The REAL cause of the mortgage industry train wreck:

[BigPapaVol]

Originally Posted by oklavol

The Fed chairman sets the rate money is loaned to banks, when the rate is lowered, the banks then in turn lower the rate they loan money to consumers.

So it becomes cheaper to buy a house because your house payment becomes lower because the interest rate on your home loan is lower.

Which is what Bush and his appointee the Fed Chairmen did, to stimulate home buying and home loans. They've had the rate so low for so long, they have it next to zero now and it has no effect. Which is part of the mess we have now, they can't stimulate the economy anymore with low interest rates because they have no where to go.

the bolded part is incorrect. The final paragraph is an attempt at analysis and is just off base. The next to zero rate drives borrowing and would if the FDIC wasn't killing all lenders regarding their loan portfolios.

Mortgage loans have nothing to do with the Fed Funds rate which drives the Prime Rate. Mortgage rates are driven by the private investor market and how they view the relative spread for 30 year paper (risk free rate of gov't issues vs. mortgages). If those spreads are enticing enough to warrant the risk, investors buy mortgages. That spread has moved wider recently because of the enormous perceived risk in pooled mortgage securities. Hence, when the risk free rate was dropping, mortgage rates were rising or flat.

[oklavol]

The subprime mortgage industry collapsed in March 2007, with many of the largest lenders filing for bankruptcy protection in the face of spiraling foreclosure rates. For these reasons, Greenspan has been criticized for his role in the rise of the housing bubble and the subsequent problems in the mortgage industry,[58][59] as well as "engineering" the housing bubble itself:

It was the Federal Reserve-engineered decline in rates that inflated the housing bubble … the most troublesome aspect of the price runup is that many recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable-rate mortgages. That leaves them fully exposed to rising rates. —BusinessWeek, July 19, 2004, Is A Housing Bubble

About To Burst?[60] George Soros and Warren Buffett criticized derivatives while Greenspan defended them.[61]

Alan Greenspan - Wikipedia, the free encyclopedia

[BigPapaVol]

Originally Posted by oklavol

Alan Greenspan - Wikipedia, the free encyclopedia

If that's correct, why is the bubble not screaming larger today with mortgage rates bottomed out? The issue of spreads against alternative investments and investment risk is something you're clearly missing in the commentary. Mortgages were perceived to be of very low risk, when in actuality, the new underwriting standards massively undervalued that risk.

Low mortgage rates are fine in the event that underwriting standards are upheld.

The lower rates certainly moved real estate pricing to an unsustainable level, but mortgage underwriting should still have precluded this enormous wave of foreclosures. The bottom line is that you can't lend money to folks walking a razor's edge to pay it back. It wasn't a presidential or Fed chair induced problem. They each played a role, but the investors in mortgages shoulder the biggest blame, and appropriately, the biggest losses.

[OrangeYankee]

Yes, the Carter Administration, that man's stupidity is still wreaking havoc on us to this very day nearly 30 years after he left office. Pretty much soley responsible for almost all of the instability in the Middle East, Started the ball rolling on a banking disaster, gave away a key strategic point (for those of you who struggle with hanging chads, it was the panama canal), but hey he started habitat for humanity!

Anyway, I am not sure how this thing matured over the years, but I read that Clinton put meat on this law's legs early in his presidency, and fast forward to 2003 and yes Bush wanted to take a strong look at Fanne and Freddie: Hot Air Blog Archive Whose policies led to the credit crisis? I know it's a blog but they link to some NYT articles who, at the time, were heeping on the praise to the political geniuses Barney Frank and Chris Dodd and never realized they were incriminating them in the future.

Of course the gutless wonders aka the Republicans absolutely failed to grow some balls and stand up to them (like every other issue), and even Bush rolled out his Compassionate Socialism and started the government take over of huge portions of our economy. In the end the blame does not fall on any one person or party, because basically our Government probably could be better run by trained circus monkeys who just spend all day throwing their poop at each other... oh wait.

[oklavol]

Originally Posted by BigPapaVol

Low mortgage rates are fine in the event that underwriting standards are upheld.

The lower rates certainly moved real estate pricing to an unsustainable level, but mortgage underwriting should still have precluded this enormous wave of foreclosures. The bottom line is that you can't lend money to folks walking a razor's edge to pay it back. It wasn't a presidential or Fed chair induced problem. They each played a role, but the investors in mortgages shoulder the biggest blame, and appropriately, the biggest losses.

Banks are insured by the FDIC who then in turn audit their underwriting standards every 6 months. The Chairman or Chairwoman of the FDIC is appointed by the President.

