a dramatic acceleration in the pace of foreclosure starts for non-agency jumbo prime mortgages, LPS said

TO BE NOTED: From HousingWire:

The prepayment rates for borrowers at various stages of delinquency show current borrowers are refinancing at rates exceeding those seen among 30-day and 60-plus-day delinquencies. (source: Lender Processing Services Inc.)

Jumbo Prime Foreclosure Starts Spike: Report

Posted By DIANA GOLOBAY
March 27, 2009 2:35 pm

Mortgage delinquencies declined by 1 percent in February from December 2008, when in the past during the December to February season, delinquencies have declined an average 6.5 percent, according to a monthly Mortgage Monitor Report released Friday by Lender Processing Services Inc. ([1] LPS: 30.41 -0.75%). Total February delinquencies are now at 8.37 percent. The data also show a dramatic acceleration in the pace of foreclosure starts for non-agency jumbo prime mortgages, LPS said.

February posted the largest single-month percentage increase in foreclosure inventories since December 2007, LPS said. The February foreclosure rate increased 8.2 percent month-over-month and 75 percent year-over-year, to a total rate of 2.23 percent. Non-agency foreclosure sales continued a downward trend in the month, while FHA foreclosure sales followed suit, ticking down toward record lows. “The moratorium on Fannie Mae ([2] FNM: 0.72 -2.70%) and Freddie Mac ([3] FRE: 0.80 -4.76%) foreclosure sales expired on January 31 and was reinstated on February 13, to continue through the end of March,” LPS analysts said in a media statement regarding the report. “During the two-week period when the moratorium was lifted, agency foreclosure sales approached all-time highs.”

Agency foreclosure starts from December to February surpassed FHA foreclosure starts, although private-party foreclosure starts still hold the highest pace of starts. Subprime is still king of the roost when it comes to foreclosure starts by product, though the category did show a bit of a decrease in the past month. Option ARMs soared past Alt-A in terms of foreclosure starts, although both hold at historic highs.

RealtyTrac [4] in mid-March reported surprising data: foreclosure filings, which were driven by new defaults and reported REO inventory, surged for the month, although actual foreclosure sales had fallen. The foreclosure halts in place at the GSEs and some major banks kept many properties from going through the foreclosure sale process for a time, but they did nothing to keep borrowers from entering the process after becoming delinquent. The effect is a backlog of properties somewhere along the way from a notice of default to becoming REO. That backlog, once the stops are removed, leads to an influx of foreclosure sales.

LPS’ data show the volume of first payment defaults — when a borrower becomes delinquent defaults without a single payment — on Federal Housing Administration-insured mortgages has reached historic highs recently and spiked up again in December after November’s lull. When taken with historic highs of FHA originations as a percentage of the total volume of originations, this observations loses some of its shock. As LPS noted, “there has been no observed increase in the rate of first-payment defaults for either FHA or non-government loans.”

LPS, which also studies the prepayment rate — or the rate of refinance, which treats a mortgage in a loan pool as paid-in-full, although the loan has not disappeared but simply moved to a different pool — found that the rate of prepayment among borrowers current on payments has spiked considerably from December to February and now sits at a high not seen in the reported data from January 2007. The prepayment rates among delinquent borrowers, however, has not changed much in the last few months and are lingering far below the rate for current borrowers. These data suggest delinquent borrowers are not able to refinance as easily as current borrowers. Additionally, LPS found that refinance activity in the last several months has been “concentrated primarily in the highest FICO category” of 720 plus. “Prepayments have continued to increase significantly, but refinance liquidity is concentrated most in borrowers who need help least,” LPS said.

Modification, an alternative to refinance in which the borrower can reach some other repayment plan with the lender, did not fare particularly better in recent months, according to the data. The rate of recidivism — or re-default after modification — has improved little. According to LPS, continued recidivism rates exceeding 50 percent six months after modification attest to the “quality” — or lack thereof — inherent in the volume of modifications made during the fourth quarter 2008.

A look into roll rates — or the rate at which loans move from one stage of lateness or delinquency to another, ultimately to 90 plus days delinquent or real estate-owned — shows a startling trend that has developed after the burst of the housing bubble. Overall, the volume of loans rolling from better to worse has outpaced those rolling from worse to better for much of 2008. A brief glance at February’s data would almost give the impression that worse-to-better roles are racing to catch up, meaning borrowers are finding some means of payment. While essentially this assumption is true, LPS was quick to point out that the worse-to-better roll rate included a recent surge in refinanced mortgages, which shows up as an influx of prepayment and pulls a mass of borrowers out of the delinquent buckets and into the paid-in-full bucket.

“When the prepayment impact on roll rates is removed, the trend toward higher rates of loans improving in status is eliminated and there is no observed increase or decrease in that category over the last several years,” LPS said.

The six-month increase in the percentage of loans rolling from 30 days delinquent to 60 days delinquent — or from bad to worse — was highest in the Anchorage, Alaska metropolitan statistical area (MSA), followed by the Seattle-Bellevue-Everett, Wash. MSA and the San Francisco-San Mateo-Redwood City, Calif. MSA. Taking the middle slots of the top 10 MSAs were New York-White Plains-Wayne, N.Y.-N.J.; Santa Rosa-Petaluma, Calif.; Edison, N.J. and Lake County-Kenosha County, Ill.-Wis. The bottom of the top 10 list filled out with an Oregon-Washington MSA and another California and New York MSA.

Jumbo Prime took the cake in terms of which product showed the highest deterioration in 30-to-60-day roll rates from February to July 2005, followed by non-agency conforming prime.

Read [5] the statement and [6] full report.

According to Zillow.com, this is true, and worse yet, that conditions are worsening.

From News N Economics:

"Foreclosures are driving sales: study confirms housing market is far from healthy

Home values are declining and foreclosure rates are up 81% in 2008. Putting the two together leads to the following conclusion: investors are buying up foreclosed properties, driving down the price. According to Zillow.com, this is true, and worse yet, that conditions are worsening.

According to Zillow.com, the 2008 housing trends were distressing (I highlight the national figures, but you can view city-level data here):

• 34.6% of 2008 national home sales were at a loss.
• 19.9% of the homes sold were foreclosures.
• The New York/Northern New Jersey had the lowest % of foreclosure sales, 3.9%, while Madera, CA marked the highest, 54.6%.
• 10.9% of the homes sold were short, i.e., sales price was lower than the seller's mortgage obligation.
• The Albany, New York area had the lowest % of short sales, 0.1%, while Loncoln, NE marked the highest, 14.1%.
• 17.6% of all homeowners hold negative equity, or the value of the home is less than homeowners' mortgage.
• This is a wide distribution: Anderson, SC had the lowest % of negative equity homes, 0.9%, while Las Vegas, NV marked the highest, 61.4%. That is a humbling statistic.

