Saturday, February 21, 2009

Idealogues on A Mission: Revisionism Already Well Under Way to Explain the Origins of the Mortgage Crisis

I am seeing more stories about the number of foreclosures connected with speculators. In one county in Florida, the court's foreclosure docket is up to 1,000 a day and is called the rocket docket.  Unlike Tennessee, Florida requires an order form a Court to finalize a foreclosure.  Most of the foreclosures are homes bought by speculators who were also largely responsible for the run up in homes prices in that Florida county. Subprime mortgage crisis - Wikipedia In 2006, 22% of the homes purchased nationwide were for investment purposes. In certain markets, like condominiums in Miami, the number of units purchased by speculators reached as high as 85% of the total.

The role of speculators is just one of the scores of facts overlooked by right wing editorial writers, like the ones at Investors Business Daily, IBD, when engaged in what can only be characterized as contemporary revisionist history.  The editorial in today's IBD contains a largely fictional account of the origins of the crisis and is nothing more than a form of right wing propaganda. Most facts are ignored by "conservative"  ideologues to deflect blame for the crisis from the very policies advocated by IBD and largely followed for eight years by Bush. In this alternate reality, the blame falls mostly on three factors:

1.  the decline in the stock market has to do with Obama taking a lead over McCain in 2008 and then winning the election, 2. Obama saying bad things about the economy, the happy face theory of economics (discussed in 2 prior postsJapan GDP/ Economists: Secular Theologians with a lot of Numbers The GOP's New Alternate Reality: Obama is to Blame for our Troubles/Put on a Happy Face Beanpole/ Japan-US Comparisons Continued/GM Wants more dough) and 3. the Democrats are to blame for everything since they encouraged Fannie and Freddie to lend money to subprime borrowers, primarily to minorities, that could not afford the loan.

This is their version of reality and it can only be referred to as absurdest, revisionist extremism.  I am sure that there are millions in America who believe that the President's comments about economic reality, apparent to anyone following events in the real world, and his election in 2008, are two of the primary causes of the current crisis, as opposed to a myriad of events that happened from 2002 to 2007.  

Those people are just hopeless- no amount of facts will ever have any influence on them.  They read editorials written by ideologues simply to confirm their pre-existing opinions. I read them to see how reality and events are distorted for ideological purposes.   

When addressing the origins of the crisis, I try to remove any ideological considerations when looking into the rearview mirror since that only distorts my view. I want to try to understand what actually happened and how to prevent it from happening again. One interesting fact about Fannie and Freddie that is always omitted by the ideologues is that their purchase of subprime securities was just a small fraction of the total outstanding. In 2006 for example, near the height of the madness, subprime mortgage securities bought by Fannie and Freddie totaled 90 billion out of a total origination of 450 billion. 

The ideologues know that most of those mortgages were originated by and sold to the private investors, pursuant to what I would characterize as part of what IBD and other extremists advocate, a laissez-faire, anything goes, wild west, free market capitalism. In their preferred world, there is no meaningful regulation of mortgage originations which is left up to the free market. Most of the subprime originations occurred in this world, the ideal world for IBD, where there were no rules, and the money was funneled by Wall Street to mortgage companies between 2002 to 2007, mostly now defunct, and the resulting loans were then packaged and sold  by Wall Street to investors around the world after receiving favorable ratings from Moody's and/or S & P based on an unrealistic assumption about housing prices increasing 6% or so  compounded into infinity. Another factor that is always ignored by ideologues is the percentage of bad ALT-A loans held by Fannie and Freddie versus subprime, and even the number of prime loans that have gone bad particularly in areas where the rise in  home prices far exceeded the increases in income. Other factors that are invariably omitted from the revisionist history promulgated by ideologues who wish to distract attention from the failures of their own policies include the 2004 SEC Rule change which allowed investment banks to increase leverage to 40 to 1 from a limit of 12 to 1, part of their philosophy of allowing Wall Street to regulate itself. All of these factors, and how they contributed to the crisis, are discussed in more detail in prior posts.

See, e.g.:  

(this is a link to my comments on a NYT article about securitization of subprime mortgages rated AAA by a rating agency and then sold by Wall Street to investors around the world: Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSM)

When I use the term ideologue,  I am not referring just to those who wish to be called conservative but rarely are, or to liberals,  socialists or any other political label used mostly to condemn or mislead, but solely to any person who is a partisan advocate of a particular ideology to such an extent that they ignore or dismiss any and all reliable information inconsistent with the tenets of their ideology. As a consequence, their view of the world and reality is invariably severely distorted by their ideology. I have focused on those who wish to call themselves "conservative" in these posts since I view them to be creating the most distorted views of the origins of the current crisis.  

