Mortgage Market Crisis/A Failure to Manage Risk/Economic Outlook Grim
9-1-11NYTimes--At Last US is Suing Big Banks over Mortgage Fiasco
- U.S. Said to Be Ready to Sue Banks Over Mortgages - NYTimes.com
The federal agency that oversees Fannie Mae and Freddie Mac is expected to sue Bank of America, Goldman Sachs and others, accusing them of failures in vetting mortgages during the housing bubble.
7-2-08 Deep Job Loss Cycle Will Last into 2009 Peter Goodman in the NYT
- Economic Outlook--Slow Motion Recession
Plummeting home prices and car sales, rising foreclosures, accelerating joblessness, tight credit, expected FEDERAL RESERVE interest rate increases. 2 years of sub-par growth expected. Goldman Sachs forecasts unemployment peak of 6.4% late in 2009.
Subprime Mortgage Crisis Update
I wasn't busy today, and I happened on a C-Span colloquy sponsored by Demos, a New York City research and advocacy organization, on the mortgage crisis. The program featured three speakers--Jim Lardner, senior fellow at Demos and the author of a Demos report on the mortgage crisis, Mark Zandi, Chief Economist at Moody's, and Alfred Dellabovi, HUD secretary under George H.W. Bush and currently CEO of a large wholesale bank in New York that services more than 300 small banks.
The picture painted by the DEMOS report and by the three speakers was alarming. DEMOS supports the action taken thusfar by the FED and Congress but believes that much more is required. The situation is likely to get worse before it gets better according to the report and the three speakers.
According to the Miles Rappaport, DEMOS president, the crisis stemmed from a failure of deregulation and over-reliance on a belief that all problems would be solved by the market. What is needed, he said, is the re-creation of regulations that will protect the home buyer, the financial institutions and the U.S. economy by preventing future excesses and failures like the current one.
Dellabovi pointed out that historically the mortgage market functioned well because mortgages were written and financed by local FDIC banks and credit unions who, as well as the home buyer, had "skin in the game." That is the bank retained and serviced the mortgages, and risked its capital, and the home buyer had "skin" in the transaction by virtue of a healthy down payment.
Since 2000 many mortgages have been sold by mortgage brokers and bankers whose only interest in the mortgage was to collect the fees because the mortgages were packaged and sold to other banks and mutual funds around the world who thought they were buying a secure income stream from the mortgage interest payments. The mortgage brokers invented a variety of new types of mortgages and sold them to home buyers who didn't understand them and couldn't afford the over-appraised houses they were buying. Dellabovi said the best advice to a home buyer is to stay away from mortgage brokers and apply at a FDIC insured bank where he has a checking account. The local bank will provide a mortgage the buyer can afford at a fair price based on the documented income of the applicant and an accurate appraisal of the property and a suitable down payment.
Mark Zandi, Chief Economist of Moody's, who holds a PhD in economics from University of Pennsylvania and a BA from the Wharton School made the following six points:
1. Foreclosures are still rising. 2.75 million mortgages are currently in default. There were 800,000 foreclosures in 2005, 1 million in 2006, 1.5 million in 2007 and 2.75 million in 2008. Foreclosures are rising rapidly across the country in every state except for North Dakota.
2. The causes of the foreclosures are changing.
The first foreclosures were cases of crooked lenders and borrowers bent on flipping houses, many of whom never made the first mortgage payment.
In 2007 Adjustable rate mortgage (ARMS) re-sets led to more defaults and foreclosures.
And, now, in 2008, negative equity due to the collapse in house values is playing an increasing role. Currently 9 million mortgagees are in a negative equity position on their mortgages. Increasing unemployment is contributing to mortgage defaults.
3. The problem is likely to intensify this year and next. We are seeing a negative feedback loop phenomenon (some say death spiral) with price declines leading to foreclosures which are leading to more foreclosures.
Nobody is sure how long this will last. Mortgage interest re-sets are being helped by low interest rates. But rates are not likely to remain abnormally low as they currently are. The ARM re-set problem will continue in 2009 and 2010. This is likely to be an ongoing problem into the next decade.
4. The mortgage system has improved but still is anything but normal. The FED has done about all it can do. No one knows when the ongoing decline in house values will end. There is negative feedback between the economic situation and the housing/mortgage situation.
5. All of the policy efforts thusfar have been good--GSE and Hope Now. Hope now has achieved 500,000 loan modifications and 500,000 are on repayment plans. However, many of these are not likely to be successful. These efforts are not nearly enough.
6. The Frank-Dodd plan is a very good attempt at improving the situation. It is a voluntary plan. We are very worried that it won't be enough. There is no silver bullet. We need to try a lot of platinum bullets.
One of the speakers pointed to the serious financial problems created by foreclosures and declining home prices for many cities across the country as assessment based tax collections fall.
Listening to the hour long program which took place on Wednesday June 25 and was broadcast on CSpan the following day made me wonder if it contributed to the big decline in the stock market Thursday and Friday this week. ???
Note: The above is based on my memory and a few sketchy notes. The speakers painted a bleak picture.
Beyond the Mortgage Meltdown
- DEMOS Report "Beyond the Mortgage Meltdown"
The DEMOS report documents the causes of the subprime mortgage crisis and suggests that it's solution will require a number of remedies.
Mortgage Default Rate Snowballing Vikas Bajaj in the NY Times 6-29-07
- Housing Crisis Grows Deeper
Congressional proposals will help only a small fraction of those in trouble. Nine million homeowners owe more than their houses are worth. Three million loans are in peril as home owners are over-burdened by credit card debt and home equity loans.
DEMOS HOME PAGE
Wikipedia Entry for DEMOS
- Wikipedia Entry for DEMOS
Non-partisan think tank founded in 2000.
What Happens if We're Wrong? Peter Bernstein in the NYT 6-22-08
- Managing Risk
What are the consequences of being wrong in our expectations? Risk management is dealing with the consequences of being wrong, concentrating either on limiting the size of the bet or ways to hedge the bet so you aren't wiped out.