Who Really Caused the Housing Bubble

When President Barack Obama announced plans to help struggling homeowners in 2009, he made it clear whom the government was not out to help: "I want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell."

Almost three years later, the plan has been almost universally panned as a failure, barely getting off the ground. There are several reasons for this, but one may be that the number of homeowners who weren't being unscrupulous or irresponsible by purchasing multiple homes is smaller than you think.

The Federal Reserve Bank of New York recently asked a simple question: What percentage of mortgages lent during the bubble went to people who owned more than one home?

Its answer: nationwide, over a third. In Arizona, California, Florida, and Nevada, it was nearly half. Astoundingly, about 1 in 10 mortgages lent in those states during 2006 and 2007 went to those who owned more than four homes. All figures are about double the rate seen before the bubble.

The numbers might seem reckless in hindsight, but try to remember how rational owning a second home seemed at the time. In April 2004, an article in Florida's Ocala Star-Banner explained:

Second homes aren't only for rich people. They have become mainstream whether they're used for vacations or for rental income ... You don't have to have a pile of cash at hand to buy a vacation house. You can use the equity in your primary residence to help for a second home (or third).

In 2006, an executive of mortgage lender GMAC (later bailed out by taxpayers) described the thought process when deciding to own a second home: "The number one factor that any homeowner should consider is the memories that a vacation home can provide." Whether you could afford one didn't seem particularly relevant.

In 2007, the Los Angeles Times laid out the rationale for buying a second home as an investment:

Real estate is a leveraged investment. One can own a second home with an equity investment (down payment) of no more than 20%. In fact, there are many programs that let people buy with a lot less. Most investors can't do this with stock. They need to pay the entire price of the stock.

It continued:

An investor can live in real estate. Stock certificates are pretty, with great colors, cool writing and embossed letters. Unfortunately, the stock investor can't go to sleep in them or stand on them to watch the sunset over the lake, or hold a party for your friends and family in them. They just -- hopefully -- make money. Real estate provides many kinds of satisfaction that money can't.

A second home has long-term wealth-building powers. In a nutshell, if the owner thinks a house is good enough to live in and enjoy, someone else will too, and they'll pay for the privilege to rent it.

And then came the money line: "Real estate markets don't crash the way stocks do when the bull runs out of steam. In short, it's a less risky investment."

Think about that mentality, and it's safe to say that most of those leveraging up with multiple homes didn't even realize they were speculating. They thought they were doing the responsible thing, investing their money in a safe asset, building wealth for the future.

But regardless of intention, the dynamics of buying a home as an investment are far different than those of purchasing a primary residence. As the Fed explains: "Because investors don't plan to own properties for long, they care much more about reducing their down-payments than reducing their interest rates." In fact, the more homes you owned, the higher the likelihood you were using a subprime mortgage. That alone caused overbidding and pushed up prices to crazy levels. If you want to blame one group for the housing bubble, the crowd of Americans who owned more than one home is a good place to start.

None of this is breaking news -- of course speculators helped fuel the bubble. But it helps paint a better picture of who is losing their homes today.

About a third of all mortgages "seriously delinquent" early in the recession belonged to those who owned more than one home. More recently, it was about one-quarter. Most of those ended up in foreclosure. In other words, between one-quarter and one-third of those who have succumbed to foreclosure during the housing bust haven't necessarily lost their home, but their second, third, or fourth homes -- their investments, in other words.

That should alter the conversation about the current foreclosure crisis. No one likes to see anyone lose their home, and many homeowners have truly suffered a raw deal. But so much of the angst over the foreclosure crisis has overlooked an important truth: A large number of those who have lost their homes had no business owning them in the first place.

What do you think? Share your thoughts in the comments section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On December 14, 2011, at 2:50 PM, TMFConch wrote:

    To me, the sign that the world was wacky back then was that so many people I knew had become landlords for their investment properties. That just seemed nuts. I haven't heard it mentioned anywhere else, but the one common factor with most of the people that I knew who had become real estate investors was that they all had read and taken to heart the "Rich Dad, Poor Dad" book, which to my reading was mostly bunk.

  • Report this Comment On December 14, 2011, at 3:07 PM, TheDumbMoney wrote:

    The Left wants to blame only the banks. (Barry Ritholtz of The Big Picture blog temporarily barred me as a Twitter follower when I tried to get him to acknowledge homeowners/borrowers might bear ANY blame at all. Literally. ANY!)

    The Right wants to blame only the GSEs and Barney Frank (and the Ron Paul faction will throw in the Fed as well). The fact that the GSEs were quite late to the subprime game, and that the crisis was international, are selected facts they persist in ignoring.

    As usual, neither side gets at the truth, which is that the housing boom/crisis was the result of a national or even international mania, and we are all to blame in part, including those who owned three homes in Florida and thought they were "investing."

    Needless to say, the LATimes (my home city paper) spends much more time excoriating banks (thank you, Steve Lopez) than it does excoriating people like the writer you quote above from its own pages, or than it does excoriating itself, or you, or me.

    DTAF

  • Report this Comment On December 14, 2011, at 3:14 PM, TheDumbMoney wrote:

    "As usual, neither side gets at the truth,..." should read, "As usual, neither side gets at the whole truth,..."

    There is some truth in each of their narratives, which is why the narratives are plausible to ideologues and to those who follow ideologues.

    DTAF

  • Report this Comment On December 14, 2011, at 3:57 PM, mm5525 wrote:

    "And then came the money line: "Real estate markets don't crash the way stocks do when the bull runs out of steam. In short, it's a less risky investment."

    So I should jump off a cliff if some journalist from the LA Times says it's less risky? Personal responsiblity has a role here. Do you think consumers are utterly mindless drones? When does personal responsibility have a role?

    I did mortgage loans for close to a decade, and every borrower signed at least 50 pages of paperwork. If they didn't know what they were getting into, it's really their fault. Ask questions! What a concept. Ask before you sign. Realize what you're getting into. There's a reason why buying a home, even a second home, is considered one of the biggest investments people make in life.

    If you want a second home, be in it to win it. Have a long-term view. Buy a second home and use the propertly or at least have a long-term view and rent it out. Don't freak out when you paid $400k when it's now worth $200k, the price will recover. We're not mark to market here... we're mark to model. You should have bought the home for a long-term vision in the beginning. A second home ought to be a marathon and not a sprint or some specific snapshot in time. Same if you bought a stock and it went down, but you believe in the long-term thesis.

    If you bought NFLX at $300 do you want to cry foul today based on what someone said in the LA Times? Good luck with that. You pushed the button. You signed up for it. You committed your capital.

    "In 2006, an executive of mortgage lender GMAC (later bailed out by taxpayers) described the thought process when deciding to own a second home: "The number one factor that any homeowner should consider is the memories that a vacation home can provide." Whether you could afford one didn't seem particularly relevant."

    Name the source. What executive are you referring to? Why did you not name the source in the first place? Then tell me why it matters what someone who wants to sell you a mortgage has to say when you, in the end, you make a conscious decision to sign 50+ pages of paperwork out of your own free will.

  • Report this Comment On December 14, 2011, at 4:08 PM, Hawmps wrote:

    The ability to get into a leveraged investment with little skin in the game is a major cause no doubt. But the banks had no skin in the game either. They just got the deal done and sold the note for a profit... repeat.

    But when you add to that a large group of amateur real estate "investors" that don't understand the real risks of the leverage used to get in the game, the cash flow required to sustain the investment, or how to even manage their investment. Plus, you must have cash on hand for maintenance, reserves, and to make a few payments and pay other expenses when you have a vacancies and other things that come up. It's a business and you have to run it. It's not like buying a stock and watching the price go up and down and collecting a dividend once in a while.

    The bubble bursting is a combination of not knowing how to manage that type of investment and not being required to have more skin in the game (borrowers and banks). It wasn't really "investing" in the true sense of the word but more of a high stakes game of hot potato, flipping a property from one speculator to another with no fundamental business behind it. Last one holding got burned.

    If you're going to be serious about a real estate investment, plan to hold it for at least 5 to 10 years and make sure the numbers work... conservatively.

    That said, I believe that real estate is the ideal investment, and that's an acronym because you get every part of it if you do it right and you can actively manage your investment.

    I-income

    D-depreciation

    E-equity

    A-amortization

    L-leverage

    All five components add to your overall rate of return.

  • Report this Comment On December 14, 2011, at 6:05 PM, dremella100 wrote:

    I am glad someone wrote an article that does not squarely blame the banks (i.e. the mortgage loan officers) to be the sole cause of this debacle. Whatever happened to buyer beware. I remember, at one point, (I apologize for not being able to give a link or refer to the article online because it was one of those articles that I read en passe), houses were exchanging hands 2 or 3 times in a day. These are not done by banks. These are done be individual "investors".

