David M. Abromowitz faults the Bush administration’s dismantling of federal regulation. Daniel J. Mitchell says both Republicans and Democrats over several decades contributed to the crisis.
Read it all. It isn’t a bad discussion but it is not as good as the earlier list posted from the Independent , and, once again the SEC doesn’t get mentioned–KSH.
This is the first time I have heard anyone argue that most Subprime loans went to higher income people? I would be interested in learning what the author defined as higher income. Subprime means a loan made to someone with a credit score south of around 650- now some people who got subprime loans were less than truthful regarding their income wich could explain some of the discrepancy – but I doubt that most subprime loans went to higher income persons and I would define higher income as north of 100k. Now there were many loans made to investors with little or no downpayment – but I am not sure I would classify those as subprime – merely stupid. I also remain convinced that the subprime vehicle was designed to get the Feds off lenders backs – and of course to make a fast buck at the same time.
Abramowitz shows an astonishing lack of familiarity with operational details of the US mortgage system. Take just three examples:
1) CRA loans performed equally. Like most apologists, he stops his analysis at 2000, when – due to rising RE prices – all mortgages were performing well. Different story in 2008. In our area of CA 50-100% of foreclosures are minority on any given day.
2) He cites “unregulated” lenders. No such animal. All lenders are regulated. State regulated lenders can be more heavily regulated than those Fed-regulated.
3) He cites as 2001 foreseeable risk factors hi origination fees, regulatory failure to require risk disclosure, and lender avoidance of risk by selling. All are at least partially false.
a. He may be confusing origination fees with rebates. Lenders did bribe green, unqualified originators to sell out their clients by putting them into Option ARMs. Dazzling them with the prospect of making $25,000 on a $500k loan proved an irresistible temptation. But, unlike rebates (YSPs) origination fees were clearly disclosed on HUD-1s (closing statements) and were rarely high.
b) As David Mitchell correctly notes, a major reason that the risks were not better-appreciated was that governmentally-required regulatory disclosures themselves were confusing and inadequate. They actually deterred lenders from disclosures that might have been clearer, for fear of violating some required disclosure standard. [A related point: I have actually seen cases in which governmental regulations have prevented borrowers from taking loan options that are mathematically certain to be in their financial interest.]
c. It is a myth that lenders could avoid default risk by selling off loans. Virtually all loan sales have “buyback” provisions under which the seller retains full or partial liability. The problems have been when the seller or/and insurer is out of business.
By contrast, Daniel Mitchell seems to have a much better understanding of the system. Many of us have been complaining for years that – however well-intentioned – overly-detailed regulation has led to mortgage disclosures that actually impair consumers’ understanding of mortgages.
DM cites easy money as a primary culprit. Both the Independent and, apparently, the NYT agree. The NYT this week focused on Alan Greenspan as the primary cause, noting that his reputation was so high that he was able to hold Congress in thrall and prevent any serious reform. All the while he pushed the lower rates. In fairness, we need to recognize that he was responding to the 2000 recession. Ironically, low rates created the anomaly of a real estate boom amid the dot-com bust/recession (later amplified by 9/11) and prevented us from ever dealing with much of the pain of the dot-com meltdown.
DM also deals well with the regulation issue. He notes that it is not just a blanket question of “regulation”. Rather, it is a question of the adequacy and appropriateness of specific regulations that matters.
In total, Mitchell show far better familiarity with the mortage system and also far better reasoning about the problems. But as he would surely admit (and the Independent confirms) the problem is of much greater scope than either of them could cover with their short essays.
You think the voters will blame it on the republicans?
3, most likely.
the least regulated financial arena are hedge funds. they are also performing very well right now:
http://article.nationalreview.com/?q=ZjY3Y2VmNTZkYjhhYzdjYzNmZTMyN2M0ZDJmZDEyYjA
FM/FM are (were) among the most regulated companies, yet we know what happened to them, a good article about that:
http://reason.com/news/show/129468.html
so what does this tell us about Abromowitz’s theory? hmmm…..