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March 24, 2009

Comments

"They seem contradictory to me."

I must confess that I'm at a loss as to the contradiction you see. Banks under pressure to expand home ownership made a lot of loans to people they'd never have loaned to in the past. People they had good reasons for not loaning to in the past. This doesn't mean that anybody who was paying attention during the process wouldn't have been aware that the banks were going to re-sell the loans. It IS disclosed in the paperwork, if you read it. In fact, the local small town bank advertised that they didn't.

But then, the people who probably shouldn't have been loaned money were not the sort to sit down and read an inch high stack of documents before signing it, or even after during the grace period.

Banks under pressure to expand home ownership made a lot of loans to people they'd never have loaned to in the past

(spits all over the monitor)

yes, those banks were just trying to help along Bush's Ownership Society. it had nothing to do with the voracious appetite Wall St had for MBS.

What cleek said. Brett, it's a shame you're wedded to these dubious narratives because they consistently get in the way of what could otherwise be sensible points.

Alas...

"There is no equivalency in a dubious mortgage agreement. Even if the bank thinks the client is overextending themselves, ultimately that's the client's problem.'

Why, my bookie explained my debt problem to him in those very terms just the other day!

I don't have a PhD, so maybe I'm not the brightest kid in class here, but I fail to see where these are in contradiction.

It strikes me as logically sound that a problem can arise both from perverse incentives that reward nonexistent lending standards, as well as from the asymmetric information problem that inhibits the ability of consumers who are not real estate or financial experts to make informed borrowing decisions.

Posted by: Catsy

I'm not sure exactly who's saying what here, but I certainly didn't mean to imply that these were contradictory. When I said 'no', I meant that no, it's wrong that this is not an asymmetrical information. Not that it was one but not the other. That's my math PhD habits speaking :-)

Cleek,

Re: our prior discussion on Summers/Geithner v. Krugman, Roubini, this story doesn't shine light on Summers:

http://blogs.wsj.com/economics/2009/01/01/ignoring-the-oracles/

Short story: Rajan was warning about the exact crisis we're facing - bubble collapse with securitization nukes - and Summers called his fears "misguided."

Scent of Violets: "Do you agree that the lending institutions should have made this fact known to their prospective clients?

Or do you step back yet another pace and claim that it's up to the customer to find that out, not on the bank to supply requisite information . . . even if asked (albeit in an indirect way)?"

I'm not Brett, but it seems to me that the most important fact to disclose in terms of asymmetric information possibilities was the montly payments at different times of the loan. Those aren't easily calculated by people not good in math, but they were also disclosed. I can't get on board with an abdication of responsibility so large as to say that people aren't able to understand that $xxxx per month is or is not likely to be affordable to them.

People can understand that. Though I suppose if you truly believe they can't it explains the whole liberal paternalism thing.

Cleek "yes, those banks were just trying to help along Bush's Ownership Society. it had nothing to do with the voracious appetite Wall St had for MBS."

and

Eric "What cleek said. Brett, it's a shame you're wedded to these dubious narratives because they consistently get in the way of what could otherwise be sensible points."

Nothing to do with? Of course it had *something* to do with the voracious appetite for mortgage backed securities. This whole thing had a lot to do with a lot of things.

But the government push to increased home ownership had a lot to do with it too.

Enforced mark-to-market accounting for assets for leverage ratio purposes (as opposed to disclosure purposes, which is the distinction Buffet makes in the proper use of the mark-to-market accounting tool) caused a lot of problems too.

The problem is that the private market and the public government worked together hand in hand to create an enormous set of incentive-warping situations which have now exploded.

If you focus on the private part alone, you won't be fixing the government's very large part in the problem.

(And the reason I always seem to be defending the private part and attacking the government part is purely because people around here don't seem to have much problem identifying the private portion, and seem deeply in denial about the government portion.)

Summers called his fears "misguided."

in my reading of Summers' comments, he is most troubled by Rajan's calls for more regulation. Summers isn't saying Rajan is wrong about the dangers the market faces:

    (and here's where i would paste Summer's penultimate paragraph, if i could copy from that PDF)

i think Summers was clearly wrong, back in 2005, about not needing more regulation. i hope he's changed his mind at least a little bit.

But, in answer to your question: Because prospective home owners know their income, circumstances, and future prospects better than any banker could.

First of all, bankers don't (and really shouldn't) make these decisions: simple mathematical models decide. For example, a loan may be given if the weighted sum of a prospective borrower's credit score, annual income for the last five years, and verified assets are above some threshold. The question of how skilled bankers are at assessing borrowers is irrelevant: what matters is how good bankers' models are at assessing borrowers.

For the average person, I think typical banker models are far better at predicting prospective borrower's ability to repay. For starters, the models don't suffer from cognitive biases that beset human beings when evaluating themselves. Most people are convinced they're above average drivers and the human tendency to engage in self-deception is particularly strong when it comes to social signifiers like owning a home ("Of course I qualify for this loan because I'm a good person and homeownership is restricted to good people").

This is exactly right. In fact, it's exactly why I chose the driving example, it being well-known that most people will rate themselves as 'above average'. Even, notoriously, if they've been involved in a greater than average number of accidents. Understand, these people aren't being deceptive when they gloss over these inconsistencies when discovered and questioned. They honestly think they really are better than average drivers, and that they just happened to be unlucky. Significantly - in the light of some rather unpleasant financial events - they'll often claim that these accidents would have been much worse for all concerned if they hadn't been the ones who driving at the time the accidents occurred.

Beyond that however, most people are innumerate. They are scared of math. They are extremely uncomfortable thinking about numbers and they lack the skills and experience needed to do so correctly. Banks don't have this problem. There's a reason that lots of ARM mortgages were sold with super low teaser rates: many people decide whether they can afford a mortgage by figuring out if they can cover the first month's mortgage cost every month. That is a really dumb algorithm, but if you're functionally innumerate, it is probably the best you can do.

This is the flip side of the banks having superior models derived by some extremely sophisticated people(mathematically speaking) who are backed with a lot of money, data, and computing resources. Unfortunately(irony alert), I teach math to these benighted masses. In fact, in one course, we have an entire chapter devoted to 'financial mathematics': interest payments, annuities, mortgages, balloon payments, stuff like that. Iow, extremely pertinent math that every American should know. And we teach this not only traditionally, but with TVI solvers to boot.

Here's the thing. This class, 'Finite Mathematics', is not a required math class. That tops out quite a bit lower, at 'algebra facts you would have learned in high school, had you been paying attention'. Iow, even college graduates cannot be assumed to have what is really a rather basic grasp on the mechanics of compound interest.

So why do people like von, Sebastian and Brett keep on insisting that it's obvious that these people are perfectly competent to make these sorts of decisions, more so even, than bank officers who presumably have had a number of relevant financial and business math courses, and backed by the hired eggheads out back?

This seems to touch more on meta-competence than mere competence alone.

and on the other hand, let me point out, FWIW, that not everyone worships Krugman the way the left-o-sphere has suddenly started to.

Sebastian:

I've seen plenty of people (me included) talking about the problems with the public/government parts.

But the difference is, the public/government parts didn't make the bets that let them make obscene profits off the bubble, and then start whining about their precious bonuses. The private part did. The government part mostly started whining about socialism, Bill Clinton, Jimmy Carter, Fannie Mae, all those bad, bad, bad people who took out mortgages, how NOBODY COULD HAVE PREDICTED, and communism.

"So why do people like von, Sebastian and Brett keep on insisting that it's obvious that these people are perfectly competent to make these sorts of decisions, more so even, than bank officers who presumably have had a number of relevant financial and business math courses, and backed by the hired eggheads out back?"

Because the disclosures don't make you figure it out longhand. They put actual numbers in the blanks. They say things generally like "at the current rates on month 60 of your loan, your per-month payment will be $XXXX, WARNING, rates can change based on the X month T-Bill rate +X%"

And since the T-Bill rate hasn't gone up, people haven't gotten caught by that last phrase. So if they couldn't afford $XXXX it should have been noticeable to them, because $XXXX is a scalar number which requires elementary school math to understand.

"But the difference is, the public/government parts didn't make the bets that let them make obscene profits off the bubble, and then start whining about their precious bonuses."

Well that is fine. And as I've said it is mere whining. If there were really lots of private hedge fund money to run to so they could keep their bonuses, they would already be doing it. And so far as there is such money, we should be thrilled that they find it--because that will save the taxpaymer MUCH more money than the bonuses in question.

