I’m not as outraged as some people apparently are at the Obama Administration’s urging of banks to relax their standards for creditworthiness a bit:
The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.
President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.
If you want to read some of the squeals of outrage, memeorandum has a pretty good sampling.
I think what’s being missed is that by practically every account credit requirements now are significantly higher than they were in 2006. Would even the slightest relaxing of them mean a return to the bad old days? Isn’t it just barely possible that the banks have overcompensated?
I don’t think it’s reasonable to consider bank policy without taking into account the enormous subsidies that the large banks have received over the period of the last half dozen years. I strongly suspect that banks’ high credit requirements now are a consequence of those subsidies. Risk/reward.
I think it’s possible that, if the credit requirements in 2006 were too hot, those today are too cold. Judging by the state of the economy they’re certainly not just right.
The story I gathered from a recent Fed report is that the primary problem in the housing market is that too many people are under-water. Home-owners who are not under-water are sucking up all of the lending capacity with refis. Under-water homeowners are cutting off the supply of homes because they are unable to move. The remaining housing supply is dominated by foreclosed property which is either damaged or risky, and primarily attractive to investors (speculators).
The Gordian knot appears to be having so many people underwater. We’ ve tried to tackle indirectly w/o success. Directly it would have carried a large political cost, but _if_ it had turned the economy around reasonably fast, the cost would have been nominal. By directly, I mean writing a check to bring debt below home values.
The Bureau of Consumer Protection has outlawed the practices that allowed banks to lend without ensuring the borrower could pay back the loan. I have no doubt that they can figure out a way around it, but they can also use it to justify their policies.
The FHA guaranteeing against default will provide a large pool of risk-free money. “Risk-free money” caused the housing problem, and it will cause another one. It will start small, and it will grow over time. This did not end well the last time, and it will not end well this time.
The banks should risk their (shareholders) money however they see fit. There need to be sensible regulations, but when they are responsible for failure, they will lend more sensibly.
It is not sensible to lend money to somebody with no job and a ton of student loan debt. It is sensible to lend to somebody with a job and no debt. The credit score determines the interest rate not the ability to repay the loan.
The solution to the subsidies issue is to stop the subsidies. If there are legitimate government services, charge fees.
I am guessing that there are a lot of people who took out mortgages they could afford, put down an adequate down payment, but still got killed when they needed to move because their house was underwater. Some of those people may have bad credit scores as a result, but they are not really bad credit risks.
Steve
“I think what’s being missed is that by practically every account credit requirements now are significantly higher than they were in 2006.”
This is probably true, but credit extension should be an absolute, not a relative, proposition. Because…….
” Would even the slightest relaxing of them mean a return to the bad old days?”
Yes, it might. This is the heart of everything I’ve ever commented on here. There has been such a bald faced and politically motivated attempt to lay it all on the 2000’s and GWB, without – if I may pull rank – any understanding by people who have not been in a credit environment. This is how it happens. It started in the 90’s. It was the same “how bad could it be?” attitude. Then people start making bonuses. The animal spirits take hold. Well, “how bad could a little more be? And after all, its for the good of home ownership….” And next thing you know………its the 2000’s and Barney Frank is giving regulators the devil with racist accusations that would even make Michael blush.
One of my greatest frustrations at this site, and perhaps its my inability to properly articulate the concepts and issues, or perhaps is just ignorance of this site’s participants, is exactly how credit, investment and corporate finance really work. I know it cold. Been doing it for 23 years. Maybe that’s why when I write things I make assumptions, or speak in short hand, I figure everyone (and this is quite a good crew here) will understand, but perhaps really don’t. Credit is credit. Period. Corpfin is corpfin. Its not subject to the whims of the day, at least not without recklessness and ultimate consequences.
“I don’t think it’s reasonable to consider bank policy without taking into account the enormous subsidies that the large banks have received over the period of the last half dozen years.”
With all due respect, that’s crazy. Payback? In your wildest dreams you don’t think crapass credit extension will get bailed out at taxpayer expense again? I have no use for the Bof A’s etc of the world. But bad credit extension as payback? That sounds like a Senator talking.
I see that Tasty is making much the similar points. He/she is all over it.
steve, I don’t know why they would have a bad credit score simply from being underwater. I don’t think its been uncommon over the last twenty years for a seller to have to bring a check to closing; there are a lot of transaction costs, taxes, bridge loans, and if you’ve lived somewhere only for a year or few, you’ve paid down little principle. I would be pretty outraged if I wrote a check to sell my house, which cleared all of my responsibilities and the bank dinged my credit score.
