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As I am not an expert in finances or economics, I defer any judgment on the bailout and its failure.
But we are all experts in politics, aren't we. Do I understand it correctly that the basic driving force behind the current financial troubles is a failure of a socialist experiment in the housing market? Or is it only part of the problem?
And the politicians, as usual, will blame someone else. (And everybody else will blame politicians.)
It is interesting to note, too, that more Americans are reported to trust Obama's team on economics than McCains' team. Whereas one would think that it would be the other way.
Update. A bit heated in the comments. Chill out, the world is not going to end right now.
But we are all experts in politics, aren't we. Do I understand it correctly that the basic driving force behind the current financial troubles is a failure of a socialist experiment in the housing market? Or is it only part of the problem?
And the politicians, as usual, will blame someone else. (And everybody else will blame politicians.)
It is interesting to note, too, that more Americans are reported to trust Obama's team on economics than McCains' team. Whereas one would think that it would be the other way.
Update. A bit heated in the comments. Chill out, the world is not going to end right now.
no subject
Of course, there were several additional factors, so the blame cannot be put squarely (or solely) on any link in the chain or on one particular socioeconomic approach.
no subject
1. The quotes are heavily out of context. For example, the one that talks about not counting lack of credit history as a negative factor is immediately followed by recommendations on how to assess willingness to pay debt based on other factors. Taking it out of context distorts the meaning to almost the opposite of the intended one.
This fact alone makes it clear that the quotes are propagandistic tripe not to be trusted.
2. The recommendations, which are intended to contribute to greater minority representation in mortgage loans, have not greatly contributed to the crisis, and the wide recognition of that fact which you allude to is quite illusory.recognition of that fact. In fact, minorities are not overrepresented within the set of subprime loans (w.r.t. their overall representation in the population), and by far the majority of the subprime loans were given to non-minority homeowners.
3. These are recommendations, not requirements; they do not absolve any bank from its fiscal responsibility.
In short, this is a completely irrelevant red herring.
no subject
Are you talking about this part:
Willingness to pay debt promptly can be determined through review of utility, rent, telephone, insurance, and medical bill payments.
Do you realize the amount of effort it takes a bank to review all of the above, compared to checking credit history, which is an automated process?
Contacting the above companies would require a lot of additional workforce and expense, in addition to the fact, that they not assign scores to theire customers based on timeliness of payment, unlike credit companies.
So, if the customer is current on his bill it would take reviewing all his payments with dates with multiple companies, possible multiple companies for each kind of bill - I don't know how many phone companies I used over last years.
Did you fail to notice the almost immediately following:
In reviewing past credit problems, lenders should be willing to consider extenuating circumstances. ?
Don't you see from this document that th means through which that higher participation of minorities is to be achieved is through loosening of lending standards?
On everything - debt ratio, down payment, credit history, employment history, sources of income?
Don't you see on the debt ratio the document actually tries to persuade the bank that debt ratios theretofore considered risky are not so much and that secondary market is willing to buy them anyway, in other words actually encourages the lenders to make riskier loans and play that very game that led to the current meltdown?
and the wide recognition of that fact which you allude to is quite illusory.recognition of that fact.
I don't know (and you didn't mention) what you consider to be the reason(s) for this crisis, but I hope you realize that it all starts there - if the loans didn't default en masse, none of what happened down the line, would have happened.
In fact, minorities are not overrepresented within the set of subprime loans (w.r.t. their overall representation in the population), and by far the majority of the subprime loans were given to non-minority homeowners.
Where are you getting that?
New evidence shows that blacks and Latinos in Boston were more likely to get a high-cost, subprime mortgage when purchasing a home than were white borrowers at the same financial institutions.
Fifty-five percent of black and Latino borrowers in metropolitan Boston who obtained loans for single-family homes from seven US lending institutions had subprime loans, compared with 13 percent of white borrowers, according to a study prepared for the advocacy group Massachusetts Affordable Housing Alliance.
