Whose Mistake?

An odd bit from an article on the housing bust in Maricopa, AZ (via Atrios):

Many people blame the bubble and bust on investors — both amateur and professional — who speculated in new homes. "I think that was part of the mistake that the builders made, was that they allowed investors to come in and buy," Abdullah said. "Allowed them to buy tracts of homes, you know, five, six, 10 houses, and they bought them on speculation."

What's the mistake here. Builders bought a bunch of cheap land, then built houses on it, then resold the houses to speculators willing to pay a premium above construction costs despite the lack of objective supply constraints. That's a savvy business strategy, not a mistake. The people who made the mistake were the ones who bought the houses, not the ones who sold them.

Comments

In the final analysis, it's the ones who lose money or wind up in jail that made the mistakes.

Posted by blah | May 8, 2008 3:10 PM

That is only a savvy business strategy if you're in the flipping business. If you are a homebuilder in Arizona, feeding a bubble/glut frenzy is killing the goose that lays golden eggs.

Posted by skeptic | May 8, 2008 3:11 PM

Matt,

You're deviating from the Democrats' talking points here. It was clearly the predatory lenders who were to blame. Had predatory lenders not duped these speculators into accepting financing for these homes, they wouldn't have bought them.

Posted by Fred | May 8, 2008 3:14 PM

wasn't there some business about getting the credit rating higher than it should have been, making it look less risky?

studying for finals so i can't go hunting for what i'm talking about, maybe someone else knows.

as far as public policy goes, "blaming the buyer" isn't much of a solution.

Posted by huh | May 8, 2008 3:19 PM

on the off chance you actually want to live in Phoenix, there is an even less off chance that you'd be willing to live in the (almost) town of Maricopa --it's in the middle of nowhere.

Posted by david in norcal | May 8, 2008 3:32 PM

It benefitted the builders in the short term, but in the medium term could be bad news for their business, since a boom-bust cycle is probably worse than slower but steady growth. On the other hand, there's the issue that, for any individual builder, there's no reason not to build extra homes and sell them at a profit while the market is good.

It's pretty much the same dynamic that held in the oil industry for a long time, and which was the reason for the creation of the various oil cartels to regulate production.

Posted by Doug T | May 8, 2008 3:35 PM

This article is just looking at this on entirely the wrong level. The "housing bust" can't be explained simply by massive irrationality on the part of home buyers. How was it possible for so many people to buy homes that they couldn't afford in the first place? It was possible because big investment banks made huge numbers of adjustible rate mortgage available to people who wouldn't be able to pay them back if interest rates rose.

Posted by Blake Emerson | May 8, 2008 3:42 PM

It depends on the builder's response to the increase in speculative buyers that determines whether they made a mistake or not. If they noticed speculators buying and then slowed construction in recognition, good move. If not, mistake.

Those speculators were going to put them right back on the market competing with the builders on-coming product, the supply was never absorbed.

Posted by AJ | May 8, 2008 3:47 PM

Fred,

To build on Blake's point. If individuals make bad investment decisions and speculate buying houses they can't afford intending to flip them you have individuals going broke becasue of their bad choices. In order to have a massive crisis you need the people who lend the money to be stupid or corrupt multiplying those indivuals times several thousands.

See the point? Each individual bankruptcy is likely the fault of an individual, a subprime mortgage crisis takes the big boys to make it happen.

Posted by Eric k | May 8, 2008 3:49 PM

it was possible because big investment banks made huge numbers of adjustible rate mortgage available to people who wouldn't be able to pay them back if interest rates rose.

It was actually worse than that. To the best of my knowledge, the rate resets were mostly defined (if perhaps not with the utmost clarity, to put it mildly) in the loan documents. In a lot of cases, borrowers apparently signed on the loans anyway, with the intention of being able to resell the property at a profit before the rates reset.

Posted by James Gary | May 8, 2008 3:53 PM

It's a collective action problem, no?

If there was only one builder who sold to all of those speculators, and then lost the yield on all his sunk investment in being a builder during the resulting bust, and that loss was greater than the profits from the boomtime sales, then that buildier would have been guilty of a mistake.

But as it is, many builders seperately sold to the speculators, each taking as much boomtime profit as possible, perhaps even knowing that there would be losses during the bust -- but knowing also that other builders' actions would (help) bring on the bust regardless of what he did.

