September 20, 2008

UPDATED: The weird thing about the latest financial house of cards

... is that the cornerstone, such as it was, was confidence in the increasing ability of the bottom half of society to pay back unprecedentedly large debts.

Underlying these vast pyramids of debt was, all too often, a promise by a single mother who works at the DMV or a drywaller from Chiapas to (following a brief teaser period) make mortgage payments of, say, $3750 per month for the next several decades.

In recent times, investors have typically gotten rich in our society by betting on the rich to get richer. And most of the time, that's what happens: the rich get richer. Every so often, however, we have a meltdown because, during the bubble, investors temporarily overestimated the rate at which the rich will get richer—e.g., Silicon Valley in 2000, the Texas oil patch in 1982, commercial real estate developers around 1990, and so forth.

But, most of the time, you can get richer betting on the rich to get richer....

The homeownership rate had been stuck at about 64% since the late 1960s. The Clinton and Bush administrations pushed hard to get it up to 68-69%.

What in the world made anybody think that the second quartile up from the bottom was developing more earning capacity?

They'd sent their wives out to work a couple of decades before. What else could they do now to pay bigger mortgage payments in the future?

The second quartile folks weren't getting better educated, weren't getting more unionized, weren't facing less competition from China, weren't facing less competition from immigrants, weren't getting married at higher rates so they could better pool their earning capacity.

So what trend suggested they were now developing more capacity to pay back huge debts than before?

You can read the rest at

I mean, when was the last time it was smart to bet on the working class getting richer? 1946?


DiverCity said...

I bet on the rich getting richer on the backs of taxpayers and their children and their children's children who will have to pay off the enormous debt required to offload the enormous debt created by the financial wizards who already got rich on the backs of taxpayers by stealing from them through inflation. (Nice long sentence, huh?) But that's the way it always has worked and always will work until folks like Ron Paul wrest control from the traitors Paulson and Bernanke who have engineered a private coup of our supposedly democratic government. (Dang, another too long sentence).

DiverCity said...

By the way, did you notice this choice little provision in the traitors' plan: "Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

not Ben Capoeman said...

...confidence in the increasing ability of the bottom half of society to pay back unprecedentedly large debts.

That's silly. There is absolute certainty in the Executive and Legislature of their ability to tax the middle class (the third quartile, and much of the fourth) to pay off any investment losses of the plutocracy. If you're filthy rich, there just isn't any risk in investment any more.

Headline over at ...
$700 Billion Is Sought for Wall Street in Vast Bailout


The Bush administration is requesting virtually unfettered authority for the Treasury to buy mortgage-related assets.

So if there isn't any risk to investment, why bother investing in anything that requires work? You're going to get your $20 million for running Freddie or Fannie into the ground, so why put any effort into it? It's not like your pay day is going to be any better if you're successful at what you do.

The middle class produce wealth, the upper class acquire and horde wealth, and the lower class are basically fertilizer. Now we move into that stage of history in which the upper class take everything away from the middle class, leaving only the upper and lower classes... except we have too many educated people who know that they can't fight city hall. If history is any guide pretty soon now we're going to have someone at the head of an army who knows of a way to fight city hall, but in a way that leaves bullet ridden corpses of bureaucrats everywhere. We're about at the point where this person would be hailed as a liberator by the American people (and have public approval ratings that Bill Clinton could only see in his masturbation fantasies.)

(Dubya just picked the wrong country for a successful regime change.)

We'll probably have a good two or three decades under our Caesar.

After that things will probably get "interesting."

Parentalcation said...

I blame everything on HGTV and the endless run of "house flipping" shows.

10 years ago, the middle class was excited to get 4 bedrooms instead of 3.

Next thing you know, it was considered de jure to have granite counters and wood floors in the ghetto.

Eddy said...

There's wasn't a housing bubble, there was a credit bubble. When too much money is lying around, it will eventually go into lousy areas. Lending to "the bottom half" isn't new. That's how the third-world debt crisis got started in the 1970s. Bono was pretty quiet on the subject back then.

eh said...

And that made no sense at all.

It does if you understand that the goal was never to practice sound underwriting e.g. making sure or worrying at all about whether they could make the payments, but the politically correct goal of putting more NAMs in their own house. As you and others have already demonstrated so well. So again it is the power of political correctness and the immense stupidity of those whose thinking is saturated by it, i.e. goes no further than such appearances.

Lucius Vorenus said...

Eddy: There's wasn't a housing bubble, there was a credit bubble.


