no larger than 30% of your income. Because we're frugal, we could have afforded quite a bit more house than they were willing to lend to us for. Indeed, we paid way more in rent than we could get for a monthly mortgage payment. We ended up wishing that the banks had tried to "take advantage" of us because that would have meant giving us more latitude to manage our own affairs.

I was under the impression that the CDO as a whole was being rated well - and the junk loans still maintained their rating when they were packaged. In other words, both parties were aware that the highly rated CDO contained bad loans. Is this not the case?

So it took taking some good bonds and some bad bonds and throwing them into the same CDO to get a good rating.

Agreed, I think the sheer size of the crisis relates back to deliberate policies to support sub-prime lending. The idea was to help people to afford homes even though they would not normally be considered a good risk.

But opening this up created a vast new market, like adding a wider bottom tier to an already giant pyramid. Along with the vast size came even higher risk, since all these people would be more liable to default if the economy tanked.

Even still because we are accepting more sub-prime liability, it goes beyond poor people to others with better incomes but are buying into a more expensive neighborhood. Now people of all incomes are getting sub-prime loans, and this feed into rising housing prices.

EDIT: To substantiate and cite, "Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law (CRA)." [0]

[0] http://ritholtz.com/2009/06/most-subprime-lenders-werent-cov...

So other banks jumped on board. Are you saying they would have taken on this risk if the federal government hadn't moved first? I think there is a clear cause and affect.

The private banks took greater risks and wound up with worse performance.

[0] http://ritholtz.com/2013/03/the-big-lie-annotated-an-aei-his...

Not everything has an evil agenda behind it. Sometimes the reasons are fairly ordinary and boring.

It's very similar to the story with student loans. Easy student loans have driven tuition costs as crazy as housing costs.

There's a reason the Dodge Journey retails for 4k+ off msrp. With the inflated mspr they can get the bank to write a bigger loan. That way you can buy a journey at a "discount" with room to roll your existing bad loan into a new, even worse one.

You might be referring to the higher margins that SUVs get, which are getting more and more popular in the US... but TBH I'm not sure where you get the idea that car prices have been inflated.

https://fred.stlouisfed.org/series/CPIAUCNS

https://fred.stlouisfed.org/series/CUUR0000SETA01?utm_source...

That said, loan terms are lengthening and subprime loans are a large and growing part of the market. That has to be buttressing prices. I really can't back this up, but my suspicion is that over the long term, available credit has helped discourage auto makers from simply making cheaper cars.

Today you can buy a cheap appliance computer for a price that would've been unimaginable in 1995. And you can buy a cheap appliance car... for about the same price as in 1995. Obviously the two markets don't work the same way, but there's still something odd about that.

Directly supporting people is "socialism," a handout, and is seen as supporting laziness and vice. A loan must be paid back, which allows many Americans to view it as something encouraging responsibility and virtue. It all comes down to the puritan work ethic.

The problem is that government backed loans are just an indirect way of giving welfare, and a monstrously perverse and inefficient way to boot. It drives price inflation which gets captured by the vendors of the products/services in question (existing home owners, builders, universities, etc.) instead of those you're trying to help and it creates debt bubbles that represent a danger to the overall health of the economy.

Overall it's probably worse than doing nothing due to the price inflation it generates. Housing was reasonable across much of the USA prior to the 'oughts. The housing bubble destroyed home affordability, an effect which as I said persists to this day.

https://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae...

> As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

> Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

> Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Furthermore:

> Federal Reserve Board data show that:

> More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

FURTHERMORE

> But these loans, and those to low- and moderate-income families represent a small portion of overall lending....Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent...During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market.

And then we get to the only 70% in the article:

> fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market. About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve.

I mean what the hell is going on here? You link to a wikipedia quote which points to an article methodically dismantaling the case you are making, which flatly contradicts the wikipedian citing the article, and whose only connection to your comment is that they both have a "70%" in them, though referring to different things (secondary market dominated by investment banks VS fannie and freddie, NOT THE SAME THING)

> in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market...mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans... only one-third of all CRA loans had interest rates high enough to be considered sub-prime

This is honestly the first time on hackernews I've felt like I'm talking to a shill.

https://www.theatlantic.com/business/archive/2011/12/hey-bar...

What does a banker have to do before he/she can be charged with at least a misdemeanor? You're right about the government having a hand in the crisis, but this is ridiculous that no banker was charged.

If a family can not afford a house then they can choose not to own a house. I can understand the point of increasing access to affordable housing, but allowing more people to buy homes seems to have the opposite effect.

From my perspective they skipped a step or two and some of the difficulty came from that. I started by renting an apartment with a friend and saved up enough for a down-payment on a normal loan in a condo over two years. It's been five more years since then, and only now would I consider a house (though don't really want to move yet).

If the banks were profitable leading up to the crash then its still the banks responsibility. The government is allowed to force these rules because the banks are allowed to create money out of thin air.

Today 91% of student loan disbursements are public loans that are funded directly from the treasury. The remaining new private loans aren't federally guaranteed (although we still make it difficult to discharge them in bankruptcy).

I will admit I chose the wrong word in my prior comment when I said guaranteed since that has a very specific meaning in this context. I was using that phrase more colloquially because there are other ways that the government protects the lender beyond a literal guarantee. For example, student loan debt cannot be discharged in a bankruptcy like mortgages, medical debt, or credit card debt. This was done because a private lender is normally heavily disincentivized from loaning money to someone with no credit history, no collateral, no income, and no expectation to start making payments on the loan for years.

[1] - https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsid...

I'm not really concerned with whether or not students are able to attend their "college of choice."

If government loans provide enough to go to a state school, or even enough to live at home or off campus and go to a community college for the first 2 years, I'm fine with that.

Also you'll notice that I mentioned bankruptcy in my comment.

The price of housing in many high cost of living is completely unrelated to how much it cost to build the apartment building.

Or in other words, the actual construction of the building is the easy part. It is the government that is getting in the way of reduced prices

I didn't know reducing regulation on businesses was the socialist solution. But yeah, sounds good to me.

I am not sure why a socialist would be opposed to lower living expenses for poor people.

We should, if we want to use tax policy to promote home ownership outside of the wealthy, be subsidizing principal payments for owner-occupied primary residences meeting certain local and personal affordability standards, and possibly tax-favoring sale proceeds for sales of property when, after sale, it will be owner-occupied primary residence meeting affordability standards.

(More often than not, I see criticism of this on HN.)