Some associated charts: The percentages of sales that are foreclosures and sold at a loss are rising.

Equity is back in the green for sales in 2007 (barely) and 2008, but the average buyer who purchased in 2006 is underwater, i.e., they owe more than the home is worth. That is a troubling statistic.

This report confirms that the housing market is crushed. It highlights that the stress signals - short sales, foreclosures, negative equity - are rising into 2009. The implication is that prices will continue to decline, but worse yet, the economy recovery will be pushed off until this market works out the excess supply of homeowners."

Me:

Don said...

Rebecca,

I'm interested in this:

"investors are buying up foreclosed properties, driving down the price."

If the properties are being bought, and the supply decreasing, then how can this lead to lower prices? Presumably the investors are overpaying in that case. I understand that more foreclosures could be added than sold, buy doesn't buying need to accompany a stabilization and rise?

If investors are buying these properties, in which they won't live, then they must want to resell them. What's their strategy?

Also, this negative equity puzzles me. When I bought my house, the price when down 10%, and remained lower for three or for years. I applied for a reduction in property tax, but I can't remember if I received it. I might have. But, as long as I could make the payments, this never bothered me.

Finally, about Madera, a city in the Central Valley :

"Holders of so-called “subprime” mortgages are in danger of losing their homes, especially in the Central Valley, according to a report from the Center for Responsible Lending.

As much as $164 billion in mortgages is at risk due to foreclosures in the subprime mortgage market, it says.

With 25 percent of the mortgages issued this year being subprime, Merced County ranks as the nation’s most risky area for foreclosures, according to the report.

Other Central Valley areas are not much better, it says.

Bakersfield ranks second in the nation; Fresno is fifth; Stockton is seventh and Visalia-Porterville is 13th.

In contrast, Yuba City ranks 152; Sacramento 28; Modesto 205; Madera 29; and Hanford-Lemoore( I'M FROM HERE ), 152.

“We project that one out of five (19 percent) subprime mortgages originated during the past two years will end in foreclosure. This rate is nearly double the projected rate of subprime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the ‘Oil Patch’ disaster of the 1980s,” the report says."

I don't know who was buying these houses, but it sounds as if the prices would have to come down substantially for people to actually be able to afford homes in the Central Valley. Mortgage rates alone won't do it. I'm not even sure how long it will take for these houses to sell in the Central Valley. It could be a long time.

Don the libertarian Democrat

February 3, 2009 11:12 AM

"charging distressed homeowners for help negotiating better loan terms -- a service provided for free or for a nominal fee by many nonprofits. "

From the Washington Post:

"By Renae Merle

Washington Post Staff Writer
Friday, December 26, 2008; A01

A growing industry has emerged to take advantage of the unprecedented wave of foreclosures, charging distressed homeowners for help negotiating better loan terms -- a service provided for free or for a nominal fee by many nonprofits( TOO SAD ).

Such companies charge $500 to $2,500 or more and are drawing the ire of consumer advocates, regulators and lenders, who say many are just the latest version of foreclosure rescue scams and can make it more difficult for homeowners to get help( MORE OF THE SAME GRAFT I SAY HAS LED US INTO THIS MESS ).

"You don't need to go out and hire someone to help you," said Michael Gross, managing director of mortgage servicing for Bank of America. "It is very, at times, frustrating to find a homeowner who has paid a for-profit company $3,000 to $5,000 in an upfront fee, when they could have gotten the same or better assistance free."( TERRIBLE )

Loan modification firms say they are taking up the slack left by unresponsive lenders and overwhelmed nonprofit groups. "Nonprofits are not as efficient( RUBBISH ) as the regular market," said Moose M. Scheib, the head of Michigan-based LoanMod.com, a loan modification firm that charges homeowners $1,500 to help renegotiate their mortgages. "I think the difference is probably more attention( BS ) you get from us."

There do not appear to be federal laws that prohibit charging for this service, several law-enforcement officials and law professors said. Instead the practice is governed by a hodgepodge of state and local laws. Virginia does not appear to restrict its practice, according to the state's consumer services department. Officials with the District's Department of Insurance, Securities and Banking said these companies would fall under statutes covering credit counseling services, and therefore must be registered( ARE THEY ? ).

Maryland has received several complaints and issued an alert in September warning that under its existing laws, loan modification firms cannot charge an upfront fee( GOOD ).

Maryland's Department of Labor, Licensing and Regulation has helped recover at least $10,000 for homeowners who say they were misled( FRAUD ), according to the agency. But the state says the problem is bigger than the fees.

"Once a borrower pays an unscrupulous loss-mitigation consultant and time is wasted, the damage has been done," said Sarah Bloom Raskin, Maryland's commissioner of financial regulation. "While we may be able to recover fees, we can never recover the lost time -- time that the borrower could have used to work out a bona fide loan modification( YET THEY'RE HELPING )."

"We are extremely concerned about the huge proliferation of for-profit companies making a buck on these people," said Laurie Maggiano, senior policy adviser at HUD's Office of Housing. The department has certified 2,300 nonprofit housing counseling agencies across the country, which are required have at least one year of experience( GOOD ) administering a housing counseling program, Maggiano said.

Legal Services of Northern Virginia, a nonprofit group, investigated a case involving U.S. Homeowners Assistance of Irvine, Calif., after a client paid the firm $2,500 for help modifying the loan for her Alexandria home. After receiving the money, the company did not return her calls( IT'S EXTREMELY EFFICIENT ), said Kristi Cahoon, a lawyer with the nonprofit group.

By the time the homeowner, a 75-year-old retired nurse, realized no help was forthcoming, she had fallen behind in her payments and was facing foreclosure, Cahoon said.

U.S. Homeowners Assistance said in an e-mailed statement that the borrower's money could be returned if she requested a refund and a review of her file was conducted.

Clayton Sampson, founder of U.S. Housing Assist of Nevada, which launched in July, said nonprofits provide a great service, but added, "We have a lot of clients that need us."