There was POPULATION bubble - Caucasian [and Asian] Baby Boomers failed to breed at replacement rate fertility, and now there are insufficient numbers of young people in the USA who are capable of producing a return on an investment in them [realized when you offer them mortgage financing]:

USA Population by Age, Caucasian

USA Population by Age, Asian

USA Population by Age, Black

USA Population by Age, Hispanic

mnuez said...

All of this race talk seems to me to be counterproductive.

Don't get me wrong, most of it is true... But there are bigger truths.

The natural tendency that we all feel to speak truths that aren't allowed to be spoken should not be allowed to override permitted truths that may be more relevant to the issues at hand.

Some of the various race issues brought up with reference to this crisis have serious merit but there are other issues (even if they be more "permittable" for discussion) that appear to me to be of greater relevance and importance with regard to the crisis at this time, not least of which is the socialism for the rich that's just been forced upon us (such as that which is artificially propping up house prices to the benefit of wealthy and middle class home-owners and to the detriment of the working class and middle class renters).

All that I'm saying is that accuracy favors neither the permitted nor the verboten, both need to be equally and coolly considered in our analyses.



Jim Bowery said...

The point was never to have the mortgages repaid. The point was to liquidate what remained of the US's credibility with the newly rich global "playahs" and run.

Ultimately this was caused by the moral depravity of wealth centralization.

Captain Jack Aubrey said...

If you're filthy rich, there just isn't any risk in investment any more.

Well, yes, that is their attitude. That's been their attitude towards the cost of labor for a long time: if you start a business, you're entitled to the labor you need at the price you want to pay. There was never a time when this administration looked at a businessman and said: "You know, maybe people just aren't willing to pay for your service at the going rate of labor. So find a new line of work, m'kay."

Americans aren't entitled to gas at the price we want to pay. When home prices were soaring we certainly weren't entitled to homes at the price we wanted to pay.

Just look at Agriprocessors in Postville, Iowa: they employed hundreds of illegals, and have been charged with hundreds of labor violations. Few businesses have less right than Agriprocessors to go to the government hat-in-hand and ask for favors. But what are they doing? The government is going to let them import dozens (hundreds?) of Palauans to do their dirty work. Palau is not a US territory or possession, but it does have a "compact of free association" with the United States, signed because they give the US military certain access to their islands. "Invade the world, invite the world," indeed.


And notice Barack Obama's plan for "solving" the crisis: spend another $50 billion on stimulus; make it easier for those behind on their mortgages to keep their homes; make it easier for people to declare bankruptcy but stay in their homes.

Every single one of those policies helps blacks and Hispanics far more than it does whites. Obama's looking out after his base (and race). When can white Republicans look to our politicians to look after our interests?

steve wood said...

If history is any guide pretty soon now we're going to have someone at the head of an army who knows of a way to fight city hall, but in a way that leaves bullet ridden corpses of bureaucrats everywhere. We're about at the point where this person would be hailed as a liberator by the American people

Where is the evidence for impending armed rebellion against the government? Anyone who believes that such a thing is likely in the near future is spending too much time at extremist blogs. Anyone who imagines that such a leader would be greeted as anything but a ursurper, thug and incipient Fascist dictator doesn't know the American people very well.

I blame everything on HGTV and the endless run of "house flipping" shows.

10 years ago, the middle class was excited to get 4 bedrooms instead of 3.

Next thing you know, it was considered de jure to have granite counters and wood floors in the ghetto.

Good point, although you have to look deeper than HGTV and "Flip That House." Our economy is built on endlessly rising consumption, and it's the job of advertisers and media types to keep fueling the purchasing frenzy. To earn the money to buy these fun but frivolous things, we are urged to work ever longer hours and make our lives ever more work-centered. However, we can't blame mysterious media forces; fundamentally it's our own fault. No one was forced to buy a McMansion with a Jacuzzi in every bathroom or his'n'hers SUVs. The increasing greed and materialism of our society was bound to lead to problems eventually.

Frankly, I think the national spirit would, in the long run, benefit from a long, deep recession to wring some of the ridiculous excess and self-indulgence out of society. It would be cruel to wish for anything that would cause so much suffering, but, if a depression happens, it might not be all bad in the long run.

dearieme said...

If the American people want an "incipient Fascist dictator" they'll vote for one, just as they did for FDR.

Pat Shuff said...