Home buyers in predominantly black and Hispanic neighborhoods in New York City were more likely to get their mortgages last year from a subprime lender than home buyers in white neighborhoods with similar income levels, according to a new analysis of home loan data by researchers at New York University.
(continued below)
no subject
Willingness to pay debt promptly can be determined through review of utility, rent, telephone, insurance, and medical bill payments.
Yes, and the rest of the paragraph.
Do you realize the amount of effort it takes a bank to review all of the above, compared to cheking credit history, which is an automated process?
The bank could ask the applicant to bring the documentation of this kind. It's actually commonly done in some situations.
Anyway, why are you trying to defend the deceptive behavior of people who originally cherry-picked the quote? (I trust you didn't choose it yourself). They're liars; they aren't trustworthy. You can't be trustworthy if you take a paragraph talking about alternative ways to judge the risk of a loan and quote one part of it that creates an impression that the intention is to ignore the risk altogether. It's dishonest. End of story. I'm not willing to engage in a debate with liars, because I don't have time and patience to fact-check every quote of theirs.
When recommendations are accompanied with numerous references to fairness laws (which lend themselves to loose interpretations) and by quotes like
“The regulatory issues in the 1990s will not be limited to safety and soundness, but will increasingly emphasize fairness: whether or not banks are fulfilling the needs of their communities.”
Lawrence B. Lindsey Member Board of Governors of the Federal Reserve System Address to the California Bankers Association May 11, 1992
this is a little more than mere recommendations.
Nope; still recommendations. The quote peddlers couldn't find actual regulatory enforcement that would require banks to give out riskier loans, and instead they peddle a quote from one member of the board in some address to some bankers about what he thinks the regulatory issues *are going to be*. This is laughable.
Where are you getting that?
I read some statistics saying that the percentage of subprime loans given to blacks is a little bit higher than their presence in the population and those of blacks considerably lower. What you quote doesn't contradict that. It doesn't matter if blacks/hispanics were more likely to get a subprime loan if the total number of subprime loans given to blacks/hispanics is a small portion of all subprime loans (which is the case).
no subject
I am afraid that this misconception has to do with the lack of familiarity with the realities of this country, and once you understand them a little better, you'll see that this argument doesn't hold any water (and with that the whole cherry-picking accusation as an excuse to dismiss the whole document).
I am not sure if you know what credit history is beyond what can be deduced from the actual words, because there is no such thing in Israel. Credit history is, basically, a record (or a report based on the record) of all the financial transactions of a particular individual related to loans and consumer credit (credit cards). In other words, anyone, who has ever had a credit card, has a credit history. Actually, a more important and related notion is credit score, which is calculated, as far as this information is disclosed, based, more or less, on such factors:
* 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
* 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
* 15% — length of credit history
* 10% — types of credit used (installment, revolving, consumer finance)
* 10% — recent search for credit and/or amount of credit obtained recently
Also, note, that the credit history is tied to a federally unique ID (social security number) and is checked by bank computers within a minute.
Now, despite what you might think, there is no such standard document, that says: "This consumer has paid all his utility bills" and even if there was, it would be impossible to determine if he paid them on time. Nor would this system take into consideration any other risk factors, which credit score is designed to assess. The only thing that a consumer can bring to prove his timely payments of his utility bills, are the actual bills, and only in the case and to the extent that he kept them (and only if they mention the last payment). Most people don't keep them, so besides them not being very useful, the applicant will either have to be excused to cherry-pick them, or this is not going to help him. And imagine which bills he will bring if he cherry picks them, those that show his delinquencies or those that show his timely payments? In fact, if people could choose what gets into their credit history this way, it would become utterly useless too. But it gets better. They also mention medical bills, which, as you may imagine, everyone owes to different doctors. Even if someone brings signed statements from ten doctors, that testify that he owes them nothing, that in no way proves that there aren't ten other doctors to whom he does owe some amounts and hasn't paid them for quite some time. How useful is that? Don't you see that this makes a joke out of the verification process?
no subject
When I moved to this country I subscribed to a cellphone service literally next day. I hadn't had not only a credit history, but any local ID at that point yet. But I had a cosigner, who had everything in place. I was their customer for a year, by that time I had all kinds of identification and had paid them with my personal checks for a year. So, I dropped the cosigner and when my yearly contract was up, I opted for another year. They asked me for an upfront deposit of $1000. Why? Because I didn't have a credit history.