    When I bought my house and went to a lender (American Home Mortgage) to apply for a loan, the loan officer told me to not get the house I was looking at and "advised" me to get a house that costs 400K more since I could get a loan for that. I thanked him for his confidence and requested him to approve my loan application since obviously I qualified just fine for that. My house appreciated 100K less this year, but that did not kill me because I am still able to pay my mortgage and am still living in it. Think about how many people have taken such an offer without doing their own math about what is it that they could afford with a reasonable level of safety. It is always convenient to point the finger at the big organizations because they don't bark back. They just quietly take your money and make you feel good about it too. Don't blame them. Stock investors expect them to make a profit.

    When you go to buy a car, the car salesman tries to sell you a higher end model than what you are looking for because that is what they are supposed to do to make profits for the company. They are not charity organizations.

    Well that is my take on it anyway.

    Best regards.

  • Report this Comment On December 14, 2011, at 6:06 PM, dremella100 wrote:

    Appraised at 100K less not appreciated. Apologies for the typo.

  • Report this Comment On December 14, 2011, at 6:14 PM, xetn wrote:

    I believe the following fully explains the housing bubble and the resultant crash:

    http://blog.mises.org/19608/the-austrian-theory-of-the-busin...

  • Report this Comment On December 14, 2011, at 6:28 PM, 102971 wrote:

    Very interesting article and comments. I live in Los Angeles and although the article states that nearly 50% of the foreclosures in California were on 2nd, 3rd & 4th homes, this is a case of the glass being half empty rather than half full.since it still means that over 50% of the foreclosures WERE ON OWNER OCCUPIED HOMES. My home, purchased in 2003 IS owner occupied and I am still "under water". After over a year of frustration, I finally got a loan modification but the bank (Wells Fargo) made it so difficult that I almost gave up and said "to hell with it, take the damned house". I'm glad that I didn't since they finally reduced my interest rate to 2.5% which made it cheaper for me to stay in the house rather than move to rented accomodation but I know of so many other people (all owner occupiers) who were not as lucky. The banks and mortgage companies made it so difficult to obtain a loan modification that you would think that they were using their own money rather than the Federal Government.

  • Report this Comment On December 14, 2011, at 6:30 PM, Cedarjones wrote:

    For those of you that think that banks caused the housing bubble, here's a simple question for you: What causes car accidents? (a) the freeways or (b) car drivers?

    If you answered (a) freeways, you will probably also blame banks and lenders who did whatever it took to get people a loan - any kind of loan - just to get that house. You will also probably spend your whole life blaming the wrong people for the mortgage meltdown.

    If you answered (b) the car drivers, you at least have a basis for finding th truth of the housing bubble. In a nutshell there were too many inexperienced and unqualified drivers hitting the freeways at the same time.

    Just as a driver's license keeps underage drivers off the roads, lending standards are supposed to keep unqualified buyers from owning a home. Those standards started deteriorating with with Forced Lending Laws (inaptly named "Fair Lending Laws") and then really took a hit when HUD was put in charge of FNMA and FHLMC in the 1990's. The surge of new buyers sent housing prices for a 15-year run after HUD forced those mortgage giants to devote 42% of all housing loans to "low income individuals". That opened the floodgate.

    Fair lending laws did the rest when lenders started doing more "no-doc" loans, which were normally reserved for doctors and professionals who are unable to document income on a W2. Well, you can't "discriminate" when it comes to mortgages, so those same loans were made available to anyone! Moreover, FNMA and FHLMC made sure there was plenty of funding for subprime loans because they bought them from other lenders to fulfill their requirement to devote loans to "low-income individuals.

    Barney Frank could have written a 1-page bill that could have addressed the government's role in the bubble. Instead, we have 2300 pages of absolute nonsense that does nothing to solve the problem. Barney's entire goal was apparently to divert attention from himself and his own role in the mess.

  • Report this Comment On December 14, 2011, at 6:30 PM, RobertBaker1 wrote:

    I have been trying to clue people in on the number of foreclosures that are on rental properties, which is close to half. I am glad to see an article that really spells out the problem with numbers. Besides that, most properties were used to pull cash out. People who have owned a house for 30 years should not be $600,000 in debt. But they took the money and now want taxpayers to bail them out. Many are public employees and politicians. It is sad.

  • Report this Comment On December 14, 2011, at 7:19 PM, Hawmps wrote:

    <<although the article states that nearly 50% of the foreclosures in California were on 2nd, 3rd & 4th homes, this is a case of the glass being half empty rather than half full.since it still means that over 50% of the foreclosures WERE ON OWNER OCCUPIED HOMES. >>

    This is important because the buying and selling of these 2nd, 3rd, and 4th homes had a significant impact on the market creating artificial demand fueled by laxed underwriting of cheap debt. The affect is abnormal appriciation in value that was unsustainable which unfortunately hurt the owner occupied. The glass wasn't half empty or half full; but rather, the credit markets changed the size of the glass.

  • Report this Comment On December 14, 2011, at 7:43 PM, Kiffit wrote:

    What we are really talking about here is unsustainable behavior. And over a long period, there has been a lot of that going round and steadily accumulating in virtually all areas of life; personal, social, economic and environmental.

    It is pointless trying to just point the finger at any one party or groups of parties, because the culture of unsustainability is pervasive. The fix has to be equally pervasive.

    The most successful such rectification exercise done in recent times is the one that the Germans had to go through after WW2.

    Denazification involved everybody, because pretty much everybody had been actively involved in the Nazi state at some level. And its philosophy was to emphasize rehabilitation and re-education over punishment.

    Mainly it was only the top Nazi bigwigs who were tried and hanged, or given stiff prison sentences. Everybody had to watch the films of the liberation of the concentration camps. Institutions were democratized. And the children had to learn about the appalling behavior of many of their parents' generation at school.

    It was a salutary and overall very benign process that brought the country back into the community of nations within five years, armed with a strong and democratic system of governance and an entrenched sense of shame about the past.

    Unfortunately it takes more that just financial disaster to bring on such an exercise. And it really helps to have a temporary benevolent dictatorship in place to mandate and enforce the process. But at least the model gives us some understanding of the scale and depth of the change necessary to undo 60-70 years of excess, folly and megalomania.

  • Report this Comment On December 14, 2011, at 7:51 PM, AlPlus wrote:

    I recall when I was refinancing my house about 8 years ago. The mortgage broker asked me if I wanted a loan that did not require qualifing. I asked How can they do that? I rejected that offer and took a regular traditional mortgage. I qualified on my own finances. I also recall seeing several infomercials selling kits on buying with no money down. I suspect those creative financing signature loans is how we got into the housing bubble.

  • Report this Comment On December 14, 2011, at 8:26 PM, Rokiez wrote:

    In Wisconsin, it's the fault of public teachers and other public employees.

  • Report this Comment On December 14, 2011, at 8:32 PM, Disengage wrote:

    I suspect banks, mortgage loan originators, etc. are the main problem. If you are packaging your aaa rated loans by the thoiusands into securities packages and selling them all over the world you probably didn't have time to check the quality of the illegal immigrant's ( I mean legit borrower's)credit, just get his P.O. Box # and send the check. Don't worry about too many bad loans, we've got credit default swaps, stupid. The more subprime, the better. Now shut up and start finding some more people who want a free third house.

  • Report this Comment On December 14, 2011, at 9:06 PM, stickerbush12345 wrote:

    Dear Fool, You are correct in saying they had no bus. Buying. I didn`t buy one and I own "OUTRIGHT" 3 income condos. When I purchased them I looked at every thing in site and when I found the best deal, I paid cash. If I didn`t pay cash and mortgaged it to the HILT. There was no income! So it didn`t work for me why would it work for them. GREED

  • Report this Comment On December 14, 2011, at 9:22 PM, don12string wrote:

    When your headline said "Who", I expected you to mention the individual who triggered the housing bubble. Instead you named a rather nebulous group of people. Your analysis is a bit shortsighted. The fuse was lit in 1993-1994. I know this will raise the hackles of many but political correctness be hanged. Slick Willie Clinton kicked it off with his mandate to Freddy, Fanny, Countrywide and the banks with his declaration that everyone will be eligible to buy a house no matter whether they can afford it or not. That allowed the banks to get into the subprime fiasco and here we are wondering why the bubble burst. Lets call the shots as they really are.

  • Report this Comment On December 14, 2011, at 9:24 PM, dgmennie wrote:

    The housing bubble can best be understood in terms of event horizons. On Team "A" we have the relatively sophisticated loan originators who (for whatever political and/or economic reasons) were offered the opportunity to make all manner of unsustainable loans, collect fat commissions in a matter of days/weeks (EVENT HORIZION #!), and then move on to the next deal.