Now, if I leaned on the bank to give me concessions under the threat of default, they should ding me.
“I am guessing that there are a lot of people who took out mortgages they could afford, put down an adequate down payment, but still got killed when they needed to move because their house was underwater. Some of those people may have bad credit scores as a result, but they are not really bad credit risks.”
This is an interesting, perhaps good, point. It is much debated by those of us steeped in credit.
As I have noted a number of times, there are various determinants of a good credit risk. Metrics like loan to value, fixed charge coverage, income stability etc. The number one is history of repayment. Period, full stop.
So steve points out that the asset value might have declined but the creditor is a Good Joe. Perhaps. Let me tell you how this argument goes. Just because the asset value dropped you walked? Offered the keys? Your P&I didn’t change. Why did you walk from the deal?
The only answer is a) they were not a Good Joe or b) the bank created a self inflicted wound – an incurrance test default: loan to value. If its “b” then no sympathy to the bank. Someone making current payments even if the loan is underwater is fine and dandy with 99.9% of lenders. Reality is – people walk from their credit obligations.
As always, its easy to blame greedy bankers, but its almost always bum creditors. Banks don’t like to have workout departments. That’s not a profit center. Please trust me on this.
PD
At the risk of putting words in steve’s mouth, he is pointing out that someone with a personal dynamic forcing them to move even if their real estate portfolio position is harmed might walk from their associated credit obligation.
My view: Life’s a bitch. You take on obligations, you honor them. If you are not prepared to honor them, don’t make them.
Some might view that as Puritan. But once we let loose of financial responsibility (and lord knows, we did and we have….See: The US Government, Most State Governments) then its open season, and a food fight.
I don’t mean in the sense of payback. I mean in the sense that you can’t consider what banks do now in comparison with what they did six years ago without recognizing that federal government bailouts and Fed policies (like QE or interest paid on reserves) influence their decision-making calculus.
So, Drew, you want all the risk to be on the borrower’s side. I’m guessing you’re for bringing back debtor’s prisons, too.
“My view: Life’s a bitch. You take on obligations, you honor them. If you are not prepared to honor them, don’t make them.”
If it is a non-recourse loan, you have every right to walk. You are just giving the house back to the bank, which is what you agreed to do, not pay the loan back no matter what. Doing so should hurt the bank’s credit rating, but that is not how it works.
“Credit is credit. Period. Corpfin is corpfin. Its not subject to the whims of the day, at least not without recklessness and ultimate consequences.”
Which always gets us back to the liars loans. The majority of the defaulting subprime loans were liars loans. No one was forcing the banks to give loans to people who they knew were lying to them. There is only one reason they did so. It made them a ton of money. Only about 6% of subprime loans were subject to the CRA. How those 6% brought down the banking system is way beyond me. You concede that the liars loans make no sense, but always forget about them so you can blame the govt for everything, not that the govt is blameless.
On the particulars of finance, you are way ahead of me. Probably everyone here, but I think I am pretty good at listening to people. When you deny that bankers bear fault for this mess, you sound like the docs I know who deny that they bear any responsibility for the mess our medical system is in. In any particular case, that may be true, but on the whole, both professions have some responsibilities for what has happened. In the case of bankers, if you look back at other recessions/depressions both here and abroad, you see bankers in the middle of many of them. Docs OTOH, were just complete quacks until recently and have not had the opportunity to destroy economies until recently.
Steve
We must help the liars from those who they lie to?
“whom”
I would say that there is more blame that can be assigned than simply lenders approving so-called Liars’ Loans.
Homeowners, participating in these qualification lies, could be considered partners in crime with the lenders. Also there was secondary mortgage abuses going on by investment banks. And, don’t forget rating agencies who lost their scruples in accurately giving assessments of risk because of the lure of lucrative fees.
Basically, there was a panoply of players involved in a lack of oversight or simply skewing a housing market that eventually blew up. And, for good measure, I will also throw in a Barney Frank and Chris Dodd, who fanned the sub-prime fires even more by rejecting even mild caution, by the Bush Administration, over such a loosely run housing market.
The poor pitiful banker shaking in his shoes lest the mean regulator bully him is a bitch. Let the little bitches stand up and be counted. Any takers? The people who actually run the bank do not give a crap about a regulator. The people who are worried are seated at the kid’s table.
@Tastybits,
I think the problem is different, though I am not outraged by Obama jawboning the banks to show more results. Bankers take risk without certainty of whether the income statements reflect future earnings or whatever the future may hold. They know they will lose some and win some.