A Quantum of Kumquats seek Mammon Particle in Large Headless SuperDuperColluder

Bloomberg: New Jersey's `Wall Street West' Quakes Amid Namesake's Turmoil

As now NJ slides towards the Black-Scholes event horizon, seeing its fate sealed in CA, NY (Europe, Venus, sundry turdish financial nebulocities cum velocities) swirling
around the bowl, Working Group aka TPPP (toilet paper plunger plumbers, inc.) make every contempt to clear the Crocs, er, clogs plugging the suing system.

In relatively news, fiscalists continue the frenzic work in the aftermath of the Mammon
Particle undetected at the large superdupercolluder in ConCERNs, Swizzleland, especially the Gnomes of Zurich. With loan sharks sideswiping the now putrifying incorporate
carcasses as far as the coasting Britain, the wheeling, dealing vultures and ravens, eyeing the undercurrents with low overhead, now threaten the virulent spreading academic just may go Airborne, 101st Espresso, realizing their best fear. Time is of the issuance.

Changelings in the temple, fearing not an accounting for the angels of mammons dancing on pinheads in pinstripes in priesthoods from Princetons, they fired up the colluder
smashing sums unqualified incertitudes unquantified undeniably unqualified in herds beyond certified. Squared. By the cubicles of the cubicled. Searching through the haystacks of needles, in the quantums of kumquats from Princetons of priesthoods, their exhilarating pinheads grew nil an A ratings longer than shorters yet shorter forshortened the time spreading the pinstripes wider than spyders cracking forth the mammon particle captivated by the
smashing crashing successpool.

To con firmly Higgs Bosun's Whistle (all aboard), HitIceberg's (the unprincipled certainty), StumpPeter's (destructive cretinism) but most importantly ForShoreDingaling's
Copenhagen thought experiment, the fatcat box (would he be snuffed or not?) So nakedly fearless a mere child would blow the lid off for all to see. And boy did they. Half the poison ivy league rocket scientists wouldn't be shocked at the nine fatcats boxed in paned auras whom, fur flying to the nines, left half to remain faceless in the wake of the mirrored exchange.

So there you have it, unladies and ungentlemen, 50-50 is as good as its getting, misplace bets accordingly. Spooked by entanglements, at the speed of light very far joins very near everything, so very dear, whether spinning left or right spewn by the malcontents from paned auras box.

For collusion in delusion joyriding to conclusion in collision & contusion, merci d'avance for your perusion, merci bien for such confusion when footing castles in the air
bid adieu to the illusion.

Anonymous said...

Steve, quality control, please.

rightsaidfred said...

Pat Shuff, how long did you spend crafting that?

>>>>Anyone who believes that such a thing is likely in the near future is spending too much time at extremist blogs.

You're harshing my buzz. I want some action, and I want it now.

Pat Shuff said...

Less time than being
crafted by it.

chirich said...

SWPL alert:
Re: "to (after a brief teaser period) make".
If you parenthesize can you split...?

Close the F'ing Borders said...

Wow, is it great to see "diversity" finally bite the elitist NY-DC Axis of Evil right on the ass, rather than having diversity terrorize only the middle class.

Anonymous said...

My criticism of your VDare piece is it implies that minorities are more likely to default on their loans. This is probably true. Please show the statistics to back it up. My second criticism is that the dollar value of losses may not be disproportionally minority caused. That is, white people who had better credit are more likely to get approved for a bigger sized loan. White people with mortgages = bigger mortgage losses by dollar value. There is a difference between losing 40% on a 300,000 dollar mortgage and losing 40% on a 1,000,000 dollar mortgage. What percentage of people who got a million dollar mortgage in 2007 in California are white? My guess is that they are a lot whiter than the average. If I am wrong, please show the statistics.

btw, my mother lost stuck the banks with two million dollars in mortgage losses in Florida. She had a dozen properties and all sorts of exotic loans. She was an immigrant....and white!

Anonymous said...


why don't you say that a driver towards bigger houses in the suburbs was perceived social class based on a manor system? The lord of the manor had lots of land and the peasants worked on it. The size of his house indicated social class. The house buyers were trying to emulate the status symbols of English country life.

Anonymous said...

I'd actually like to see this as a reality show...

For example, Southern California is full of people who used to be movie, TV, or pop music stars but aren't anymore. Yet, with the exception of addicts who blew all their money on drugs, you almost never hear of ex-stars having to undergo the humiliation of having to get real, boring, non-glamorous jobs to pay the rent. Among ex-stars who stay off drugs, you find a lot of them during the longer and longer periods "between projects" coaching their kids' soccer teams, taking yoga classes, noodling on screenplays they never finish, walking their dogs, and just generally enjoying pleasant lives without bosses or jobs.

