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Wednesday, October 29, 2008

Mortgage Meltdown post-mortem

Items of Interest:

Prof. Stan J. Liebowitz / University of Texas / Independent.org:
Anatomy of a Train Wreck - Causes of the Mortgage Meltdown [29 pages, pdf] -- Why did the mortgage market melt down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere as risky as they actually turned out to be?

This report concludes that, in an attempt to increase home ownership, particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s. Regulators, academic specialists, GSEs, and housing activists universally praised the decline in mortgage-underwriting standards as an “innovation” in mortgage lending. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The price bubble, along with relaxed lending standards, allowed speculators to purchase homes without putting their own money at risk.

The recent rise in foreclosures is not related empirically to the distinction between subprime and prime loans since both sustained the same percentage increase of foreclosures and at the same time. Nor is it consistent with the “nasty subprime lender” hypothesis currently considered to be the cause of the mortgage meltdown. Instead, the important factor is the distinction between adjustable-rate and fixed-rate mortgages. This evidence is consistent with speculators turning and running when housing prices stopped rising...

Liebowitz's conclusion:

But let’s not blame the speculators here. There is nothing wrong with speculation or speculators. At fault is a mortgage system run by flexible underwriting standards, which allowed these speculators to make bets on the housing market with other people’s money. It was a system that invited the applicant to lie about income. It was a system that induced applicants to watch a video instead of providing solid evidence about their financial condition...

Discussion:
Right Truth:
Anatomy of a Train Wreck -- This report has also been excerpted for the cover story in the October 20th issue of National Review (subscription required).

Steve Sailer's iSteve Blog:
Liebowitz: Anatomy of a Train Wreck: Causes of the Mortgage Meltdown
-- Paul Krugman just won the Nobel Prize in economics, but they should have given it to the economist who has been hollering since the 1990s about the government's mortgages for minorities and the poor policies, Stan J. Liebowitz...

Real Clear Markets:
Foreclosure Myths: Can the Media Handle the Truth? -- As Liebowitz observes, what we are currently seeing is often characterized as a subprime crisis, but in fact, it is an adjustable-rate mortgage problem. Starting in mid-2006, foreclosures jumped sharply for both prime and subprime ARMs, but not for fixed-rate mortgages of any kind, including subprime ones...
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M. Jay Wells / Investors.com:
Why The Mortgage Crisis Happened -- one of the most complete timelines of the debacle...

"...it is not free-market capitalism at the root of the current mortgage industry crisis, but rather the very socialism Obama hawks. The historical record makes this fact unmistakably clear." ...

"Initially the GSEs [i.e., Fannie Mae and Freddie Mac] resisted purchasing these risky mortgages but eventually the Clinton Administration instructed them to substantially increase the percentage of these mortgages in their portfolios." ...
Discussion:
Barry Ritholtz / The Big Picture:
President Bush and Home Ownership -- There was an editorial in IBD this week, mistitled, Why The Mortgage Crisis Happened. Funny thing is, they somehow overlooked these speeches below.

The pandering and disinformation campaign of the far right are looking more and more like the death spasms of an intellectually bankrupt ideology

A Home of Your Own, by President Bush, May 17, 2002 ...
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Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia