Comments on: How Lending Standard Changes Led to the Housing Boom/Bust http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/ Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media Wed, 15 Feb 2012 00:33:57 +0000 hourly 1 http://wordpress.org/?v=3.0.5 By: Bill Carlson http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-123683 Bill Carlson Tue, 28 Oct 2008 19:32:51 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-123683 I guess I have a hard time accepting the argument that cheap credit and careless lending standards caused the current mortgage dilemma. I was under the impression these had little effect on lending practices. To begin with, didn't bond insurers and subordinate investors keep lenders in check. When subprime mortgages were pooled they were done so in the form of asset backed securities and used bond insurance for credit enhancement. Thus, bond insurers were key in pricing credit risk. Weren't they the main buyers of ABS along with subordinate investors who were meticulous to pricing risk and said no to overly risky securities. It seems they controled lending practices by saying no to risky loans. Instead, I would argue that increased demand by CDO's caused the mortgage mess. When CDO's came into the picture and began using subprime ABS as collateral they were less discerning in pricing risk and beat more experienced bond insurers and subordinate investors out of the market. This caused an increase in demand for risky loans since CDO's were willing to buy them. Their had been little need for tight lending standards because the bond insurers and subordinate investors kept lenders in check. Lending standards didn't cause the mortgage problem. Rather, a lack of experience by asset managers and investors when structuring and purchasing CDO's combined with lack of experience in understanding default risks associated with underlying securities caused the current predicament. I guess I have a hard time accepting the argument that cheap credit and careless lending standards caused the current mortgage dilemma. I was under the impression these had little effect on lending practices. To begin with, didn’t bond insurers and subordinate investors keep lenders in check. When subprime mortgages were pooled they were done so in the form of asset backed securities and used bond insurance for credit enhancement. Thus, bond insurers were key in pricing credit risk. Weren’t they the main buyers of ABS along with subordinate investors who were meticulous to pricing risk and said no to overly risky securities. It seems they controled lending practices by saying no to risky loans. Instead, I would argue that increased demand by CDO’s caused the mortgage mess. When CDO’s came into the picture and began using subprime ABS as collateral they were less discerning in pricing risk and beat more experienced bond insurers and subordinate investors out of the market. This caused an increase in demand for risky loans since CDO’s were willing to buy them. Their had been little need for tight lending standards because the bond insurers and subordinate investors kept lenders in check. Lending standards didn’t cause the mortgage problem. Rather, a lack of experience by asset managers and investors when structuring and purchasing CDO’s combined with lack of experience in understanding default risks associated with underlying securities caused the current predicament.

]]> By: Sharon Salisbury http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-123682 Sharon Salisbury Mon, 27 Oct 2008 20:16:09 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-123682 I think the cartoon at the end of your posts speaks volumes! It's unfortunate that short term profit got in the way of long term value and stability, but I guess that's what happens when we let the criminals run the assilum. I think the cartoon at the end of your posts speaks volumes!

It’s unfortunate that short term profit got in the way of long term value and stability, but I guess that’s what happens when we let the criminals run the assilum.

]]> By: downandout http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-121414 downandout Wed, 22 Oct 2008 14:52:54 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-121414 I think it all comes down to the human element that is called " greed ". I think it all comes down to the human element that is called ” greed “.

]]> By: Wisdom Seeker http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-121413 Wisdom Seeker Wed, 22 Oct 2008 14:10:54 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-121413 @Flory "Are the securitizers claiming fraud and the contracts were invalid from the start?" Yes. The policemen and the regulators were instructed to look the other way, and a culture of fraud sprang up in some areas. Borrowers were invented, or their paperwork was modified without their permission (and in some cases understanding). People were pushed into loans they didn't want (again, sometimes without their knowledge). The Federal Government told the states they couldn't regulate most of this (some sort of override), and then the Federal Government sat on its a** and did nothing. Known criminals (former convicts) were handing out mortgage money, even though there should have been detailed background checks. Since there were no incentives to prevent this (and those that were there, were deliberately if mistakenly removed), Greed ran rampant and enlisted the aid of its pals Fraud and Falsehood (and Fannie and Freddie) and reduced the system to shambles. As to the broader question of why this happened here but the rest of the world suffers as well: the specifics are unique to each country but the whole world was in a competitive race-to-the-bottom in terms of leveraging, easy credit, and moral hazard / too-big-to-fail. @Flory “Are the securitizers claiming fraud and the contracts were invalid from the start?”