A big reason for them not running out of rent money: back when they were making lots of money, they didn't rent, they bought—and in very expensive neighborhoods.

One of the things everybody does when he becomes a star is to buy a house in Beverly Hills. And then when you aren't a star anymore and finally run out of money, rather than get a job, you sell your Beverly Hills house, which has appreciated dramatically, to somebody who is currently a star, and you buy a cheaper house in Santa Monica and live off the difference while you pretend you still have a career in the industry.

Then, after a decade or two of going out to lunch at nice restaurants you are running out of money again. So you sell your Santa Monica house to a newly rich person for a lot more than you paid for it and buy a cheaper house in Encino. Lather, rinse, and repeat.

Anonymous said...

The end of your article needs fine tuning:

"Oh, wait—it just didn’t.

And they just haven’t.


Statsquatch said...

Steve enjoys being right too much. said...

"The real owners are the big wealthy business interests that control things and make all the important decisions. Forget the politicians, they're an irrelevancy. The politicians are put there to give you the idea that you have freedom of choice. You don't.

You have no choice. You have owners. They own you. They own everything. They own all the important land. They own and control the corporations. They've long since bought and paid for the Senate, the Congress, the statehouses, the city halls. They've got the judges in their back pockets. And they own all the big media companies, so that they control just about all of the news and information you hear.

They've got you by the balls. They spend billions of dollars every year lobbying to get what they want. Well, we know what they want; they want more for themselves and less for everybody else. But I'll tell you what they don't want. They don't want a population of citizens capable of critical thinking.

They don't want well-informed, well-educated people capable of critical thinking. They're not interested in that. That doesn't help them. That's against their interests. They don't want people who are smart enough to sit around the kitchen table and figure out how badly they're getting fucked by a system that threw them overboard 30 years ago.

"You know what they want? Obedient workers people who are just smart enough to run the machines and do the paperwork, but just dumb enough to passively accept all these increasingly shittier jobs with the lower pay, the longer hours, reduced benefits, the end of overtime and the vanishing pension that disappears the minute you go to collect it.

"Now, they're coming for your Social Security. They want your fucking retirement money. They want it back, so they can give it to their criminal friends on Wall Street. And you know something? They'll get it. They'll get it all, sooner or later, because they own this fucking place. It's a big club, and you ain't in it. You and I are not in the big club."

This country is finished."
The late George Carlin

Captain Jack Aubrey said...

Interesting data on income disparity.

"Real after-tax incomes jumped by an average of nearly $180,000 for the top 1 percent of households in 2005[in one single year], while rising just $400 for middle-income households and $200 for lower-income households, according to new data from the Congressional Budget Office...In addition, the share of national after-tax income going to the top 1 percent of households more than doubled between 1979 (when it stood at 7.5 percent) and 2005 (when it reached 15.6 percent). The $180,000 average income gain for these households in 2005 is more than three times the average middle-income household’s total income."

In order to counteract this disturbing trend, former Speaker Newt Gingrich presented us with this snake oil for our consideration: eliminate capital gains (among other things).

My criticism of your VDare piece is it implies that minorities are more likely to default on their loans. This is probably true. Please show the statistics to back it up. My second criticism is that the dollar value of losses may not be disproportionally minority caused.

It's probably true that at least a slim majority of defaulters are white, and almost certainly true dollar value-wise.

But NAMs contributed more to this mortgage crisis than their higher likelihood of default:

1) Pressure by minority groups (like ACORN - Obama's old employer) to lower lending standards so that more minorities could get loans.

2) Mass immigration probably helped with the perception that this was not a bubble, but a genuine, permanent increase in home prices due to higher demand.

And even when the villains weren't minorities, they were in the open borders crowd: George Bush, Bill Clinton, Phil Gramm, and so on.

Bill said...

You can't leave out the generational aspects of this. Young Americans (under 40) are overrepresented in the second quartile, and have, for the most part, missed the boat for their entire lives.

Who needs houses the most? People with kids. Who is least able to afford them these days? Those of childbearing/rearing age.

I really feel for young people who bought houses over the last five years or so. They're going to get nailed to the wall in this. One problem is that a lot of them thought they didn't have a choice, or they took advice from parents and others who said it was "always a good investment."