The POTUS publicly chastising lending standards gives banks the inroad to say that the loans they lost are the government’s fault. Its somewhat worse than imposing a regulatory standard because we could study it. Without a standard, the bankers would have only chosen the good loans and none of the bad, which, of course, is impossible.
Perhaps to clarify (or sidetrack):
I remember a post at OTB on the problems with mortgage regulation in which Ben Wolfe proposed* a simple requirement that all home loans be subject to a requirement of a ten or twenty percent down payment. The thread turned against him because a number of commentors pointed out that they would have been denied a loan under those conditions and they’ve never missed a payment. A simple rule like that means you almost never have to worry about lies and being lied to. It would not be popular with banks or voters.
@PD- Wallison wrote a paper for the Wilson Quarterly in 2009, IIRC, noting that the low down payment loans had performed well. It inspired bankers to take bigger risks. That was before he had made up his new numbers to more directly blame govt. So, I think some kind of down payment is a good idea, but even better is to restrict banks to plain vanilla loans. No exploding ARMs or liars loans. Our other big source of problems was the second mortgage. Texas tightly regulated these, unlike most states, and is a major reason they were spared a lot of damage from the crisis.
@jan- Yes. Like most catastrophes it takes more than one mistake. I think the ratings agencies should take a large share of the blame since it was actually their job to assess risk.
Query- How did Frank and Dodd have so much influence while in the minority party? Heck, why doesnt Ryan just declare his budget as passed if minority members have that much power.
Steve
@PD Shaw
You will notice that it is never the actual banking industry decision makers complaining. The bitching is either done by partisans or industry “big shots”.
Banks operate within regulations, but they are responsible to the shareholders. When the banks use their money, they are mostly responsible. They have capital requirements, and investors are concerned about their books/loan portfolio/performance not the President’s comments.
If the banks are mandated to include a larger number of bad loans, they will have capital requirement problems. Investors have many crappy options for their money. Has the CRA gone away?
If the banks are provided with low/no interest money, they will lend based upon risks to their books if the loans will be kept in their loan portfolio. This is what has been happening with QE1,2,…n. Banks lend sensibly, and lending standards are tighter.
FHA guaranteed loans is risk-free money, and bankers will lend accordingly. The purpose of the guarantee is to get the bankers to make loans they would not make otherwise. Bankers are no different than anybody else. They are going to try to make more money.
@steve
The credit rating agency problem was created by government regulations. This was an attempt to fix the problems created by making risk-free money available.
“I don’t mean in the sense of payback. I mean in the sense that you can’t consider what banks do now in comparison with what they did six years ago without recognizing that federal government bailouts and Fed policies (like QE or interest paid on reserves) influence their decision-making calculus.”
I think that’s what I said.
“So, Drew, you want all the risk to be on the borrower’s side. I’m guessing you’re for bringing back debtor’s prisons, too.”
Hold on there, pal, I’m the King of Hyperbole here. Don’t tread on my territory. Off with their heads!! Heh. Just kidding.
Look, the notion that borrowers are innocents is nonsense. Just nonsense. Take this from an ex-lender. Its a fair exchange. In the LBO world, both sides are EXTREMELY sophisticated. In the retail world, yes, not so much. But are you to have me believe that someone who takes out a car loan or home mortgage is a babe in the woods who hasn’t considered the potential consequences? Please.
Lenders know exactly what risks they are taking with their balance sheets. How many times have I said it? Maybe its finally dawning on people. They knew these were crap loans. They knew the regulators would, uh, “frown” on institutions who didn’t make these loans. So they lobbied for entities to take them off their balance sheets. Anyone here understand finance 101? Crap assets means troubling liabilities on the other side. Hello!?! That was the banks dilemma. And the solution was Dodd, Frank, Waters……….sell them off.
This isn’t rocket science, people. I’ve seen rocket science. This is basic credit, asset management and portfolio management. I have to tell you all. Its a god damned shame that ideology has blinded many commenters here to the absolute travesty that occured in the housing market. Its an absolute travesty that two of the main sources have covered their political and legacy asses with legislation that will turn out to be as assinine as SarBox. That’s Dodd Frank. Clinton, Frank, Dodd, Waters, Greenspan and on have blood on their hands. Argue if you want that GWB didn’t do enough to stop it. I’d agree. He was preoccupied with a war. But please, spare me the ideological BS. This was left leaning social policy to the nines. And it was government that induced the frenzie, not the capitalists. But capitalists are capitalists…….and when the blood was in the water, they pounced.