Just think about that. It's not like I came out of nowhere sticking some old disparate crumpled bills into their faces to prove that I had paid someone else in the past, trying to convince them to entrust me with hundreds thousands of dollars. I had actually been their customer, I had a history with them. Yet, neither my letter to the management, nor showing up in person and bringing copies of my personal checks paid to them changed their mind. I had to put down $1000, because I didn't have a credit history. Also, consider their downside: all they were risking was $65, one monthly payment, because if I didn't pay that, they would disconnect the service. Yet, they wouldn't budge. You may imagine that for a bank that is to hand over a six-digit amount to a person without credit history some old utility bills are not really an adequate substitution.
In other words, this omitted sentence not only doesn't change the meaning to the opposite, it actually strengthens the aforementioned point, the theme of the entire document: looser standards, looser standards. Once again, didn't you notice the sentence about extenuating circumstances in the same paragraph? Don't you see that all that pushes in the same direction?
But, once again, it gets better. Credit history and credit score are checked not only when extending new credit, but in many other contracts and transactions. It is very hard to get by without credit history in America. So, if a potentional home-buyer, who, as such, is most likely at least in his late twenties and married, has never had a credit card, apprently, there is a good reason for that: nobody trusted him with one, not even with a tiny credit line (especially compared to a house loan). The argument, that the document makes for not having a credit card is completely bogus: being used to pay as you go does not contradict having and using a credit card.
Now, you should now how credit cards work in the US, because it's very different from Israel. A credit card is both a convenient way to pay and a borrowing vehicle. It is NOT tied to a bank account, so repaying it is based on trust and therefore not everyone gets them. You can charge a credit card up to your credit limit and then pay it off for years (with huge interest, of course), choosing yourself your monthly payment that has to meet some tiny minimum. But you can as well choose to pay off the entire balance every month, which many people, myself included, always do. On the other hand, even upper middle class people like to keep around a couple of unused credit cards because it gives them an easy access to cash in case of emergency.
This is like an insurance policy, which is actually far, far more important to poor people, who are both constantly out of money and have far fewer opportunities to borrow it. Would you really believe that a poor person, no matter how disciplined, frugal and prudent, would willingly forgo this kind of insurance? Chances are, the reason he doesn't have any credit card is not his "pay-as-you-go" philosophy, but a mere fact that nobody would give him one.
no subject
And I can't imagine a homeowner without a car, I know none and I've heard about none like that. Life in the suburbs (where most houses are) is all but impossible without a car.
So, that solvent person without a credit history is pretty much is mythical character. Not that they don't exist at all (I was one of them in my first year), but they are very hard to come by. And if they have trouble with all the other criteria it's definitely time for the lender to wake up and smell the hummus. I hope that's enough to give an idea about how much the sentence in question has to do with the reality and also whether or not it suggests a viable alternative to credit history.
The quote peddlers couldn't find actual regulatory enforcement that would require banks to give out riskier loans, and instead they peddle a quote from one member of the board in some address to some bankers about what he thinks the regulatory issues *are going to be*. This is laughable.
First of all, this is not some "board", but the Board of Governors of the Federal Reserve System, of the few people, appointed by the president and the Senate that serve on that little board of which Bernanke is the current Chairman. Not very laughable, I dare say.
And not just "some bankers" but the bankers associations of the richest and most populous state, which has over 300 member banks that hold almost twice the budget of the entire country in assets. Also a little less laughable.
But what makes it so-not-laughable is that those regulations weren't just going to be, they actually were. But more about that below.