    On Team "B" we have the unwashed masses who may never have bought anything more substantial than a used car on credit before. Team "B" was not offered anything beyond pop media mania (buy buy! home prices are rising! You will make a bundle a year from now! -- EVENT HORIZON #2) to base their financial decisions on, backed by the availability of what looked like "easy" money. (Thank you liberals who decided that every family not living in a shelter should become homeowners.)

    Was the outcome of this process ever really in doubt? Only today we have all those financially pious hindsighters wagging their fingers at everyone who did not "read and fully understand" the 50 pages of documents they signed at closing in 2003-2006.

    Blaming the victims of financial disasters never goes out of style, provided the playbook always allow "Team A" get out early with their quick cash intact.

  • Report this Comment On December 14, 2011, at 10:35 PM, reliapete wrote:

    This information makes me more inclined to blame banks rather than individuals. When you get to multiple houses, then these are business loans not home loans. You can't blame Barney Frank the the alleged pressure banks were under to make loans to under qualified people. Banks simply got caught up in a bubble and continued to lend regardless of a business/renter/multi-home owner's abilty to pay and bought into the appreciating pyramid whether the hoped for appreciation was more important than the ability of the business to produce cash flow to pay for the loan

  • Report this Comment On December 14, 2011, at 11:26 PM, jfrankh57 wrote:

    On December 14, 2011, at 3:57 PM, mm5525 ...

    Here, here. What a novel concept. Responsibility...hmmm. I with you. I have a wife that has been after me for the longest time to sell my house (which I bought before we married), so we could go out and buy a grandiose house we could call "both of ours!" I still refuse and she has finally resigned to live in a house that is comfortabe and relevant to a down to earth life style. She doesn't need 3500 sq ft so she can play perpetual hostess or queen of all she surveys:)

  • Report this Comment On December 14, 2011, at 11:29 PM, luckyagain wrote:

    A long time ago, I thought of buying rental property for an investment. I took a class and learned something about investing in real estate. It was probably the best money that I ever spent because I learned that I did not have the temperament to be a landlord. So I stuck to stocks instead. My guess is a lot of people who bought houses treated them like stocks. Real estate is an entirely different type of investment and only suitable to some people. My guess is that many people who invested in it were terrible landlords too. Some people are still making a lot of money in real estate but it is harder than what is shown on TV programs.

  • Report this Comment On December 15, 2011, at 2:24 AM, monsenor wrote:

    Housing bubble came about and inevitably burst just as bubbles do and for all the same reasons. Stocks, fine art, antiques, rare coins and of course tulips along with others all take their turn in due course. As always the final act is the same...who to blame. The fault dear brutus ...

  • Report this Comment On December 15, 2011, at 3:05 AM, MichaelDSimms wrote:

    It all being said and done, I still have my home which I purchased 9 years ago and am now paying far less in interest and payments due to the credit issues of others. And It is worth a little more than what I paid for it, well maybe.

  • Report this Comment On December 15, 2011, at 4:01 AM, marc5477 wrote:

    I am always amazed when people who work as lenders and brokers jump on here and blame everyone but themselves. If a broker/lender does not take the time to warn the people they represent of risks in the contract then what the heck are they getting paid for? They dont even do anything useful. They are just leeching middle men whos only job in life is to fill out papers and give them to someone else. They are just are responsible for the mess as banks and buyers.

  • Report this Comment On December 15, 2011, at 4:04 AM, goalie37 wrote:

    When the internet bubble came in the late 90s, large numbers of people became day traders...to the extent that the term "day trader" still has negative connotations. The problem wasn't short term technical analysis, it was that the people doing it had no idea what they were doing. When these same people turned to real estate, was the real estate business rotten? No, it just was never meant to be a game for amateurs.

    If you are going to invest large amounts of money in anything, please take the time and know what you are doing.

  • Report this Comment On December 15, 2011, at 5:13 AM, mm5525 wrote:

    I worked with plenty of brokers who didn't bother to explain things, perhaps they didn't even understand it themselves, and some even lied to the customers. Some of us, however, did things the right way and went out of our way to explain things. Some customers were engaged, and some stared at me with a blank stare only wanting to know two things: What's my monthly payment and how much cash do I get.

    I have found, though, the average borrower will spend more time scrutinizing a watermelon at the grocery store that costs $2.40 than they will a mortgage contract for $240,000.

    The entire globe operated within the same "conventional wisdom" (such dangerous words) that home values would do nothing but continue to go up. Congress, the Fed, banks, Fannie/Freddie/Ginnie, borrowers, mortgage brokers, appraisers, everyone. As pointed out in the comments above, the Left will blame the banks, the Right will blame the GSEs. I'm glad someone finally blamed the borrower. There were people I refi'd 7-8 times on the same property, always anxiously and eagerly tapping into that newly found 25k in equity they had "gained" from the year prior during the housing boom. Always amassing $5k-10k in closing costs per transaction year after year. What a recipe for disaster.

    There were plenty of bad actors in this play.

  • Report this Comment On December 15, 2011, at 5:50 AM, dbtheonly wrote:

    DATF,

    Much as I dislike disagreeing with you:

    It seems to me that the growth of derititves separated the risk/reward ratio for the lenders.When a lender holds the loan he makes as part of his portfolio; he has the incentive to make sure the loan is a good one i.e. is likely to be repaid. He gets the reward & he bears the risk. When the lender will spin off the loans he creates as part of a derititave it removes the incentive to insure the loan is a good one.

    You can talk about the growth of Real Estate Investors, the "interesting" loan products available, the (potentially) fraudulent loan originators, the (potentially ) fraudulent loan applicants, the severe leveraging of the major banks & banking houses, the politics of the CRA, or even the lack of the gold standard & existence of the Fed, when one separates risk & reward, problems will ensue.

  • Report this Comment On December 15, 2011, at 7:16 AM, dbjella wrote:

    DTF -

    The GSEs started the sub prime mess. Gradually, their underwriting engines started lowering their criteria which made more loans available at lower rates. Then they lowered them more and more.

  • Report this Comment On December 15, 2011, at 10:39 AM, Cedarjones wrote:

    This housing bubble would have never occurred without the active government pressure. That pressure came in the form of outright laws such as Fair Lending (if you make one loan to an unqualified borrower, you must make more loans to unqualified borrowers in order to be “fair”) and CRA (forces banks to make loans they would not normally make). Then there were more subtle changes like forcing FNMA and FHLMC to lower lending standards in the 1990’s in order to qualify more borrowers. Private lenders could not compete with the government agencies on price, so they were forced to lower lending standards even more in order to compete. The flood of newly-qualified borrowers caused a steady rise in housing demand, which in turn caused home prices to rise over a 12-15-year period. That long-lasting trend put the rating agencies to sleep so that by 2005 it appeared that as long as a house was attached to the loan, the loan would always be paid in full by the sale of the home even if the borrower defaulted. Give that loan an “AAA” rating! The financial innovations that took place in the 1990s, such as derivatives, guaranteed that highly-rated loans would always get funding, but derivates are only a vehicle to move money to those who need it (borrowers) from those who have it (money market funds, retirement funds, etc.).

    The flood of speculators who entered the housing market was the final straw. Easy money, no lending standards, and government cheerleaders did the rest.

    Recommendations to prevent a future disaster:

    1. Barney Frank must retire (DONE). He would have crucified any CEO of a private firm that played a far lesser role in a far smaller disaster.

    2. Repeal Dodd/Frank

    3. Repeal all Fair Lending Laws and CRA

    4. Wind down FNMA and FHLMC

    5. Repeal Humphrey/Hawkins and make the Fed focus upon maintaining a stable dollar.

    6. Quit blaming EVERYONE and focus on those who lit the fuse.

  • Report this Comment On December 15, 2011, at 11:04 AM, TMFHousel wrote:

    Question: If the housing bubble was caused by the govt forcing banks to make bad loans, then why did some banks (Wells Fargo) end up with a fraction of the defaults of other banks (Washington Mutual)?

  • Report this Comment On December 15, 2011, at 11:07 AM, TMFHousel wrote:

    <<Private lenders could not compete with the government agencies on price, so they were forced to lower lending standards even more in order to compete.>>

    No one forced anyone. Banks that were smart enough to not lower lending standards avoided the bust and are doing great today.

  • Report this Comment On December 15, 2011, at 11:38 AM, badnicolez wrote:

    What about the homeowners who did everything right but had bad timing?

    Had the bank given the slightest hint that I would ever be able to refinance my mortgage (for exactly what I owed) at today's interest rates, I never would have walked away (and I'm guessing they could have prevented at least a few hundred thousand foreclosures this way).