So they had to get while the getting was good.

Posted by Tom from the Bx | May 8, 2008 3:53 PM

"lost the yield on all his sunk investment in being a builder"

A smart builder could avoid most of this problem because there isn't much capital investment other than land and inventory. That's the problem with how (most) builders managed the bubble--they ignored that so many buyers were flippers, thought that there was a real change in demand and made investment decisions based on that bad judgment. So now they hold a bunch of land they either overpaid for or overleveraged and a ton of inventory with no buyers. So the quote is right about the builders making a mistake w/r/t sales to speculators, just misassessing what the mistake was.

Posted by zaleriana | May 8, 2008 4:04 PM

In a lot of cases, borrowers apparently signed on the loans anyway, with the intention of being able to resell the property at a profit before the rates reset.

And the banks approved those loans thinking that house prices would continue to go up, thereby allowing owners to sell the house before the rates reset to a level that made the payment unaffordable. "Real estate never goes down." is not a good basis for a business plan.

Posted by daveNYC | May 8, 2008 4:09 PM

There are plenty of mistakes to go around vis a vis Maricopa, and a bunch of victims guilty of nothing but wanting to live in a house. I recently flew to Phoenix from Pittsburgh with a fellow who lives in Maricopa. We got to talking about the NYT article on Maricopa. He said that every reason he had moved there in 2005 is gone. His kids have to bus 40 minutes to high school now that they've reached that age, the low taxes are about to become a memory, the commute into Phoenix is horrible (better since so many folks have left), and the cost of consumables is rising because the demographics are shifting so fast retailers don't know what to stock on their shelves. He also said that mischief makers and illegals were starting to squat in many of the houses in his neighborhood. There have been problems with water service as well.

Now here's a guy that bought a house with a regular mortgage to live in in what he thought was a terrific neighborhood. He didn't buy on speculation, but is suffering from the process all the same. He wants to move. To leave the Southwest altogether (the song's the same all over Phoenix, Las Vegas, etc...). He's an electrical engineer so he could... if he could sell his house. He knows he can't, and it easy to see its killing him.

Some of the worst victims of this whole mess are innocent bystanders.

Posted by Roboticghost | May 8, 2008 4:10 PM

And the banks approved those loans thinking that house prices would continue to go up...

In my opinion that's where the problem lay. Since they intended to resell the loan anyway, the originating banks seem to have had no problem writing dicey loans. I wouldn't pretend to be an expert, but if there'd been a bit more oversight in this area the bubble might've been less severe.

Posted by James Gary | May 8, 2008 4:17 PM

Those Las Vegas casinos, they made a mistake. They allowed me to come in and play, play, play blackjack -- play for five, six, ten hours at a time. They never cared whether I could afford to lose the money!

Posted by CN | May 8, 2008 4:29 PM

I'd like to add this comment:

Many are looking at the housing bubble as a function of increasing median home prices vs historical norm. This, I think, overlooks a few key factors. One is that the median home size has increased over time. The other is that much of the new home starts during the bubble were for upper middle class homes and McMansions rather than the lower middle class homes of yesteryear (remember how small Levittown home are).

With that in mind, the housing bubble is really a supply and demand issue. In many region, supply was overbuilt. Population growth was never going to catch up with new home starts, and neither was the number of new home buyers (people finally able to afford a house). Supply outstripped demand. Isn't the problem that cities and municipalities weren't able to annex these new growth communities in order to manage growth? It is what cities used to do back in the days when cities were nice places to live.

Posted by freddiemac | May 8, 2008 4:29 PM

"This article is just looking at this on entirely the wrong level. The "housing bust" can't be explained simply by massive irrationality on the part of home buyers. How was it possible for so many people to buy homes that they couldn't afford in the first place? It was possible because big investment banks made huge numbers of adjustible rate mortgage available to people who wouldn't be able to pay them back if interest rates rose."