Krugman's influence in Left Blogistan has more to do with his being one of the first public people with a soap box to stand up and say "Dude, the emperor's totally naked!" during the Bush years.

Being a Nobel prize winning economist certainly makes him credible on the financial front, as well.

Scent of Violets: "Do you agree that the lending institutions should have made this fact known to their prospective clients?

Or do you step back yet another pace and claim that it's up to the customer to find that out, not on the bank to supply requisite information . . . even if asked (albeit in an indirect way)?"

I'm not Brett, but it seems to me that the most important fact to disclose in terms of asymmetric information possibilities was the montly payments at different times of the loan. Those aren't easily calculated by people not good in math, but they were also disclosed. I can't get on board with an abdication of responsibility so large as to say that people aren't able to understand that $xxxx per month is or is not likely to be affordable to them.

That's just the whole point right there. By your own choice of words, you acknowledge an adversarial relationship. Great numbers of people did not know really know this, and never needed to. They just figured that while the bank did not have their best interests in mind, the banks interest was aligned with theirs in that neither party was anxious for the loan to go into default. Why would the bank be so crazy as to issue a loan that it thought stood a good chance of being defaulted on? This is sound thinking, and served at least four continuous generations very well. A good thing, because previous generations weren't all that sharp with the math thing either. They never needed to look at that table of payments to see whether or not they could afford to make them later on.

You seem to be of the 'buyer beware' school thought. Could I get a straight answer from you for the question I have asked others? Do you think lending institutions should have made the fact that they were no longer holding on to the mortgages, and that they no longer cared if the buyers could meet the payments because they still stood to make money in the case of a default, known to their prospective clients?

You shouldn't be reluctant to answer the question forthrightly.

"So why do people like von, Sebastian and Brett keep on insisting that it's obvious that these people are perfectly competent to make these sorts of decisions, more so even, than bank officers who presumably have had a number of relevant financial and business math courses, and backed by the hired eggheads out back?"

Because the disclosures don't make you figure it out longhand. They put actual numbers in the blanks. They say things generally like "at the current rates on month 60 of your loan, your per-month payment will be $XXXX, WARNING, rates can change based on the X month T-Bill rate +X%"

And since the T-Bill rate hasn't gone up, people haven't gotten caught by that last phrase. So if they couldn't afford $XXXX it should have been noticeable to them, because $XXXX is a scalar number which requires elementary school math to understand.

Posted by: Sebastian

You're still not answering the question. And no, recalculating interest payments should the rate reset is not 'grade school math.'

One more time - what makes them more competent than the bank in these sorts of financial matters? Especially since(contradiction time again), you seem to grant this is not the case with something like auto insurance?

Damn you cleek!!!

For the record, though, it's not Krugman alone - or even mostly. I look to Roubini, but also Stiglitz, equally if not moreso.

I find Yves Smith to be quite informative as well.

Regardless, bottom line: No matter how you slice it, the Geithner plan gives almost risk free money to hedge funds/other investors, and recaps the banks on the backs of the taxpayers - all the while the Obama admin is cowering about scaling back compensation on Wall St.

It's better than no plan, and if for some reason the underlying securities are secretly worth close to what the banks are asking, then it will work out to some extent for all involved. But if not (which is likely the case), we all take a bath while the screwed up banking structure remains in place (still too big), and Wall St continues its conspicuous consumption.

Them's the facts, regardless of Paul Krugman or any other DFH economist.

"Why would the bank be so crazy as to issue a loan that it thought stood a good chance of being defaulted on? This is sound thinking, and served at least four continuous generations very well. A good thing, because previous generations weren't all that sharp with the math thing either. They never needed to look at that table of payments to see whether or not they could afford to make them later on."

Says you. I'm quite confident that four generations of Americans who purchased houses were able to competently decide for themselves whether or not they could make payments if offered a table of payments.

Seriously do you know people who lived through or were born just after the Great Depression? None of the ones I know were brilliant at math, but every single one knew what to do with monthly payments.

"Do you think lending institutions should have made the fact that they were no longer holding on to the mortgages, and that they no longer cared if the buyers could meet the payments because they still stood to make money in the case of a default, known to their prospective clients?"

No, not to buyers, though they should have been clearer to bank investors perhaps. Payment tables are quite sufficient for the needs of the home buyer. Can I pay $3000 per month is not complicated math. If we were caught in huge *unexpected* payments becuase of say an enormous increase in T-bill rates, you might have a point. But that isn't the situation we are in at all.

"One more time - what makes them more competent than the bank in these sorts of financial matters? Especially since(contradiction time again), you seem to grant this is not the case with something like auto insurance?"

Because a table of payments is the kind of thing that people can handle. There have been no interest rate surprises so the payments are in line with OR LOWER THAN the disclosed payment tables.

Auto insurance is an extremely poor analogy. The question there is how good people are at predicting an unexpected and enormous payment obligation for medical bills or physical compensation based on how well they drive. That has just above nothing to do with how well people can handle a chart of payments.

This is the flip side of the banks having superior models derived by some extremely sophisticated people(mathematically speaking) who are backed with a lot of money, data, and computing resources.

This is a minor aside, but I don't think the banks really needed, or in many cases even had, very sophisticated models or people for assessing whether to approve standard home owner loans. Based on my experience in other domains, I'd bet that the simple weighted sum threshold test will outperform much more sophisticated classification algorithms and will be more robust to boot.

Do you think lending institutions should have made the fact that they were no longer holding on to the mortgages, and that they no longer cared if the buyers could meet the payments because they still stood to make money in the case of a default, known to their prospective clients?

I am neither Brett nor Seb, but my guess is that this sort of disclosure would not have made a difference. People get really irrational when it comes to home ownership and the power of wishful thinking is strong. I don't think most people would have been able to game out the consequences of securitization. After all, even if you sell a loan, the buyer is still very interested in the borrower's ability to pay, and I don't think most people would have understood that loan buyers would have no clue about the borrower's ability to repay. I mean, that aspect of the system is pretty darn irrational, right? In this day and age, you'd think it would be trivial to attach a tiny bit of data to each security specifying credit score, income, assets, and whether those numbers were independently verified.

Even if people could figure out that securitization in practice meant that there was no incentive for good underwriting, I'm not sure that most people really understand that getting a loan means that someone thinks you can repay it (as opposed to just relying on the notion that people who get loans can repay because that's how it has always been). People often rely on historical correlations without understanding why those correlations work. And that's a reasonable thing to do.

FWIW, I think there was a lot of borderline fraud on the part of a lot of borrowers. I'm thinking of cases where the mortgage vendor runs your numbers through the computer and it says denied, so he asks you suggestively, surely you must have some other assets hidden somewhere right? Maybe you had some extra income sources last year that you forgot about? I have trouble blaming people for this because I honestly don't know whether this phenomena affected 1% of borrowers or 80%, and even if it was very common, I'm don't know how to separate self-deception from willful deception.

In that sense, banks are a much easier target: they are supposed to take simple easy precautions to prevent fraud. How on earth could I entrust my deposits or IRA to any bank so stupid as to issue a mortgage without verifying income and assets? I mean, if the bank is that stupid, how do I know they won't give all my money to the first person who claims to be me but doesn't have any ID and doesn't know my account number?

Well... Not completely. After all, many of the first loans that caused the problems were subprime loans, including the "ballon" ones, and NINJA loans, and other "financial innovations" that started out low then had the payment jump after a year or two or whatever. Combine that with people talking about how "housing prices always go up" and you've got problems.

And then when the bottom fell out of the housing market, people who HAD been able to afford the mortgages started losing their jobs, watching their houses' value drop below what they owed, and so on. Which disinclined them to keep the houses. So then more people lost jobs, or houses, and house prices dropped, and... So what HAD been a payable mortgage before wasn't any more. The assumptions that had underlaid the whole system BROKE when housing prices stopped going up.

Also, another reason people are madder at the bankers? Bankers' real product is trust. Do you trust this person to take care of your money? To be honest with you, and advise you on retirement, and all the rest. And now it turns out that many of them had been taking people's money and simply betting it. They actively violated the expectations for them.

Says you. I'm quite confident that four generations of Americans who purchased houses were able to competently decide for themselves whether or not they could make payments if offered a table of payments.

Four generations of Americans were not presented with the variety of skeezy loan products on offer today. They could not apply for stated income stated asset loans or negative amortization loans, etc.

Them's the facts, regardless of Paul Krugman or any other DFH economist.

and i won't argue. i'll just say that i hope that this really is the best plan possible at the moment, and i'm content to let them implement it.

what else can i do, really ? it's not like we get to vote on this...