    But I didn't "qualify" to refinance. That's funny, because three years prior for the same house, same income, same everything, I qualified for $155k more than what I owed when I walked away. But the value of the house had fallen too far by the time they implemented the government refi program. So they expected me, because I could "afford" it, to pay twice what the house was worth at a much higher interest rate. No thanks.

    I would have even paid that much, had I been able to refi at a lower rate. But I did the math after they refused to do anything at all, found out I could rent in a nicer area for half the cost of my mortgage, and walked. It was a purely financial decision.

    The banks (and/or the government) could have prevented these losses and still made a significant profit on many loans, but were too greedy and/or shortsighted to help homeowners and themselves, I think because they knew it would be the taxpayers who would bear the burden if they did nothing at all.

    I find it amusing in a sick way that I made good on the two "liars loans" I got over the past ten years, while the full-doc conforming loan was the one I walked away from.

  • Report this Comment On December 15, 2011, at 11:41 AM, DJDynamicNC wrote:

    @Cedarjones: The CRA was passed in the 1970s. I'm interested in your analysis of how it impacted the housing market in the decades preceeding 2008, and what element specifically of the CRA led to a housing crash but took 40 years to have that effect.

    There is no such thing as a "Fair Lending" act (if only!) but I suspect you're talking about the "Fair Housing Act" which prohibits discrimination on the basis of race, color, national origin, religion, sex, familial status or handicap (disability) when making loans. You want to repeal THAT? Pardon my shock, but even aside the severe moral questions anyone would have over such a proposal, I don't even see how that would improve the economic picture.

    If that's not what you're talking about, can you cite me the law that requires "fair lending" of the nature you described? I'd be very interested in seeing that specific law.

  • Report this Comment On December 15, 2011, at 11:43 AM, TMFHousel wrote:

    When people discuss CRA, the difference between "encourage" and "forced" is often blurred. Makes a big difference.

  • Report this Comment On December 15, 2011, at 11:57 AM, DJDynamicNC wrote:

    The idea that homeowners who followed their bankers advice should be held solely responsible is ludicrous. I do not expect anybody to be an expert in EVERYTHING. The nature of the system is that sometimes you have to leave some things to the experts, especially complicated things. When I go through to make a financial decision and my banker - the professional who gets paid to study such things - makes a suggestion, I typically follow it. If I went to the doctor and he said I ought to do something, I'd probably do it, for the same reason.

    It's easy now to look back and say "well of course I wouldn't have gotten one of those loans! I know better!" And, of course, you do know better - NOW. Monday morning quarterbacking is as prevalent as it ever was, and about as valuable, too.

    But to suggest that everyone should have just been an expert and ignored the advice of the highly paid professionals, who could point to dozens of charts and graphs showing why subprime mortgages and second or third homes were profit machines, is to be willfully obtuse at best.

  • Report this Comment On December 15, 2011, at 11:57 AM, mm5525 wrote:

    True words, Morgan. WFC and JPM cut off our little broker shop in 2006-ish. These smarter banks eliminated third-party originators like us and instead chose to have their originators soley within their own employees in-house. One day we just got a notice: "Don't send us anymore business." However, there were always others such as CFC. GE Capital, Taylor Bean, and plenty of other armpit outfits who literally would have given a loan to a chipmunk and hardly bothered to underwrite the file. Everyone made money and was happy: The bank. The broker. The borrower. Yet not much accountability anywhere. Sort of like the Madoff thing - everything works well while home values go up: It's only when the tide goes low that you learn who's swimming naked.

  • Report this Comment On December 15, 2011, at 11:58 AM, DJDynamicNC wrote:

    ^^ Not directed at anyone's comment in particular, just making an observation.

  • Report this Comment On December 15, 2011, at 12:26 PM, TheDumbMoney wrote:

    Cedarjones, you are making a "but-for" causation argument. (Sidenote: God I wish everyone could get legal training, if only to train more people to pick out "but-for" from "proximate" causation, and to distinguish causation from corrolation.)

    Government policies (various) likely WERE a but-for cause of the housing crisis. ('But-for' means, that 'but-for those acts, the crisis would not have happened.) In this category, I would put, repeal of Glass Steagall, some Democrat-advocated fair housing policies, OTS preemption of ALL state anti-predatory-lending laws in mid-2003 with a much more laissez-faire policy in Section 560.2, and Greenspan's interest rate policies from 2001-2006. That does not mean they were THE cause. They were A cause.

    Also A cause, not THE cause, were greedy banks, greedy mortgage brokers, semi-currupt (or totally incompetent) credit ratings agencies, uncurious, incompetent pension fund investors, and greedy borrowers, and even a school system that failed to educate so many people about basic finance, while making sure they were instead vigorously tested about f^cking geometry.

    Without any one, or any few of these, the crisis probably would not have happened as it did. I am so f^cking sick of ideologues on the Right and the Left each trying to fit the facts to their predetermined ideologies. It doesn't work. It is not true. It was not "all Bill Clinton's fault." It was not "all the banks' fault," or the "1%'s fault." It was not "all Greenspan's fault." It was a titanic systemic failure, where the Left caused bad ideological OVERregulation in some areas, the Right caused bad ideological UNDERregulation in other areas, where the Fed screwed up, where states screwed up, and where thousands of banks and millions of individuals screwed up. Period.

    Love and hugs,

    DTAF

  • Report this Comment On December 15, 2011, at 12:51 PM, Cedarjones wrote:

    @DJDynamicNC:

    You are correct about the “Fair Lending Laws”. There are actually a series of laws that started with an attempt to stamp out “redlining” (a problem we have not seen for 40 years) and have since been revised and adjusted to make sure regulators have something to do in the years since. I’ll post the specific laws later. I believe the last major revision to one of the laws was during the Clinton era when it was given more "teeth".

    The upshot is that lenders must make loans equally available to everyone or equally unavailable to everyone. The penalty for the mere appearance of discrimination is immense and can result in criminal prosecution from the DOJ. If that’s not government coercion at its worst, then I don’t know what is. You can blame the pressure of these various acts for subprime lenders making sure that “No-doc or "Low-doc subprime” loans were available to everyone for the asking. To make those loans available to professionals only (which is why they were created because a doctor or lawyer usually cannot produce a W2), would invite a criminal inquiry!

    As for the CRA, that’s another pernicious law that had an indirect effect on housing prices. It started a cottage industry of loudmouths who were never satisfied with a few loans to “underserved” or “poor” areas. The supporters of CRA grew in influence until our elected officials felt it was their business to make sure everyone had the opportunity to own a home. By the 1990s this influence led the government to shift regulators over FNMA and FHLMC. A division of HUD was put in charge of those lending giants. Safety and soundness became an afterthought. The new “regulator” immediately mandated that 42% of the loans should go to “low income” individuals. Lending standards were relaxed in order to meet the new mandates, which started the cycle of ever-lower standards until 2005 when had no standards at all.

  • Report this Comment On December 15, 2011, at 12:57 PM, jrj90620 wrote:

    Seems to me that if govt is going to back these banks with deposit insurance and other support they should require that lenders get at least 20% down payment.Now we have the FHA offering near zero % down payments.Looks like they never learn.

  • Report this Comment On December 15, 2011, at 12:58 PM, TMFHousel wrote:

    ^ The vast majority of now-defaulted mortgages issued during the housing bubble were not subject to CRA regulation. They were made by private mortgage lenders, not depository institutions. It's not causation, but several studies have noted that mortgage standards fell after CRA regulations were *weakened.*

  • Report this Comment On December 15, 2011, at 1:07 PM, Turfscape wrote:

    Morgan,

    Thanks for keeping the quotes from the LA Times and Ocala Star-Banner in the public eye. It horrified me at the time how much real estate was being pushed as a no-lose proposition, not just by media outlets, but by financial advisers...(and real estate agents "pretending" to be financial advisers). Hold their feet to the fire!

    I spent much time rebutting pitches for house purchases and trying to convince people that a house should be viewed as a liability, not an asset, from a financial standpoint. I was mocked many times for my staid, boring view of judging investments on their existing financials instead of projected scenarios. How silly of me, right?

  • Report this Comment On December 15, 2011, at 2:45 PM, velodad wrote:

    I have purchased several houses over the past 20 years and rent them out. My plan was to purchase at least 5 properties so as to leave one to each of our children. I have only 3 so far, but each is self-supporting and I have never reduced rental rates with the changing property values.

    There is no reason for a properly structured and managed rental property to lose money or go into foreclosure. The landlords who skimmed rental income to live on rather than pay mortgages are likely the ones who defaulted.

    Since this is the best market conditions to be a buyer in decades... I am currently shopping for the last 2 properties to complete my "plan".

  • Report this Comment On December 15, 2011, at 3:11 PM, DJDynamicNC wrote:

    @Cedarjones - I was unable to find any reference to a 42% benchmark under HUD regulations for low income serviced loans.