AGREED. This is a much more fascinating and complicated issue than Matt set it up here in his baiting short take. But this commentator quoted above notes correctly imho that the idea of making a short term killing while the opening is there is really tempting -- not only for the hypothetical builder in these explanations but for the bankers too, especially the Directors and others who after being tied to their desks and professions for years figured a way to become mega-millionaires almost overnight, even if it would down the road spell ruin for the mortgage banking industry (in the short term... of course) with ramifications out across the economy, but what the F**k, these kind of opportunities only come round once a life time. You got to go for the gold when it is suddenly there in front of you man.
It's called the free market and enterprise. I mean, heiresses like Cindy McCain should not be the only ones with so much cash they can form the kernel of a new plutocracy. This was a scientologist's moment come true. Go For It, you are special, you deserve it, and besides, it's the other guy's greed that will do him in. He'd have done the same to you.

Posted by sleuthiness-the-blogosphere | May 8, 2008 4:31 PM

"Each individual bankruptcy is likely the fault of an individual"

Mortgages in America are generally non-recourse loans, so defaulting on one doesn't lead to bankruptcy; it leads to a buyer losing his down payment. Had most buyers been required to put 10% or 20% down, you would have had less of a bubble, and fewer defaults now. Most newer buyers have very little skin in the game though, since both private sector lenders and U.S. government had been encouraging the use of low- or even no-down payment mortgages (FHA mortgages require only 3% down payments). With so little skin in the game, there's less to lose from from defaulting.

Similarly, mortgage originators who sold their loans had little skin in the game if those loans later defaulted, and so on.

It's not always possible (or even desirable) to prevent economic bubbles (most participants don't think it's a bubble when it's happening), but one thing the government could have down as the real estate market got hotter was to gradually raise down payment requirements on FHA loans, and raise the down payment requirements on the mortgages the GSEs bought. That would have throttled back the leverage a little bit. It probably wouldn't have been politically possible though, considering the broad bipartisan desire for maximizing the percent of home owners in this country. Barney Frank recently balked at a proposal to raise FHA down payments up to 3.5%.

Posted by Fred | May 8, 2008 4:42 PM

Fred,

Considering A) the low default rate of FHA loans and B) the low volume of FHA loans during the bubble, I'd say you are wrong. The FHA's lending requirements aren't really a factor in the bubble. Why not suggest that Countrywide, with 80/20 piggyback loans requiring 0% down, and with their huge market share, had much more of an effect on loose lending than FHA loans that no one used because they just got a subprime ARM.

Posted by freddiemac | May 8, 2008 4:50 PM

Zaleriana: "there isn't much capital investment other than land and inventory."

That's why I said "sunk investment in being a builder," rather than in land and inventory. I thought the problem is that the builders are now idle, not that they are stuck with value-losing land.

If they are holding land, they are doubly foolish, since they could have gotten penion funds to take that risk -- see LandSource.

http://calculatedrisk.blogspot.com/2008/04/s-landsource-bankruptcy-expected-in-may.html

Posted by Tom from the Bx | May 8, 2008 4:57 PM

Zaleriana: "there isn't much capital investment other than land and inventory."

That's why I said "sunk investment in being a builder," rather than in land and inventory. I thought the problem is that the builders are now idle, not that they are stuck with value-losing land.

If they are holding land, they are doubly foolish, since they could have gotten penion funds to take that risk -- see LandSource.

http://calculatedrisk.blogspot.com/2008/04/s-landsource-bankruptcy-expected-in-may.html

Posted by Tom from the Bx | May 8, 2008 4:58 PM

"That's a savvy business strategy, not a mistake" - no, it is a savvy business strategy and a mistake. Since the ultimate justification of business is that it more efficiently serves the good of the people than, say, command and control systems, when it evidently ends up serving the good of very few people, destroying the environment, and impoverishing its customer base, that is called a long term mistake. It might seem like a savvy business strategy to pick the pockets of people in a crowd, but once you are caught, it turns out to be a mistake.

I guess this is one of the metrics of the success of Reagan - to produce a generation whose moral impulses are so deadened that they have no idea what business is for.

Posted by roger | May 8, 2008 5:01 PM

It figures that Fred would first look at the type of loans that aren't a problem.

Aren't by definition the people in subprime loans people who couldn't qualify for FHA loans?

Also isn't it telling that the more regulated FHA loans are in much better shape than the free market free for all of subprime?

So what does Fred propose? Make the requirements for FHA even harder so more people are pushed into the free for all.

And people wonder why Republican economics get such a bad rep.

