It might come as a shock, but comedian Rush Limbaugh and his imitators are not Very Good Sources of Information. McClatchy newspapers (for whom I’ve had a lot of respect since, in its previous incarnation as Knight-Ridder was one of the few news outlets to accurately report on the run up to the Iraq War) debunks another cherished right wing talking point.
Remember how shiftless poor people forced banks to lend them money for houses? Turns out, not so much.
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.
Only one of the top twenty-five subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.
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, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.
I wonder how these commentators can ignore facts where the only thing to be gained is to reinforce their preconceived notions, scapegoat people and policies they already dislike, and make self-reflection unnecessary.
“I wonder how these commentators can ignore facts where the only thing to be gained is to reinforce their preconceived notions, scapegoat people and policies they already dislike, and make self-reflection unnecessary.”
Because people who take their words at face value believe it to be true, and more listeners means more advertising dollars and more power for them. Economy and country be damned.
Honest Question:
A while back I posted a comment that ran something along the lines of “no one forced these banks to loan money” and another commenter said that due to regulation, tax breaks and some other causes, in fact the lenders had been forced to do so. As I’m not fully upon this, I figured I’d just read more on the subject and try to form a more informed (or at least nuanced) opinion
“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.”
Dos this mean that I was right? or just too nuanced for my own good?
So, why are so many people talking about bailing out sub-prime mortgage borrowers? Or angrily talking about not bailing them out?
I don’t think this means there was NO problem with either sub-prime lending or Fannie and Freddie – but I’m all for finding out that the hole we are in does in fact have a bottom.
Regardless, I don’t want to be on the hook for other folks’ mistakes – and it still seems like that is what is happening.
I’m no expert, but that’s never stopped me before. I think, Parker, you’re right that you’re being put on the hook for the mistakes of others — the question is whose mistakes?
Lemming, I think that this McClatchy article is basically undercutting the argument that it was government regulations that essentially forced banks to make risky loans. There are some who would very much like to blame the current financial situation on do-gooder government initiatives. Apparently the loans made in response to these initiatives were less prevalent and made under tighter standards than the loans that actually started blowing up.
Part of the problem appears to be that the exact nature and number of loans at risk and who has them are not well known.
My limited understanding is that the beginning of the problem is inflated assessment values for the real estate.
Next, people who receive the loans aren’t well vetted for an ability to pay. Either they lie about their ability or their inability to keep up with a mortgage (particularly as it adjusts) is overlooked.
Next, the originators of loans don’t have to bear the consequences if the loan goes south — they just sell it upstream, collect a fee, and walk away.
Next, the loans are bundled together as securities and purchased by institutions that don’t have a very good handle on what the underlying mortgages are actually worth.
Next, the institutions who purchase these securities use the phantom value of these securities as assets on their books against which to loan or borrow money at some multiple of the securities’ purported value.
After that, I’m lost, but when the securities’ value comes into question Very Bad Things Happen and serious men from the government come looking to Parker expecting him (and the rest of us) to pay into the government treasury to clean up the mess. (Or, more likely, the U.S. Government goes borrowing more money from China and signs an IOU on behalf of our children and grand kids saying they’re good for it.)
Thanks for the parsing, Doug.
I’ve been trying to read up on this, understand what the BBC says… I keep thinking that the high price of gas set the stage for the mortgage collapse.
Basically, the fantasy continues to hold up until some event happens that causes someone to want their money. In this case, adjustable rate mortgages adjusted upwards, causing some people to default on their loans.
About the same time period, people who could no longer afford their mortgages also learned they could not just sell, due to the housing bubble bursting (rising interest rates, oversupply of/decreased demand for houses). Some of these people had leveraged against the inflated values of their homes by getting home equity lines of credit. In the span of a few months, many people went from having a highly valued asset to being hundreds of thousands of dollars in debt if they sold, or obligated to make greatly inflated payments just to manage that debt.
So a lot of people defaulted. As those numbers increased, the financial institutions who had used those mortgages as collateral to borrow and invest from other institutions started getting nervous. Institution X owed Institution Y 30 bucks, and suddenly only had a dollar to cover it because they had borrowed so much using those mortgages as collateral. Institution Y needed to money because Institution Z gave it some money and was starting to ask questions. Thankfully it was all backed by mortgages insurers, who sadly didn’t have nearly the required assets to cover a 10% mortgage default rate.
Every several years, HIV crops up in the adult entertainment industry, and it looks kind of like this. It basically shuts the system down until everyone makes a list of what dozen people they slept with, and what two dozen people those people slept with, etc., and takes quite a while to figure out which working assets are clean and which are toxic. That’s kind of the stage we’re at right now in our financial system. Never mind the exuberance the DOW showed today about our possible partial nationalization of the banks. We’re still trying to find out who still has something of value, and what it’s worth.
T, I think your last paragraph may be my favorite bit of explanation yet – thanks for the smile as well as the clarification.
Lemming,
NOW a program on PBS did a report on the link between increased gas prices and the mortgage crisis a few nights ago entitle Driven to Despair. http://www.pbs.org/now/shows/440/index.html
They looked at the situation in California where commuting expenses play a much larger role than here and where housing was (emphasis on past tense) priced so high that it wasn’t just low income people who went for nonconforming loans. An interesting analysis but still just one more piece in the puzzle. Add it to the other factors that T lists in his excellent explanation of the housing bubble and mortgage crisis.
Lori,
I listened to that show on a podcast yesterday. I thought it was interesting that a couple of the guys who were spending over $500/week for gas also said that they weren’t “bus or train riding” type of people. Then when one actually tried it he found out it wasn’t so bad.
“Next, the originators of loans don’t have to bear the consequences if the loan goes south — they just sell it upstream, collect a fee, and walk away.”
