What we knew and Democrats didn't want to admit on Housing
A well-done research piece on just how the government's CRA standards directly lead to the housing meltdown. Everyone knows this is what happened, but this is the incontrovertible and empirical evidence.
CRA had nothing to do with the 'intent' to create crappy loans, the problem was banks were forced to equally represent their market share across zip codes. It is a reality, particularly here in California, that you pay for a better neighborhood. People usually end up in crappy neighborhoods by not having a good track record of paying their bills on-time (if at all), and are forced to rent from landlords that don't care what their credit rating looks like, immigrants that think that the lower-rent or house-price is a good deal, and people that don't have a steady source of income (and resulting spotty bill-payment).
During the hey day of that stuff, banks were trying to fulfill their quotas, but if you have no applicants in the neighborhood, or more commonly the loan officers just don't want to deal with the headache, you have to keep going down the ladder rung to scoop up enough to fill those zip codes with loans. Loan officers are paid on a commission-only basis either entirely or as a huge part of their income. If they have to spend their time taking loan applications from people that couldn't get a credit card from Home Depot, have never filed a tax return, work for cash under the table for a landscaper or something, and don't have any proof of their income - the loan officer is going to be starving to death. They are also paid on a percentage of the size of the loan, so if it's a $30,000 mobile home loan, they are going to make $300, and it's going to be far more work for 60 days with everything from DMV license plate certification on the thing to whether it has a smoke detector, carbon monoxide sensors, and earthquake strapping. It's a pain in the ass, quite literally, or they can take a VA app from a recently discharged veteran that just started working in Silicon Valley buying a $600,000 townhouse that they can pretty easily make $12,000 on with a minimal amount of paperwork, a 750 fico score, and most of the documentation requirements waived. Which one would you spend (or waste) your time on? Realtors just tell people you can't finance a mobile home, it's not entirely true, you can, you just can't find anyone to bother doing it.
To scoop up enough of that stuff, we were being given stuff like "0-down up to $1 million, 500 FICO score, and 1 day out of Bankruptcy OK" - did anyone seriously think this crap would be paid back? We were being forced to scrounge up community loans to package with our A-credit borrowers. You couldn't bundle 100% of that junk in the same pool, and at the time, interest rates were around 6-7%, and bond investors were being paid something like 3-4% on their money, so there was theoretically some margin to cover the bad loans with. There was never a thought that 100% of everyone might default, and if someone defaults, you still have the asset to sell - they didn't think that houses would drop to practically nothing in value either at the same time. It was a noble thought to bring people into the marketplace, and it's true that home ownership does contribute to the building of wealth and security (if you can afford the home). It was just executed poorly.
Lets not forget either, the only reason Wall Street got into the mortgage business, which was perceived as a low-margin investment, was because Fannie & Freddie (stacked with former democrat politicians managing them) were found in extreme violation of common accepted accounting practices and had to restate years and years of earnings to the negative, and investors ran like hell from them. Wall Street wasn't content with 5% interest, so securitization was developed. The loans were packed by the hundreds or thousands and sliced up into $1000 bonds, which would be a piece of many loans with presumably lower risk of default. The individual bonds, could be sold at retail - with retail investment/brokerage fees of maybe $60 or so on a bond. On a $300,000 mortgage, you turn into $18,000 in bond fees, plus the interest, plus an annual servicing fee of another 1%... and within weeks of the investment you sold the loan with a premium markup above face value to boot.. so it was someone else's money at that - so paying a couple of points to the mortgage bank originating it wasn't a big deal, in fact you would chase the stuff to get more and more of them. They might make 2-3% (net) on that $300,000 in hours selling it into a securities pool, which then made more money, and more in perpetuity. $9k in an hour is pretty good compensation. Of course, its linear, so $1,000,000 would be $30k Liability for the loss was only for 3-6 months of payments, so a common underwriting practice was to see 3-6 months of reserves (money to pay the bill) as cash-on-hand after the transaction, if they defaulted after that, who cared.
It got much more complex with AIG... AIG made a lot of money selling insurance on the pools, so what might have been a A- or B grade investment becomes a AA+ or AAA with the implicit insurance against default from AIG attached (in exchange for a premium that adds to the service charge each year but reduces risk).