Posted by Eric k | May 8, 2008 5:07 PM

freddiemac,

Since you must have missed this phrase the first time you read it, I'll put it in bold for you:

"since both private sector lenders and U.S. government had been encouraging the use of low- or even no-down payment mortgages"

The low down payments on FHA loans weren't the only way the government encouraged low-down payment loans, they were just an example. The government exerted more influence on lending trends with the GSEs, which I also mentioned above. What were the LTV requirements for the mortgages bought by the GSEs? What do you think private sector mortgage originators would have done if the GSEs had started to require lower LTV ratios (i.e., higher down payments on mortgages)? They would have had to require higher down payments if they wanted to be able to sell their loans to the GSEs.

You brought up Countrywide -- who do you think bought 40% of Countrywide's mortgages in 2006? Fannie and Freddie. The GSEs had enormous influence over lending standards, but as I noted above, it has long been a bipartisan policy goal to maximize home ownership.

Posted by Fred | May 8, 2008 5:43 PM

Fred,

Fannie Mae and Freddie Mac are private, for profit, publicly traded corporations. Did you forget that?

Posted by freddiemac | May 8, 2008 5:58 PM

Re: It was possible because big investment banks made huge numbers of adjustible rate mortgage available to people who wouldn't be able to pay them back if interest rates rose.

Um, no. The big investment banks weren't the ones writing the mortgages. They're the ones who ended up with them when they turned to dust in the sunlight. New Century, American Home and other slick lenders were the ones who made those loans.

Re: And the banks approved those loans thinking that house prices would continue to go up, thereby allowing owners to sell the house before the rates reset to a level that made the payment unaffordable.

The lenders basically didn't give a damn. They were going to sell the mortgages long before the rates reset.

Re: Isn't the problem that cities and municipalities weren't able to annex these new growth communities in order to manage growth?

What incentive would they have to turn down housing permits? All those overpriced houses were expected to bring in boatloads of property tax cash.

Re: Had most buyers been required to put 10% or 20% down...

Very few people can do that nowadays. 20% hasn't been the standard for years, and even 10% has become rare. However, that's what the FHA is for-- and the FHA vets its borrowers very thoroughly. No "stated/stated" BS. Had more borrowers been steered to the FHA, rather than into subprimes, the problem might be less too.

Re: but one thing the government could have down as the real estate market got hotter was to gradually raise down payment requirements on FHA loans,

Again, FHA loans are NOT the problem. They are defaulting at historic rates, which is to say not so much. Raising DP requirements on FHA loans would simply have driven even more borrowers into subprimes instead. No, the problem lay with private lenders, not the government, and above all with the widespread acceptance of fraud (which is what "stated/stated" usually was). By requiring borrowers to prove income and assets, and enforcing sensible debt-to-income and loan-to-income ratios (which the FHA also does), small downpayments would not have mattered: people who not afford to buy five McMansions to flip would not have gotten loans, sellers could not have jacked their prices up to the stratosphere and we'd be much better off. (Note: I suppose I would agree to having a significant downpayment requirement on people buying investment real estate; but for first-time homeowners getting rid of the FHA option would basically create a nation of renters in the long term since eventually only the well-to-do could get started in the housing market. Conservatives used to be strongly in favor of home-ownership, seeing it as a generator of a more conservative populace. Apparently the drive to neo-feudalism has driven that wisdom out the door.)

Posted by JonF | May 8, 2008 6:46 PM

It was saavy if you were getting out of the home building business, but if you held other large tracts of land, or wanted to avoid a bubble that would cripple your business beyond the next six months, it wasn't so bright. Particularly since many of the home builders are public companies and essentially set the bar for future earnings based on current earnings. Their stock price might jump up based on the earnings generated by those sales, but then in future quarters the severe declined lead to plummeting stock prices. That's part of the problem with our economy these days - everything is geared towards short term gratification and the long term building blocks are ignored.

Posted by Jim | May 8, 2008 6:49 PM

"Mortgages in America are generally non-recourse loans, so defaulting on one doesn't lead to bankruptcy"

It entirely depends your state's laws. "generally" paints with far too broad a brush, and would be more accurate if replaced with "in some states".

Posted by not today | May 8, 2008 7:34 PM

"Fannie Mae and Freddie Mac are private, for profit, publicly traded corporations. Did you forget that?"

