Income depression caused by easy credit... more eloquently explained than I could have done. And with less misspellings
If you do a google search, you'll find the Atlantic posted something similar to this in '96 too. Plenty of blame to go around, but pushing subprime mortages into the market is a result of the policies of Freddie and Fannie.. and guess who had oversight of those?
It's hard to see things changing otherwise, however, since Americans aren't likely to willingly reduce their quality of life. Fiscal responsibility would have to suddenly triumph, which would mean Americans would have to choose to live humbler lives. They would have to forgo that stylish Gucci wallet and that shiny Mercedes, even though their credit would allow it. If Americans began spending what they've already earned, instead of what credit dictates they can afford, the income gap would begin to shrink.
Correction Mr. President, I DID build this, and please give Lurker a hug, we wouldn't want to damage his self-esteem.
Embar, Here's the question you asked the other day.
Embar wrote:Here's te reality that sort of flies in the face of stagnant "income" as show on that graph. How have standards of living continued to rise over the years for most Americans if income has remained stagnant?
I answered, "Borrowing and debt" as the reason standard of living continued to rise even though wages were stagnant. The article you read in the last day since asking your question is a good illustration of the problem caused by stagnant wages. While I agree the borrowing and debt creates a feedback loop that makes things worse, it's still result of the initial problem and not the cause.
Embar wrote:Plenty of blame to go around, but pushing subprime mortages into the market is a result of the policies of Freddie and Fannie.. and guess who had oversight of those?
How about this.. regardless that it came from Fox.. can you disagree with Frank's comments? Were they taken out of context? This was 2008.. Obama (then Senator) was silent on the issue.
There's no doubt that Fannie and Freddie could have benefited from increased regulation, that they had a part to play in the economic crisis, and that they required a bailout to survive. But they were not a big driver behind the subprime crisis, and the Community Reinvestment Act had almost nothing to do with the crisis. I link to a past post because I have no desire to re-argue an issue that was already beaten to death.
Lurker wrote:There's no doubt that Fannie and Freddie could have benefited from increased regulation, that they had a part to play in the economic crisis, and that they required a bailout to survive. But they were not a big driver behind the subprime crisis, and the Community Reinvestment Act had almost nothing to do with the crisis. I link to a past post because I have no desire to re-argue an issue that was already beaten to death.
Answer me this Lurker.. what GSE supported more the less than 20% down payments on home purchases through economic policies, and what GSE encouraged subprime mortgages via the same? What other entitiy was substantially backing these loans? Can you answer that?
And who was in charge of those GSEs during the timeframe indicated? What person had the chair?
And why didnt you address my specific questions in my previous post? You dodged all of them, and they were pretty specific.
Correction Mr. President, I DID build this, and please give Lurker a hug, we wouldn't want to damage his self-esteem.
Fannie created the secondary market.....and the policies under the Clinton administration for those entities created a false sense of security in the subprime instruments. They were simply bad loans from a risk perspective but because they were "insured" the banks felt they were safe because they simply didn't want to see that the people doing the insuring were not sufficiently solvent to actually back the guarantee.
There is certainly enough blame to go around but the trend began with Fannie in the 60's/70's (the creation of the FHLMC "Freddie Mac") and ramped up dramatically in the 90's. Freddie was specifically created to provide competition for Fannie which at that time had a lock on the secondary market. Then once others caught on, it got totally out of control. Taking fees to subordinate their risk behind "normal" loans certainly didn't help things.
I read it and not only doesn't it support what you and Embar have said, it goes a long way towards proving you wrong.
I especially like the Conclusion.
As the subprime market has evolved over the past decade, it has experienced two distinct periods. The first period, from the mid-1990s through 1998-99, is characterized by rapid growth, with much of the growth in the most-risky segments of the market (B and lower grades). In the second period, 2000 through 2004, volume again grew rapidly as the market became increasingly dominated by the least-risky loan classification (A– grade loans). In particular, the subprime market has shifted its focus since 2000 by providing loans to borrowers with higher credit scores, allowing larger loan amounts, and lowering the down payments for FRMs.
