The Causes of the Subprime Crunch
December 28th, 2007 by Peter SudermanThe New York Times suggests that some of the current waves in the subprime credit market might not be caused by nasty companies in need of more federal regulation, but by something a little more obvious, and more clearly malicious: mortgage fraud. And it turns out that fending off this sort of fraud isn’t a big concern for law enforcement agencies:
Fraud is especially common with subprime mortgages, the high-price loans for borrowers with poor credit. Lenders and investigators trace part of the foreclosure crisis to mortgage fraud.
For local law enforcement agencies, fraud is increasing as regulatory budgets are tight and other crimes seem more pressing, said Tom Levanti, a fraud investigator in New York.
“You only have a certain amount of resources,” Mr. Levanti said, “and in New York, you need to spend them on counterterrorism, protecting citizens, reducing violent crime. Mortgage fraud cases are long and time consuming, and the victims are usually financial institutions that can write off the loss. So as a police department, return on investment has to be thought about.”
Management and prioritization of law enforcement budgets is a tricky issue, but this seems far more plausible as a legitimate problem in need of some sort of government action. Perhaps Congress should focus less on Frank-Dodd style legislation aimed at stifling and controlling innovative business models and more on actual criminals whose actions are having spillover effects on the system.
December 28th, 2007 at 12:37 pm
Except that “subprime” isn’t the whole mortgage problem. Why are you guys so eager to go after consumers and everyday Americans at FW, eh? From today’s LA Times:
What’s so “innovative” about a business model that leaves the companies open to fraud and waste?
Once again I’m disturbed by your refusal to hold the mortgage companies and banks accountable for entering into these disastrous relationships to begin with without providing safeguards for themselves.
For some reason, you guys refuse to even ask a simple question: What were the banks doing issuing these subprime mortgages to begin with? Instead, you’re more eager than ever to make sure you blame anyone but the banks.
Real “grassroots” of you there…
December 28th, 2007 at 2:04 pm
Well, if by “holding banks responsible” you mean allowing them to feel the burn of making bad investments and handing out risky loans, then I’m all for it.
If, however, you mean the government forcing them to make up for poor decisions made by consumers (or, in the case of the NYT piece I link to above, fraudulent actions on the part of criminals), then no, I wouldn’t go along.
Both banks and consumers deserve some blame for poor choices. Sometimes these risks may have seemed reasonable or justifiable at the time; other times not. Either way, though, there’s no reason to further regulate the industry. If the banks want to continue to engage in risky lending practices that expose themselves to too much risk, that’s should be their option — and they’ll pay for it. The government shouldn’t be in the business of propping them up, just as it shouldn’t be in the business of propping up poor decisions made by consumers. The article you link to in the LAT actually reinforces this:
Hers is an unfortunate case, but it’s not the bank’s fault she took on a loan without understanding it, and nor is it the job of taxpayers to bail her out. Doing so would only promote further risky behavior. The best way to get rid of poor practices, by both banks and consumers, is not to insulate anyone from the consequences of their own decisions.
December 28th, 2007 at 5:35 pm
The thing is, Peter, the taxpayers aren’t really bailing these folks out, they’re bailing out the banks. The Treasury department is now poised to take over insuring the worthless subprime debt, which means its the taxpayers that will fork over the billions of dollars in insurance cash once the write-downs begin in earnest.
but they’re not paying for it. In fact, several of these nice bank executives got nice bonuses while this whole thing was going on. Countrywide gave its COO a $2.67 million dollar bonus in January; two weeks later, Countrywide’s stock fell off a cliff.
But worse, you seem not to understand the biggest problem happening right now. Bond insurers have given great credit ratings to these subprime-backed securities. Since these securities are now essentially worthless (see the billions downgraded by Citibank just last week), confidence in the bond raters is dropping like a stone. Check this out from Bloomberg:
The biggest problem isn’t these individuals who shouldn’t have signed contracts they didn’t understand, it’s that bond insurers have been rating these subprime debts as AAA when they weren’t. Indicators of a coming credit crunch were already two years old, but the banks ignored the shouting, since their insurance companies kept the bonds rated higher than they were. Now that confidence has fallen out, the two solutions are:
1.) immediate influx of cash to the banks, which is happening, though this money is coming from foreign governments (not individual investors) like China and Singapore;
2.) Have the U.S. Treasury back the bonds and eat the loss when they pay out (at taxpayer expense).
Number 2 is the bad one, and will cost taxpayers MUCH MUCH more than just bailing out individuals, which we can only do in a very limited way due to the new bankruptcy laws anyhow.
This is advanced economics, of course, and not readily visible to the general public. That’s where you guys need to come in. I suggest you guys really get a handle on what this is all about and the potential problems with it. We all pay when the banks do risky things like this, because the numbers are so huge, and the consequences so large.
The “free market ideal” you embrace is too quaint to really grasp the problems with what’s going on out there.
December 31st, 2007 at 12:30 pm
Looks like I spoke too soon, Peter, about something I wrote above: “but they’re not paying for it. In fact, several of these nice bank executives got nice bonuses while this whole thing was going on.”
Seems there <a href=”http://www.guardian.co.uk/business/2007/dec/31/subprimecrisis.creditcrunch”were some consequences for the bank execs:
So I stand corrected (but who didn’t think O’Neal shoulda been out at Merrill a LONG time ago?) about what I wrote above. The Countrywide bonus to its COO was apparently something of an exception.
January 8th, 2008 at 7:33 pm
Alan Greenspan pushed these ARMs big-time all over the place, and now that bad advice is killing our economy big-time. Banks were willing to give out loans to people that they knew in advance couldn’t pay them off long-term…then those same banks turned around and immediately sold those loans to another company and left everyone else holding the proverbial “bag”. And all that’s OK with you guys…geeze…this website should be recommended as a comedy website…
February 10th, 2008 at 2:12 am
Business Loan Settlement A Huge Resource Stuffed with Interesting Info…
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October 15th, 2008 at 4:55 am
Those b@sT@7ds! If you’re interested, here’s another take on those ****s in charge of finance - http://uk.youtube.com/watch?v=HAaxeqikUlE