Now you're just drifting into douchebag territory, but what the hell, I'll follow you in there. Did you forget what the "G" in "GSE" stands for? Did you forget who tells Fannie and Freddie what sorts of mortgages they can buy?

""generally" paints with far too broad a brush, and would be more accurate if replaced with "in some states"."

Give us the of states where mortgages are not non-recourse loans and we'll see if "generally" truly "paints with far to broad a brush".

Posted by Fred | May 8, 2008 7:44 PM

"I would agree to having a significant downpayment requirement on people buying investment real estate; but for first-time homeowners getting rid of the FHA option would basically create a nation of renters in the long term since eventually only the well-to-do could get started in the housing market."

Who suggested getting rid of the FHA option? I don't think raising the down payment required to, say, 5%, would be a bad idea though, but that seems politically unfeasible considering the resistance to raising it to 3.5%. And no, it wouldn't create "a nation of renters" if the FHA went away. It would certainly lower the percentage of home owners (probably closer to 50% than the current 66%), but considering that academic research has suggested home ownership is often a bad deal for low-income home owners, this wouldn't be such a bad thing.

"Conservatives used to be strongly in favor of home-ownership,"

Maximizing home ownership had and continues to have broad bipartisan support, as I mentioned a couple of times above.

"Apparently the drive to neo-feudalism has driven that wisdom out the door."

WTF are you talking about?

Posted by Fred | May 8, 2008 7:58 PM

Re: "Apparently the drive to neo-feudalism has driven that wisdom out the door."
WTF are you talking about?

Setting the nation on a course to becoming a nation of renters, with a small minority being landowners. As I mentioned, home ownership used to be a recognized conservative value for reasons which should be fairly easy to see. Your desire to make it harder for people to become home owners strikes me as a betrayal of that former wisdom that used to be associated with your ideology (and the fact that I term it "wisdom" should indicate that I rather agree with it.)
As noted by myself and others, the size of down payments are NOT the real problem: "liar loans" and excessly high loan-to-income ratios are the problem-- along with the failure to distinguish between investors and owner-occupants. The latter are far less likley to send in "jingle mail" than the former since owner-occupants have to find and move to a new abode; investors do not. The FHA allows small downpayments, but only backs owner-occupants, not investors; the FHA requires full and extensive doc; the FHA has strict standards on the size of loan (and payments) borrowers are permitted. The FHA is a success story, and its mortgages are less likely to fail than private only mortgages. Another piece of old conservative wisdom: If it ain't broke don't fix it.

Posted by JonF | May 8, 2008 9:25 PM

WTF are you talking about?
Posted by Fred

Fred, you are a moron. STFU we arleady know this and you ain't getting smarter by talking. You are just removing all doubt.

Even William F. Buckley, Jr. could have told you this was a giant mistake, and not just the predatory lending practices.

CSpan BookNotes interview with Brian Lamb (aired 4/2-3/2000)

CALLER:Mr. Buckley, it's a pleasure to talk to you. I've heard you describe yourself as a Georgist, a follower of Henry George, but I haven't heard much in having you promote land value taxation and his theories, and I'm wondering why that is the case.

William F. Buckley: It's mostly because I'm beaten down by my right-wing theorists and intellectual friends. They always find something wrong with the Single-Tax idea. What I'm talking about Mr. Lamb is Henry George who said there is infinite capacity to increase capital and to increase labor, but none to increase land, and since wealth is a function of how they play against each other, land should be thought of as common property. The effect of this would be that if you have a parking lot and the Empire State Building next to it, the tax on the parking lot should be the same as the tax on the Empire State Building, because you shouldn't encourage land speculation. Anyway I've run into tons of situations were I think the Single-Tax theory would be applicable. We should remember also this about Henry George, he was sort of co-opted by the socialists in the 20s and the 30s, but he was not one at all. Alfred J. Nock's book on him makes that plain. Plus, also, he believes in only that tax. He believes in zero income tax.
William F. Buckley: I think so.

Brian Lamb: (Quoting the book) "The first time I met William F. Buckley, we were both members of a televised panel discussing word. The moderator introduced me with a pop-quiz to test my credentials asked me to define the word..." Is it USUFRUCT?

William F. Buckley: Usufruct, yeah...