Sampson said he spent five years at a mortgage brokerage and his contacts have enabled him to customize workout plans for a homeowner's lender. His firm charges a minimum of $2,500, but he said he would return the money if he was unable to help the homeowner.

The pitch companies make varies. But one approach includes paying a company to challenge the legality of a loan -- a process housing experts say can be long and complicated.

Vienna-based Mortgage Analysis and Consulting, for example, charges $150 for a consultation and $250 to $500 for a preliminary audit. If the audit finds problems with the loan document, Mortgage Analysis will refer the borrower to a lawyer( THIS SEEMS BETTER ), who may charge an additional $2,000 retainer. If the lawyer requests a more in-depth audit, Mortgage Analysis charges up to $1,750, which clients can pay in installments.

In several cases, the introduction of a lawyer( THIS COULD WORK ) has helped spur the lender to agree to a better loan modification, said Jose Semidey, the firm's founder.

Semidey, a former real estate broker, said he planned to open a nonprofit firm earlier this year to help homeowners. But, he said, he quickly found himself inundated with distressed homeowners willing to pay for his service.

"I am not in this for the money or to get rich. I see it as a mission and a duty," he said. "And yes, we are a for-profit company, but that only makes [us] do a better job."

Virginia's State Bar is investigating a complaint that Semidey has illegally practiced law( THAT IS A PROBLEM IF YOU'RE GIVING LEGAL ADVICE ). Semidey said he makes clear he is not a lawyer and refers clients to a list of lawyers he has compiled.

One of Semidey's former clients, Edwin Monge, said he became concerned that he would no longer be able to afford the payments on his Woodbridge townhouse after the adjustable interest rate rose and the payments increased. The home's value had tumbled, making it impossible for him to refinance. Monge said he met Semidey through a friend and eventually paid him $7,000, some of which was to be used to pay a lawyer.

"I was blind," Monge said. "I wasted my money, and they lied to me and they didn't tell about the community groups( THAT'S NEGLIGENCE )."

Some of the money eventually was returned. And in the end, with the help of a nonprofit legal group, Monge was able to get into a new loan -- at no cost -- through a Federal Housing Administration program.

Semidey said the process did not work out because Monge could not find a local lawyer to represent him and a large portion of the money was spent on an outside auditor. "He came to our office 10 or 15 times," he said. "We translated for him. We sat with him. . . . You cannot make everyone happy."

He said, "We did not profit from the interaction."

The bottom line is that a lawyer could help in some cases, but they usually give a free consultation on their own. I don't see the need for a middleman. Also, if free services are available, a decent and honest person would say so. See, some things are more important than money.

"the disparity of available help between subprime and prime borrowers continues to grow"

Paul Jackson on Housingwire:

"New data released this week by the HOPE NOW( GO HERE ) coalition of servicers, lenders and investors shows clearly that while the nation’s foreclosures decreased during November, the disparity of available help between subprime and prime borrowers continues to grow. According to the group, just 69,075 foreclosures were completed during November nationwide, down 13.9 percent from Oct.’s totals; the drop reflects a strong push to enact voluntary and involuntary foreclosure moratoriums in key housing states."

Here's a definition of loan modification:

"A Loan Modification is a permanent change in one or more of the terms of a mortgagor's loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford."

The post continues:

With the extra time, it’s clear that servicers are working to modify more loans for troubled subprime borrowers, too. HOPE NOW’s data shows that despite the sharp monthly drop in foreclosure volume, the number of modified subprime mortgages actually rose slightly in November, from 73,211 in Oct. to 73,592 in Nov. The number of subprime borrowers receiving repayment plans fell sharply, however, dropping 19.8 percent."

Here, from AFS:

"Repayment Plan

The most common way of resolving a loan default is to work out a plan (Repayment Plan) which will let you repay part of the delinquency each month, along with you regular monthly installment.

Most of our clients will be eligible for a Repayment Plan for the amount they are delinquent if their financial circumstances have stabilized. Most of our clients have realized a short term financial hardship that has caused them to become delinquent. They are now financially back on their feet and need help getting caught up. If this is your case we will negotiate with your lender to distribute your past-due amount over a set period of time, usually 18-24 months, depending on your circumstances. Your lender will usually ask for 25-50% of the arrearage down and the remainder will be paid out over a period of months. You will need to provide financial information to prove that you are now capable of making this responsibility. Remember, this monthly amount is in addition to your usual mortgage payment.

This type of solution to your mortgage foreclosure is generally accepted very well by lenders. We will complete a detailed financial portfolio of your income vs. your expenses to show the lender what payment that will work with your current income along with what down payment that you can afford. This will bring your account up to date immediately and keep you secure in your home.

Here are some examples of Repayment Plan documents from actual client cases. These are only a sampling of the Repayment Plans we have received. These documents are on the mortgage company letterhead for authentication. You can see the actual reinstatement amount versus how much they had to come up with is a down payment.

Since we are obtaining new workouts daily it is very hard to keep this page up to date. Please visit our Mortgage Resource Center to get up to date plans that we have received from each Mortgage Company.

Litton Repayment Plan - click to download or print

Ocwen Repayment Plan - click to download or print

First Franklin Repayment Plan - click to download or print

Select Portfolio Repayment Plan - click to download or print

AMC Repayment Plan - click to download or print

Chase Repayment Plan - click to download or print

HomEq Servicing Repayment Plan - click to download or print

Option One Repayment Plan - click to download or print"

The post continues:

"As has been the case throughout the evolving mortgage mess, however, an increased focus on the needs of troubled subprime borrowers appears to have left prime-credit borrowers out in the cold. While the number of subprime loan modifications rose slightly, the number of prime loan modifications fell dramatically during Nov., dropping 15.2 percent; the drop shows that the disparity in available help options is clearly tilted towards subprime borrowers.

Does a single servicer matter?

Such a reported disparity, however, may have more to do with how a single servicer can influence the HOPE NOW data set, rather than reflecting a real difference market-wide in available help for prime and subprime borrowers. In particular, the apparent rise in industry-wide modifications among subprime borrowers could be an artifact of recent efforts by Ocwen Financial Corp. ([1] OCN: 8.16 -0.12%) and a few other key servicers — Litton and Nationstar among them — to modify the subprime loans in their respective portfolios. Such an effort may be skewing HOPE NOW’s numbers, although the coalition generally does no discuss the reliability or variability of its data between individual servicers.