When looking for a house a few years back (I was skeptical, but my parents and in-laws were advising me to do so) I did the numbers and determined how much a mortgage, maintenance and taxes would cost compared to rent (twice as much), then I just tossed in the towel, and I'm very glad I did!

But this trillion dollar bailout? My God... How will we ever pay that off? And the war, and social security, and medicare, and so on. This won't work. No way. There's going to be a hell of a reckoning.

The bailout will just delay the inevitable for a year or so. Maybe less. I always expected this to happen sooner, but they've kept up the financial tap dance for long enough to keep things going until now. That probably just made things worse for the long run. Oh well.

Tscottme said...

Steve, remember that this developed, step-by-step, over years and years with little or no big plan, putting aside the conspiracy theories. It seems you're presuming some big wig(s) used a version of your analysis of lower-income home buyers and arrived at a different conclusion than yours.

While some investing fads came and went, housing persisted as an attractive investment. Throw a lot of financial engineering to leverage increasing investments and shift the risk, rinse and repeat, and you eventually get a bubble and then a burt bubble.

During the Tech Bubble, most people, even the experts, recognized the P/E ratios were far beyond historical norms, suggesting development of a bubble. But to be safe meant giving up giant profits today in anticipation of some future crash. If the bubble lasts any significant period even many level-headed investors will be tempted to "make hay while the sun is shining" while expecting to get out of the risky investment before it fails. The lnger the bubble lasts and the more people that participate and win, the more difficult it is to give up real profits.

Everything in this world would look very different if some omnipotent planner was able to know exactly what today would be, years in advance, and then optimally design every thing and every law for maximum benefit. Sadly, life is not an exercise in clean-sheet optimum designing. You have to work with the things as they are and while your experiences influence your current understanding.

We have Fannie and Freddie because we had Great Depression's forclosure epidemic. We have overworked national guardsmen because the national guard once seemed to be a way to avoid dangerous duty. We have over-subscribed and over-priced colleges because college degrees once were the sure bet for a better career.

People like us are uber-rationalists and seek some rational and deliberate explanation to some crazy things that are the result of a series of decisions which were only slighty unusual, individually taken. The outcome is crazy and obvious in hindsight. BTW college often teaches one to discount reality and prefer the complicated explanation delivered by an expert. As Dennis Prager says some things are so stupid only a college graduate will believe them.

simon said...

"What in the world made anybody think that the second quartile up from the bottom was developing more earning capacity?"

Ah, but that's the soft bigotry of low expectations, Steve.


Gibbon said...

Plebs non gentum habet. Most of America is plebs. Middle class = plebs. Upper middle class = plebs.

What is gentum? Gentum is "family" in the old Roman sense of the word. Not a nuclear family; gentum means a family name and and family assets that are passed down along many generations. Grandma's wedding ring does not count. Assets means businesses with connections and trade craft, estates, loyal servants, and the value inherent in a real family name.

Americans made a little bit of money in the 1950's, because the world was reeling from infrastructure damage and human casualties in the Wars. What did Americans do? We spent it all. The biggest investment was in educations for the kids (increasingly few of these), who were shooed out of the nest as quickly as possible. What money remained from lifetimes of work was spent in Winnebagos and any crumbs left over were inherited minus estate taxes.

Now the world is well back on its feet, and Americans have lots of competition. Those corporation that were temporarily so loyal to American workers have been looking for better labor for some time now. Meanwhile, Americans kept spending whether they had the money or not, and the grand clock in Cinderella's ballroom (bad mortgage debt) has struck midnight.

Now we are back to square one.
In the long run we will reckon not only with our mortgage debt and consumer debt, but also with the massive educational debt that parents have pushed their kids into.

Unfortunately, there will be no retreating to the family estate or even the family farm. We have long abandoned the farms and we never had the estates. Plebs non gentum habet.

Anonymous said...

dicercity said, "...traitors Paulson and Bernanke..."

Bernanke's not a traitor. I see no indication that he's betrayed his nation.

Waspy Paulson, on the other hand...

Anonymous said...

I recently worked for a private bank in Southern California. Most of my clients were educated, professional whites looking for second loans and lines of credit.

A typical client of mine was a high-level executive or entrepreneur and owned several properties. Their mortgages were mostly ARMs. Their primary residence was in, say, Corona del Mar (a prestigious seaside town in Newport Beach), but they owned condos or duplexes in less affluent areas nearby which they rented out to Hispanics, Asians, and other third world immigrants. In fact, not a few of them told me they wanted to snap up more properties to take advantage of all the Mexicans coming in. They were aspiring to be slumlords.

