Re: The definition of insanity? Obama administration pushes banks to make home loans to people with weaker credit
posted at 4/3/2013 3:04 PM EDT
In response to WhatDoYouWantNow's comment:
In response to DamainAllen's comment:
The housing bubble and its subsequent burst was not caused by banks orginating loans to people with weak credit. Programs like CRA have existed for decades prior to the housing crisis and the default rate for the people with morgages via those programs was actually quite small in and line with the national rate for default for all morgagee's.
The problem was the thrifts like countrywide and beneficial (not subject to banking laws and hence CRA) dropped all standards and were orginating loans with no documentation required, no income, etc. Why? Because they were selling the loans up the chain to investment banks who had concocted securitization schemes that further incentivised the thrifts to write loans not to people with weak credit but to people with no credit, and who would not otherwise have been approved for a morgage. Because the originators had no skin in the game (they sold the loans) their risk was nonexistent, thus no real need for due diligence. This was a mechanism of greed, not government intervention. The free market saw an opportunity to make gobs of cash on these worthless securities (rated AAA by the ratings agencies) and off we went down the rabbit hole. Add in the insurance scheme by AIG via CDO's and the house of cards which was premised on the idea that real estate would NEVER go down fell.
Institutions can lend responsibily to people with lower credit scores in the course of their normal due diligence. They have always done so because applicants that have lower credit scores can't secure the lowest rates and therefore the transactions are a financial boon for the morgage lenders who make more money off of the person with the lower credit score than the person with pristine credit.
The trouble I see is that if there is a way for them to make the same "mistakes" to generate profit, they'll do it again regardless of recreating a bubble.
I would argue that it is difficult to inflate a bubble when
1. proper due diligence and lending standards are enforced and
2. lenders aren't writing subprime adjustable rate morgages almost exclusively.
With proper standards qualified buyers are given loans and unqualified buyers are not, as a result the demand for NINJA loans or interest only loans with teaser rates are the exception rather than the norm. A person with a good work history, income, and is paying rent of 1500 dollars a month is going to be a good candidate for a home with a 1500 morgage if the lender can determine they have adequate credit. The issue with the housing bubble was people who could afford a 1500 dollar morgage were given loans for homes with 3000 dollar morgages and the person could afford the home while it was interest only or on a teaser rate, once the rate adjusted they were screwed. Its the wave of defaults that happened to those types of loans that triggered clauses in the securities contracts that made them lose value and put companies like AIG in a position where they had to post collateral on the insurance they sold to protect companies like Goldman if the securities built on shoddy morgages went in the toilet. Of course companies like Goldman knew the securities would fail because they built them with subprime garbage morgages and they knew after 1 or 2 years when the teaser rates expired defaults would soar. This is why AIG nearly imploded.
None of this means that people with less than stellar credit will be crowded out of the marketplace. Maintaining standards doesn't mean those people can't get approved, but it does mean their approval will be for lower amounts and that they will have to prove their credit worthiness. The system has worked that way for years. Its the perversion of the securitization model that drove the bubble.