"They could not apply for stated income stated asset loans or negative amortization loans, etc."

Again, I'm certainly not defending the banks in their really stupid practices surrounding loans in the past 10 years. But the idea that people are just too stupid to read a chart of payments is a bit too much. Responsibility isn't found in just one party of this multiple party transaction. Should banks have decided not to make loans where it should have been obvious that the person wouldn't be able to pay? Of course.

Should the prospective homeowner have decided not to take a loan with clearly stated charts of payments that he well knew were out of reach? Of course.

I'm all for the idea that banks shouldn't have made these loans. But I'm not accepting the ridiculous level of irresponsibility that Scent of Violets seems ok with if people are shown a payment $3,000 dollars per month in 2 or 5 years that they know they won't be able to pay. A chart of payments isn't specialized math. It just isn't.

Actually, before we go around asserting things about charts, how clear WERE these charts, especially for balloon and NINJA loans and all the other strange "subprime" ones?

Well, I agree with Sebastian.

However, let's not underestimate the immense stupidity of the American people at large regarding financial matters.

After all, look at the ten of millions of folks who believed the predicted compounding rates of the stock market into the forever future, which would allow them to retire and pay for their kids' college education ..

... why, we lemmings even thought the market would bail out Social Security. Considering the market is worth less than half (minus dividends) of what is was when Bill Clinton left office, what we have here is a negative compounding rate over a ten year period .....

..... despite Wall Street and Larry Kudlow talking head assurances that the DOW would keep inflating.

There is too much small print in American society these days and not enough bifocals and magnifying glasses. That is, if you can remember all of your PIN numbers, passwords,and account numbers to get into your accounts and check out the damage.

Yeah cleek. I'll probably keep muttering to myself for a bit, and then just hope to hell those securities are worth more than the current market value. By a good clip. And that this was the best possible route - I don't think so, but I'm pretty sure I was wrong at least once before in my 34 years.

Brett Bellmore: Banks under pressure to expand home ownership made a lot of loans to people they'd never have loaned to in the past. People they had good reasons for not loaning to in the past.

You skipped about ten steps between the first sentence and the second, incidentally. Redlining, for example, was not typically done for "good reasons," unless you consider "that neighborhood is full of black people" to be a "good reason."


Eric: I also embrace the responses Bernard gave to Von. But, while I've noticed Hilzoy and Publius have tackled the economic mess and you have mostly kept a posting focus on foreign affairs, I wanted to say thanks for participating and keeping a sharp point in the comment sections of these lively Econ posts.

Meanwhile, I believe Bernard Madoff would agree with Von's thesis that it is important that we regular folk share in the blame of the economic meltdown.

P.S. Speaking of Bernard -- Yomtov, that is -- I would like to lift a virtual cold one, Sam Adams will do, to him, Russell, Janie, Tony P and the other New Englanders who will be gathering tonight for good food, drink and discussion. Wished I lived as close to Boston as I do Philadelphia, and I'd be there.


"But I'm not accepting the ridiculous level of irresponsibility that Scent of Violets seems ok with if people are shown a payment $3,000 dollars per month in 2 or 5 years that they know they won't be able to pay."

In full agreement with you here, Seb.

However, I think it's clear where the sleazy mortgage companies helped get us into this mess was when they did not show those figures, did not make it a point to bring them to the attention of the consumer and just kept painting a rosy picture instead.

At the start of the decade, I was seduced by one of those interest-only loans on the townhouse I had at the time that I had managed to refinance a 30-year down to a 15-year mortgage.

Single, I was OK making an $800 payment but, hell, when it was explained to me that I could pay $250 or $350 -- essentially whatever I wanted as long as it met the minimum -- I was in, hook, line and sinker. I kept asking questions, obviously not the right ones, because the mortgage rep kept making her product sound so good. After all, she said, all of us in this building are doing these.

Now, of course, I know these interest-only instruments are insane and warned a co-worker recently not to do it.

Luckily, I wound up selling the townhome just a year later for more than $50,000 I had paid 10 years earlier -- and had to pay "only" a $1,000 penalty to First State Mortgage -- and used the proceeds of the sale for the rancher that we're trying our best to stay in now.

So, yes, I was a fool and should have known better about this woman's sales pitch. But she was good, and while I can't say she committed fraud, there definitely was deception involved.

P.S. I was between jobs. No problem, the lady said. We'll do a "no-doc" (no proof of income necessary, no proof of a job; just what was then my excellent credit score -- boy, I thought at the time, these people are accomodating.)

Thanks btfb. And yeah, I'm jealous. I could use a cold one right now. I imagine a bunch of us could.

Cleek: what else can i do, really ? it's not like we get to vote on this...

Eh, you did dude, you and me both. We *voted* for this.

As Glenn would say: Heh!

*We* voted for this.

You and me both…

That has to suck at some point, Heh?

That has to suck at some point, Heh?

It stings, but you know what salves the pain: President McCain and Vice President Palin.


Eh, you did dude, you and me both. We *voted* for this.

sure. and i don't regret it. McCain would have been an utter disaster. a complete sh!tstorm of failure.

did you see the press conference tonight? about 1/2way through i started trying to imagine grumpy-ol McCain up there with his fake laugh and his mindless sloganeering... then i realized that we chose correctly. i felt a warm wave of relief flow over me, i shuddered. and when i opened my eyes, the sun was out, the sky was blue; i'd been laid-off with five years severance, and i had the fitness level of an 18 year old; and beer was the same price as it was in 1991.

O! Ba! Ma!

McCain? Let us not forget his senior economics advisor, Phil Gramm. We had a long chat about him around a year ago.

Cheers to Bernie Yomtov and the others meeting tonight. Wish I could be there.

"Why would the bank be so crazy as to issue a loan that it thought stood a good chance of being defaulted on? This is sound thinking, and served at least four continuous generations very well. A good thing, because previous generations weren't all that sharp with the math thing either. They never needed to look at that table of payments to see whether or not they could afford to make them later on."

Says you. I'm quite confident that four generations of Americans who purchased houses were able to competently decide for themselves whether or not they could make payments if offered a table of payments.

Says you indeed. Running out of room to manuveur there? You keep changing the rules; now we are down to what would be a traditional mortgage, like the one I got, or my parents got, or my grandparents got. Yes, if you put 20% down, paid a fixed rate, etc, you just get your little payment book and you mail each installment off like a coupon once a month. And yes, you could read off the amount due from a handy little table, no problem.

But those weren't the loans that got people in trouble, were they? The problematic loans were the weird paper like the Alt-A's and the option-ARMS (I never knew any of this stuff until I started reading Calculated Risk about three years ago. If I sound knowledgeable, it's because I'm cribbing from the late great Tana.) The sort of loans our forefathers didn't have any experience with. Trust me, the people in 1962 couldn't have calculated a rate reset unless they hired a professional to do it for them. You might try it yourself sometime to see how 'easy' it really is.

"Do you think lending institutions should have made the fact that they were no longer holding on to the mortgages, and that they no longer cared if the buyers could meet the payments because they still stood to make money in the case of a default, known to their prospective clients?"

No, not to buyers, though they should have been clearer to bank investors perhaps.

But this doesn't make sense. Why should they have been clearer to the investors, but not the buyers? It sounds like after all, you treally do think that warning prospective buyers of the new situation would have cost the lenders money.

Iow, you're not being consistent again.

Payment tables are quite sufficient for the needs of the home buyer. Can I pay $3000 per month is not complicated math. If we were caught in huge *unexpected* payments becuase of say an enormous increase in T-bill rates, you might have a point. But that isn't the situation we are in at all.

You keep saying things like this without offering up the slighest scintilla of evidence. Would it be to hard to dig oup some other reason than 'because I say so'? Cites, quotes, links? Since you are, you know, making the argument about how competent home buyers are.

"One more time - what makes them more competent than the bank in these sorts of financial matters? Especially since(contradiction time again), you seem to grant this is not the case with something like auto insurance?"

Because a table of payments is the kind of thing that people can handle. There have been no interest rate surprises so the payments are in line with OR LOWER THAN the disclosed payment tables.

Auto insurance is an extremely poor analogy. The question there is how good people are at predicting an unexpected and enormous payment obligation for medical bills or physical compensation based on how well they drive. That has just above nothing to do with how well people can handle a chart of payments.