[BigPapaVol]

Originally Posted by oklavol

Banks are insured by the FDIC who then in turn audit their underwriting standards every 6 months. The Chairman or Chairwoman of the FDIC is appointed by the President.

please. The banks weren't the ones holding the majority of the mortgage paper out there. They were the ones doing the shady mortgage selling.

The FDIC chair has as much to do with the mortgage market as I do.

[GAVol]

Originally Posted by oklavol

The Fed chairman sets the rate money is loaned to banks, when the rate is lowered, the banks then in turn lower the rate they loan money to consumers.

So it becomes cheaper to buy a house because your house payment becomes lower because the interest rate on your home loan is lower.

That's just wrong. The Fed rate and Mortgage rates move in opposite directions all the time. The two numbers don't really correlate.

[dan4vols]

Originally Posted by GAVol

That's just wrong. The Fed rate and Mortgage rates move in opposite directions all the time. The two numbers don't really correlate.

The only reason our economy hasn't collapsed is because 99.9% of Americans don't understand how it works enough to comment.

[gsvol]

Originally Posted by oklavol

Bush names the Fed chairman, the Fed chairman sets interest rate that money is loaned to banks, banks sets interest rates to the consumers. When rates are lows consumers then respond by making loans.

Who owns the Fed??

How do we get money to begin with??

Does any president have any say over what the chairman of the fed board does at any time??

Originally Posted by oklavol

God forbid we might actually blame the people in charge for anything.

Thomas J. DiLorenzo professor of economics at Loyola College:

Excerpts:

The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call "communities of color" that they might not otherwise make based on purely economic criteria.

The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various "neighborhood organizations," as they like to call themselves, such as "ACORN" (Association of Community Organizations for Reform Now).

These organizations claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $100 billion in such loans had been made in the first twenty years of the Act.


So-called "community groups" like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation.

The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA "protest" is issued by a "community group."

This can cost banks great sums of money, and the "community groups" understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.


Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.

Then of course there is the issue of the Fed’s monetary policy having created the housing bubble, characterized by a spectacular escalation of real estate values in every American city over the past decade or so. This created a further problem for the financial institutions that are victimized by the CRA.

They are forced to make a certain amount of bad loans, but because of the Fed-created explosion in housing prices, many thousands of subprime borrowers no longer qualified, by a long stretch, for conventional mortgages based on their incomes.

The only way these borrowers could qualify for their mortgage loans (even ignoring their bad credit ratings) was to take out adjustable rate mortgages, some of which had astonishingly low first-year rates in the 3 percent range, and sometimes lower. This is what has largely fueled the subprime mortgage meltdown – the inability of thousands of subprime borrowers to afford their mortgages now that their rates have adjusted upward.


Thus, the combination of the Fed’s enforcement of the CRA (with the help of political pressure groups like ACORN) and its post 9/11 monetary policy in general are the reasons for the bursting real estate bubble and the "subprime" mortgage meltdown.

[oklavol]

Originally Posted by GAVol

That's just wrong. The Fed rate and Mortgage rates move in opposite directions all the time. The two numbers don't really correlate.

The Prime Rate matched changes in the Fed Rate almost exactly. Look at this graph:

Federal Funds vs. Prime Rate & Mortgage rates - HSH Associates Library of Mortgage Information

[therealUT]

Originally Posted by oklavol

The Prime Rate matched changes in the Fed Rate almost exactly. Look at this graph:

Federal Funds vs. Prime Rate & Mortgage rates - HSH Associates Library of Mortgage Information

I could be way off on this, however, it looks like that graph just proved BPV's point...not yours.

[oklavol]

Originally Posted by gsvol

Who owns the Fed??

How do we get money to begin with??

Does any president have any say over what the chairman of the fed board does at any time?

The president appoints the Chairman.

[gsvol]

Originally Posted by oklavol

The president appoints the Chairman.

We had already established that.

Is that the extent of your understanding of the Federal Reserve System??

[oklavol]

Originally Posted by gsvol

We had already established that.

Is that the extent of your understanding of the Federal Reserve System??

You asked does the President have any say over the Chairman. Well he picked him what would you think? The President can replace him in 4 years if he wins re-election, and is not satisfied with how he is doing his job.

[GAVol]

Originally Posted by oklavol

The Prime Rate matched changes in the Fed Rate almost exactly.

Prime Rate is calculated based on the Fed rate, so it has to correlate whenever the Fed Rate moves.

On the other hand, you're own graph proves that the Fed Rate doesn't really correlate with mortgage rates.