    I was, however, able to find this study on the CRA's effects on lending and foreclosures as contrasted with non-regulated institutions making loans to the same demographic:

    http://www.frbsf.org/publications/community/cra/cra_lending_...

    I also found this article from 2008 which addresses each of your claims systematically: http://www.mcclatchydc.com/2008/10/12/53802/private-sector-l...

    And as Morgan said, the vast majority (over 80%) of defaulted mortgages were issued by banks that were NOT covered by CRA, which poses some difficulty for your claim that the CRA is responsible.

    I look forward to your citation of the specific law in question regarding "fair lending," and I'd also like to request you throw in your source for the 42% figure, since I was unable to find it.

  • Report this Comment On December 15, 2011, at 3:16 PM, DJDynamicNC wrote:

    @Turfscape: "I spent much time rebutting pitches for house purchases and trying to convince people that a house should be viewed as a liability, not an asset, from a financial standpoint."

    I cannot applaud this view loudly enough. You're exactly right.

    My stock certificates never need a new furnace, I don't pay property taxes for holding them, I don't need to pay for fuel to mow their lawn, I don't need to repair their roof when it rains, I don't need to pay for an automated security system to protect them, and if they lose all their value, I'm not out on the street.

  • Report this Comment On December 15, 2011, at 4:27 PM, mm5525 wrote:

    What DJ fails to mention is the subprime private lenders had to compete with a constant threat of the "Fast and Easy" (a Govt-sponsored program) no-doc lending program backed by Fannie/Freddie/Ginnie, where the govt-backed loan offered a much better interest rate than they did, yet asked for no income verification whatsoever. None. Just a good credit score. How conveinent this is that he omitted such a commonly known fact from his statements. The brokers made more to steer borrowers to the private lenders, thereby earning more money, but the govt. was always there with the fast and easy program. There was always a place to send the loan, and the governmet provided that backstop.

    He also fails to mention the fact the GSE's gobbled up tons of subprime debt that had been refinanced year after year, clearly being able to see multiple refinances in the chain of title over the past decade, but of course it was all ignored and approved.

    Anyone can quote a study saying something supporting of his particular point of view, but do not think for a fleeting moment the govt. had no role here. He also fails to mention that both regulated and non-regulated companies grossly failed to be properly regulated by existing laws already on our books. What's the solution? Blame the banks and increase regulations, and then complain why banks don't lend and would rather buy Treasurys at even 1.90% over 10 years rather than risk lending to a borrower who will dream up of every reason known to man why they don't deserve the loan they signed up for and will blame even the moons of Saturn for why they were tricked, connived, mislead, and manipulated into their loan.

  • Report this Comment On December 15, 2011, at 5:28 PM, DJDynamicNC wrote:

    @mm5525: So to review, what we just had was:

    Interesting claim. You said that there is a "Fast and Easy" program for no-doc lending. I couldn't find that on any government website (although a search for "Fast and Easy lending" came up with a ton of private institutions of dubious reputation). Can you cite the proper name of this alleged program so I can verify the claim?

    You also claimed that the private actors "had to" compete with this alleged program, as though they were incapable of making decisions on their own or would have failed as a business if they hadn't done so. Given that this is demonstrably untrue (several banks did not offer these loans, and the vast majority of credit unions did not either, and both groups are in a better position than their subprime lending peers), it's tough to see where you're going with this claim.

    On the same topic, here's a fun quote for you from Allen Fishbein, studying the topic in 2002, WELL before the crisis hit: "Interestingly, subprime market growth in the 1990s occurred largely without the participation of Fannie Mae and Freddie Mac." Since this ever so slightly completely contradicts your point that the private market simply followed Freddie Mac and Fannie Mae into subprime territory, you may wish to consider investigating the claim a bit further.

    And finally, you end your post with "[a]nyone can quote a study." Of course, that doesn't appear to be the case - you didn't quote a single one.

    I look forward to your evidence for your claims. I am happy to be proven wrong and thus gain a better understanding of the world; but I would like to be PROVEN wrong, and not just assumed so.

  • Report this Comment On December 15, 2011, at 5:29 PM, DJDynamicNC wrote:

    ^^ Ignore that first sentence; started out on one path and wound up on another, and forgot to delete my previous steps.

    I'm getting old, I suppose.

  • Report this Comment On December 15, 2011, at 5:53 PM, Cedarjones wrote:

    @DJdynmaicNC:

    Here's a document that might interest you regarding low-income lending targets at FNMA and FHLMC:

    http://www.huduser.org/publications/pdf/gse.pdf

    Pay particular attention to P. 3 and to the conclusion.

  • Report this Comment On December 15, 2011, at 6:01 PM, mm5525 wrote:

    Here's your evidence, Captain Obvious. Next question, please. You have considerable fortitude to argue with someone who spent their living in the industry to just spew nonesense.

    http://www.econbrowser.com/archives/2008/05/fast_and_easy_f....

    http://www.laobserved.com/biz/2008/04/fast_easy_at_country.p...

    http://creativefinancing101.com/204/countrywide-fast-and-eas...

    http://www.msnbc.msn.com/id/29827248/

  • Report this Comment On December 15, 2011, at 6:14 PM, mm5525 wrote:

    Oh, wait, there's more.

    http://reason.com/archives/2011/03/04/the-truth-about-fannie...

    http://hotair.com/archives/2010/07/08/good-news-no-doc-liar-...

    And lastly, just call this a mercy killing, this has to suck for your view:

    http://seekingalpha.com/article/75397-fast-and-easy-fannie

    Either everyone else is wrong, or you are. Think before you speak. Back up your facts rather than spew nonesense. The world will be a better place.

  • Report this Comment On December 15, 2011, at 6:26 PM, TMFHousel wrote:

    I don't think anyone disputes that Fannie or Freddie had a hand in the bubble. But by no means was it the only role, or even the biggest. Fannie and Freddie's market share dropped considerably during the bubble years (from 70% to 40%) because private lenders and private secularization reduced standards to next to nothing.

    http://www.ritholtz.com/blog/wp-content/uploads/2011/02/OB-M...

  • Report this Comment On December 15, 2011, at 6:32 PM, TMFHousel wrote:

    ^ securitization*

  • Report this Comment On December 15, 2011, at 6:41 PM, DJDynamicNC wrote:

    Ahh, thank you sir, that's what I was looking for, evidence.

    Your claim: "Fast and East (a gov't sponsored program)" was somethign that private lenders "had to" compete with.

    That's really two claims, but the first one is that "Fast and Easy" was a government sponsored program. Interestingly, every link you cited claims that Countrywide - a private lender - was the one that managed "Fast and Easy." Can you square that with your claim that it is "government sponsored"? In what sense did the government sponsor it?

    The second claim, that lenders "had to" compete with it, has been dealt with adequately.

    You failed to address my point that Fannie and Freddie followed the market into subprime, not the other way around.

    You quoted four articles about Countrywide, two opinion pieces from conservative websites, and then for a "mercy killing" you quoted your first citation a second time via a different source, which was admittedly confusing.

    You also knocked down a strawman claim - at no point did I or anyone else claim that Fannie and Freddie played NO role in the crisis. The claim I am making is, in fact, a counter-claim to those who state that Fannie and Freddie (and the government) should bear ALL of the blame, which is patently false.

    Good progress though, I asked for evidence and you provided it, I'm perfectly willing to be proven wrong if you have the evidence. I don't think we're quite there yet though - let me know how the government sponsored Countrywide's Fast and Easy program, and if you can prove that point, then we can progress to determining why it is that you feel Fannie and Freddie and the gov't should bear ALL of the blame for the crisis (if, in fact, that is your ultimate claim).

  • Report this Comment On December 15, 2011, at 7:21 PM, whereaminow wrote:

    All bubbles have their root cause in intervention. In the modern world, central banks are the primary intervention. Money is half of every transaction and central banks have a monopoly on the issuance of it. Low interests are targeted to spur investment. Rates can only be driven low for long periods by intervention via manipulation of the supply of money. So the central bank pours the gasoline, lights the match, and then hires shills to blame "excess greed" or some other 3rd grade explanation for the masses when it all goes up in flames. Google: "How the Federal Reserve bought the economics profession."

    Before central banks, intervention in the money supply was still common, whether it was suspension of payment supported by government law or outright debasement committed by the king's treasury.

    Fannie and Freddie are interventions as well, but they're just the tip of the iceberg.

    David

  • Report this Comment On December 15, 2011, at 7:22 PM, mm5525 wrote:

    DJ, since you apparenly do not want to post any sort of link yourself, let me ask you a few questions: Did Fannie, Freddie, and Ginnie buy up those Fast and Easy Countrywide loans? Yes or No?

    The answer is yes. Otherwise, they would have never gone through.