Posted by: Sebastian

Again, this is simply not in touch with reality. Unexpected and unforseen circumstances are also priced into the loan you get on your house. Combining the two, how does the home owner know they're not going to have a catastrophic illness? Or lose their job? Or get into an auto accident, incurr huge lifelong medical costs, and lose their livelihood as well ;-) You sound as if you are unaware that in fact, good drivers get better rates on their auto insurance, just like people with a long history of good credit with a stable job get offered better terms on a mortgage. Can you say no-doc loan? Sure. I knew you could.

At this point, Sebastian, you have given little if any reason to believe that individuals are better at this stuff than the professionals at the bank. You've made me move in the other direction, actually - no doubt, you would like to think of yourself as being competent to make these sorts of decisions, but you were unaware that banks price the risk of the unforseen into their home loans. So why should I trust you any further?

A few points:

(a) Introspection: meh. I have gone over and over my mortgage history -- the first house with a 6% 30 year fixed rate loan, the second with an 8.something 30 year fixed rate loan, which I refinanced down to a 6% or so year fixed rate loan; the third with a 6 3/8% 30 year fixed rate loan which I just refinanced down to a 5% year fixed rate loan (nb, in none of the refis did I take equity out, other than to cover closing costs); never less than 30% equity -- and I have yet to see what I should have done to prevent the housing collapse.

Specificity: it is a good thing.

(b) I don't know about the tables, Seb. There were some pretty hairy loans out there, including some that could reset completely unpredictably, based on (iirc) whether, in exercising the option to pay less than the interest on your loan, which option was part of the deal, you passed some percentage of equity in the home, at which point the whole thing reset.

I would not have taken out such a loan, myself. (You might have noticed a pattern in my mortgage history ...) But then again, I have a good job and fairly modest tastes, so I was never in a position where I needed to make tough choices.

(c) A lot of people also lost jobs, or in some other unexpected way came to grief. This was not imprudence.

(d) That said, I'm not particularly invested in the idea that homeowners have no responsibility at all. I think that probably a decent number do. On the other hand, I also recall (and will try to find, if anyone wants) a particularly interesting post by Tanta on CR, about a horrible hairy complicated kind of mortgage that was becoming popular, whose terms she tried to explain at nearly unendurable length (and recall that Tanta was a very clear writer and a very clear thinker; if she had to write half a dissertation to get it across, imagine your average mortgage broker), and which she had found agents who didn't understand. I don't think it had tables.

Which is just to say: I think there's a lot of blame to go around.

But not everyone is holding a gun to the country's collective heads, after having made out like bandits on the grounds that they were so wise that they deserved to make six or seven figures a year, during which time they helped to blow apart the economy. I mean, for chutzpah, that leaves most deluded or deceptive homeowners in the dust.

Oh -- I really wish I could be at the meeting in Boston (my fair city!) ;) Have a wonderful time.

This is the flip side of the banks having superior models derived by some extremely sophisticated people(mathematically speaking) who are backed with a lot of money, data, and computing resources.

This is a minor aside, but I don't think the banks really needed, or in many cases even had, very sophisticated models or people for assessing whether to approve standard home owner loans. Based on my experience in other domains, I'd bet that the simple weighted sum threshold test will outperform much more sophisticated classification algorithms and will be more robust to boot.

No doubt such a simple model would easily capture most of the behaviour; I'd say over 90% After that the bites get smaller and come at a higher price. And while the smaller concerns might be perfectly happy with a simple model - it is by it's simplicity robust as you note - I'd guess that the larger outfits would find it monetarily worth while to chase after those increments.

Do you think lending institutions should have made the fact that they were no longer holding on to the mortgages, and that they no longer cared if the buyers could meet the payments because they still stood to make money in the case of a default, known to their prospective clients?

I am neither Brett nor Seb, but my guess is that this sort of disclosure would not have made a difference. People get really irrational when it comes to home ownership and the power of wishful thinking is strong. I don't think most people would have been able to game out the consequences of securitization. After all, even if you sell a loan, the buyer is still very interested in the borrower's ability to pay, and I don't think most people would have understood that loan buyers would have no clue about the borrower's ability to repay. I mean, that aspect of the system is pretty darn irrational, right? In this day and age, you'd think it would be trivial to attach a tiny bit of data to each security specifying credit score, income, assets, and whether those numbers were independently verified.

All very true. I am in general very leery of ascribing any weight to intentions; I prefer tangible outcomes. However, in this case, that's all we've got. I know of several people who have said something to the effect "Well, if Ida known that . . ." and I'm guessing that this is just blow. But I also know people who really did reason that way(ironically, people who considered themselves to be hip, smart, going-places economic conservatives), to the effect that they themselves were cynical enough (all of 28!) to be well aware that the lender wasn't doing them any favors out of the kindness of their institutional hearts.

Even if people could figure out that securitization in practice meant that there was no incentive for good underwriting, I'm not sure that most people really understand that getting a loan means that someone thinks you can repay it (as opposed to just relying on the notion that people who get loans can repay because that's how it has always been). People often rely on historical correlations without understanding why those correlations work. And that's a reasonable thing to do.

I agree that this is the weakest part of what I take as my argument. Once again, a case of intentions versus reality, of talk versus action. If I had a better way to discriminate, I would. However, this is certainly better than what other people have been offering up to point the finger at that nefarious figure, the buyer. And - trust me, as math teacher, this is something of a sore point - there are a lot of people out there who think of themselves as smart and clever, well-educated, many of them who actually work with figures from time to time who are quite simply functionally inummerate.

On this point, I think Sebastian and I might even be in agreement - compound interest, amortization, annuities - these are certainly exactly the sort of things that should be taught in high school. There's no reason why it shouldn't be, especially in an age of calculators, many of which come preloaded with some sort of TVI. That this isn't taught until the college level, and in a nonrequired course at that(I live in Missouri, btw), is simply disgraceful.

Here's the thing. This class, 'Finite Mathematics', is not a required math class.

Do you by any chance teach at a major Midwestern university? Because I taught a class with that exact name and syllabus...

Boy - this is depressing -

I'm all for the idea that banks shouldn't have made these loans. But I'm not accepting the ridiculous level of irresponsibility that Scent of Violets seems ok with if people are shown a payment $3,000 dollars per month in 2 or 5 years that they know they won't be able to pay. A chart of payments isn't specialized math. It just isn't.

Posted by: Sebastian | March 24, 2009 at 06:00 PM

Actually, before we go around asserting things about charts, how clear WERE these charts, especially for balloon and NINJA loans and all the other strange "subprime" ones?

Posted by: Nate | March 24, 2009 at 06:06 PM

I was going to say something, elaborate on what I had said earlier, but exactly so, Nate. Further:

Well, I agree with Sebastian.

However, let's not underestimate the immense stupidity of the American people at large regarding financial matters.

After all, look at the ten of millions of folks who believed the predicted compounding rates of the stock market into the forever future, which would allow them to retire and pay for their kids' college education ..

... why, we lemmings even thought the market would bail out Social Security. Considering the market is worth less than half (minus dividends) of what is was when Bill Clinton left office, what we have here is a negative compounding rate over a ten year period .....

..... despite Wall Street and Larry Kudlow talking head assurances that the DOW would keep inflating.

There is too much small print in American society these days and not enough bifocals and magnifying glasses. That is, if you can remember all of your PIN numbers, passwords,and account numbers to get into your accounts and check out the damage.

Posted by: John Thullen

I'll say it again - if you're in a 'conventional' mortgage, sure, it really is that easy. Yes, all you have to do is read off the schedule on the rate table. But that's not even math, really. The problem is that when things become even slightly more complicated, Americans at least become extremely stupid. If there was one reason why people should be learning math up to the high school level, I'd say that this would be the prime candidate. But you know what? I personally teach people every year - at the college level, mind you - who if they multiply two two-digit numbers together are unsurprised to see a two- or five-digit number. Who upon subtracting 126 from 710 on their calculators will not have warning bells flash if the result is, say, 614.

Honestly, I don't think the situation was ever that much different in the times of those sturdy pioneers, our fathers and grandfathers. Oh, they say otherwise, of course. But talk is cheap. As near as I can tell, what's changed is not the the people; it's the loan 'products'. I really attach small credence to the notion that people somehow became greedier when the 21st century rolled around, or that the banks went soft in the head and the heart simultaneously. I attach a much higher probability to the emergence of a new scam that succeeds for a while until enough people are caught out. That's the sort of human behaviour I can believe in, the sort of motivations that haven't changed through the millenia.

As a matter of fact, Anarch, I teach at the University of Missouri at Columbia. Or whatever they're calling it these days. There's been a lot of bureaucratic squabbling, literally thousands of people-hours wasted on what to call the thing and whether outlying institutions like Southwest Missouri State (or whatever they're calling it these days) can call themselves 'the University of Missouri at _'. If this is where you were, then you may have had a class or two by Professor Cutkosky; he's my advisor.