A recent report by Credit Suisse’s Rod Dubitsky notes that the the servicer variation in the use of loan modifications among subprime borrowers can be dramatic: some servicers are employing loan mods to a much greater extent than others, with the three servicers above clearly dominating the loan modification push thus far among subprime borrowers.

Equally variable is the rate at which servicers have ramped up their modification efforts throughout the year, with Ocwen leading the charge; the Credit Suisse report notes that Ocwen more than quintupled modifications between Q1 and Q2 of this year, a trend that HousingWire’s sources suggest has continued unabated into the back half of this year.

All modifications are not created equal

Beyond the raw effort to modify loans, it’s often the type of modifications that matter, as well. HOPE NOW doesn’t specify aggregated numbers for different classes of loan modifications — and the press (along with consumer groups) have since picked up on the meme, espoused here very early last year, that loan modifications are generally better than repayment plans for troubled borrowers. Which remains generally true. The particulars here, however, are far more nuanced than most realize.

Dubitsky notes, for example, that more than 70 percent of the entire mortgage industry’s principal-reduction modifications to-date have been performed by Ocwen — which underscores the fact that not all modifications are created equal. Doubly so when you consider that the recidivism rate on principal-reduction mods is vastly different from other forms of modification, or that 1/3 of modifications actually increase borrower’s payments (and there are valid reasons for doing this, as well).

The point here is that by lumping everything into loan modifications, and then comparing that to raw repayment plans, there is only so much market trending that can be seen — while we’ve been among the media outlets that used that tool as a rough hammer to pick out trends, at some point, even that sort of comparison begins to take on a black-and-white distinction that makes its use increasingly problematic.

As Dubitsky notes: “There can be too much of a good thing, and some servicers could modify too much, while other servicers could be doing far too few mods.”

The difference remains

Regardless of what caused the disparity, however, the difference between modifications for prime and subprime borrowers is very real in the aggregate sense: the ratio of repayment plans to modifications for prime borrowers during November was 2.39 percent, while for subprime borrowers that ratio was 0.61 percent. What we don’t know is why this is the case: is it because a few subprime servicers, looking to save their own skin and recoup advances, are modifying loans are an amazing clip? Or is it because prime servicers are more comfortable using repayment plans as a front door to a workout, even if it means booking a loan as delinquent?

There are other considerations here, as well, for much of the reported data: if servicers focusing on prime loans are indeed more likely to rely on repayment plans — for whatever reason — does that help explain why so many prime loans appear to be going bad so quickly? Does a strong modification focus by subprime servicers, in comparison, help explain why reported delinquencies in the sector aren’t rising as fast?

Regardless, expect to see loan modification efforts increase dramatically next year, HOPE NOW executive director Faith Schwartz said. She said that the group expects to see the number of loan modifications double their 2008 totals next year, largely as servicers look to implement bulk loan-mod processing programs — programs that are, ostensibly, not limited to one credit sector or the other.

Frankly, getting to that level of loan mods could be done by pushing the ratio of prime loan modifications to the same level we’re already seeing in the subprime space, although HOPE NOW didn’t comment on any planned strategy by servicers for modifications going forward.

Schwartz also said the group intends to roll out “significantly enhanced loan-level data that will help the industry further analyze trends and make necessary adjustments,” as well. At HousingWire, our wish list for that data would include aggregate information on what type of loan modifications are being executed, as well as recidivism rates. It is Christmas-time, after all.

Write to Paul Jackson at [2] paul.jackson@housingwire.com."

"It's a relationship rife with the possibility of conflicts of interest"

ChumpChanger with an interesting post about foreclosures:

"I mentioned in the story that two big players, REDC and Hudson & Marshall, have essentially locked up the business of auctioning off the houses that mortgage issuers are foreclosing on.

The question is how these two players have managed to split the market so efficiently. One thing to look at is their relationships with the banks that serve as preferred lenders for their auctions. These lenders seem to be largely the very same ones that financed the houses that are now being foreclosed on in the first place (I wrote about Countrywide's relationship with REDC earlier this year in Slate). It's a relationship rife with the possibility of conflicts of interest. If a mortgage company actually owns the underlying mortgage, it has a great deal of incentive to finance a buyer that will get it out of foreclosure, even if the loan is likely to go bad later. If, one the other hand, it's the servicer for a mortgage that's been packaged into a bond and sold to investors, the big incentive for the company auctioning off the house isn't to get maximum value, but to make sure it gets to finance it (hey, there's not much mortgage business these days). It's a small corner of the real estate market, but it's one that's worth looking into. Though the whole mortgage crisis is feeling a little like yesterday's news with everything else going on, isn't it? "

Not to me. This is one of those issues that needs to be investigated because it could be a continuation of earlier practices which also involved conflict of interest. We cannot leave collusion uninvestigated.

"I think there are at least three arguments for the canary theory and against the domino theory."

Here's a post on The Baseline Scenario about Subprime Lending and its role in the crisis by James Kwak:

"Asking whether subprime lending caused the crisis raises all the questions about agency and causality that I’ve raised before. On the agency question, insofar as there was a problem in the subprime lending sector - and few would deny that there was - does the fault lie with borrowers who took on loans they had no chance of repaying, perhaps sometimes without understanding the terms; with the mortgage lenders who lent them the money without doing any due diligence to determine if they could pay them back; with the investment bankers who told the mortgage lenders what kinds of loans they needed to package into securities; with the bond rating agencies who blessed those securities while taking fees from the investment banks; with the investors who bought those securities without analyzing the risk involved; or with the regulators who sat on their hands through the entire process? Note in passing that it may have been perfectly rational, as well as legal, for an investor to by an MBS even knowing that the loans backing it were going to default, but making a bet that he could resell the MBS before the price fell, under the “greater fool” theory of investing. (It may have been rational for an investment bank to do the same, but not necessarily legal, given the disclosure requirements relating to securities. Goldman Sachs is being sued over precisely this question.) Readers of this blog know that my opinion is that, although there is blame to be shared along the chain, the greatest fault lies with the regulators, for a few reasons. First, although the desire to make money may cause problems, it can be no more be said to be a cause of anything than gravity can be said to be the cause of a landslide; second, bubbles are inevitable, at least in an unregulated market; and third, there is a difference in kind between the mistake made by an investor, who is foolish and loses some money, and the mistake made by a regulator (or a legislator who votes to reduce funding for regulators), whose job is to serve the public interest."