I read some statistics saying that the percentage of subprime loans given to blacks is a little bit higher than their presence in the population and those of blacks considerably lower. What you quote doesn't contradict that. It doesn't matter if blacks/hispanics were more likely to get a subprime loan if the total number of subprime loans given to blacks/hispanics is a small portion of all subprime loans (which is the case).
In fact, the important figure is the share of people who actually defaulted. It's not the loan that's the problem, it's the default. I can't seem to find that information about blacks, but I've found it about hispanics:
Latinos make up 14.8 percent of the population, but represent about 21 percent of the subprime default burden.
I am pretty sure it's at least that high with blacks, since they have a similar share of the population and they are worse off economically. So, I find it very likely that the combined share of the two group is nearly half of the subprime default burden.
no subject
First, it's not so much about the minorities. If you look at the actual recommendations, you'll see that they apply to all poor people, to the higher risks that the banks are encouraged to take. They are not saying accept a higher debt ratio pretending that it does not involve a greater risk if the applicant is black/hispanic, but if he is poor. Heck, when talking about downpayment they actually use the word "barrier" - as in "barrier to homeownership by lower–income applicants". Note that is has nothing to do with race, but has everything to do with the social stratum and the risk of insolvency. What's really striking about this document is that it's recommendation read exactly like the list of bad lender practices blamed for the current crisis - this is the widely accepted fact that I alluded to .
Second, I am not trying to present this document as the ultimate culprit, but merely as an indication of a particular trend.
As to the actual regulations based on such views and approaches I commend this article to your attention. Note, by the way, that the push has started in 1992, the year that the Member of Board of Governors of the Federal Reserve System made his prediction.
In short, as you can see, the government actually forced and cajoled the industry into giving more and more riskier loans, widening the home-buyer stratum and causing the prices to keep rising. This is what created the bubble that burst so loudly. Make no mistake, other participants share the blame, starting with homeowners and speculators, mortgage brokers etc and ending with Wall Street. But none of that would have happened if there wasn't a bubble.
In fact, I argued that ALL this mess could have prevented by a strict and stiff downpayment requirement.
I believe, I've shared with you my views as to reasons of this crisis in great detail now. I would appreciate if you share yours with me, even if in a far more concise manner.
no subject
When recommendations are accompanied with numerous references to fairness laws (which lend themselves to loose interpretations) and by quotes like
“The regulatory issues in the 1990s will not be limited to safety and soundness, but will increasingly emphasize fairness: whether or not banks are fulfilling the needs of their communities.”
Lawrence B. Lindsey Member Board of Governors of the Federal Reserve System Address to the California Bankers Association May 11, 1992
this is a little more than mere recommendations.
Or how about that:
Management should consider having all appraisal reports that would cause an application to be denied reviewed by another experienced appraiser. This can help protect the financial institution as well, as it may be held liable if an appraisal is found to be discriminatory.
Don't you see a thinly veiled threat here? Mind you, says the document, unless you find a way to reconsider so that the denied applicant to be approved, you may be liable...
And, in any case, it says plain and simple: loosen you standards. Note that it doesn't suggest that banks reconsider approved applicants.
they do not absolve any bank from its fiscal responsibility.
Here we step into the more complicated part. Bank may not be acting irresponsibly or even unreasonably in giving a loan to risky ("recommended") buyer when this loan is backed by a rapidly appreaciating collateral.
The problem is that the rapid appreciation is fueled by an artificial increase in demand which stems from widening the home-buying stratum by adding the insolvent buyers to it.
Which makes that appreciations non-sustainable, the col laterals highly inadequate, which is compounded by the fact they are often abandoned or vandalized by disgruntled homeowners, who have no equity and thus no vested interest in maintaining them, which further depressed the values of the col laterals and the spiral goes downward from there.
This in turn kills everyone down the line in the CDO investment path, which is also a huge part of the problem, but don't forget - it all starts at this end.
All the other problems are further down the line of the falling dominoes.