(d) That said, I'm not particularly invested in the idea that homeowners have no responsibility at all. I think that probably a decent number do. On the other hand, I also recall (and will try to find, if anyone wants) a particularly interesting post by Tanta on CR, about a horrible hairy complicated kind of mortgage that was becoming popular, whose terms she tried to explain at nearly unendurable length (and recall that Tanta was a very clear writer and a very clear thinker; if she had to write half a dissertation to get it across, imagine your average mortgage broker), and which she had found agents who didn't understand. I don't think it had tables.

Exactly so. And I don't mean to imply that the homeowner side of the equation bears no portion of the blame. Just that in matching culpability their portion is by far the smaller for two reasons: a)at the end of the day, it is only the lender that can offer a loan, and b)it is the lender who is more financially sophisticated and who has the most information and experience. As always, there will be fools and frauds on both sides for which no excuse is possible. And the people making six figures who bought a second or third property to flip and who thought of themselves as smart and sharp and smooth operators and knew the risks going in? Yeah, they lost a lot. And I could care less - it's all on them.

The people who between them had a household income of less than $50K? Who only had a pair of high school educations between them, but were steady workers, and aside from a bit of bad credit from their teens which disqualified them for a straight 20% down thirty-year mortgage at a reasonable rate, were otherwise excellent risks? If they sign the papers with all the wierd resets and manifold clauses and sub-sub-subclauses and get hosed later, my sympathies are entirely with them.

Perhaps what is at issue here is just in what proportion are these two types of buyers?

While I understand that individual homeowners are not blameless, I think putting the spotlight on them only serves to minimize the focus that should be placed where it ultimately belongs: Wall Street excess, Wall Street schemes, Wall Street making sure it can partake in the American Dream, even if it comes at the expense of others.

Wall Street has gotten billions upon billions in bailouts. Its probably safe to surmise that its CEOs and employees aren't suffering like so many of us have in this Great Recession. If they haven't had Hank Paulson and, then, Timothy Geithner's ear at Treasury, then it certainly seems that way.

What have regular working stiffs have received?

Many of them even lost the characterization of "working stiff" upon losing their jobs. Many of them have lost their homes. Many of them, like yours truly, have filed bankruptcy; clearly, we are not Too Big To Fail.

What have we gotten?

I called my mortgage holder, Wells Fargo, today to gain answers, and more, regarding the Homeowner Affordability and Stability Plan, having been told three weeks ago to give them time to set up. Three weeks later -- after listening to the wait-for-a-rep music for 25 minutes, I got the same answer: Call back in a few weeks when the plan is up and running.

I believe the Fed and Treasury got money flowing to Wall Street -- to AIG, Citi, Bank of America, to friggin' Wells Fargo -- much faster than six weeks once a plan was first implemented.

So despite the Obama Administration's best intentions to help the little guy -- despite their pronouncements that they are indeed doing that -- I think it's just the usual political hot air.

This is still a trickle-down economy.

And so it is that folks like me are waiting for the damn trickle-down.

I voted for President Obama. I'm glad a Democrat, not a Republican, is in office. But in so many ways -- tangible these-guys-are-on-my-side ways -- you can't tell the difference, and that is sad.

Look maybe 10% of the country understands the risks of ninja neg am option arm. They were set up to blow up a few years down the road. They only way they make sense is if there were an unlimited flow of buyers and property never went down

a long ways from executive bank personnel who are not going to take "no" for an answer about the delivery of those bonuses...as if the exceptional clause(s) enabling that delivery were not enough to condemn these professionals.

What could be more subprime than this, people?

Good on you for pursuing your education Scento, and mighty fine performance here, too.

Who upon subtracting 126 from 710 on their calculators will not have warning bells flash if the result is, say, 614.

Heh. I'll raise you: the first time I taught our Finite Mathematics, I had a girl declare on a midterm that there were 899 3-digit numbers -- we weren't counting leading zeros -- and 724,149,894 3-digit numbers that did not repeat a digit.

Let me repeat:

1) Her work consisted of two lines.
2) On the first, she declared that there were 899 3-digit numbers.
3) On the second, she declared that there were 724,149,894 3-digit numbers that did not repeat a digit.
4) The kicker: after the exam, she came to my office and complained that she didn't receive enough credit. When I asked her what she thought was fair, she said 6/10... and she wasn't joking.

And this at, as I said, a major university. [IIRC, we were in the top 5 public universities on US News & World that year.] Trust me when I say, you have no idea just how bad math is in this country.

Oh, and let me add: later in the book, when we covered the normal distribution, I received conclusive evidence that, in fact, a non-trivial number of people can't read a table. I've never really recovered from the cynicism that blossomed that semester.

I am marveling at the disconnect between some saying that going after bonuses instead of the real problems is myopic and the idea that the individual home owners who took out loans deserve a non-trivial portion of the blame. If you accept the first premise, how do you accept the second?

Hilzoy: Oh -- I really wish I could be at the meeting in Boston (my fair city!) ;) Have a wonderful time.

Janie M, Bernard Yomtov, Warren Terra, Russell, Turbulence, and yours truly had a wonderful time indeed. We need an excuse to do it again, so let us know if you ever get to Boston, Hilzoy.

--TP

Our strategic oil reserves aren't nearly enough to seriously tinker with the price of oil.

This is VERY wrong. The SPR is 6 months of US consumption, which makes it about 12% of one year of world consumption. Oil has unbelievably inelastic demand; the elasticity of oil is about 1/15th, meaning, after a change in supply, the ratio of the price before to the price after is the fifteenth power of the ratio of supplies. (1/1.12)^15 = 0.18, so releasing the entire US petroleum reserve would have reduced prices 84 percent.

With such a huge move, the elasticity equation would no longer hold, and the price move would probably have been somewhat less. But it would still have been HUGE.

Should the prospective homeowner have decided not to take a loan with clearly stated charts of payments that he well knew were out of reach? Of course.

As far as I know, default rates for mortgage products similar to what had been traditionally offered have not changed much over the last few years. That is, default rates for fixed rate mortgages with 20%+ down payment and income/asset verification are no higher than they were for earlier generations. Therefore, I really don't understand your complaint.

I'm all for the idea that banks shouldn't have made these loans. But I'm not accepting the ridiculous level of irresponsibility that Scent of Violets seems ok with if people are shown a payment $3,000 dollars per month in 2 or 5 years that they know they won't be able to pay. A chart of payments isn't specialized math. It just isn't.

Many loan products did not have a chart of payments as I understand it. They had a clearly explained first month payment and then a lot of verbiage that a suitably trained person could use to generate a chart but which the average person could do nothing with.

I'll be happy to stipulate that people who took out simple loan products that clearly stated tables of monthly costs over the lifetime of the loan that differed significantly from their earning capacity suck. They should be punished horribly. I just don't think most people buying negative amortization ARMs fall into that bucket because I don't see how you can make a payment schedule when the payments depend on future interest rate changes.

It's a good general principle that you need more than just a PhD to pull rank around here. Like maybe a named professorship, or something.

Oh, certainly you need a Ph.D in math to even come close to claiming credibility in the arena of math. hilzoy has pretty much ranking credentials in the areas of ethics and philosophy, I think.

None of which gives anyone a priveleged argument. Just, if we're arguing from authority, Anarch and hilzoy are tough acts to follow. Possibly others; I have a hard time keeping track.

If you want a decently informed discussion of missile defense or targeting systems, I just might be your huckleberry. We'd have to wait and see, though. You just never know who's lurking.

Dunno why I keep insisting on misspelling 'privileged'. Nervous tic, or something.

Pulling rank has always struck me as unseemly, especially in such a democratic forum such as this.

Which isn't the same as saying I do not appreciate the value and weight of one's credentials, even if they may only come from a person's life experiences.

Lucky for me, my degree in Journalism and Communications makes me priveleged of a sort in everything. And nothing.

But I am proud of my knowledge of dogs, squirrels, mafia and cowboy movies, "All in the Family," Russia, Russian women, homemade vodka, apple pie, baseball, football, birds, Buddy Ryan, Pete Rose, Larry Bowa, Charles Barkley, Randall Cunningham, Reggie White, Italian mothers, John Wayne, Humphrey Bogart, Frank Sinatra, Ava Gardner, Rita Hayworth, David Halberstam, Russian architecture, Wendell Berry, Norman Rockwell, cats, horses, bi-polar manic depression, "Gunsmoke," pickup trucks, family, divorce, wolves, Andrew Wyeth, cancer, hospice, charity, and the value of a good newspaper.