I don't agree with this.
1) The desire to make money is always there, but there isn't always Fraud, Negligence, Fiduciary Mismanagement, and Collusion. That is an essential element of this crisis.
2) Bubbles are not inevitable.
3) The markets were not unregulated. Indeed, one also has to remember that there are professional codes that might have also been violated here as well as criminal ones.
4) There's plenty of research that Regulators act as Private Actors do. ( I'm thinking of James Buchanan )

I believe that the Banks and other Financial concerns in general are the most responsible, including the Credit Rating Agencies and Mortgage Brokers, for example.

"But that was all the preamble, because today I want to talk about the question of causality.

I think it’s generally accepted that the crisis we know today first appeared in the subprime lending market, where an increase in delinquency rates triggered a fall in asset values. Those problems were clearly visible early in 2007 (it’s impossible to say exactly when they were first visible, because some people had been warning of the problem for years, to little effect), and over the next year the main entertainment in the financial sector was watching banks and hedge funds suddenly realize they had large subprime exposures and either take writedowns or fold. But I think there are three ways to understand the relationship of subprime and the current crisis:

1. Subprime was the first place where various structural problems appeared, but those problems existed elsewhere, where they only appeared later. If the subprime lending boom had never happened, we would still be roughly where we are today. Call this the “canary in the coal mine” theory.
2. Subprime was the first place where various structural problems appeared, and the subprime crisis generated additional pressure that exposed those problems in other areas. For example, subprime concerns caused a pullback in lending, which caused a leveling off in home prices, which caused a reduction in housing construction, which slowed economic growth, etc. Call this the “domino” theory.
3. Subprime was a necessary cause of the crisis. Without subprime, the levels of housing prices, indebtedness, and risk in the system would have been sustainable indefinitely. Call this the “prime mover” theory.

Only under the prime mover theory can subprime truly be said to have caused the crisis. Under the domino theory it played the role of a precipitating but unnecessary cause. Under the canary theory it is just a leading indicator.

In my opinion, subprime was probably the canary, and possibly the first domino. There are various arguments against the prime mover theory:

• The U.S. subprime sector is simply not big enough. Although the numbers have been shifting in the last couple of years, roughly 80% of outstanding residential mortgages in the U.S. are prime; the other 20% is split between subprime and Alt-A. About 50 million homeowners have a mortgage, of which about 7 million have subprime mortgages. The idea that an increase in the delinquency percentage among 7 million U.S. homeowners (total mortgage value about $1-2 trillion, so losses on foreclosure - assuming a 100% foreclosure rate - about $0.5-1 trillion) could have by itself caused the largest economic downturn in the world since the 1930s is hard to credit.
• In absolute terms, losses in the subprime sector will be dwarfed by losses in the prime sector. Credit Suisse is now forecasting 8.1 million foreclosures by 2012, over 5 million of those outside of subprime. Current-month foreclosures among prime mortgages have already caught up to and passed (see chart on p. 4) foreclosures among subprime mortgages.
• The U.S. and global economies bumped along passably for over a year from the beginning of the subprime crisis. The U.S. recession did begin in December 2007 (Econbrowser for a good post on recession dating), but most of the numbers don’t start falling off cliffs until the second half of 2008. By the time Lehman went bankrupt in September, it’s probably true that all of the bad news about subprime was already priced into the various markets. What’s happened since then is new bad news about every other market.

Deciding between the canary and domino theories is tougher. The canary theory is that there were lots of boulders perched precariously on a cliff and subprime was just the first one to fall. The domino theory is that the subprime boulder knocked into a lot of much bigger boulders and knocked them off, but something else could have knocked them off just as easily. The domino theory could go something like this: Subprime caused writedowns and instability in the financial sector and nervousness in the housing market; nervousness in the housing market caused housing prices to start to fall, making it harder to refinance and increasing delinquencies on all kinds of mortgages; expanding writedowns caused a liquidity run on banks such as Bear Stearns and eventually Lehman; falling house prices and the consequent wealth effect reduced U.S. personal consumption, slowing economic growth; reduced consumption had the usual multiplier effect, reducing incomes and creating a recessionary cycle; the the recession hurt the value of every other type of debt (commercial mortgages, credit cards, etc.), triggering a full-scale banking crisis; and the fear created by the banking crisis led to the sharp downturn in credit and in consumption that put us where we are today.

I think there are at least three arguments for the canary theory and against the domino theory.

First, there is the issue of timing. The subprime crisis took an awfully long time to blossom into a full-fledged global recession and, as I said above, by the time the latter occurred the full scale of the subprime problem was more or less known to everyone. On that principle, the other boulders withstood the bump they got from the subprime boulder.

Second, once we had a housing bubble, it was inevitable that it was going to pop one way or another. So one question to ask is whether subprime lending was the reason for the housing bubble. Even at the peak of housing prices in 2006, subprime loans only made up about 20% of total mortgage origination volume. (Everyone cites Inside Mortgage Finance, but you have to pay for their data; here’s an NPR primer on subprime with a chart.) Could that 20% have have been solely responsible for the bubble? I suppose it’s possible, depending on the shape of the supply curve, but count me as skeptical.

Third, there is another good explanation for what pushed all those boulders down. James Hamilton thinks that the economy was structurally fragile, and the shock that knocked the boulders down was the oil price spike.

My view is that we were teetering on the edge of a cliff last summer, and the oil price shock may have been just enough to tip us over the edge. As we did so, the financial disaster that had always been a potential became a reality.

The trouble is, now that the economy is in free fall, it’s going to take more than $2 gasoline to pull us back up.

Ultimately, I think this question (canary or domino) is not definitively answerable, like many historical counterfactual questions, but I’m on the side of the canary.

One final note: Blaming subprime can have a disturbing overtone of blaming poor people for reaching beyond their means. First of all, it’s not true that subprime has more than a vague correlation with income. In the words of the late Tanta:

The capacity C of traditional underwriting was, of course, always relative to the proposed transaction. A lower-income person buying a lower-priced property was, you see, not a case of subprime lending; assuming a reasonable credit history, it was a prime loan. People with quite good incomes and stellar credit histories who tried to buy way too much house got turned down by the prime lenders.