Yes. The policemen and the regulators were instructed to look the other way, and a culture of fraud sprang up in some areas. Borrowers were invented, or their paperwork was modified without their permission (and in some cases understanding). People were pushed into loans they didn’t want (again, sometimes without their knowledge). The Federal Government told the states they couldn’t regulate most of this (some sort of override), and then the Federal Government sat on its a** and did nothing. Known criminals (former convicts) were handing out mortgage money, even though there should have been detailed background checks.

Since there were no incentives to prevent this (and those that were there, were deliberately if mistakenly removed), Greed ran rampant and enlisted the aid of its pals Fraud and Falsehood (and Fannie and Freddie) and reduced the system to shambles.

As to the broader question of why this happened here but the rest of the world suffers as well: the specifics are unique to each country but the whole world was in a competitive race-to-the-bottom in terms of leveraging, easy credit, and moral hazard / too-big-to-fail.

]]> By: BRIAN http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-121412 BRIAN Wed, 22 Oct 2008 13:15:51 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-121412 I hear alot of comments about how borrowers put themselves in homes they could not afford and that is true but also because of the lax underwriting standards there were many loans where there was no true borrower--they were created by the broker and others --the so called strawborrower deals-false borrowers and there were many of these. I hear alot of comments about how borrowers put themselves in homes they could not afford and that is true but also because of the lax underwriting standards there were many loans where there was no true borrower–they were created by the broker and others –the so called strawborrower deals-false borrowers and there were many of these.

]]> By: wunsacon http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-121411 wunsacon Wed, 22 Oct 2008 07:14:58 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-121411 oulous, nice analogy. oulous, nice analogy.

]]> By: khan http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-121410 khan Wed, 22 Oct 2008 06:15:51 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-121410 Economic jurisprudence is based on interest and has always been so.. and interest is driven by greed and greed surpasses all regulations and institutional policies. hence the price is been paid , sadly back to the conglomerates to continue with thier greed. Economic jurisprudence is based on interest and has always been so.. and interest is driven by greed and greed surpasses all regulations and institutional policies. hence the price is been paid , sadly back to the conglomerates to continue with thier greed.

]]> By: redriver http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-121409 redriver Wed, 22 Oct 2008 05:06:15 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-121409 Hey readingcraplikethis here's the link which I got by googleing "Steven Holmes 1999 ny times article" http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260 Hey readingcraplikethis

here’s the link which I got by googleing “Steven Holmes 1999 ny times article”

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260

]]> By: readingcraplikethis http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-121408 readingcraplikethis Wed, 22 Oct 2008 03:04:14 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-121408 hey David, The article you cited in NY Times, September 30, 1999 by Stephen A. Holmes does not exist in the NY Times archives. I've just queried the NY Times archives at the NY Times website: nytimes.com and there is no article on that date written by Stephen A. Homes. Nice try though. hey David,

The article you cited in NY Times, September 30, 1999 by Stephen A. Holmes does not exist in the NY Times archives. I’ve just queried the NY Times archives at the NY Times website: nytimes.com and there is no article on that date written by Stephen A. Homes.

Nice try though.

]]> By: Rathipon http://www.ritholtz.com/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/comment-page-2/#comment-121407 Rathipon Wed, 22 Oct 2008 02:31:01 +0000 http://ritholtz.vs3.wilder.ca/blog/2008/10/how-lending-standard-changes-led-to-the-housing-boombust/#comment-121407 Scott, Admittedly my evidence is anectdotal. I'm an attorney in the NYC/LI area and I did quite a few residential transactions from 2003 through today. Before 2006 I never saw 100% LTV financing. Towards the middle of 2006, every single deal was 100%. So anectdotally, 2006 was when I saw lending standards get absolutely thrown out the window. Scott,

Admittedly my evidence is anectdotal. I’m an attorney in the NYC/LI area and I did quite a few residential transactions from 2003 through today. Before 2006 I never saw 100% LTV financing. Towards the middle of 2006, every single deal was 100%. So anectdotally, 2006 was when I saw lending standards get absolutely thrown out the window.

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