    Rather than argue the core of the matter, DJ wants to argue semantics. Was "Fast and Easy" a government sponsored entity? No. I misspoke. But did the government buy it (and insure it) hook, line, and sinker? Yes.

    There are plenty of bad actors in this play. I do highly resent someone somehow seemingly giving the government a free pass, though. Especially when they guy wants to scrutinize my links and never post any of his own.

  • Report this Comment On December 15, 2011, at 7:27 PM, TMFHousel wrote:

    <<The answer is yes. Otherwise, they would have never gone through.>>

    The answer is yes, but I disagree with the last part. The private, unbacked, unguaranteed securitization market lapped up subprime junk faster than Fannie or Freddie could. That's why Fannie and Freddie's market share plunged during the bubble years.

  • Report this Comment On December 15, 2011, at 8:06 PM, mm5525 wrote:

    And you just have to frankly love (lovingly chuckle at) a guy (DJ) that will attempt to argue insuring a loan is not the same as sponsoring it. It's all about the definition of the word "is" is I guess.

  • Report this Comment On December 16, 2011, at 2:31 AM, DJDynamicNC wrote:

    I think it's reasonable to be confused by the attempt to claim that "sponsored" means the same thing as "purchased in quantities that represent a small portion of the overall market in the normal course of business."

    And you can't start out your response to the thread with "anybody can post a link to a study" and then conclude with "and you haven't posted any links!" These directly contradict. One or the other, please.

    That said: we are in accord that many actors deserve blame for the crisis.

  • Report this Comment On December 16, 2011, at 6:31 AM, dbtheonly wrote:

    Morgan,

    You were right the first time last night with secularization.

    When the loan originator can sell the loan he no longer needs "faith" that the loan will be repaid.

    "mm"

    Insurance is not sponsorship. A quick trip to the OED would teach you that.

  • Report this Comment On December 16, 2011, at 11:58 AM, Ironbob wrote:

    What killed the goose is that these 2nd, 3rd, 4th time home owners WALKED AWAY FROM THEIR LOANS AND LET THE BANK DEAL WITH IT. Literally walked away as in one day they found it was easier to stop paying then to lose money regardless of what it did to their credit history.

  • Report this Comment On December 16, 2011, at 12:21 PM, FoolSolo wrote:

    That part that stinks the most is the folks that did it right, that bought homes they can afford, that didn't get upside down or underwater, are the ones that got screwed and left behind in this mess. I'm still paying my 5.75% mortgage, and my taxes, and I didn't get any handouts, or any breaks. But many "speculators" and other unscrupulous people sure did.

  • Report this Comment On December 16, 2011, at 12:52 PM, jwilste wrote:

    I guess you are blaming me and my wife. Well, we own 9 houses, 6 of them rented. I guess we were greedy, took out conventional loans, made every payment, provided clean wholesome places for people to live. I do think it's a stretch to blame home buyers for the collapse of the market. It's like saying consummers have to artificially pay higher prices to keep capitalism going. When through their own folly or otherwise when individuals or institutions get into financial trouble it creates bargains for buyers who have resources. Anyone who buys on wishful thinking rather than analysis is risking their money and I wouldn't have any other way.

  • Report this Comment On December 16, 2011, at 12:58 PM, conwaymech wrote:

    I am an investor and have been for 40 years. While young I pushed but was energetic enough to work 4 jobs to carry it. When this last bubble started I realized that low rates don't make values increase and prevented my sons from falling into the trap. After the crash I added 2 more wuth 25% down which insulated me from further drop. I charge moderate rents to well qualified tennants and make a small return on my investments. Get rich quick is not in my strategy, paying off the loans is. If you cover your payments and taxes and clear 9% on the cash you have invested you match my strategy. At this rate you have write-offs for your other income while the property gets paid for and appreciates and some money going back for the next one.

  • Report this Comment On December 16, 2011, at 1:36 PM, fishmeluck wrote:

    Who was really responsible? The banks. Sure, you can always claim someone shared responsibility. That's what people say about people who get taken by grifters, too.

    When someone is conned, or defrauded, or robbed, it often is because that person is greedy, or gullible, or incautious. That doesn't mean it is he who committed the crime. It is not a crime to be greedy, gullible, or incautious.

    In the U.S., the monetary system is run by the Fed, a cartel of private banks, owned by and operated for the benefit of a few huge commericial banks and the richest of the rich.

    When that cabal decides they want to expand credit, then they expand credit until the economy can take no more. A grand, multi-decades long, housing bubble was one of the results. Combine expansion of credit with financial industry lobbying of Congress to repeal Glass-Steagull and promote intemperate support of Fannie and Freddie, rampant fraud in the MBS markets, over-leveraged banks, and there you have the causes of the Financial Crisis in a nutshell.

    It is predictable that under such conditions, many people (suckers) will be drawn into market manias. But, blaming the suckers for being drawn in is no different than blaming marks for being grifted by con men. Sorry, they were not the cause, they were the result.

  • Report this Comment On December 16, 2011, at 1:47 PM, timmer47 wrote:

    Bubbles and booms are part of a free enterprise

    system. Making loans to people who can't begin to pay them back is the key to how the mess could have been avoided. Alan Greenspan could and

    should have intervened. He fanned the fire with

    40 year low interest rates. He left us with a multi-trillion dollar bailout tab. Multiple presidents and congresses are to blame for such massive government subsidies and interference in the housing market.

  • Report this Comment On December 16, 2011, at 1:57 PM, Bonefish100 wrote:

    As the market was peaking five years ago, a builder friend of mine told me he was pulling back his activities. He said, "When housewives start building spec homes it is time to get out." He's a wise man.

    This is my third recession since I entered the real estate and construction business. Every time it was the same thing...people simply got greedy with the easy money...easy to borrow, easy to buy, easy to count your eggs before they hatch.

  • Report this Comment On December 16, 2011, at 3:41 PM, Hawmps wrote:

    On December 14, 2011, at 9:22 PM, don12string wrote:<<The fuse was lit in 1993-1994. I know this will raise the hackles of many but political correctness be hanged. Slick Willie Clinton kicked it off with his mandate to Freddy, Fanny, Countrywide and the banks with his declaration that everyone will be eligible to buy a house no matter whether they can afford it or not.>>

    This is absolutely true. Not everyone is cut out to be a home owner and there is nothing wrong with being a renter. To be a home owner, you must have at least some sense of bugeting and putting away some kind of reserve for maintenance and emergencies. A 20% downpayment should be the #1 criteria for being approved for the loan... if you can't put away that much cash over a period of time, then you may not be cut out for the responsibility of home ownership. Many people have a hard time thinking past their next two pay checks and they are probably not cut out for home ownership. I have had plenty of good friends over the years, that I love dearly, but they have no business being a home owner; they and their family are better off renting. Slick Willie's moves in '93/'94 created artificial demand over time from people that would not have been potential buyers otherwise which fueled artificial price appriciation compounded by this huge new pool of potential buyers; that had no business even applying for a loan much less being qualified.

    Aside from that, too many other great comments to reply too, and not even going to touch on Barney Frank... poster child for term limits so a couple comments on some of the themes I've read...

    A house is not an investment, it is a liability sucking money out of your pocket every month unless it pays you to own it (rent). Attending a local real estate workshop or investment club is an excellent way to learn about what it takes to be a landlord and rub elbows with people that are doing it.

    I do not like being a landlord, but I love my real estate investments. You don't have to be a landlord to invest in real estate, but it is very difficult to do if you're not IN the real estate business in some capacity or have connections to the business. You also need to have the right team in place. Investing in real estate should be viewed as going into business and you should treat it as such and own it as such. I have one single family rental home as an investment and it is the only property I actively landlord... and it really isn't that bad to be a landlord. This was my first real estate purchase, I've owned it for over 10 years, and I was able to leverage it to get into bigger and better real estate investments when I was ready... REPEAT... when I was ready.

    There's a saying amongst real estate investors, "Real Estate has a 10 year cycle, but only a 5 year memory." So, '93/'94 is when Clinton pushed his ideals, give it 2-3 yrs to get implimented and take hold (government) and the market begins to cycle up, fast forward 10 years to 2006/2007... pretty close. If the cycle holds relatively true, the market should begin a new "real" upcycle around 2018-2020 and we'll be doing this all over again in some other capacity by 2030. It will probably happen sooner than later, but the cycle and the implications are the same.

    On a final note, financial literacy should be required 11th and 12th grade curiculum. A 12th grade graduate should be able to understand amortization; it is not rocket science. Too many adult Americans don't know how to balance a checkbook and many of them bought a home in the last 10-15 years.