Same as it ever was. Same as it ever was.
“Lenders know exactly what risks they are taking with their balance sheets. How many times have I said it? Maybe its finally dawning on people. They knew these were crap loans. ”
How could they with liars loans? Are you claiming it was all a big scam? They knew they were handing out crap loans? Internal memos suggest that a lot of people believed their models, that they couldnt lose money on the loans. If they knew they would lose money, why make them? Because someone would frown on them? Really? Ok, so while I think that is nonsense, we are talking about the most aggressive lobbying sector in the US, that accounts for 6% of all loans. What about the other 94% not subject to the CRA? How do you explain all of those alt-A loans? Isnt it just too pat that they were forced to do something that made them Billions? In any other kind of scandal anywhere, we look to see who made the money, who benefitted, but not here. Poor innocent bankers forced to create scams. (Why cant the govt force them to make loans now. I am pretty sure I have seen Obama frown. Isnt his frown as scary as Bush’s, Clinton’s or whomever you think more responsible. Oh yes, that would be the guys like Barney Frank, a Congressman in the minority party. Yes, they are omnipotent, with wicked frowns.)
Please Brer Fox. Dont throw me in that briar patch.
All you have done is ignore incentives. Ignore numbers and ignore timelines. Bush occupied by a war? Hell, when the state attorneys general tried to put a stop to these loans his guys stopped them. Otherwise, you make sense.
Steve
Somewhat relevant to the topic, its being reported this morning that Skilling may get out early because of errors in his sentencing. He got an extra ten years for defrauding a financial institution, when Enron is not a financial institution, just an energy company that pretended to be one.
steve
I apologize. I did not see your earlier comment. Look, let me clarify this once and for all. Anyone here can agree, or disagree. And at the risk of sounding arrogant, I’m the only one here with significant experience with credit extension. My opinion counts.
Any competant banker has gone through basic credit training. Once on the line, they have gone through the credit approval process, and if they have done it long enough, have some scars. Just so you all know, I did leveraged finance deals as a banker. (I’m obviously on the principal side now.) 21 deals. No loan loss. None.
You do all the usual metrics, which I have cited in prior posts. Then you use your experience, your acumen and your gut.
steve – you seem fond of the “liar loan” meme. If you understood the finances of banking you would know that no one – and I mean no one – would make a loan they thought would fail. Its hard to recover financially. Its metered money, steve. 4-6-8% net interest win or lose. Principal loss is absolute. Do the math. If you make 6% on 9 loans, but lose all the principal on 1, where are you?? You would only do that if there was some outside motivating factor.
What might be those outside factors? Government coersion if you don’t make crap loans. Government subsidy if your portfolio tanks. And oh, I can sell the loan off my balance sheet? Cool!! That’s reality. That’s what happened.
If you want to blame the bankers, then you have to blame the motivators of their behavior: government. You do not seem able or willing to cross that threshold. It goes against your ideology. Bankers are always and everywhere greedy. That’s the trivial observation. It is only government that released them from their financial constraints. Similarly, creditors are always and everywhere greedy. To absolve them with the notion that they were victims of “liar loans” is childish.
Market controls are imperfect, but cruely constant. It is only government intervention into these controls that results in catastrophy and laying the risk and result on innocents. I just wish we could all learn that lesson, and stop with the lightweight crap about greedy businessmen.
If you want to blame the bankers, then you have to blame the motivators of their behavior: government. You do not seem able or willing to cross that threshold. It goes against your ideology.
Dovetailing into that statement, just look at the deja vu going on today: White House pushes home loans to people with weaker credit.
The Obama administration wants to move the housing recovery along faster, and so is calling for bankers to have a more relaxed view of people’s credit — approving a loan for say a 600-650 FICO score instead of a stronger one in the 700’s. This kind of government intervention is exactly what happened during the sub-prime build-up — lenders being coaxed by government officials to lighten up so everyone would have a better and fairer opportunity to be a home owner.
I well remember Frank and Dodd giving passionate Congressional speeches chiding those who didn’t fall into line with soft pedaling loan qualifications for needier applicants. Ironically, these two idiots then created the fiscally inept Dodd-Frank Bill to make banking oversight better!
Now, though, it appears there is a similar wash and rinse cycle going on, leaning on lending protocols, just when the housing market is beginning to peek over the abyss of the ’08 crash. Why doesn’t the government just stay out of the way, instead of repeating a behavior, which once again could leave the taxpayers hung out to dry, in providing restitution for so-so loans that never should have been granted!