Brian Lamb: (Quoting the book) "I felt smug as I recite the right to enjoy another's property as long as you don't damage it. Then Mr. Buckley leaned into his microphone and quoted an entire paragraph on usufruct from the political economist, Henry George...

William F. Buckley: The land belongs to those in usufruct.

http://www.cooperativeindividualism.org/buckley_hgeorge.html

Henry George said that the rent of all land ought to be public. ...I am sympathetic with that particular analysis.
[From: Firing Line, PBS, 6 January, 1980]

Posted by WTF | May 8, 2008 10:09 PM

"Setting the nation on a course to becoming a nation of renters"

Who do you imagine is setting the nation on that course, JonF? To repeat myself for the fourth time, there has long been widespread bipartisan support for doing the exact opposite -- increasing the home ownership percentage in this country.

As for the negative consequences (for them) of encouraging low income people to buy houses when they'd be better off renting, see this study by Caroline Katz Reid.

"Fred, you are a moron."

If your intent was to get me to not read any of your post beyond that first sentence, mission accomplished. If you have something to say, try being civil and maybe I'll read it.

Posted by Fred | May 8, 2008 10:42 PM

Right, Fred. But you read it anyway.

Fred...Now you're just drifting into douchebag territory...

And some kid's dissertation is only so persuasive. It just confuses people as to what your agenda might be, but perhaps it is just you that is confused. I suspect the latter.

Home ownership is not preferred by all, but it certainly has upsides for the community and the individual and the nation at large. Nothing is ever as simple as some clown named Fred thinks it is.

http://www.dollarsandsense.org/archives/2007/0507karger.html

Posted by WTF | May 9, 2008 12:10 AM

Fannie Mae and Freddie Mac are private, for profit, publicly traded corporations. Did you forget that?

Yes and no. In return for their charter, they have to follow the mandates set down by the federal government. Then there is the whole implied government backing for their bonds.

Even so, I don't think the GSEs were really the problem. Yes, their portfolios are taking hits, but when compared to the writedowns on the mortgages held by the issuing banks, they look pretty damn good. The stuff on CFC's and others' own books is absolutely toxic, which indicates to me that even though the GSE's might not have been totally on the ball, the private originators were acting like crack-addled monkeys.

At the end of the day there's blame enough for the bulders, mortgage brokers, banks, investment banks, ratings agencies, and buyers.

Posted by daveNYC | May 9, 2008 12:48 AM

daveNYC,

At last, someone who knows what he is talking about. I have a love/hate relationship with Fannie and Freddie. I remember several years ago, before the housing bubble really bloated, that they were in trouble for shoddy accounting practices. I am quite frankly surprised that they are still solvent, so I guess that flattens Fred's assertion that they are to blame for this mess. They wrote down a few billion last quarter. Next quarter that number will be bigger, because the Congress is telling them to buy more junk. Your tax dollars at work.

Fred,

You are trying to assert that somehow the government agencies are to blame for this mess. First you impugned the FHA for not requiring higher downpayments, even though they historically haven't required large downpayments and generally have done well at what they do. Not only did they invent the 30 year fixed, but their bonds, issued through Ginnie Mae, are actually saleable because they haven't had the high default rate. Next you tried to attack Fannie Mae and Freddie Mac, even though they weren't the originators of these subprime muck loans, and haven't been holding the poo bag until the Congress made them. Just because New Century sold the loan doesn't mean that they are free and clear. They are forced to repurchase many of these non-performing loans. And that is why Countrywide and other wholesalers along with Citibank and other investment banks make huge writedowns for the last year. If you want to make childish ad hominems about bags of douche, you might want to look in the mirror, since it is clear that you really have no clue what you are talking about and are only a shill for the Republicans - full of fabrications, lies, and deceptions, and totally intellectually bankrupt.

Posted by freddiemac | May 9, 2008 9:32 AM

wow, first time here....LOL

very proud of ourselves aren't we?

I think Matthew Y has it right "The people who made the mistake were the ones who bought the houses, not the ones who sold them"

best I can tell, no one is forcing people to buy homes these days...

Posted by Darren | May 9, 2008 10:16 AM

wow, first time here....LOL

very proud of ourselves aren't we?

I think Matthew Y has it right "The people who made the mistake were the ones who bought the houses, not the ones who sold them"

best I can tell, no one is forcing people to buy homes these days...