For me, the biggest difference Fannie and Freddie made to the US home market isn't so much the low-deposit loans (they are available all over the world) but the fixed rate loans which tend to be only found in the US market due to the government assuming the massive risk of offering these sorts of contracts. Everywhere else you pay a large premium (several percent) to fix for 5 years of the 30 year term, which is very marginal a proposal at best.
Ddrak wrote:For me, the biggest difference Fannie and Freddie made to the US home market isn't so much the low-deposit loans (they are available all over the world) but the fixed rate loans which tend to be only found in the US market due to the government assuming the massive risk of offering these sorts of contracts. Everywhere else you pay a large premium (several percent) to fix for 5 years of the 30 year term, which is very marginal a proposal at best.
Hah, I remember when I bought this house in 2004, everyone I knew was telling me I was stupid for wanting to put 20% down on a 5% 30 year fixed.
Why the hell would you throw that money away when values were still skyrocketing and you could always re-fi before that big scary ARM adjusted? Why not just keep that down payment and the extra mortgage money and buy the wife a platinum Rolex or something? I was that nervous gambler that saw a big pile of chips and thought no, this is where I bow out. Since then, some of those same people have had to walk away from upside-down houses with massive mortgage payments while I'm still above water drawing breath. It was funny that even my normally conservative friends had that weird gleam in their eye.
Lurker wrote:I read it and not only doesn't it support what you and Embar have said, it goes a long way towards proving you wrong.
I especially like the Conclusion.
As the subprime market has evolved over the past decade, it has experienced two distinct periods. The first period, from the mid-1990s through 1998-99, is characterized by rapid growth, with much of the growth in the most-risky segments of the market (B and lower grades). In the second period, 2000 through 2004, volume again grew rapidly as the market became increasingly dominated by the least-risky loan classification (A– grade loans). In particular, the subprime market has shifted its focus since 2000 by providing loans to borrowers with higher credit scores, allowing larger loan amounts, and lowering the down payments for FRMs.
Thanks for posting that.
Glad you found it educational but I fail to see how it "proved me wrong" when it is discussing something totally different. The secondary market is not only subprime loans but ARM's for nonconforming loans. Those ARM's are the ones that were insured and took fees to move into second position even though they had MUCH higher risk than the standard loan. I included a paper on subprimes because that is what you and Embar were apparently focusing on even though the subprime market didn't account for much of the secondary market but was certainly the first casualty as the banks cut off the subprime lenders lines of credit.
But I am grateful to have contributed to your better understanding of this rather complex issue.
Ddrak wrote:For me, the biggest difference Fannie and Freddie made to the US home market isn't so much the low-deposit loans (they are available all over the world) but the fixed rate loans which tend to be only found in the US market due to the government assuming the massive risk of offering these sorts of contracts. Everywhere else you pay a large premium (several percent) to fix for 5 years of the 30 year term, which is very marginal a proposal at best.
Hah, I remember when I bought this house in 2004, everyone I knew was telling me I was stupid for wanting to put 20% down on a 5% 30 year fixed.
Why the hell would you throw that money away when values were still skyrocketing and you could always re-fi before that big scary ARM adjusted? Why not just keep that down payment and the extra mortgage money and buy the wife a platinum Rolex or something? I was that nervous gambler that saw a big pile of chips and thought no, this is where I bow out. Since then, some of those same people have had to walk away from upside-down houses with massive mortgage payments while I'm still above water drawing breath. It was funny that even my normally conservative friends had that weird gleam in their eye.
And that is why your local banks did fine through this crisis because they kept the mortgages they originated. The weren't buying up mortgages on the secondary market trying to make a killing and sticking out their necks. Banks are supposed to be conservative institutions......not investment houses. A lot of your friends probably did cashout refi's to live the highlife and had literally no equity in their homes. That's what I saw all the time in CA. People refi to pay off credit cards in a lifestyle they simply couldn't sustain. Just look at the some 800,000 subprime cash out refi's at the tail end of the data from the paper I linked.
Man we all made money off that shit. It was sure nice while it lasted. I remember this conversation when I was 1,500 miles away from my wife for a couple months:
"Hi, honey, I need some boots and a new computer, oh and a fax mahine. Can I take 10 grand out of checking?"
"Sure, if I can too. I need some winter clothes. It's getting cold here."
"Sure."