Pulling rank has always struck me as unseemly, especially in such a democratic forum such as this.

Which isn't the same as saying I do not appreciate the value and weight of one's credentials, even if they may only come from a person's life experiences.

Lucky for me, my degree in Journalism and Communications makes me privileged of a sort in everything. And nothing.

But I am proud of my knowledge of dogs, squirrels, mafia and cowboy movies, "All in the Family," Russia, Russian women, homemade vodka, apple pie, baseball, football, birds, Buddy Ryan, Pete Rose, Larry Bowa, Charles Barkley, Randall Cunningham, Reggie White, Italian mothers, John Wayne, Humphrey Bogart, Frank Sinatra, Ava Gardner, Rita Hayworth, David Halberstam, Russian architecture, Wendell Berry, Norman Rockwell, cats, horses, bi-polar manic depression, "Gunsmoke," pickup trucks, family, divorce, wolves, Andrew Wyeth, cancer, hospice, charity, and the value of a good newspaper.

Privileged, indeed, Slarti.

"Redlining, for example, was not typically done for "good reasons," unless you consider "that neighborhood is full of black people" to be a "good reason.""

Um, is "High crime neighborhood with very low property values, lots of carjackings, and a history of riots in which houses get burned to the ground." a good reason, in your opinion? Or does the fact that a good reason happens to correlate with a particular bad reason magically transform it into a bad reason?

Businesses do not, typically, "redline" on the basis of race. They do so on the basis of perfectly rational criteria such as crime rates, which happen, through no fault of the business, to correlate with race.

I don't see why an insurance company is obligated to lose money on it's policies in high crime areas just because a lot of black people live there.

Although in the United States informal discrimination and segregation have always existed, the practice called "redlining" began with the National Housing Act of 1934, which established the Federal Housing Administration (FHA).[7] The federal government contributed to the early decay of inner city neighborhoods by withholding mortgage capital and making it difficult for these neighborhoods to attract and retain families able to purchase homes.[8] In 1935, the Federal Home Loan Bank Board (FHLBB) asked Home Owners' Loan Corporation (HOLC) to look at 239 cities and create "residential security maps" to indicate the level of security for real-estate investments in each surveyed city. Such maps defined many minority neighborhoods in cities as ineligible to receive financing. The maps were based on assumptions about the community, not accurate assessments of an individual's or household's ability to satisfy standard lending criteria. Since blacks were unwelcome in white neighborhoods, which frequently instituted racial restrictive covenants to keep them out, the policy effectively meant that blacks could not secure mortgage loans at all. link

I look forward to Brett relating the history of riots in the late 30's where houses were burnt to the ground.

I can only speak to what redlining was all about in Michigan, while I lived there. For all I know it could have meant something different decades before I was born.

Note, I used the present tense.

So, I got back my property assessment the yesterday upon getting home from my MBA class.

We're down 61% from last year. Not down TO 61%, but down 61%. I'd have to pump 40K into the mortgage just to hit 0 equity. (Or to put it another way, assuming no appreciation we'll hit 0 equity in 2020.)

The problem being of course is that I'm going through a divorce and I'm getting the "asset" of the house. It is affordable, but it isn't where I want to live. And the only way for me to leave is to get foreclosed on. Which isn't an option thanks to job related concerns. Nor can I take my soon to be ex-wife off the deep. You can refinance up to 105% value; I'm at 145%. So no refi for me.

How did I get here? Back in 2003, my wife and I had been married a year with good jobs, and saw what rent was doing, versus what house prices were doing, and decided to buy. It being 2003, we were on the front edge of the financial innovations, in our case a 95/5 mortgage - where we had two mortgages for a total of 100% of the mortgage. No PMI. A sweet deal, and it worked for us.

And over the next 5 years, the values doubled, I can remember seeing in 2006 seeing someone willing to buy the house sight unseen for about 80K more than me bought the house for. 20/20 hindsight makes me kick myself.

But now we're standing in the midst of the rubble of our neighborhood. We were hit hard with the sub-prime and Alt-A bubbles thanks to being a starter home community, and I can only imagine what the latest round of assessments are going to do to people's motivations to pay.

It is going to be an interesting ride.

"But those weren't the loans that got people in trouble, were they? The problematic loans were the weird paper like the Alt-A's and the option-ARMS (I never knew any of this stuff until I started reading Calculated Risk about three years ago. If I sound knowledgeable, it's because I'm cribbing from the late great Tana.) The sort of loans our forefathers didn't have any experience with. Trust me, the people in 1962 couldn't have calculated a rate reset unless they hired a professional to do it for them. You might try it yourself sometime to see how 'easy' it really is."

You don't have to CALCULATE anything. The amount you have to pay is right there in the table. You READ it. That is all.

I know because I looked over disclosures with ARMs with friends buying houses over the past 3 years. I also suggested that they not use ARMs. And I bought a place of my own, without an ARM, which I lost when the person I bought it with became unemployed for 9 months.

Your entire argument is based on the idea that the homeowner has to calculate anything.

And you're 100% wrong about that.

Which makes responding to the rest of what follows from your completely wrong premise kinda of pointless.

"This is VERY wrong. The SPR is 6 months of US consumption, which makes it about 12% of one year of world consumption. Oil has unbelievably inelastic demand; the elasticity of oil is about 1/15th, meaning, after a change in supply, the ratio of the price before to the price after is the fifteenth power of the ratio of supplies. (1/1.12)^15 = 0.18, so releasing the entire US petroleum reserve would have reduced prices 84 percent."

First of all, the claim was that merely not putting into the reserve would have been enough to dramatically impact the prices.

Second, you are talking about drawing THE ENTIRE RESERVE which is a) ridiculous, and b) would be foolish.

Third, where does that leave us 6 months in? With no reserve, and back in the same supply/demand problem as before.

Which is why we don't use the reserve in such a silly way.

The SPR is 6 months of US consumption

Actually, barely more than one month. The SPR holds about 700 million barrels, and US consumption is right around 20 million barrels a day.

To be clearer, I think perhaps the discussion is bogged down because of the materialized risk in ARMs (that you couldn't pay the later legs no matter what) and a potential risk in variable ARMs (that you couldn't pay the later legs because interest rates had gone up).

I'm not sure that the latter risk was adequately disclosed. The disclosure tables I've seen had the prices at very possible interest rates, but no easy way of figuring out the likelyhood of having to pay at that rate. If you are talking about disclosures on THAT, you may be right.

But if you are talking about what actually happened, that part of the disclosure is irrelevant. The part of the disclosure that is relevant to what actually happened is the monthly payment at pretty much the lowest disclosed rate. The Fed rate is extremely low right now. The risk of it being high did not in fact materialize. So if people can't pay, they can't pay even at one of the very lowest disclosed monthly payments for where they are in the loan.

I would think you had an important point if people had relied on the Fed rate not rising and had been caught by unexpected inflation. I'm not sure that risk was disclosed enough to my liking.

But when they can't pay even the very lowest monthly payment possible under the loan, I can't say that complicated math confused them.

Your entire argument is based on the idea that the homeowner has to calculate anything.

And you're 100% wrong about that.

Which makes responding to the rest of what follows from your completely wrong premise kinda of pointless.

Posted by: Sebastian

And your evidence for this is? I'm going to post a few things here, but let's get one thing clear first: I am under no obligation to post this. The obligation to post supporting data, cites, whatever is entirely on you. Accordingly, I'll take a very dim view of you if you try to wiggle out from under this burden and start attacking these cites as if their not 'proof':

Trom msnbc:

Distress in the home loan market started about two years ago as increasing numbers of adjustable-rate loans reset to higher interest rates. But the latest wave of delinquencies is coming from the surge in unemployment.

How about delinquencies on those traditional 30-year mortgages? The ones that you just have to look up on a table? From the same story:

Job losses are already having an impact in rising delinquency rates for traditional 30-year fixed rate loans made to borrowers with strong credit. Total delinquencies on those loans rose to 3.35 percent in September from 3.07 percent at the end of June, the Mortgage Bankers Association said.

It appears that even with rising unemployment, delinquencies rose less than a third of one percent. So it seems that my understanding of the big picture is generally correct.

Now, how about offering up some evidence of your own? And one more question: why do you think so many people here have the wrong perceptions and you the right one? Especially since your impressions seem to be faith-based at this point?

I can only speak to what redlining was all about in Michigan, while I lived there. For all I know it could have meant something different decades before I was born.