On face value, and in theory, that system should have (and did work) just fine, while also having the capacity to exponentially increase the housing market of the US. Too much, obviously, but with simple population growth and replacement, we need to basically build about 500,000 to 1 million new homes a year in the US, that money has to come from somewhere in terms of land development costs to the developer (roads & infrastructure), sidewalks, parks, schools, construction loans, and ultimately homebuyers. In California terms, we don't do one-off custom houses very often, with 40 million people, we don't have 400,000 home builders - it's going to be tracts of houses in most cases, usually 300 to maybe 2000 in a development. We're talking scale that most banks won't really take on by themselves in the risk of a calamity at the location. It takes Wall Street investment to do things like that. That's not the local credit union.
When everything went to shit at once, there was a run on the credit default swaps (the insurance sold by AIG), which probably had reserves to pay 10 or 20% of them in a worst-case scenario. Paying 25 or 30% was not in the realm of reality. When the insurance defaulted, so did the trade agreements with investors, and then the ugly mess of figuring out who owns what, where, how much, etc.
The politicians love to bash the 'banksters' or whatever as taking advantage of people, but they were heavily regulated to fund x number of loans in the zipcode in order to fund y number in that zipcode. You don't mysteriously find 35% of the residents in the 'hood as being upstanding citizens that have been teaching college for the last 10 years and Sunday school on the weekends, but they just decide to live in Del Paso Heights or South Central LA to save a few bucks. People self-segregate based on socio economic class, and as a matter of fact, if a customer asks their real estate agent about a 'neighborhood', for example someone moving from outside the area, the realtor is actually prohibited by law from stating something to the effect of crime rates, predominant racial makeup, or anything with the exception of the general quality of the public schools, and the other here in California would be the presence and address of a registered sex offender (Megan's Law). If they are asked "is this a safe area?", the answer would be null to avoid a potential racial or economic discrimination case.
Inevitably, some zip codes have a very small percentage of people that have the ability to purchase a home, so the banks are pushed into a direction that would include the [undesirable] portfolio of non-owner occupied (investor) mortgages, or a sufficient credit 'bottom' to ensure quota compliance. That translates into other more credit-worthy borrowers subsidizing the interest rates to offset the risk.
Both of those examples have problems for a portfolio. Lower income doesn't really mean a bad borrower, if they can afford the home. Higher debt-to-income ratios do represent risk. The article is false on that account. So called "Community" loans do two things - 1.) they exempt the second mortgage to cover the downpayment from being a factor in creditworthiness because it can be forgiven after 5 years of home ownership or whatever. and 2.) Community loans allow much higher debt-to-income ratios... in my experience from about 8 years in the 2000's, the typical was a 52% front-end and 58% back-end ratio. That means that 52% of the gross income (before taxes and social security) is allocated to debt service of the mortgage/insurance/property taxes, and 58% committed to all credit obligations. Let's analyze this, if it's say someone making $35,000 a year in California, that isn't much, but typical for an area as described above. The person is grossing $2916 a month, with $1691.28 going out to pay bills, not including phone/cable/electricity/gas, car insurance, etc. Somehow that single mom or dad with a kid or two is going to be living on $400 / week for their mortgage and home insurance, income taxes, social security, utilities, food, everything they need, plus if a car breaks down, or if the house needs a new roof... It's pretty stupid, and the intent was to never 'red-line' mortgages, it was to avoid mortgages that would seem to represent a lot of risk to the bank and its depositors. The same neighborhoods probably have a $135,000 to $165,000 price tag for a home, and you are at every penny of that $1690 house payment, for the next 30 years. Let's look further, the person has a GED or maybe not even that, so their upside of future earnings growth might be very negligible. What if they get hurt on the job? Do landscapers carry worker's comp? No idea. Probably not. How is that house going to look in 5-7 years when the reality of $15 of spending money left over each month has really taken its toll and the gutters are falling off (or gone), the roof needs to be replaced, there is some kind of evidence of animal life in the rafters, and what looked like a mild case of termites is now a full-blown infestation. To say nothing of rafter tails and rotted fence maintenance & replacement. Now we have a new problem, the house is $20,000 behind on maintenance that the average homeowner can expect to spend $2000 to $3000 a year on, and its way-below in market value compared to the loan balance, and the people decide to just give it up and go back to renting. And let's be honest, if you are not a DIY type, or don't have the financial resources, some people really should be renters.
