tag:blogger.com,1999:blog-7905515.post2591188427091056207..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: To do nothing is sometimes a good remedyEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-7905515.post-36715270351269912212008-10-24T05:40:00.000-05:002008-10-24T05:40:00.000-05:00Anonymous at 5:41PM: Who originated the mortgages ...Anonymous at 5:41PM: Who originated the mortgages is rather inconsequential, since they were resold for a hefty fee to Fannie and Freddie [F&F] (mostly; also to the likes of Deutsche Bank, who were big in the MBS business) before the ink was dry. And F&F happily guaranteed their "product" against homeowner default. The structure was diabolo-shaped (roughly), with F&F at the juncture of the two funnels. Back in those days (2000) I took a graduate level class on real estate finance, and default was not mentioned even once in it, but the homework assignment right after the first class session was on prepayment tables and structures. Prepayment was the concern <I>du jour</I>, and once you had a grasp on that, the focus was on creating fanciful structures. These structures were all designed to sell the maximum volume of the top tranches, and concentrate as much of the risk as possible in as small an H-tranche as possible, with the understanding that the issuer will retain that tranche. <BR/><BR/>Bottom line: default risk on a DEBT instrument was totally ignored, even as early as 2000 - it was all assumed to lay safely with F&F and with the mortgage insurers. Who mandated F&F to buy crap and cook it into crap cakes, we all know.Plamenhttps://www.blogger.com/profile/14209486398849262374noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-45877465893242574892008-10-23T20:42:00.000-05:002008-10-23T20:42:00.000-05:00I was listening today to Sheila Barr's suggestion ...I was listening today to Sheila Barr's suggestion to backstop Mortgages. Sounded like a horrible idea for the simple reason that it gives banks the incentive to just dump toxic debt on taxpayers.<BR/><BR/>I wish people would just understand the problem as a "sugary donut". When you eat a sugary donut for breakfast you get the sugar high for a while (peak) and then the post-donut trough around 9:30 a.m. The last thing you want to do in the trough is eat more sugar. It just creates a longer trough before lunch.<BR/><BR/>So, let's get through a sugar trough and eat some veggies for lunch by encouraging savings and investment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-62334089711212338032008-10-23T19:01:00.000-05:002008-10-23T19:01:00.000-05:00I think everyone was drinking the kool-aid, in tha...I think everyone was drinking the kool-aid, in that investors didn't think it mattered, nor did issuers, they were too short term oriented. But...without the legitimacy granted on the evaporation of standards from such respected groups as academics (American Economic Review, 1996), the Federal Reserve (Boston Fed), Pulitzer prizes looking at mortgage data, Fannie, Freddie, and many others. Important people, including regulators (and every financial institution other than hedge funds is pretty heavily regulated in their activity), were pushing lowering underwriting standards. <BR/><BR/>I think the 'good intentions gone awry' idea is basically that it gave legitimacy to a bad idea, that without it, would have been much less probable. After, all, a company like Moody's, which owes so much of its quasi-monopoly profits to its cozy government benefits (all vague, but all highly valuable), is not going to put out a piece saying that a new housing initiative targeted at poor people requires twice the subordination. Did you hear Kucinich lay into the rating agencies for their mention of the budget decifit, which he saw as a code word for getting the government to privatize social security? <BR/><BR/>CRA was one of many little 'reminders' of what a 'good lender' does. This aided and abetted the the frenzy, though I'm sure many at the bottom had no idea about the genesis for 'liar loans'.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-24212256013135816642008-10-23T17:41:00.000-05:002008-10-23T17:41:00.000-05:00"encouraging home ownership was not a large, if no..."encouraging home ownership was not a large, if not the singular prime mover, of the crisis we are in"<BR/><BR/>Is there any evidence of this. The numbers just don't add up. <BR/><BR/> * More than 84% of the subprime mortgages in 2006 were issued by private lending institutions.<BR/> * Private firms made nearly 83% of the subprime loans to low- and moderate-income borrowers that year.<BR/> * Only one of the top 25 subprime lenders in 2006 was directly subject to the CRA;<BR/> * Only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.<BR/> * Mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans. <BR/><BR/>via big Big pictureAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-38670018578066586942008-10-23T15:34:00.000-05:002008-10-23T15:34:00.000-05:00If you want to help homeowners, let them take an o...If you want to help homeowners, let them take an ordinary deduction on a loss from sale of their home. Its much simpler than an inextinguishable bureaucracy built to liaise between guvment and homeowner and bank, because the tax code already segregates homeownership sales and costs. <BR/><BR/>People seem to refusing to lower prices and take losses out of pride or endowment bias, etc. This plugs up the necessary correction to the market. A $20,000 loss doesn’t sound so bad when you get to deduct it. Another example is how ordinary people make December sales to realize their $3,000 in capital losses that they can use against ordinary income. <BR/><BR/>This approach is consistent with the idea of the home as an investment or the “ownership society”; i.e., deductibility of mortgage, exclusion on some gain, etc (all bad policy, but the ones under which people have bought and maintained homes).<BR/><BR/>Seems simple, no more government bureaucracy, gooses the market, and is targeted only at homeowners who sell at a loss.$9,000,000,000 Write Offhttps://www.blogger.com/profile/14455548811771787363noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-39490646300681095962008-10-23T11:40:00.000-05:002008-10-23T11:40:00.000-05:00Well-said. Unfortunately, it is hard for any ambi...Well-said. <BR/><BR/>Unfortunately, it is hard for any ambitious politican to resist the self-interested imperative to "do something" in order to rationalize his/her position and utility.Anonymousnoreply@blogger.com