Note, I used the present tense.

Posted by: Brett Bellmore

Something besides your mere statement would be nice. Something more statisticky with juicy cites and crunchy numbers.

"The obligation to post supporting data, cites, whatever is entirely on you."

Who pray tell introduced the entirely anecdotal idea that people were relying on the banks to not loan them too much?

I believe that was YOU.

And your alleged evidence about disclosures is not on point. You are offering evidence that unemployment makes it difficult to make mortgage payments.

I don't believe I've disputed that point. I haven't even made a point that is even within driving distance of that point.

"And one more question: why do you think so many people here have the wrong perceptions and you the right one? Especially since your impressions seem to be faith-based at this point?"

Ah, the ScentofViolets from JaneGalt and CrookedTimber begins the descent.

Your points on this thread have been largely anecdotal (I have friends who said they relied on the bank to not loan me to much) and appeals to authority (I'm a PhD, a MATH PhD, well almost a PhD, no seriously MATH!!!!)

But I responded to the arguments contained in them as much as I could.

But you have to be a bit brazen to start on the "your impressions seem to be faith-based at this point".

I've seen actual disclosures in actual mortgage applications. The ones I saw seemed sufficient to me. The

My 11:10 contains the crux of my argument with you. You seem to be arguing that the disclosures for what didn't actually happen caused a problem. That seems odd.

Sigh. I've admitted up front that relying on what people say is probably the weakest part of forms my beliefs. But I honestly don't know how to go about testing for something like this. Not only that, but you appear to be rather heavily overstating my original observation:

At the risk of repeating common knowledge for the nth time, that is simply, factually, not true. Actually, rather than repeat ad nauseum the facts, let me ask you this: What makes you think prospective home owners know better than banks what they can afford to pay on a mortgage?

You have offered nothing to support the claim that they do know better. The best you can say is that the only thing homeowners need do is 'look at a table'. And even that is unsupported. In fact, you misread my cite; the point was that homeowners who only have to 'look at a table' don't seem to be the ones having problems. The problems, everyone seems to think, were with the more complicated 'products', the Alt-A's, the ARM's, etc. The mortgages which weren't just a matter of 'looking it up in a table'. And I've just produced a cite that seems to agree with me - not that I am under any obligation to do so. Now, getting back to what you said:

Your entire argument is based on the idea that the homeowner has to calculate anything.

And you're 100% wrong about that.

Which makes responding to the rest of what follows from your completely wrong premise kinda of pointless.

Posted by: Sebastian

What evidence do you have for this?

Finally:

Your points on this thread have been largely anecdotal (I have friends who said they relied on the bank to not loan me to much) and appeals to authority (I'm a PhD, a MATH PhD, well almost a PhD, no seriously MATH!!!!)

Since you seem to have missed it, I've been poking fun at myself, and anyone who thinks that saying "I have a PhD" is any sort of way to make a point. The only time my math experience has been relevant is to note that people really aren't any kind of math savvy. I hope you don't dispute this.

"The problems, everyone seems to think, were with the more complicated 'products', the Alt-A's, the ARM's, etc. The mortgages which weren't just a matter of 'looking it up in a table'."

But for even most of those mortgages, it is a matter of looking it up on a table. The variable rate disclosures that I saw for ARMs had the date of the rate reset and the payment at various possible rates. In the situation as it played out because of current interest rates, they will be paying the lowest disclosed rate. Between the Truth in Lending Act, and the Federal Reserves Regulation Z, these monthly payments were disclosed, as well as the date when the payment changes would take place.

See for example the Federal Reserve testimony on the subject here">http://www.federalreserve.gov/newsevents/testimony/braunstein20060920a.htm">here

The TILA payment schedule, like the APR, is based on the interest rates that are in effect at the time the loan is closed. No assumption is made about possible future changes in the index used to set the rate. Consequently, a consumer's actual payments may be higher than the amount shown in the schedule if interest rates increase due to changes in the index.

Although the payment schedule disclosures do not assume changes in the interest rate, they must reflect increases in the monthly payment that will be required for interest-only loans or option-ARMs in order to amortize the principal. In general, for option-ARMs, the payment schedule is based on the assumption that the consumer makes only the required minimum payment each month. Accordingly, the payment schedule for an option-ARM should reflect the higher monthly payment that will be required to amortize the new loan balance after the option period ends.

There has been much discussion about the value of also requiring a worst-case payment disclosure based on the loan's interest rate caps. Some believe that such a disclosure would provide consumers with useful information to assess the affordability of a particular loan. Others assert that disclosing a worst-case payment has "shock value" that would alert the consumer to the loan's inherent risk. Some industry representatives question the usefulness of the disclosure, particularly if the worst-case payment would occur so far in the future that the consumer's payment is unlikely to reach that level before the home is sold or refinanced. Others argue that if the disclosure is provided, individual consumers will be able to evaluate for themselves the relevance of this information in light of their own financial circumstances.

In 1998, the Board and the Department of Housing and Urban Development (HUD) submitted a joint report to the Congress making recommendations for legislative reform of the mortgage disclosure requirements. The 1998 joint report contained model disclosures which included a proposed disclosure of the maximum interest rate that could be charged on the loan and the resulting payment for that "worst-case" scenario. In reviewing Regulation Z, the Board plans to study this aspect of the disclosures carefully by using consumer testing to determine its usefulness.

If it had turned out that the Fed rate was high right now, you might have been correct that the disclosures were largely a problem because people might not have been able to accurately understand the risk of a big inflationary spike. That is what the Fed testimony is worried about. (In actual fact the disclosures I saw had a maximum amount, but I take it that those were not required).

But that isn't what actually hit us.

What actually happened is that people, even with jobs, are defaulting as the ARMs go to their lowest full rate. This is the lowest they could have expected to pay, and they can't pay it. That payment was fully disclosed and has been for decades.

At the risk of repeating common knowledge for the nth time, that is simply, factually, not true. Actually, rather than repeat ad nauseum the facts, let me ask you this: What makes you think prospective home owners know better than banks what they can afford to pay on a mortgage?

You have offered nothing to support the claim that they do know better. The best you can say is that the only thing homeowners need do is 'look at a table'.

They know better, because they know their actual earnings better than the bank does and they know their actual prospective earnings better than the bank does. They can use that knowledge to look at the box which says "monthly payment".

In any case I think you are hanging way too much on 'better'. Whether the amount of knowledge distribution is 49-51, 50-50, or 51-49 isn't important to me. The homeowner has more than enough actual knowledge of his job, his job prospects and his personal budget to be able to use the information of a single dollar amount monthly payment and understand whether or not he can pay that.

Was the bank at fault for making the loan? Almost certainly yes. Was the purchaser at fault for seeking/taking a loan that clearly disclosed he couldn't pay it? Definitely yes.

The government mandated dislclosures were already in place. No matter how greedy the bankers are, we don't get here without tens of millions of Americans looking at that number they know they can't pay and buying the house anyway.

Note that this is only what the law says, not what is actually practiced. Further, the testimony goes on to say:

Negative Amortization The ARM program disclosures must note the possibility that negative amortization will occur if the consumer's payments are not sufficient to cover the interest due. The transaction-specific disclosures are not required to show how much the consumer's loan balance will increase if the loan has a negatively amortizing payment schedule. Whether or not consumers would find such disclosures useful is something that the Federal Reserve will evaluate through consumer testing during the Regulation Z review.

We also have gems like this in a cite chosen by you:

Because these products are complex, the disclosures describing them are also complex and can be difficult for some consumers to understand.
In addition, describing loan terms in legally precise language can make disclosures difficult to read and can hinder consumers' understanding.

Back to your quote here:

Accordingly, the payment schedule for an option-ARM should reflect the higher monthly payment that will be required to amortize the new loan balance after the option period ends.

Note that it says nothing about any other rate, only the worst case. So people who pay more than just the interest can still be quite shocked at how much they have to pay when the rates reset. Are there any tables for those other rates?

A simple yes or no will suffice :-)

Also, in the same quote:

There has been much discussion about the value of also requiring a worst-case payment disclosure based on the loan's interest rate caps. Some believe that such a disclosure would provide consumers with useful information to assess the affordability of a particular loan. Others assert that disclosing a worst-case payment has "shock value" that would alert the consumer to the loan's inherent risk. Some industry representatives question the usefulness of the disclosure,

It looks like your cite doesn't back you up the way you think it does. In fact, I'll claim it for my own :-) Do you have anything else? Oh, and there's this as well:

They know better, because they know their actual earnings better than the bank does and they know their actual prospective earnings better than the bank does. They can use that knowledge to look at the box which says "monthly payment".