Almost all of these High Net Worth clients had a belief that the housing boom would never end. It simply did not figure into their anlaysis. The falsification of income and assets was commonplace, but we were encouraged to turn a blind eye.

Some of the loans and lines were we gave these clients were secured by real estate and investment portfolios. They are getting hit hard by the recent downturn.

Among my colleagues at the bank, the most vulgar bankers were the Indians and Asians. It was they who were the most crass and arrogant, displaying an almost unbelievable grasping materialism. They certainly weren't the smartest people, but they knew how to suck up to their (mostly white) clients.

The conspicuous consmption was out of control. My clients used to invite me to parties in Newport Beach, Laguna Beach, and LA, at which there tended to be loads of escorts and drugs.

I remember going to a party at a beach front house in Laguna Beach in 2006 and there were piles of cocaine on a glass table in front of a huge window overlooking the beach. People were having sex in the jacuzzi outside. I am too young to have experienced the excesses of the 1980s, but I imagine it was similar.

O, happy days...

Reg Cæsar said...

"This country is finished."
--The late George Carlin

"The late George Carlin is finished."
--This country

(from an old Nietzsche joke)

J said...

While about half of the mortgages to black people are not repaid, black make up less than 10% of all the mortgages. The numbers are approximations. At the start of the subprime crisis a year ago, the total amount of losses was calculated 300 million dollars, which are peanuts for the American banking system. How come that these small losses are causing large banks to go broke? I think it is a typical run on the bank phenomenon, nothing to do with Bush being excessively generous with the underclass.

Reg Cæsar said...

Who needs houses the most? People with kids. Who is least able to afford them these days? Those of childbearing/rearing age.

If my city is any indication, there are plenty of affordable houses fit for families of 2 or 3 children on the edges of the ghetto. (Or el barrio.) Just invest in some weaponry (and NRA stickers on the windows), and word will get around that crazy-- excuse me, serious-- white people are moving back in, and the neighbors had better behave.

A fixer-upper kitty-corner from my church was recently going for $45,000. Interested parishioners wouldn't have to look around for a good school-- not only is there one attached to the church, their children are already enrolled in it!

But it could be across the street, rather than across the county, as it is now.

Anonymous said...

For that matter, when was it safe to bet on ANYBODY always being able to write a check for $4K a month, every month, for 30 years, much less an ARM or interest-only in that amount?

Here is the lesson for consumers to learn: if you don't have $750,000 liquid, you can't afford a $750,000 home. Period. Working schleps, even ones with Vice President of Marketing on their door, just don't generate that kind of cash flow for three solid decades. Also, you are talking about almost $2M in mortgage payments by the time that white elephant is paid off. That is a gamble on A LOT of appreciation for a bit of land with a durable consumer good on it. And all this is probably applicable to $300K homes as well--we'll find out when we hit bottom.

--Senor Doug

Captain Jack Aubrey said...

Who needs houses the most? People with kids. Who is least able to afford them these days? Those of childbearing/rearing age.

There's plenty of affordable homes out there for people raising kids. Trouble is they're in neighborhoods that look nothing like the safe neighborhoods these parents were raised in.

Patrick said...

I agree with that lenders were drunk with cash, and lowered standards to provide mortgages to those who would not or could not service their debt. However, deregulation of the banks via the repeal of the depression era Glass-Steagall Act was significant. It created the opportunity for the dangerous credit swaps, and these swaps are where all the money came from. Most interesting is the host of characters that pushed through the repeal, including Clinton, Greenspan, Phil Gramm, Sanford Weill of Citigroup and more. It would be interesting to know what current incumbents pushed through this disastrous repeal.

Duscany said...

A lot of the low income/poor credit risk people didn't care about their monthly payments since they never intended to make them anyway. They got in a house with no down payment, they pulled out all the equity as soon as they could, they quit making payments (even before the payments increased) and now they want a bailout to keep their homes. Their houses where never theirs in the first place. When you make no down payment, lie about your income (a federal offense on a bank loan, by the way) and pull out all the equity, you have done nothing but make a profit on the house. You haven't lost a thing. Why should anyone feel sorry for you? Or want to make sure you get an even better deal on what so far for you has been a fantastically profitable investment?