There are regulations that could have been in force that would have put a halt to what actually caused the crisis, and that is what the conservatives want to avoid talking about when trying to re-create history with absurdist theories.

One set of regulations would have been to create tight underwriting criteria for loans that were not securitized and bought by Fannie or Freddie.  This would include, for example, all of those homes bought by speculators and most subprime loans.

The speculators would be subjected to much more stringent underwriting standards than what actually prevailed during the bubble years, requiring by law on a nationwide basis at least a 20% down payment for example. A similar rule could be applied to another problem area, vacation homes, where the underwriting was loose and the defaults are now high.  

Since these problem areas do not fit into subprime loans bought by Freddie and Fannie at the insistence of Barney Frank,  they will not be discussed by IBD.  In other words, you do not allow anyone to finance loans to speculators or for second homes with one of those funky mortgage products, but require those buyers to have a lot of skin in the game.   

I discussed a another sensible regulation that would tie the amount of down payment required to the borrowers before tax income. Obama's Foreclosure Plan

For example, if the mortgage payments exceed 31% of the borrower's pre-tax income, then the borrower would have to make a down payment on the house that would bring the payments below that 31% threshold. If someone wanted more house than they could afford, then they could still receive a loan for that house, provided the borrower uses non-borrowed cash to bring the payments down to 31% level. This would be a nationwide minimum standard and banks would be free to impose more stringent underwriting criteria. I came up with the 31% figure after reviewing the Obama foreclosure plan which used that number as the ideal amount on affordability.   

You could also develop a nationwide regulation that would require more money down whenever home prices started to rise more than five per cent a year. This would be hard to implement nationwide, but one of the causes of the current mortgage crisis is that home prices were financed with mortgages at levels that could not be supported by a rise in income. This  in turn distorted price further, creating a further increase in home prices, and so on until the bubble burst and millions were left with mortgages that exceeded the value of their homes.

The loose and easy extension of credit in effect distorted a true market price. Possibly this kind of criteria could be enforced by a rating agency downgrading a pool of debt coming from such a market that would make lenders more hesitant in extending credit in a real estate market experiencing bubble prices, meaning a significant acceleration in home prices far above rises in incomes. With credit marginally harder to get, this will in turn tamp down a rise in prices to coincide more with a rise in income rather than a speculative fervor.

I am just suggesting some preliminary thoughts on the subject. But, in the last analyst, this kind of problem can be effectively dealt with by regulating the origination of mortgages.

But a wild west free market is exactly what conservative ideologues want to keep, so they have to divert the blame elsewhere, because what they want is the primary source of the problem, a market that operates free of any meaningful regulation and where greed by Wall Street, private mortgage companies, private mortgage brokers,  and speculators can create the crisis and the participation of all those folks are always conveniently ignored by the ideologues on a mission. 

A reader of these posts know already that I assign some responsibility to Barney Frank and the Democrats, for using Fannie and Freddie to pursue their social policy objectives. TRUST CERTIFICATE AON BOND KTN FREE MONEY FOR THE TREASURY/Plan for Doling the Dough to the American People/JZJ & JZE

Unlike those who pretend to be conservative because a more accurate label sounds less soothing, a True Conservative wants to learn what history teaches about the fallibility of individuals, unwilling as a matter of principle to distort information in furtherance of an ideological objective, and the facts simply do not justify assigning a central role to the GSEs exclusive of other factors.

When viewed in a non-partisan and non-ideological manner, the use of Fannie and Freddie to further home ownership by low income, subprime borrowers is one of about ten or so important factors that led to the current mortgage crisis, and not even in the top five in importance.

Many other factors other than home mortgages led to the current economic crisis. The role of speculators in driving up home prices and defaulting on their loans is a larger contributor to the current crisis. Speculators  skewed the fundamentals of many local real estate markets, an artificial force in creating demand that drove prices up for others interested in only buying a primary residence and now they are contributing to the problem by defaulting on the mortgages in droves which were used in their speculative activities. The role of private mortgage companies and brokers, and the SEC's rule change in 2004, are also more central, as is the Federal Reserve maintaining abnormally low interest rates for an extended period of time and the absence of regulations relating to mortgage originations.

Fraud and misrepresentation, particularly in ALT-A originations, was a huge problem as well as the development by the banks and mortgage companies of loans that facilitated an easy credit cycle that gave impetus to a rapid rise in prices that could not be sustained by increases in income levels, an extremely important consideration and one rarely mentioned by those who want to dwell on Fannie lending money, in the thoroughly repulsive Ann Coulter's words, based on having a missing child by the name of Caylee or how well the borrower can hit a jump shot. They Gave Your Mortgage to a Less Qualified Minority - HUMAN EVENTS Ideology and Facts: Coexistence Not Allowed/CIT/ F & FCZ/

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