More often, however, people in gentle society realize it’s not proper to blame poor people, so they take aim instead at the Community Reinvestment Act and liberal politicians generally for attempting to extend homeownership to people who couldn’t afford it. This line of attack was most recently exhibited on the New York Times op-ed page. I will leave the rebuttals to the experts:

• Mark Thoma (2 separate posts, with additional links)
• Barry Ritholtz (2 separate posts)
• Randall Kroszner (cited by Ritholtz)"

I suppose I also accept the Canary Theory, in that there were other investments that could have triggered this crisis. The lowering of capital requirements infected a number of investments. The complexity of the investments also contributed as well. In general, there was a mountain of Wishful Thinking that infected a whole range of investments.

"So let's assume that fraud gets a free pass. "

Arnold Kling picks up a point made by John Paulson in his congressional testimony that I agreed with. First, here's Paulson:

"The Institute, launched with a $15 million grant from investment management firm Paulson &
Co. Inc., will provide funding and training to organizations that help homeowners negotiate
alternatives to foreclosure. The majority of the funds will be grants to support direct legal
assistance to borrowers in 10 or more states to fight foreclosure, predatory lenders and abusive
loan servicers. It will do this primarily by providing money to top non-profit legal-aid groups and
law school clinics."

Here's my comment:

"Since this is mainly legal help, and the loans are called abusive, maybe we should be doing what I say, which is examine the legality of these loans."

Here's the Kling post:

"Thomas Cooley writes,

The most important role for public policy is to provide incentives for servicers to restructure and modify loans, to make certain that shared appreciation contracts are part of the policy mix, and to address the legal barriers to modifying securitized loans.

Pointer from Greg Mankiw.

My wife says that I became too angry and agitated at the hearing when Ed Pinto suggested that we need a major effort at loan modifications. I do become angry and agitated every time one of these suggestions gets made.

What are the standards that you are going to use to determine eligibility for loan modification?

Many (most?) of the loans that you would be modifying involve fraud. Sometimes, it was the borrower who deliberately committed fraud. But most of the time, it was the mortgage broker. We won't be able to sort that out. So let's assume that fraud gets a free pass."

See, I don't make that assumption. However, it's becoming obvious that my idea, and Paulson's it seems, to legally challenge these mortgages is going nowhere. I suppose people will claim that it will take too long, but I actually believe that people simply don't want to deal with this legal mess. Now, it's possible that people might begin taking Fraud, Negligence, Fiduciary Mismanagement, and Collusion seriously, given this Madoff mess among others, but I'm not holding my breath.

"What we need is an honest housing market, with legitimate owners, legitimate renters and prices that balance supply and demand. Loan modifications undermine the honesty of the market. They delay the necessary adjustments. With foreclosures, it might take two years for the housing market to find a bottom. With loan mods, it will take at least ten years.

Why is loan restructuring so popular? I think it's because people are in denial. They want to think that there is some feel-good way to avoid severe adjustments in housing. But loan restructuring will worsen the pain, not relieve it."

I don't know what the correct adjustment is, and I doubt that anybody does, even experts. I don't mind a few marginal attempts to ease this fall, or try and feel out a bottom, but, as of now, I still believe that we should let housing prices fall, for reasons I've already given. Namely, I believe that it would be better for the buyers. I agree with Kling that the most generous explanation of this Flight From Fraud is yet more Wishful Thinking, a desire to get this mess over as quickly as possible, whether or not the plans offered for renegotiating mortgages would in fact do that. One big problem I have is that I believe that servicers and lenders, and, in some cases, borrowers, realize that there is this Flight To A Quick Solution Through Government Action, and have been holding out or dragging their feet in hopes of provoking such action.

As I've said with TARP, the only real solution would be for the government to go in and impose a settlement, but, in this aspect of our crisis, the legal problems are, in my mind, insurmountable. They would result in unconstitutional seizures of property, at the very least. The solution, to the extent that there is one, is going to be a number of attempts to help this situation which will, in the best possible case, marginally ease the problem. God forbid we make matters worse, but that's a real possibility.

Again, I believe that Massive Fraud is being left unexamined and unprosecuted. Stick that up your Moral Hazard Pipe and smoke it.

"As if you couldn’t see this one coming a mile away"

Barbara Kiviat is where I first ran into this story:

"The big question looming over the push to rewrite the home loans of people struggling to make payments is whether or not such mortgage modifications keep folks in their houses for the long term. As I've mentioned before, there's a danger that loan modifications, at least the way they're currently done, don't solve the problem, just delay it.

This morning Comptroller of the Currency John Dugan gave a speech and shared some grim data: more than half of loans modified in the first quarter of 2008 fell 30 days delinquent within six months. Here's the graph he put up:

The data come from the largest national banks and thrifts and cover 35 million loans worth more than $6.1 trillion, or 60% of all first mortgages in the U.S.

Dugan called the results, part of his agency's new Mortgage Metrics report, "somewhat surprising, and not in a good way." He pointed out that a person could argue that 60-day delinquencies are a better indication of future foreclosure, but those figures aren't so good either—after six months, 35% of people were 60 or more days behind on their payments.

These are great numbers to have since historically we haven't—and problem solving often starts with data collection. Unfortunately, we're still not quite at the point of knowing what to make of it. As Dugan said this morning:

The question is, why is the number of re-defaults so high? Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors? We don't know the answers yet, but these are the types of questions that we have begun asking our servicers in detail.

Godspeed on that.

Barbara!"

Here was my comment:

1. donthelibertariandemocrat Says:
   Monday, December 8, 2008 at 5:07 pm

   I think that the data is interesting, and leads me to believe that these negotiations are a bit tougher on the borrowers than we had imagined. In other words, the lenders are willing to bend a bit, but only a bit. There are limits to their willingness to negotiate a new monthly payment. They're not willing to accept any amount that people can obviously pay, but are pushing that amount as high as they can.

   I would say that 50 %, in that scenario, is reasonable, if it wouldn't be worse for the borrowers. But Barbara is asking the correct question: How realistic are these renegotiated payments? And how much do they differ from what was being paid before?

   After all, a 50 % rate might be fine if what you're really trying to do is stabilize prices, not really end foreclosures.

I then ran across it on Alphaville by Stacy-Marie Ishmael:

"There has been a growing chorus of voices calling for measures to stem foreclosures in the United States. Just last week, Ben Bernanke unveiled a fairly aggressive set of proposals, including the government buying “delinquent or at-risk mortgages in bulk” and refinancing them under federal programmes such as Hope for Homeowners.

But recent comments from John Dugan, the Comptroller of the Currency, should give advocates of loan modification programs (and similar efforts) a moment’s pause.