Lets take the same ratio, apply it to someone making $125,000 a year in Silicon Valley. The VA loan has zero mortgage insurance, a lower cost insurance from USAA w/ with their car loan & auto insurance there, and lets say it is a 58% back-end ratio as well because the BMW payment is kind of chunky. That person has a little over $4000 for the same expenses each month, and probably a lot less using the townhouse example because there wouldn't be any homeowner-paid maintenance on it. The HOA does that. The most expensive thing is a new refrigerator at Sears or a bucket of paint here & there. Is it conceivable that the single person just back from Iraq with $4000 a month of disposable income and a degree & experience in military-grade cyber security and free lunch/sodas/oil changes & massages at work is going to be able to get by on $1000 a week with a significant upside in earning potential? Heck yeah, I'll take that bet all day long.
Investor loans are just bad, they never take care of the properties for the most part, if you end up foreclosing, the combination of an absentee landlord and a terrible tenant is a very bad situation.
We (my mortgage bank) did make extensive use of subprime, I'm not going to say we didn't, but we used it as a 3-legged stool. We regarded A-paper as excellent credit, excellent income, and excellent reserves (cash/investments/retirement account,etc). If you are missing one of those - say the person has crappy income - like one of my best customers, she electively taught part time in San Jose for like $25,000 a year, but had an 800 credit score, very responsible use of credit, and had a 'trust fund' of sorts. Her parents used to own a 26-unit apartment building free & clear, sold it shortly before they died, and converted the money into Treasury Bonds and left them for her in a safe deposit box. She literally had around $3M in bonds. Whatever she needed each month to cover her shortfall, she went and converted some bonds. I couldn't document that, nor did she want to, as I'm sure the estate tax was never paid... but she had interest accruing on each of them and she didn't mind paying a little more interest with a subprime loan to avoid having to answer a lot of uncomfortable questions.
We also worked with a lot of home flippers, why go through the hassle of 25 days of paper work, 5 years of tax returns, profit & loss statements on the investment and 3 years of business financials just to use a loan for 2 or 3 months while rebuilding a property? We could give them a subprime loan in 5 or 6 days, it might cost them an extra couple of hundred a month for 2 or 3 months, but they saved themselves 30 days of paperwork and time has a value to it. Pay the bill and move on to the next one.
The problems arose when the government requiring equal representation of homeowners by zip codes, etc., and the inability to qualify those quota type loans with a traditional mortgage. Not only were they done a disservice, now the cost of the loan is more expensive than they would have paid otherwise (if they had been more credit-worthy), but there is significant risk to the investors too, and its not an easy answer. The knee jerk reaction from the government then was to heavily discriminate against all borrowers, and dramatically slowing the real estate market to the point that it still has not really recovered. Heck, I bought my house in 2004, and it's pretty much worth $40,000 less, still, today, than it was in 2004, despite over $100,000 + years of sweat equity I've invested in it over the years. I'm skeptical if it will ever recover in my lifetime to where it should be.
http://www.discoverthenetworks.org/Ar...
http://www.nbcnews.com/id/12923225/ns...
That was redistribution of My wealth...not to mention the stock I held in the Co. I worked for.
Hillary will buy me a brand new car!
Hillary will even pay of the national debt!
Where will she get all that money?
From her stash!
Remember, folks, HILLARY is~ FIGHTING FOR US!
Bernie will buy me a brand new car!
Bernie will even pay for my college education!
And Bernie will not give a happy damn about the national debt!
Where will Bernie get all that money?
From YOUR stash!
Do you feel the Bern?
1.) It was 'unfair' that veterans didn't have to have a downpayment. Ok, well, that was a long-standing benefit for service and one of the highest-performing investment portfolios in the industry (they highest in my experience). So what's the problem?
2.) FHA was like, 3.5% down, but required the house to not be in terrible condition and the borrower to come up with 3.5%. Quite honestly, if either of those is a factor, or both normally, why invest more time than has already been lost.