Anonymous said...

mnuez: All of this race talk seems to me to be counterproductive.
Don't get me wrong, most of it is true... But there are bigger truths.

No, race is the biggest factor here. Interesting that you, RKU, and testing99 are always on the same page on this -- "see no race". Always a different redirect. Testing99 redirects to the Muslims and you redirect to the evils of capitalism, which are the two standard redirects. RKU implements a less common one, which is to ignore Hispanics but point at blacks. But it is a redirect nonetheless. Wonder what you three might have in common. Speculating might be considered biased against your ethnic group, so I won't push the point further.

anon: My criticism of your VDare piece is it implies that minorities are more likely to default on their loans. This is probably true. Please show the statistics to back it up. My second criticism is that the dollar value of losses may not be disproportionally minority caused.

See cites below. They show:

a) default rate higher among minorities
b) minorities more likely to have subprime loans even at higher income levels (b/c income is not a perfect proxy for IQ, and high income minorities are very disproportionately affirmative action recipients. See the regression to the mean in Prince George's County).

"...the default rate on high-minority census tracts is significantly higher than the default rate on low-
minority census tracts."

What insurers aren't allowed to do is discriminate based on race, no matter how actuarially sound their arguments. Blacks, for example, have shorter life expectancies on average than whites, but companies aren't allowed to charge black customers more for life insurance.

"Urban, Minority Foreclosures on the rise"

A similar pattern can be seen in Chicago, where foreclosure filings tripled, to 7,576, from 1993 to 2005. Neighborhoods where the population is more than 80 percent non-white account for 65 percent of all cases, up from 61 percent in 1993, according to data compiled by the National Training and Information Center, a housing advocacy and research group based in Chicago. The same trends have been documented in Atlanta and Philadelphia, according to researchers from Harvard and the Reinvestment Fund, a Philadelphia-based investment organization hired by the Pennsylvania Department of Banking to study mortgage foreclosures in the state.

The 10 neighborhoods with the highest rates of mortgages from subprime lenders had black and Hispanic majorities, and the 10 areas with the lowest rates were mainly non-Hispanic white.

...the rate of subprime lending is far higher for minorities than for whites even at higher income levels. For example, 24 percent of non-Hispanic white borrowers earning $125,000 to $150,000 took out a subprime mortgage in 2006, compared with 52 percent of Hispanics and 63 percent of non-Hispanic blacks in the same income range.

July 13, 2007--The National Association for the Advancement of Colored People stepped into the fight against subprime lending Wednesday when it sued 12 national mortgage-lending companies for discriminatory practices.

. But Hispanics and African-Americans were far more likely to leverage the American dream with subprime loans — higher-cost products for buyers with impaired credit — that are now going bad at an alarming rate.

About 46% of Hispanics and 55% of blacks who took out purchase mortgages in 2005 got higher-cost loans, compared with about 17% of whites and Asians, according to Federal Reserve data. The South Side of Chicago, with a large concentration of minority borrowers, has a high concentration of subprime loans and the state's highest foreclosure rate. In Boston, where defaults are rising — especially in minority areas — 73% of high-income black buyers (those making $92,000 to $152,000) and 70% of high-income Hispanics had subprime loans in 2005, compared with 17% of whites.

...Recent immigrants lack credit histories, and 35% of Latino families don't have checking accounts. Hispanic families are more apt to have undocumented income, leading them to lenders who make loans without income verification, according to the National Council of La Raza.


Another reason for the subprime surge: Lenders have been supported by politicians and community leaders eager to promote minority homeownership, which remains about 25 percentage points below that of white non-Hispanics.

"Access became such a buzzword that people forgot about basic lending practices," says Keith Corbett, executive vice president of the Center for Responsible Lending. "You are really in debt servitude, having a loan with a loan-to-value ratio of 100% or greater."

High-cost subprime mortgages have often been framed as loans that catered to people with blemished credit records or little experience with debt.

There has been less attention paid to the concentration of these loans in neighborhoods that are largely black, Hispanic, or both. This pattern, documented in federal loan records, holds true even when comparing white middle-income or upper-income neighborhoods with similar minority ones.

The Joint Center for Political and Economic Studies reports that the rate of subprime mortgages for Latinos and African Americans is about double the rate for whites. In 2006, subprimes made up one in four mortgages (26 percent) made to whites, 47 percent of those to Latinos and 53 percent of mortgages that went to African Americans.