“steve – you seem fond of the “liar loan†meme. If you understood the finances of banking you would know that no one – and I mean no one – would make a loan they thought would fail.”
No one holding the loan. The originators had very motivation to make the loans, they got bigger fees for riskier loans. They then got securitized. It looks as though the people doing so really believed that when you put all of those bad loans into a big package, they could not fail, i.e., they believed the models. What I find hard to believe, although internal memos suggest it to be the case, that senior management did not step in and say it is not possible for the market to always go up.
You suggest the only reason they would do this is because the govt would make them do it. This argument holds no water. First, it is the sector that donates the most money. It gets what it wants. Second, it discounts money as an incentive. They made tons of money by handing out those loans. They didnt need an outside factor, they just needed to see that everyone else was making money at it. Then you have a Gresham’s dynamic that sets in. Third, the current govt is asking the banks to loan, but they cant make them do it? Why? In your story, the banks just did whatever the govt told them in the past. Why not now?
Your story makes no sense. I think you did your banking in a different time., not over the last 13 years when these problems occurred. It sounds like you were lucky enough to work with people who had some ethics and common sense. In the 2000s, bankers really did seem to believe that they could make money with these awful loans. For a while they did.
Steve
Steve,
So you believe that subtle persuasion and innuendos, from the government or those in authority, are ineffective, having nothing to do with how people act, vote or fall into line by employing a favored policy?
For instance, when rank and file police in Colorado were told it “was in their best interest” to come in uniform to support Obama gun control stance, this didn’t convey some kind of authoritative message causing some to involuntarily comply?
steve
You were on a good roll when you observed loan initiators could unload them from their balance sheets. Then you drove off the cliff with the greedy banker thing again. You are stuck in a mindset.
Bankers are always greedy. Businessmen are always greedy. Oh, and no one wants to admit this, creditors and average consumers are also greedy. Doesn’t fit the standard, and steve, argument. Tell us something we don’t already know. Your next door neighbor buys at list plus 10% – “just add 10%” – because he/she is altruistic? The local gas station sells at 10% under because its altruistic? What universe are you living in??
In the early days, and I know you just refuse to deal with this – the 90’s – the banks knew these loans were poor credit risks. So they pleaded with govt to find a home for them. Fannie and Freddie to the rescue.
All you say is true about money grubbing loan initiators and fee origination. But you are blind to what facilitated it. The private syndication market proliferated just as the govt syndication market did. You want to lay all the blame on privates. It just ain’t so. This was govt social policy gone wild. And when their is money in the wind……….capitalists will be capitalists.
You need to ask the opposite question you are asking me. If its just greedy bankers, why didn’t this happen sooner? You think they just woke up one day? Or do you think they had the government green light?
The reason its not so today is a) the light is on the syndication subject and b) they are effectively doing the same thing with low interest rates. Some observe it. (me) Others herald the housing recovery. (Obamaphiles)
Now where should your invective really be directed? Never mind. I know. Obama is god.
And I just saw as I reviewed the thread. “So all the risk should be on the borrowers side?”
NO!!!!! But do you understand what you just implicitly said? There is risk on both sides. Let’s be big boys and girls. “Liar loans?” Balls. Both sides know the deal. Sign the paper or don’t.
No tears.
“You need to ask the opposite question you are asking me. If its just greedy bankers, why didn’t this happen sooner? You think they just woke up one day?”
A point I keep forgetting to make. This has happened before. In particular, we had a small subprime run in California in the 90s. Regulators stopped it. More broadly, this has happened over and over through history. Look back more recently to the savings and loan crisis. Look to the recessions and panics of the 1800s and 1900s. Bankers do this over and over. Look internationally and you can find bankers doing it there also. Reinhart and Rogoff wrote a book on it sinc eit happens so often. The particulars change, but w/o adequate regulation, banks over leverage and take too much risk over and over.
Which is really what you would expect isnt it? You, among many make the point, and it is a good one, that govt isnt as careful with money because it is not their money. Banks also gamble with other people’s money. Is it any wonder they gamble and go for the big one?
Steve
steve
“Banks also gamble with other people’s money. Is it any wonder they gamble and go for the big one?”
This is a point we can definately agree upon. But perhaps not on the solution. Me: stop government from directing policy and from bailing the b-stards out. steve – I’ve been there. You don’t believe it. So be it. I saw it with my own two eyes. Heard it with my own two ears. Government regulators told banks: make these loans or we might not look favorably on your consolidation plans. (Banking was going through a consolidation then.) its a fact. College professsors doing studies be damned. Why do you think they are college professsors?