Saturday, September 20, 2008

My Take on Sailer

My take on the Sailer piece was that this crisis was caused by a confluence of good intentions and a good track record. Failure is endogenous because people will always extend whatever works until, and only until, it fails. Thus, the effort to create an ownership society, ie increasing home ownership, seemed like a costless way to make the world a better place. Plus, it was consistent with targeting minority home ownership, because lowering underwriting standards disproportionately helps minorities, who have lower than average credit quality. As there were no major losses for home mortgage portfolios for the past 25 years, noting the risks was unpersuasive, especially as the standards seem to morph over 10 years, and any previous naysayers were shouted down years ago. Rating agencies also missed out on the relevance of adjusting the underwriting standards, and no one called them on it. Lastly, the fact that home builders, Fannie and Freddie, are some of the most powerfully connected lobbyists in Congress, ensured this effort was going to accelerate until failure.

I don't see how you could have seen this before the fact, unless you were aware of the change in underwriting standards for mortgages (lower credit rating, no income verification, lower down payment). I haven't seen anything where someone has defended their ignoring the changes of underwriting standards in real time, only a couple statements after the fact that are obviously stupid. That is, I don't know if people were just asleep at the switch, complacent by the low defaults in this space, or they actually did the math and thought it didn't matter. I suppose the former.

6 comments:

J said...

Everybody was aware that something was wrong with the ¨pre-approved mortages" and "pre-approved credit cards" we were being pushed only a year ago. Personally I was convinced that Wall Street was repackaging these bad loans and dumping on it on the Europeans and Asians. It came as a surprise that they were cought holding them themselves. Not smart.

Anonymous said...

gotta love the timing with peterson's movie. debt just jumped $1.5T in 2 weeks. if that's not ironic i dont know what is.

Anonymous said...

behind the doors and why 700b might not be enough

http://www.nypost.com/seven/09212008/business/almost_armageddon_130110.htm

Anonymous said...

Sailer piece is nonsense. He doesn't present comprehensive set of numbers or any analytical analysis.
The argument consists of statements made by politicians. For some reason left wing lobby groups were able to put substantive pressure to increase home ownership (but appearently not income or other things they've been struggling to achieve for decades). And wall st, congress and the white house listenede because we know that Cheney and Bush are deeply concerned about black home ownerhsip, and so are mortgage brokers and wall street traders who btw would sell their mothers for an extra 1% commission or to get an extra few bps on their trades.

Come on, this is utter non-sense. And this whole mess is beyond sub-prime. Did AIG fail because of sub-prime? It's subprime + whole housing bubble + extreme leverage + ...

Anonymous said...

I really don't think "good intentions" had anything to do with it. There was a lot of competition in the traditional mortgages and margins were small. If you could pick up an extra 200 or more basis points because someone had a few dings on their credit ... hey, found money!
It was a $20 bill lying on he pavement that someone was going to pick up. It beats working.
So you go out looking for other $20 bills. Fast forward a few years. Next thing you know, you are in the middle of the expressway trying to pick up pennies kids are throwing off the overpass. That isn't going to end well.

Anonymous said...

I really don't think "good intentions" had anything to do with it. There was a lot of competition in the traditional mortgages and margins were small. If you could pick up an extra 200 or more basis points because someone had a few dings on their credit ... hey, found money!
It was a $20 bill lying on he pavement that someone was going to pick up. It beats working.
So you go out looking for other $20 bills. Fast forward a few years. Next thing you know, you are in the middle of the expressway trying to pick up pennies kids are throwing off the overpass. That isn't going to end well.