  • Report this Comment On December 16, 2011, at 7:41 PM, SteelThumb wrote:

    Hawmps - I'm not sure teaching financing is desirable. It is a failed science. Surveys of economists have demonstrated that they represent the crowd, not wisdom.

    As far as the broader topic of what created the bubble, let's face it- individuals, businesses and government were all throwing timber into the housing blaze. The madness of the crowd can be powerful. Other debt bubbles are still waiting to deflate in the aftermath of the big asset binge.

  • Report this Comment On December 16, 2011, at 8:17 PM, Sunny7039 wrote:

    Sigh! The real problem is that there is NO simple way to explain how this bubble happened, when its inflation could not have taken place absent a whole host of unregulated "exotic" derivatives and swaps. The latter are, by nature, hard to explain in a soundbite.

    Let's think for a minute. If London and Toronto and Vancouver and Sydney, etc., etc., all had housing bubbles too, then clearly Fannie and Freddie could not have been the main reason, any more than Barnie Frank could be the main instigator. Were banks "forced" to make loans, as some claim? Uh, since when do you have to "force" someone to do something that will bring them the largest bonuses known to human history?

    I read a whole bunch of books about this, and liked Simon Johnson's and James Kwak's the best. Posner's is good, too, as is Roubini's. Matt Taibbi and John Lanchester gave good journalistic accounts. What I liked best about Taibbi is that he explained the average person's distrust of government regulation, and showed how it wasn't irrational. His clear-eyed treatment of the whole subject sure got a lot of people mad at him, and scared. He debunks the standard Tea Party thesis without elitism or condescension. How scary is that?

    In short, there is no short answer to how this happened. Not this time.

  • Report this Comment On December 16, 2011, at 8:30 PM, Sunny7039 wrote:

    I also think it's kind-of funny that so many people are treating this bubble in isolation, as if the Dot-Con bubble didn't precede it, and the savings and loan debacle never occurred, either.

    Gosh, but Barnie Frank sure is one powerful guy. Anyone got him on speed dial?

    http://harpers.org/archive/2008/02/0081908

  • Report this Comment On December 16, 2011, at 8:38 PM, Hawmps wrote:

    On December 16, 2011, at 7:41 PM, SteelThumb wrote:

    Hawmps - I'm not sure teaching financing is desirable. It is a failed science. Surveys of economists have demonstrated that they represent the crowd, not wisdom.

    I was referring to teaching financial literacy in our schools. This should include very basic stuff, terminology, how interest works, and how a loan works, so they can understand and speak the language. I believe 16, 17, and 18 year olds should be taught how a car loan works in an academic environment, rather than at the dealership. I believe 16, 17, and 18 year olds are smart enough to understand a mortgage loan, and bringing up the subject in school might encourage some dialog at home. If nothing else, when they go to buy a home they have had at least some minimal exposure and don't rely souley on their mortgage broker. I've come across too many people in our society that don't have a clue.

  • Report this Comment On December 16, 2011, at 9:01 PM, Sunny7039 wrote:

    Well, the very first thing you could teach high schoolers is the real definition of debt.

    It's a contract you sign that gives someone else a right to a share of your FUTURE earnings. The earnings don't exist yet, and someone else already has a right to part of them.

    Gee, but that doesn't sound so good, does it? Maybe it's a way to get people interested in the math behind it, though.

  • Report this Comment On December 17, 2011, at 12:39 AM, Xman0803 wrote:

    Many variables created the housing bubble but federal policy certainly opened the floodgates. Home ownership rates become a metric of the America Dream; made worse by Clinton. Under Clinton it was a strategic objective to reverse falling rates. Lenders saw this opportunity to profit via the creative lending policies extended to the masses willing to overextend. I blame the government’s insistence on increasing homeownership rates as the root cause. Sure too many didn’t understand what they were signing- where was the governments oversight or care then? Next in line, healthcare…another topic

  • Report this Comment On December 17, 2011, at 2:16 PM, Pinpress wrote:

    We got sucked into buying at a housing high in 1989 and lived with an upside-down loan for 15 years. When we finally sold and bought a better house in 2005, it was inevitable that it would also end up in the same financial straits. We're ready for the next bubble, though: at the next high we'll sell this house and wait for the crash by renting for a few years. And THEN buy that retirement home. But yeah, we're in that small boatload of people who are dutifully paying on mortgages that far exceed their home's value and now can't even get a better interest rate.

    Re: teaching high schoolers about finance. The biggest problem is that people have no self control and don't seem to be able to follow the dictum: spend less than you make. I've seen plenty of smart people who know the ropes, understand debt, etc., but can't stay within their means. Understanding the essentials of credit, debt, and interest won't hurt, but they need to start with an emphasis on managing spending and resisting advertising that says, "Buy it because you deserve it."

  • Report this Comment On December 17, 2011, at 10:28 PM, UFOFred wrote:

    @dumberthanafool:

    >>> The Right wants to blame only the GSEs and Barney Frank (and the Ron Paul faction will throw in the Fed as well). The fact that the GSEs were quite late to the subprime game, and that the crisis was international, are selected facts they persist in ignoring. <<<

    What does Grapefruit Seed Extract have to do with the housing bubble?

    @ dbtheonly

    >>> You can talk about the growth of Real Estate Investors, the "interesting" loan products available, the (potentially) fraudulent loan originators, the (potentially ) fraudulent loan applicants, the severe leveraging of the major banks & banking houses, the politics of the CRA, or even the lack of the gold standard & existence of the Fed, when one separates risk & reward, problems will ensue. <<<

    What does Canada Revenue Agency have to do with the housing bubble?

    Please folks, minimize use of TLA's**, especially those that are not defined.

    ** TLA = Three Letter Acronyms.

  • Report this Comment On December 18, 2011, at 9:57 AM, menefer wrote:

    As a real estate investor, I believe investing in real estate is safer than the stock market. If people invested in stocks using margin they lost their investments just like the real estate investors using extreme leverage. I also invest in stocks and have over a long time period made much more money in real estate. Just be a conservative investor and be careful what you invest in and you will be fine in real estate or equities.

  • Report this Comment On December 18, 2011, at 12:33 PM, skylobadass wrote:

    The mostly avoided simple reality is that the Democrats featuring Dood, Frank, Kerry, Shummer & Obama all pushed for millions of unworthy credit customers with almost no cash down to become part of the American dream which they thought to be a huge expensive home or multiple homes. President Bush, Chaney & McCain and many other Replublicans tried unsuccessfully to stop the run on liar loans. Those were loans where someone have some credit but could produce a good credit score and lie about the co-maker with high unsubstantiated income. Simply a ponzi scheme under a different name and now these idiots have made regulations so tough that a perfect credit customer must go thru hell to get a paper work nightmare approval.

  • Report this Comment On December 18, 2011, at 7:06 PM, dbtheonly wrote:

    UFO,

    No acronyms?

    A-OK.

    Though for myself I'm still trying to figure how "Skylo" blames President Obama fro crashing the housing market two years before he's inaugurated.

    I guess it's true, Fox News makes you dumber.

  • Report this Comment On December 19, 2011, at 4:33 AM, Sunny7039 wrote:

    Again, if this was all because of some fraudulent pushing by politicians of "the American Dream" on people who could not afford to be homeowners, then why was there a GLOBAL housing bubble? Not just here, but in major cities all over the world.

    Was there a London Dream, a Sydney Dream, a Hong Kong Dream, a Vancouver Dream, . . . ? A Dream for every bubble?

    Dream on.

    Politicians are responsible, all right -- for governing in favor of the largest global investment banks and their get-rich-quick schemes, instead of the people whom they are supposed to represent.

    Don't take my word for it. Consider Simon Johnson's:

    http://www.theatlantic.com/magazine/archive/2009/05/the-quie...

    "Simon Johnson, a professor at MIT’s Sloan School of Management, was the chief economist at the International Monetary Fund during 2007 and 2008."

  • Report this Comment On December 19, 2011, at 4:50 AM, Sunny7039 wrote:

    More to the point -- even absent the bubble, literally pretending the bubble never happened:

    How could anyone believe that an entire generation would one day be able to live off of their house via a reverse mortgage, and that housing values would never decline?

    Wasn't that idea an obvious non-starter?

  • Report this Comment On December 19, 2011, at 8:02 AM, Zankudo wrote:

    Tulips, Florida real estate, the Roaring Twenties... nothing new under the sun and all a result of NO regulation on nothing..yeh it is a double negative. WS caused financial Armageddon creating financial instruments of mass destruction. Cause you can do something don't mean you should. Repealing Glass-Steagall, failing to regulate CDSs, letting Mexican-American strawberry pickers who make 17 grand a year buy a 700,000 house and just pure greed caused the problem. The people who lend the money have the responsibility to NOT lend it. At the end they were eating the tulips.