Data released by Dugan’s office show that more than half of loans modified in the first quarter of 2008 fell delinquent within six months:

After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent

over half of mortgage modifications seemed not to be working after six months

Not all redefaulted mortgages go to foreclosure, and some have suggested that 60 days past due is a better indicator of ultimate failure to pay than 30 days – but even using that measure, the rate of increase in re-defaults was remarkably high, exceeding 35 percent after six months.

Dugan did not offer a reason for the high (and accelerating) rate of borrower re-defaults, but he did ask the right questions:

Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?

The answers to those questions will have “important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months,” he added.

Dugan said he had posed those questions to mortgage servicers and was awaiting their responses.

FT Alphaville hopes more light will be shed on the matter when the OCC, in conjuction with the Office of Thrift Supervision, releases its Mortgage Metrics Report later this month."

Here was my comment:

Don the Libertarian Democrat Dec 8 22:38

I would say that the 50 % figure might well be correct, because the lenders are being tougher on the borrowers than many people thought they would be. There is only so much room to renegotiate from the lenders point of view.

I also feel that this rate might help stabilize prices, which is really what these lenders want, not necessarily to stop all or even most foreclosures.

So, I made basically the same point. Then Yves Smith:

"The stock market is staging a very peppy rally on the hopes for the Obama infrastructure plan and the auto bailout, but key bits of news point to the stubbornness of some of the underlying economic stresses.

We have long advocated mortgage modifications as a remedy that banks used fairly freely in the stone ages when they held the paper. While we have also been told that the mods being offered these days are often too shallow to give the homeowners sufficient relief (ie, the bank could offer a reduction in principal, rather than the more common, and lower effective reduction of merely providing interest rate relief, and still come out ahead compared to a foreclosure). However, the latest report from the Office of the Comptroller of the Currency may put a dent in efforts to find ways to offer viable borrowers sufficient changes in terms."

Next, Felix Salmon:

"An even more key question is why on earth Mr Dugan is surprised by this number. As Paul Jackson points out, loan mods normally have a 50% failure rate. On top of that, there are two key points which Dugan seems to have missed:

• The single most important factor underlying mortgage defaults is falling house prices.
• House prices have continued to fall throughout 2008.

Given all that, we should be thankful that loan modification programs have managed to keep half of formerly-delinquent homeowners out of default.

We should also understand why, from a bank's point of view, it's silly to modify loans by reducing the principal amount outstanding. It makes sense to reduce interest payments -- to something well below the bank's own cost of funds, if necessary. But the bank will also want to protect itself if that doesn't work, by keeping the total amount owed high. The problem there is that the homeowner will remain underwater -- and having an underwater loan is a strong incentive for any homeowner to walk away.

As ever, there are no easy answers. But maybe it really takes a year's worth of re-default data to persuade the OCC of that."

I think that we should understand that these are not normal times. That's why people are surprised. They were hoping that the lenders would bend over backward to modify these loans so that people could afford to stay in them. Obviously, and I agree with Felix Salmon here, the banks are going to go only so far.

However, I believe that it is in the lenders interest for home prices to stabilize. After all, they're left with an asset after foreclosure that they lost money on, and it doesn't help them if the assets they are getting back are cheaper and cheaper. So, I think that they've taken a middle road. Be lenient enough to slow the rate of foreclosures down, but don't bend over backwards to avoid foreclosures. I believe that this makes sense.

The borrowers can walk away, but, if they do, they will also lose money. So, it is in their interest to remain in the home if they can. Unless, of course, they believe that they could walk away and buy a home later on much better terms. I have no idea how wise this idea is, since I'm dubious about predicting future mortgage rates in the next few years.

As well, whatever people say about housing prices, I suspect that they'll end up higher much faster than most people believe. However, there are some areas that are in very bad shape because building homes or condos in some areas did get way out of control. But that's not everywhere.

Here's the Paul Jackson post on Housingwire:

"As if you couldn’t see this one coming a mile away: more than half of the loans modified in the first quarter of 2008 had redefaulted within six months of modification, according to statistics released Monday by the Office of the Comptroller of the Currency.

“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due,” Comptroller John Dugan said in a statement. “After six months, the rate was nearly 53 percent, and after eight months, 58 percent.”

In other words, recidivism rates are right where they historically have been, despite growing pressure to “do something” about a growing number of foreclosures. Dugan characterized the results, however, as “surprising” for regulators.

Dugan’s remarks came during a panel discussion with Office of Thrift Supervision director John Reich, Federal Reserve Board chairman Donald Kohn, Federal Deposit Insurance Corp. chairman Sheila Bair, and Federal Housing Finance Agency Director James Lockhart.

Dugan suggested that regulators weren’t sure why redefault rates were so high. “Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?”

His remarks provided a preview of the data contained in the OCC and OTS Mortgage Metrics report, set to be released later this month. But the fact that regulators have been surprised by recidivism rates that are, frankly, about par for the course is telling insofar as it suggests that regulators have yet to really understand the crisis they are trying to solve.

“I want to know why Dugan and others are surprised by 50 percent redefaults,” said one servicing manager that spoke with HousingWire. “We’d have told them to expect it, if they’d asked.”

Anyone with experience in this space expects roughly 50 percent recidivism on loan modifications, various sources in the servicing side of the business said, give or take some wiggle room with differences in vintage and product type.

The fact that regulators were blindsided by these numbers seems likely to generate more cries for aggressive loan modifications, especially of the principal-forgiveness variety, from consumer groups and the government officials; but doing so entails huge moral hazard for lenders, and the very real risk that other borrowers currently performing on their notes will seek to default in order to lower their own mortgage balances.

Read Dugan’s full remarks here."

I think, again, that people are being disingenuous here. These are not normal times. Do we expect this percentage of foreclosures in normal times or this percentage of decrease in the price of houses in normal times or the tough terms for lending now in general in normal times? Why would you expect this percentage to be to the same?

"It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents."

This ones making the rounds, but it's worth preserving. From CNN Money:

"WASHINGTON (AP) -- The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job."

Pray you expect them in 2009.

"Bowing to aggressive lobbying -- along with assurances from banks that the troubled mortgages were OK -- regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way."

They were OK. They were guaranteed by the government, they assumed, if everything went sideways.

"These mortgages have been considered more safe and sound for portfolio lenders than many fixed-rate mortgages," David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history."