You keep saying these sorts of things without any proof. And when I point out that insurance works the same way, you dismiss it. I would also point out that in my case, the bank was right and I was wrong about my future income. This isn't due to any intellectual insufficiency on my part btw, but people do fall behind or default on their payments for reasons outside of their control. The bank has a good deal of data to make an informed judgment about the set-points, just as an insurance agency has accumulated data for various classes of people in classes of health. I do not. This goes back to those cognitive biases - other people might lose their jobs, but not them; they're 'above average'.

People who take out mortgages are teachers, plumbers, administrative assistants, etc. Their job is to be good at teaching, plumbing, assisting administrators, etc.

People who originate mortgages are not just one guy who can read a few tables--the originator is actually a loan officer, plus the loan officer's secretarial staff, plus the software the officer uses, plus the people who wrote and maintain the software. And that's if you're working with only one loan officer. Many individuals get their mortgage through a broker, who works with dozens of loan officers, each of which works with secretarial staff and software written by teams of analysts and programmers. All of these people are trained to understand mortgage financing and everything relevant to it--it is their job, it is what they have trained for, it is what they having been doing for 40-60 hours every week for the duration of their careers.

So on the one hand, you have an individual with no expertise in mortgages, and on the other hand, you have the combined brainpower and experience of dozens of people or artifacts capturing the expertise of people (that is, software), whose very job is to determine whether the individual applying for the mortgage is an acceptable credit risk. The mortgage originator, in addition to more people with more experience, also has more information, including a detailed credit history of the borrower that the borrower probably doesn't have access to and wouldn't know how to assess him/herself as precisely as do the originators even if s/he did.

Over the years, people have learned that creditworthy borrowers will receive loans, and non-creditworthy borrowers will not receive loans. In the past ten or so, however, lenders changed their practices and gave just about anyone a lone. Borrowers did not change their practices--as before, they took the loans that were offered them. The system collapsed after one variable was changed, while the other stayed the same. Which variable, then, bears the responsibility for the collapse?

"Note that it says nothing about any other rate, only the worst case. So people who pay more than just the interest can still be quite shocked at how much they have to pay when the rates reset. Are there any tables for those other rates?"

Yes there are. You're misreading. They are talking about the reset rate in that quote.

I also note that yet again you are focusing on disclosure issues which did not in fact come into play--the problem of the rate being reset much higher than initially disclosed because of the federal interest rate being high.

If those disclosures were deficient, they still do absolutely nothing for your case, because they have nothing to do with why people are defaulting now.

"It looks like your cite doesn't back you up the way you think it does. In fact, I'll claim it for my own"

Go for it. Unfortunately it doesn't help your argument because high federal interest rates resetting ARMs to above the disclosure amount didn't happen in this world, only in some alternate one which is irrelevant to the discussion.

It looks like your cite doesn't back you up the way you think it does. In fact, I'll claim it for my own :-) Do you have anything else? Oh, and there's this as well:

They know better, because they know their actual earnings better than the bank does and they know their actual prospective earnings better than the bank does. They can use that knowledge to look at the box which says "monthly payment".
You keep saying these sorts of things without any proof. And when I point out that insurance works the same way, you dismiss it. I would also point out that in my case, the bank was right and I was wrong about my future income. This isn't due to any intellectual insufficiency on my part btw, but people do fall behind or default on their payments for reasons outside of their control. The bank has a good deal of data to make an informed judgment about the set-points, just as an insurance agency has accumulated data for various classes of people in classes of health. I do not. This goes back to those cognitive biases - other people might lose their jobs, but not them; they're 'above average'.

I say that people know their own finances better without proof becuase it is almost always true. The bank knows what the borrower discloses. The borrower knows what they didn't disclose in addition to what they disclose. You harp on 'proof', but you offer none that the bank had more knowledge about an individuals finances than the individual.

It isn't particularly analogous to insurance (the metaphor isn't ridiculous, it just isn't very close) because the average personal knowledge about personal finances is much more in depth than the personal knowledge of catastrophic health issues or disasterous car accident. In that kind of insurance case *nearly the entire issue* is that of catastrophic health problems or disasterous car accident. Which is to say outside the personal knowledge of the person buying insurance.

In the loan case *nearly the entire issue* of personal finances is within the personal knowledge of the person obtaining the loan. He knows how much he makes now. He knows is likely earnings in the future.

Furthermore, you again are reaching for cases beyond what actually happened. The loss of the houses at ARM reset was not largely because of loss of jobs. It was because the payments couldn't be made even with the job. Which cascaded into this recession, causing loss of jobs which will compound the problem.

But to analyze it as if joblessness was the main cause of the housing crisis, is to miss the point entirely.

The bank knows what the borrower discloses.

No, the bank knows what it chooses to verify. The bank knows what the borrower's credit report says without the borrower disclosing it. The bank knows that the borrower is being honest when disclosing assets because the bank checked out the supporting evidence that they demanded the borrower provide.

The bank is not at the mercy of the borrower because there is no reason for the bank to unquestionably accept whatever the borrower tells it. Banks do not unquestionably accept whatever people tell them in other areas of finance. Try walking into your bank, claim to be some other depositor and demand the bank give you a cashier's check for their deposits without supplying any evidence that you're telling the truth.

The borrower knows what they didn't disclose in addition to what they disclose. You harp on 'proof', but you offer none that the bank had more knowledge about an individuals finances than the individual.

The banks are not subject to the same biases that borrowers are. The banks have a great deal more statistical data available to them than the borrower does. The banks have a great deal more competence at basic mathematics than borrowers do.

Have you ever had to explain to a college graduate why making only the monthly minimum payments on a credit card is bad? There is a lot of financial illiteracy, as SoV and Anarch can attest. That means that banks tend to be better than many borrowers at making predictions about those borrowers' ability to repay. This isn't complex: functionally innumerate people are not going to make good decisions about complex loan products just like they're not going to make good decisions about relatively simple credit card loan products.

Um, is "High crime neighborhood with very low property values, lots of carjackings, and a history of riots in which houses get burned to the ground." a good reason, in your opinion?

Um, are we talking about mortgage lending or insurance?

Low property value lowers risk- even if the chance of damage is greater, the value insured is lower. Carjackings are completely irrelevant to homes.

History or riots is pretty damned sparse compared to history of wildfires, earthquakes, landslides, floods, tornados, and hurricanes and yet no wealthy community is denied mortgages en masse despite heavy exposure to these far more common causes of total destruction. Has the mortgage industry redlined Florida beachfront or Southern California hillsides?

How is risk to property of any sort related to mortgages anyway? These are insurance issues. If you can get coverage, you should be able to get a mortgage. Insurance redlining is another issue- and again, greater risk ought to result in a higher premium relative to the property's value, not the inability to purchase a policy at all because of zip code.

"This isn't complex: functionally innumerate people are not going to make good decisions about complex loan products just like they're not going to make good decisions about relatively simple credit card loan products."

Sure, but that doesn't excuse them from looking at a blank that cleary says $3,000 per month beginning 5 years from now and noticing that they make $3,500 per month.

I'm arguably kind of crappy with money. I've had late payments, and in my college years I had a minor brush with credit card silliness. But still, it says X per month, and that isn't all that confusing.

Seb, does this mean that you're backing off your earlier statements that banks only know what borrowers disclose?

My statement is that borrowers know plenty about their own position to make an informed decision. See for example my statement earlier:

In any case I think you are hanging way too much on 'better'. Whether the amount of knowledge distribution is 49-51, 50-50, or 51-49 isn't important to me. The homeowner has more than enough actual knowledge of his job, his job prospects and his personal budget to be able to use the information of a single dollar amount monthly payment and understand whether or not he can pay that.

This statement was made in the context of SoV's analogy to insurance. I said that unlike personal knowledge of the likelyhood of car accidents or semi-random catastrophic illness, the borrower knows more than enough about his own situation to be able to look at a monthly payment disclosure and have a pretty good idea if he can pay it.

Further I would say that whatever you think about the distribution of knowledge, unlike the insurance situation, the bank's knowledge is not so much more than the borrowers as to cause the borrower to 'rely' on the offer of money as some sort of guarantee that he is able to pay it. And it never has been.

And I'm not at all convinced that the bank knows 'more' about the borrower's money situation on average than the borrower. The "stick $10,000 of your parent's money in the bank for a few months" thing has been employed by the middle class for generations." The informally borrow money for the downpayment thing has been going on for generations as a method to game apparent credit risk.

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