  • Report this Comment On December 19, 2011, at 8:27 AM, devoish wrote:

    DTAF,

    Correct. At least i agree, anyway.

    Best wishes,

    Steven

  • Report this Comment On December 19, 2011, at 6:13 PM, Waltermouse wrote:

    "...one-quarter and one-third of those who have succumbed to foreclosure during the housing bust haven't necessarily lost their home, but their second, third, or fourth homes -- their investments, in other words."

    The argument rests on not on the data but on how you PRESENT the data. This statistic ALSO tells us that two-thirds to three-quarters of those who suffered foreclosure DID lose their homes (and their investments) . . . because of . . . ? (I think we all know the answer, don't we?)

  • Report this Comment On December 21, 2011, at 2:15 AM, richardrollo wrote:

    I live in the suburban Los Angeles area and there have been two foreclosures up the street from me, three more on adjacent streets, and three "pre-foreclosures" listed nearby. These were all buyer occupied homes. Before the bubble began, I thought Southern California real estate was over priced in many areas. Houses that originally sold in 1949 for $10,000 now selling for half a million. This, long after the core of the Southern California economy---defense spending---had departed. Several things caused this bubble in addition to the ones commonly talked about. 1) Real estate is not an industry onto itself. It benefits from a growing economy but cannot create economic growth. 2)Some, but not all banks, lost their sense of "moral hazard." Washington Mutual, for example, granted 8 mortgages to a real estate investor in Orange County who had been previously convicted of real estate fraud and embezzlement. It was just party time in their offices. 3) People who should have known better got caught up in the frenzy. People refinanced their houses to buy Lexus automobiles and other luxury goods that their incomes would not otherwise have justified. People laughed at me for driving old cars and not taking the equity out of my house to buy luxury cars. Those people are now under water and my old cars are still running fine.

    I'm not sure the lessons have been learned yet, though.

  • Report this Comment On December 21, 2011, at 3:20 AM, happyhouser2 wrote:

    Bought 1-acre horse property with new 2100 sq. ft. house in outer suburb of LA 1978 for $80K. Appraised @$900K in 2006, but now still worth $650K because I added nice landscaping and guest house for $150K pay-as-you-go. So my total investment is $250K, and my mortgage never exceeded $100K fixed rate. I rent out the guest house to cover expenses (prop.tax, maint. & utilities) so I now live free on nice estate with mountain view. Sure, a house can be a liability if you were dumb enough to pay too much or bought in bad location, or got crazy loan. Otherwise it can be a great asset and savings vehicle.

    Also bought slum house in 1980 for $25K, fixed and rented it; sold 10 years later for $65K. Profit went into 1031 exchange for 2 Palm Springs condos @ $55K each. They reached $175K each@ bubble height but sadly I didn't sell them then. However, rentals have been profitable, and guess what- tenants have paid the mortgages down to $14K each over the years besides giving me positive cash flow. It's hard to lose a property whose mortgage is down to $14K when you can get $800/month rent.

    I'm not bragging, just pointing out that as the old adage says "the blessing is in the buying". Buy at the right price and it's hard to go wrong in any market. Real estate buyers need to learn what house construction really costs and also what's likely to happen to a given local area, just as stock buyers need to know what makes a company and a sector tick. Many house buyers during the bubble paid $400K and $600K for houses that cost only $100 to $125 / square foot to build (but had the requisite granite countertops, stainless appliances and crown molding to appeal to the wives) and weren't worth half of what they paid, while the builders (and lenders) walked away with fortunes. Judge a property on it's replacement cost, not it's sale price or appraised value. You wouldn't buy a stock with a 40:1 P/E ratio either unless you were day-trading and ready to dump it next day. Real-estate usually has to be a long-term "value" investment because you never know when the bubble will burst.

  • Report this Comment On December 21, 2011, at 1:29 PM, 1drumlover wrote:

    So, in the scheme of things, the one third is still not the majority. They were speculators, the good old American tradition of trying to profit in the housing market. Why are you trying to make that sound like a bad thing or they got what they deserved plus, they were not thrown out on to the street? Really?

    The banks predatory lending practices of giving any warm body lots of money is the fault of the idiot who said "really, I don't even need to document my income and I can still get a big fat mortgage? I'll take it!!!!!" Some blame? For sure!!!! But not even in the vicinity of the brunt of the blame.

    Clearly the onus lays with the companies who control the "lending". Money lending is tight now, it should have been then as well and we wouldn't be having this conversation.

  • Report this Comment On December 21, 2011, at 7:49 PM, Applegate59 wrote:

    My wife and I owned fourplexes and duplexes as investments from 1988 to 2005, when we sold our last property. It sold in four days for above asking, which stunned us at the time. Even though we were tired of the landlord biz, we did our due dilligence to look around at other rental investment opportunities. But the prices were whacky, way above what rents could support. We looked at each other and knew right then what was happening: speculative bubble. we took our gains, paid our taxes and got out of housing. We've made our share of investing mistakes, but staying in real estate in the late 2000s was not one of them.

  • Report this Comment On December 21, 2011, at 9:22 PM, damilkman wrote:

    The individual who mentioned that lending standards were to blame is right on in my opinion. When I bought my first home in 1996 it was like pulling teeth to get a loan. Every little financial tidbit of my life was evaluated. In 2001, and when I refinanced in 2004, the banks barely looked. It seems were back to older standards as despite very sound finances, a refinance in 2011 generated a lot more questions again.

  • Report this Comment On December 22, 2011, at 12:03 PM, whereaminow wrote:

    ----> The Right wants to blame only the GSEs and Barney Frank (and the Ron Paul faction will throw in the Fed as well). The fact that the GSEs were quite late to the subprime game, and that the crisis was international, are selected facts they persist in ignoring.<----

    Well, the dollar IS the reserve currency for the world, right? So when the Fed manipulates the money supply to create a boom as it did for twenty years, that is going to affect every country that holds dollars, will it not?

    So the crisis being international in scope does not help the Federal Reserve's case. In fact, it points to the stupidity of other nations to think that the US will promote a sound monetary system.

    Yes, I am thankful that other nations are led by even bigger morons than the United States. U.S.A.! U.S.A.! U.S.A.!

    But that doesn't mean the Fed isn't a viper's nest of incompetents and megalomaniacs.

    GSE, of course, stands for Government Sponsored Enterprise, which is yet another intervention in the market system.

    A commentor above made the unsupported claim that the free market causes bubbles and busts. Nothing could be further from the truth. As Ludwig Von Mises demonstrated in a logical proof in his 1912 book The Theory of Money and Credit, interventions in the free market system are the cause of booms and busts. The market always clears, always moves toward correction, unless an outside agency is intervening with that process.

    The operations of the Federal Reserve and outright government intervention in the form of GSE's, are obvious examples of an outside agency distorting prices, refusing to allow the market to correct, preventing the market from clearing.

    This is where booms and busts come from. Ultimately, what really caused the housing bubble is the non-voluntary, coercive, violent sector of the economy: the STATE.

    David

  • Report this Comment On December 23, 2011, at 9:43 AM, skypilot2005 wrote:

    Morgan,

    First. Very informative article. Thanks.

    I was with you until:

    “A large number of those who have lost their homes had no business owning them in the first place.”

    This statement is unsupportable, factually.

    I have a couple of friends who have done very well with rental properties / homes.

    As I recall, the terms for such loans are / were different than those for primary resident home mortgages. For example, a minimum of 20% down verses 5%. The interest rates were variable not fixed and above those for primary residence mortgages. Freddie and Fannie would not buy them, individually. Many banks would “keep” them in their loan portfolios instead of selling them. If they sold them, it would be in packages to investors still keeping the servicing.

    I dated a very successful mortgage originator a while ago. She said the government would ask for the demographic information of all borrowers. They tracked this information specifically by lender.

    Her observation / experience was that borrowers that were demographically under represented for loan approvals were approved more quickly and with less rigorous loan qualification than identical majority demographic borrowers.

    Yes this antidotal but, I’ve heard too many corroborating tales to dismiss it out of hand. It has had an unintentional negative effect on our economy. I submit that is where the problem was.

    David wrote:

    ” The operations of the Federal Reserve and outright government intervention in the form of GSE's, are obvious examples of an outside agency distorting prices, refusing to allow the market to correct, preventing the market from clearing.”

    I am with David. Government needs to stay out of this area. “Do Gooders” like yourself, Barney Frank, etc. many times support policies that have unintentional negative effects on the economy and the rest of us.

    We have to “pay” while you go on to promote your next “cause”.

    Happy Holidays, anyway

    :)

    Sky Pilot

  • Report this Comment On January 03, 2012, at 4:33 AM, thidmark wrote:

    "I guess it's true, Fox News makes you dumber."

    A statement like this leads me to believe you are a 24/7 viewer ...

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