Illegal immigrants were able to buy U.S. homes during the boom years, either by showing evidence that they pay taxes or by simply presenting false documents. Many of them took out high interest fixed-rate loans or subprime mortgages with a low entry rate that later rose sharply.

"It boggles the mind to think how many illegal aliens are homeowners in this country thanks to these programs, all fully insured by our government. Because of fear of lawsuits for discrimination I can also tell you that a lender may have a borrower who speaks little or no English who claims to be either a citizen or resident alien and it will not be questioned nor any proof required.

In a world devoid of lending discrimination, therefore, minority
mortgage holders as a group will tend to have higher default
rates than the pool of white mortgage holders

Austan Goolsbee: Also, the historical evidence suggests that cracking down on new mortgages may hit exactly the wrong people. As Professor Rosen explains, "The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated against, the people without a lot of money in the bank to use for a down payment." It has allowed them access to mortgages whereas lenders would have once just turned them away.

The Center for Responsible Lending estimated that in 2005, a majority of home loans to African-Americans and 40 percent of home loans to Hispanics were subprime loans. The existence and spread of subprime lending helps explain the drastic growth of homeownership for these same groups. Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.

Obama, Like Dodd and Conrad, Got Cheap Home Loan

Wednesday, July 2, 2008 10:36 AM

By: Rick Pedraza

Presidential nominee Barack Obama joins the list of several other high-profile Democratic Party members who received highly favorable home loans.

Obama, D-Ill., reportedly purchased a $1.65 million mansion in Chicago through a "super, super jumbo" loan he received from Northern Trust Bank in Illinois, the Washington Post reports.

The portion of the money financed through the lender ($1.32 million) was offered to the Obamas at an unusually low discount interest rate locked in at 5.625 percent over the life of the 30-year fixed-rate loan, which was below the average of what a typical Chicagoan pursuing a similar low loan rate received at the time.

For his part, Obama and his camp are defending the lower rate as lender competition for business. A spokesman for the camp says, "The Obamas have since had as much as $3 million invested through Northern Trust."

Obama joins Sen. Chris Dodd, D-Conn., and Sen. Kent Conrad, D-N.D., on the list of high-profile public figures who received "VIP" loans that some now are scrutinizing as alleged trade-offs for political favors.

According to a report released last month by Condé Nast, Dodd received highly favorable loans under the designation, "Friend of Angelo," a reference to embattled Countrywide Financial Corp. head Angelo Mozilo.

Dodd, who chairs the Senate Banking Committee, received loans from Countrywide that reportedly saved him tens of thousands of dollars.

Conrad also has been named as a recipient of special-consideration loans from the beleaguered lender.

Countrywide is the same bank involved in the loan scandal that caused Obama's vice presidential Vetting Team Chief James Johnson to resign amid criticism over his personal loan deals with the lender.

Other high-ranking political officials involved in questionable "VIP" home loans include former Secretary of Housing and Urban Development Alphonso Jackson, former Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and assistant Secretary of State Richard Holbrooke, Condé Nast reports.

VoodooMan said...

I don't recall any banks or government agencies being so generous to white male Gen-Xers in the early 1990s.

Besides, have people forgotten how to save money for their dream home while living in apartments and riding buses to work?

anony-mouse said...

1/ $3750/ month is too high for Patty or Selma (how they got a kid might be a mystery), but half that is easily doable, and if that's what they can renegotiate...

2/ People with large families can live in Utah. Utahns are doing it.

Jun said...

"Guess again who's to blame for U.S. mortgage meltdown"
Analysts point not to greed, but to social activist politics

Captain Jack Aubrey said...

$3750/ month is too high for Patty or Selma (how they got a kid might be a mystery), but half that is easily doable, and if that's what they can renegotiate...

Why should they be able to renegotiate that? What if I can offer $2250 a month? Why should a person already in the house, who can't pay on their initial terms, get to pay less than what the house is worth on the market?

Anonymous said...

A year ago, in Roswell, GA, I did some volunteer work for a private charity for people who were temporarily homeless.

A cute, pretty black woman who had been helped by the program spoke at a meeting of volunteers. She was a single mother with two or three children. She'd lost her job and was unable to pay the rent. She stayed with her sister (also single with children) for a bit. But her sister's place was quite far off from her children's school, and she had trouble getting the kids to school on time. Eventually, she ended up getting a house through our program and soon got a job and got back on her feet.

And now, she said, through tears, she had become a proud homeowner through some other program which helps low income people get houses.

I wonder if she's still a homeowner now?