Add to this highly aggressive mortgage originators working on commission. We had a mortgage that was sold to Countrywide quite a few years ago. Basic fixed rate, way more than 20% down, etc. When rates went down we started to look at refinancing and I called them to see what they could offer. OMG – the guy I talked to wanted to get me into a teaser rate ARM with the argument that my income and home value would just keep going up and I would have lower payments right now. And by the way he said, we can get this done fast, just a few days, no income verification, etc.
I didn’t fall for it. Called my local bank got a decent rate on a fixed rate refinance. Gas prices went up, food prices went up, teaser rate ARMs adjusted, and I am sitting pretty with my fixed rate.
But a lot of folks fell for the sales pitch. Some even “built” new homes or moved to bigger homes that they could suddenly afford on the teaser rate. Once the teaser rate went away and inflation kicked in they were screwed. Buyer beware? Who’s to blame? Bet you might even know someone in this situation. And I bet they aren’t they aren’t “low income” people that the government forced banks to loan to.
$500/week for gas? Come on. Let’s break that down.
At $5/gallon and just 10 mpg, were talking about going 1000 miles. That’s 100 miles/day, and 52,000 miles/year.
Who the hell does that kind of commuting, really? 100 miles, each way? Or, if they are getting 20 mpg, and at $4/gal, make it 2,500 miles/week. And, why do we feel sorry for someone who chooses to live 100 or 200 miles from their place of employ? Why do we feel sorry for someone going that distance in a Hummer? That’s just a gigantic steaming load.
I got a kick out of people saying this summer that they weren’t going on vacation because of gas prices. Look, if you were going to drive 2,000 miles on your trip, at $4/gal, and at 20 mpg, that’s $400 for gas. Let’s compare that to the good ol’ days of $2/gal gas, which made that a $200 price tag. If $200 is the difference between a vacation and no vacation, then you’re already living on the edge, and what you probably need to do is get a second job or save up tremendously.
Lori- I am also enjoying my fixed rate situation. :-)
Absolutely, there are a lot of people in my upper-middle class Fishers neighborhood who bought more house than they could afford. A couple of foreclosures on my street, as a result. Far more ‘for sale’ signs as well. Attacking the poor who foreclosed exclusively is merely the other side of the ‘class warfare’ coin the right goes on about. It isn’t a matter of class. It’s a matter of responsibility, which cuts across class.
I personally know somebody who bought a $500,000 property in Carmel. I knew he couldn’t afford it, back in ’04 when he bought it. I asked him what the hell he was doing. He told me he knew the day of reckoning would come, when a principle call would be made that he couldn’t meet, and he’d foreclose. I wanted to punch his lights out right then and there, because he didn’t give a shit. His reasoning? “I’ll be able to say I lived in a half-million dollar house’. It made me want to puke in my soup.
Much simpler, cleaner, and fair just to say, “no, we aren’t forgiving any bad decisions, by anyone”. Of course, saying ‘no’ isn’t something Washington is very good at.
“Who the hell does that kind of commuting (100+ miles, each way), really?”
Well, me for one. But, I share the driving with another person, so I only have to drive every other day four days a week. Still, it makes for very long days.
I don’t expect anyone to feel sorry for me. I do this because my wife has a career here which would not be replaceable elsewhere, and I don’t want to uproot my children for a job that may, or may not last very long (as I am a contract employee, not a permanent employee).
So, I am an “extreme commuter”. It isn’t so common around Indiana, but in the northeast and southern California you might be surprised at the lengths that large numbers of people commute.
Mike,
You can listen to the podcast…the man speaking lived 70 miles outside of San Diego. He did share a ride with someone to cut down on costs. They worked an earlier shift so that they could beat the traffic.
Also – just for the record – my husband puts a minimum of 1000 miles per week on his car. He’s a salesman who has a territory from Indy to the TN border. His 2002 Lexus has 365,000 miles on it and running like a top. He fills up 4-5 times per week and it’s been quite a burden- a gigantic steaming load if you will…
140 miles/day = 700 miles/week, and $800/week in gas? What’s the guy driving? A Hummer towing two loaded cement trucks? I’ll stand buy this: It doesn’t pass the smell (or math) test.
A salesman is not a commuter. I put 1,000 miles/week on my car, too. I’m a contract negotiator, working 3 states. (Those reading my blog see the places I post from.) My 5-speed Toyota Corolla gets 40 mpg, thanks to all the highway driving. That’s two fill-ups/week, now at $2.75/gallon, or down to $68+/wk.
I think the guy from San Diego needs to make some choices. Maybe a nice hybrid. Maybe a move to San Diego. Maybe a job where he lives. Isn’t he a living assault against the environment?
Believe it or not, Mike Kole, it is not all that uncommon for people in California to have long commutes to and from work every day. Not saying it is great for the environment or economically sound, but it is a way of life out there to commute much moreso than it is here. Furthermore, gas–and just about everything else–is higher there than it is here in the midwest.
Also, high gas prices can prevent people from going on vacations simply because they are paying so much for gas and everything else these days.(And don’t forget, the vacation expense isn’t made up only of the cost of gas. One must also include hotels, food, shopping, whatever costs it may be to gain admission to parks, museums, etc. Most all of those things have increased in price along with gasoline.)
Good lord, if I had $200.00 extra dollars or $400.00 extra dollars to do *anything*, I’d be thrilled. It’s kinda hard to save money when everyday expenses (not only for gas) have increased tremendously, while salaries and job opportunities have not.
In the case of many Californians, people move outwards until they can find affordable housing. Then, they commute to their jobs in the metro areas. Same for the northeastern seaboard, IIRC.
My case is that it may sound easy enough to find decent employment closer to home, but in reality it isn’t. Indiana politicians who crow about their ability for bringing good jobs to Indaina just rings hollow to me.