On the other hand, they've been considered time bombs waiting to go off when interest rates go up.

"The administration's blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s."

That was the deal. Less regulations, with the understanding that the government would intervene in a financial crisis.

"Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false."

Let me repeat that this was the understanding.

"In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:"

This isn't that useful, but...

--Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit. (Obvious )

--Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses. ( Obvious )

--Regulators proposed a cap on risky mortgages so a string of defaults wouldn't be crippling. ( Obvious )

--Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying. ( Obvious )

--Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected. ( Obvious )

By "Obvious", I mean these are all already part of the code of fair business practices, and deviations from these points are either fraud, negligence, or fiduciary mismanagement.

"Those proposals all were stripped from the final rules. None required congressional approval or the president's signature."

Were they stripped from decency and common sense.

"In hindsight, it was spot on," said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.'

Hindsight usually is.

"Federal regulators were especially concerned about mortgages known as "option ARMs," which allow borrowers to make payments so low that mortgage debt actually increases every month. But banking executives accused the government of overreacting."

Accused? Is overreacting a crime?

"Bankers said such loans might be risky when approved with no money down or without ensuring buyers have jobs but such risk could be managed without government intervention."

Actually, they could have, given honest bankers.

"An open market will mean that different institutions will develop different methodologies for achieving this goal," Joseph Polizzotto, counsel to now-bankrupt Lehman Brothers, told U.S. regulators in a March 2006."

What goal? Bankruptcy?

"Countrywide Financial Corp., at the time the nation's largest mortgage lender, agreed. The proposal "appears excessive and will inhibit future innovation in the marketplace," said Mary Jane Seebach, managing director of public affairs."

"Inhibit" doesn't mean "preclude".

"One of the most contested rules said that before banks purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes. Some bankers now blame much of the housing crisis on brokers who wrote fraudulent, predatory loans. But in 2006, banks said they shouldn't have to double-check the brokers."

Fraud. Yes. So why don't we pursue it?

"It is not our role to be the regulator for the third-party lenders," wrote Ruthann Melbourne, chief risk officer of IndyMac Bank."

Just give us the money, and we'll look the other way?

"California-based IndyMac also criticized regulators for not recognizing the track record of interest-only loans and option ARMs, which accounted for 70% of IndyMac's 2005 mortgage portfolio. This summer, the government seized IndyMac and will pay an estimated $9 billion to ensure customers don't lose their deposits."

Last week, Downey Savings joined the growing list of failed banks. The problem: About 52% of its mortgage portfolio was tied up in risky option ARMs, which in 2006 Downey insisted were safe -- maybe even safer than traditional 30-year mortgages.

"To conclude that 'nontraditional' equates to higher risk does not appropriately balance risk and compensating factors of these products," said Lillian Gavin, the bank's chief credit officer."

The were meant to be higher risk. Period.

"At least some regulators didn't buy it. The comptroller of the currency, John C. Dugan, was among the first to sound the alarm in mid-2005. Speaking to a consumer advocacy group, Dugan painted a troublesome picture of option-ARM lending. Many buyers, particularly those with bad credit, would soon be unable to afford their payments, he said. And if housing prices declined, homeowners wouldn't even be able to sell their way out of the mess.

It sounded simple, but "people kind of looked at us regulators as old-fashioned," said Brown, the agency's former deputy comptroller."

Why worry? We're too far down this road.

"Diane Casey-Landry, of the American Bankers Association, said the industry feared a two-tiered system in which banks had to follow rules that mortgage brokers did not. She said opposition was based on the banks' best information.

"You're looking at a decline in real estate values that was never contemplated," she said."

That's preposterous. I saw it coming.

"Some saw problems coming. Community groups and even some in the mortgage business, like Welch, warned regulators not to ease their rules.

"We expect to see a huge increase in defaults, delinquencies and foreclosures as a result of the over selling of these products," Kevin Stein, associate director of the California Reinvestment Coalition, wrote to regulators in 2006. The group advocates on housing and banking issues for low-income and minority residents.

The government's banking agencies spent nearly a year debating the rules, which required unanimous agreement among the OCC, Federal Deposit Insurance Corp., Federal Reserve, and the Office of Thrift Supervision -- agencies that sometimes don't agree.

The Fed, for instance, was reluctant under Alan Greenspan to heavily regulate lending. Similarly, the Office of Thrift Supervision, an arm of the Treasury Department that regulated many in the subprime mortgage market, worried that restricting certain mortgages would hurt banks and consumers.

Grovetta Gardineer, OTS managing director for corporate and international activities, said the 2005 proposal "attempted to send an alarm bell that these products are bad." After hearing from banks, she said, regulators were persuaded that the loans themselves were not problematic as long as banks managed the risk. She disputes the notion that the rules were weakened.

In the past year, with Congress scrambling to stanch the bleeding in the financial industry, regulators have tightened rules on risky mortgages.

Congress is considering further tightening, including some of the same proposals abandoned years ago".

Good work. In a way, this is pointless. However, it's part of the record.

"It's worth emphasizing that the CDS demonization meme, at least in this form, is a dangerous one "

Felix Salmon on the scourge of CDS's:

"For "personal bankruptcies", here, read "foreclosures", which are much the same thing, and you've got yourself an almost perfectly wrong-headed argument. Did a wave of foreclosures help to bring down highly-leveraged institutions with significant real-estate exposure, among them Bear Stearns and Lehman Brothers? Yes. Did "haywire derivatives contracts" in general, and CDS in particular, play a much bigger role? No."

Here's my comment:

Posted: Nov 05 2008 3:30pm ET

"It's worth emphasizing that the CDS demonization meme, at least in this form, is a dangerous one -- because it implies that it wasn't really the banks' own fault that they went bust, and that the implementation of a CDS exchange could in and of itself bring the amount of systemic risk down substantially. Neither is true. By all means fiddle around with the CDS market; it might well do some good. But don't try and pretend that if we'd only done so sooner, Bear and Lehman might now be thriving."

Absolutely. There seems to be a concerted effort to extract human agency from this crisis. It's a mechanistic explanation, faulting the investments, money flows, etc. Anything but people.

I enjoyed this story in the NY Times, because, well, it confirms my own biases.

http://www.nytimes.com/2008/11/05/business/05risk.html?ref=business

I also afraid that actual fraud, negligence, and fiduciary incompetence will be neglected as long as we can blame various non-human things like CDS's.

By DonthelibertarianDemocrat