The 2007 Subprime Mortgage crisis

Dear, you said military spending, not communism, was cause of Venezuelan collapse. Then I taught you that liberals believe military spending stimulates an economy, not collapses it, and they point to WW2 as a prime example wherein war spending supposedly got us out of the depression. Do you understand now?

 

I claimed that?? If so why so afraid to show the quote?? What does the liberal learn from his fear??

 

exactly???, so USA prevents communism from working in Cuba? Where have you seen evidence that communism works? Did you know it killed 120 million human souls?? who is your favorite communist: Stalin, Mao, Pol Pot? Keep in mind that on a % basis Pol Pot killed by far the most.

 

I am fully convinced thAt this Crisis was caused by in large part by the Federal Government, Fannie and Freddie Mae that following the Government mandates attempted to give mortgage loans to lower income purchasers. Lower down payment and lower qualifications for a home loan. I sold real estate when 20% down was required and income and expenses were a high consideration for obtaining a loan. Then, when interest rates were above 12%, builders would buy down the interest rates, variable rates were available and even loans where you owed more after paying over 12 months. When the Federal Government pushed lenders to approve Mortgages for those that normally would not qualify, the whole system fell apart. People unwilling or unable to continue to make their payment when their home prices fell, forclosing and bring down prices in their neighboorhoods. I think private lenders were were less at fault than the Government.

 

To a certain degree, I agree with you

 

The U.S supports Pol Pot after denouncing him for a while as being communist. He is a favorite of the U.S government, not me. Now about Cuba, did the American policymakers left Cuba alone to allow communist releasing its full potential? Considering the circumstances, Cuba is doing great.

 

And what will happen if I show the quote? are you gonna repent from writing in the forum or what? Your memory is very short, like fish.

 

TARP was used to provide liquidity to the financial system. It was all paid back with interest. This had nothing to do with the Obama stimulus.

Here is a good account of the housing bubble, financial crisis, and the causes of it all.


The housing bubble and financial crisis are actually two different things although the collapse of the housing bubble resulted in the financial crisis. The housing bubble was caused by the lowering of lending standards due to the HUD requirement that Fannie and Freddie make a set percentage of loans to low income borrowers. This policy was initiated by Bill Clinton and was based on an interpretation of the Community Reinvestment Act. At the end of Clinton's term that percentage was 50%. This was increased to 55% by the Bush administration. The lowering of the lending standards was used by unscrupulous mortgage lending firms like Countrywide and New Century to make many other high risk loans. Adding to the housing bubble was the easy money policy of the Fed which made loans easier to afford due to low interest rates. The housing bubble suddenly burst in 2008. This was similar to the dot.com bubble which burst in 2001 and recovered from by 2003 but why was the financial industry so terribly affected this time.


The financial crisis triggered by the housing bubble collapse was the result of a combination of financial and banking regulations going back to 1936 (See the list below). Mortgage backed securities have been around for years before the 00's. They are securities formed by conglomerating home mortgages and are a way for investors to earn a return through the housing market. They have historically been very safe investments. The HUD housing policies however resulted in a portion of the MBS's created in the 90's and 00's to consist of the subprime and other low standard loans. The Basel rules were based on the assumption that securities consisting of home mortgages were of very low risk. Therefore the reserve requirements for MBS's were set at a very low rate of 5%. This meant that for every $50K of MBS's that a commercial or investment bank had it could make loans totaling $1M. Since banks make money from loans they would use the investment vehicles with the lowest reserve requirement. And very many of them did. They bought AAA rated MBS's (the ratings were determined by the National Ratings Agencies - Fitch, Moodys, and Standard and Poors). This was required by gov regulation. But the ratings agencies were not doing due diligence on the make up of the MBS' which was unknown to the banks involved who trusted the ratings and Basel guidelines. Collapse of the housing bubble caused foreclosures in the subprime mortgages especially. This created fear and uncertainty in the value of the MBS's even though they were still paying ~ 90% of their returns. The market price dropped (in some cases a price could not be determined because no one was interested in buying). This is where the mark to market rule came in resulting large paper and consequently the banks reserves falling below the already low 5%. The bailout from the gov started out as TARP which was passed to buy up all these MBS's which had now large paper losses due to mark to market. It was quickly changed however to give money directly to the banks so that they could bring their reserves up to the 5% level. Bear Stearns was bailed out but Lehman was allowed to fail. This resulted in uncertainty and the credit markets froze (none of the banks wanted to lend to other banks who might not be bailed out). Some commercial banks like WaMu also had MBS's in reserve and ended up being taken over.



The analysis of what happened is contained in the book by Friedman and Kraus – “Engineering the Financial Crisis” – 2011. As can be seen these rules were issued over the years with no analysis on how they might conspire together to set up a catastrophic house of cards situation due to the homogenization of asset mix held by many of these investment houses. Collapse of the housing bubble which affected these assets including MBS’s (whose contained loans were still paying at ~ 80%) then lost value due to the market price dropping way below value triggering large paper losses due to mark to market accounting rules. This reduced the capital and lending capacity of the banks due to Basel I and the Recourse Rule (an adoption in the U.S. of part of what later became Basel II), which specify those capital requirements. The conflation of all of this resulted in the financial (really the banking) crisis. The authors also show that the repeal of Glass Steagal had nothing to do with the financial crisis. Glass Steagal prevented the mixing of private deposits with investments and that was not a factor. Here are the set of regulations:




1. SEC Regulations from 1936 requiring mandated minimum ratings for a growing number of institutional investments.


2. SEC decision in 1975 to confer NRSRO on the big three ratings agencies.


3. Basel 1 from 1978 which established favorable risk weighting for mortgages and GSE issued MBS’s.


4. Mark to market accounting established by FAS 115 in 1993 and refined by FAS 157 in 2006.


5. HUD targets for mortgages to low-income families in the late 1990’s resulting in reduction of down payment requirements for the GSE’s.


6. Recourse Rule issued by the FED, FDIC, and Office of the Comptroller of the Currency, and the Office of Thrift Supervision.






Here are some excerpts from an editorial from the WSJ:

http://online.wsj.com/article/SB10001424052970204468004577166723093578272.html


Google – The Meltdown Remains a Whodunit

 

Thanks for your comment. It added to my knowledge a lot. I appreciate meaningful comments.