Posted by Darren | May 9, 2008 10:18 AM

JonF,

Re: Had most buyers been required to put 10% or 20% down...

Very few people can do that nowadays. 20% hasn't been the standard for years, and even 10% has become rare. However, that's what the FHA is for-- and the FHA vets its borrowers very thoroughly. No "stated/stated" BS. Had more borrowers been steered to the FHA, rather than into subprimes, the problem might be less too.

The requirement to put 20% down keeps prices low. The reason prices got so out of whack is because down payments were not required.

Let us say that the only loans available required 20% down and offered only 30 year fixed rate terms and the payment could not exceed 25% of gross income. If that was the case, if the median income of an area was $50,000, then the price of the median house could not exceed the mortgage available with a $1041 montly payment plus the amount a median couple could be expected to save up for a downpayment. That would mean a median home price of about 210k.

Posted by jmo | May 9, 2008 10:50 AM

Let us say that the only loans available required 20% down and offered only 30 year fixed rate terms and the payment could not exceed 25% of gross income. If that was the case, if the median income of an area was $50,000, then the price of the median house could not exceed the mortgage available with a $1041 montly payment plus the amount a median couple could be expected to save up for a downpayment. That would mean a median home price of about 210k.

To reiterate JonF's point about feudalism: A 25% gross income requirement would price just about all new working and middle-class homebuyers from the past three decades out of the market. The only thing that justifies an industry supplied with FHA guarantees on mortgages, banks with depository insurance, favorable tax treatment for mortgages, etc. is that these programs lead to increased homeownership and upward mobility. You're throwing the baby out with the bathwater.

Fred, meanwhile, would like to blame the GSEs for a following a program of expanding homeownership. Based on what? A study that says that capital gains from home appreciation in the 80s were roughly the same as the returns on a Treasury bond? Not astounding, to be sure, but what are the returns on the rent you pay to a slumlord? The author's findings are much more modest than your simplified "low-income homeownership = bad", and it certainly doesn't bear the weight of the policy you're proposing, which is that reducing homeownership to 50% and making FHA go away.

To be sure, homeownership is not a guarantor of upward mobility. You can't, for instance, bleed decent jobs and replace them with 2 or 3 temp jobs apiece with no health care benefits and expect people to graduate to the middle class with ease just because they are making their mortgage payments. But that doesn't mean making them all renters is an improvement.

To hear Fred describe it, the expansion in homeownership opportunities sounds like some kind of forced government program that came about when intervenors in the market started making loans based on somebody's heartfelt political arguments. But government has been at the heart of making homeownership part of the American dream since the Depression and FHA. The GSA's engineered the securitization process and made a subprime market possible. Securitization and the subprime market have created genuine increased in efficiency in the allocation of capital and lowering of monitoring costs for investment in real estate. The weak points in this market were that the monitoring costs got lowered too much, beyond justification, and along with gaping holes in regulatory coverage, allowed room for the emergence of predatory lending. Hence predatory originators could get away with making meritless loans, and nobody else bothered to do due diligence on them.

Pointing out the destructive effect of predatory lending on the entire industry isn't a "Democrat talking point". Do you think holders of mortgage-backed securities are best pals with fraudulent loan originators who sold these shitboxes to iBanks, who got them stamped and approved by Moody's?

Yes, bankers didn't do due diligence a lot of places. Buyers bought into sales pitches and were steered into higher-cost loans by spread-seekers. The fault is systemic, but there are some worse actors than others. Fraudulent subprime originators, a subset of the subprime lenders, stand out as the lowest of the low, and the most willfully culpable in this mess.

Posted by StJoe | May 9, 2008 2:28 PM

Online list of non-recourse states:

Alaska
Arizona
Arkansas
California
Colorado
District of Columbia (Washington DC)
Georgia
Hawaii
Idaho
Mississippi
Missouri
Montana (as long as non-judicial foreclosure is used)
New Hampshire
Oregon
Tennessee
Virginia
Washington
West Virginia

Accuate? I don't know, but we are talking about less than half the states and (with the exception of California) mostly rural states with a smaller population. "Generally" is inaccurate.

Posted by Hey Fred, facts are useful things | May 9, 2008 4:01 PM