Long Read: The Housing Bubble and “The Big Lie”

Oh, look, what a coincidence. The NYTimes, March 9:

The email from a Credit Suisse executive was blunt: The bank seemed to be pushing through risky home mortgages from questionable applicants.

One borrower, the executive wrote, appeared to be a gas station attendant who was living with his mother while claiming to make $93,000 a year. Another was a former sales clerk at Nordstrom who was said to be making $110,000 a year.

A different email, from another Credit Suisse executive in June 2007, went further: “Our diligence process is such a joke.”

The emails are part of a newly released trove of internal communications and documents, mostly from 2006 and 2007, that paint a troubling picture of how Credit Suisse, a major player in the American mortgage market, operated as the housing bubble inflated. The documents, filed in Massachusetts state court as part of an investor lawsuit, suggest that top officials at the bank routinely pressed subordinates to override due diligence standards and accept questionable loans that were subsequently bundled into mortgage investments….

Dean Starkman, “reporting fellow with The Investigative Fund at the Nation Institute”, in TNR, March 9:

No, Americans Are Not All To Blame for the Financial Crisis:
Exposing the big lie of the post-crash economy

With Wall Street’s demand for mortgages unending and some loan producers managing to book up to 70 loans per day, the system didn’t just crash. It was brought down.

But we’ve also been made to understand that subprime lenders and their Wall Street funders didn’t act alone. Instead, they were aided by the avarice of the American people, who were not victims of the crash so much as accomplices in it. Respondents to a Rasmussen poll done during the throes of the crisis overwhelmingly blamed “individuals who borrowed more than they could afford” (54 percent) over Wall Street (25 percent). To this day, the view is widespread and bipartisan: Main Street was an essential cause of the meltdown. The enemy was us…

Everyone-Is-To-Blame (or EITB, for brevity’s sake) has done much to mute the public outcry essential for sweeping efforts to respond to the financial catastrophe. To the extent that Dodd-Frank fell short of the root-and-branch reform that followed the last great crash in 1929, EITB is to blame. The fact that banks too big to fail before the crisis have been allowed to grow to twice their pre-bubble sizes can be traced to a nagging sense that they didn’t act alone. And if you wonder why, six years after the fact, no significant Wall Street figure has been criminally prosecuted, I would suggest that EITB has muddied perceptions just enough to allow the administration to sidestep the necessary legal mobilization. If everyone is to blame, then criminal indictments of individual executives can be framed as exercises in scapegoating…

The fact is that defrauding a bank that actually cares about the quality of a loan is actually rather difficult, no matter how aggressive or deceitful the borrower. Lenders, on the other hand, can lie with relative ease about all sorts of things, and mountains of evidence show they did so on a widespread basis. For starters, it’s lenders who establish the loan-to-value ratio for a property: how much money the buyer is borrowing versus the house’s estimated worth. Banks didn’t used to let you take out a mortgage too close to the home’s total cost. But play with those numbers and, voilà, a rejected loan application turns into an accepted one. Leading up to the crash, some banks’ representations about loan-to-value ratios were off by as much as 40 percentage points.

Then there was the apparent rampant corruption of appraisals, which also have nothing whatsoever to do with borrowers. Before the bubble popped, appraisers’ groups collected 11,000 signatures on a petition decrying pressure by banks to arrive at “dishonest” or inflated valuations.

And that’s to say nothing of lenders misleading borrowers directly—a practice that the Financial Crisis Inquiry Commission, the Levin-Coburn report, and lawsuits by attorneys general around the country have all found was very much systemic. Mortgage brokers forged borrowers’ signatures and altered documents; Ameriquest (those guys again!) had its own “art department,” as it was known internally, for precisely that function. Oh, and remember those 137,000 instances of “suspicious activity” about possible borrower misdeeds? For the sake of perspective, Citigroup settled a Federal Trade Commission case alleging sales deception that involved two million clients in a single year. That’s what we call wholesale, and it was happening before the mortgage era even really got started…

Trust me, it’s worth reading the whole article.

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77 replies
  1. 1
    tybee says:

    yeah, jump, you fuckers.
    i wanna see frog marches and jail time and executions.

  2. 2
    efgoldman says:

    Hey look!
    A thread!
    A brand new clean thread.
    About money!!

  3. 3
    Baud says:

    Balloon Juice lives! (Or at least AL does).

  4. 4
  5. 5

    Has anything changed since then?

  6. 6
    Lord Baldrick says:

    Fascinating theory regarding the plane: http://www.lowyat.net/2014/03/.....-aircraft/

  7. 7
    Baud says:

    Climate change is real too. Some people will never care.

  8. 8
    Howard Beale IV says:

    @tybee: Insufficient.

    Guillotine, in prime time.

  9. 9
    Violet says:

    @tybee: This post is incomplete with a “Jump You Fuckers” photo to accompany it.

  10. 10
    ulee says:

    When I bought my house in 2006, the bank ok’ed me for a $115,000 loan, a figure I could never meet. I ended up buying my house for $83,500. I’m glad I didn’t take them up on their insane offer. I would have been ruined.

  11. 11
  12. 12
    La Caterina (Mrs. Johannes) says:

    I’d love to see bank executives face jail time. In the meanwhile, keeping money out of their pockets one house at a time. . .
    Nice post, AL.

  13. 13
    Omnes Omnibus says:

    @Omnes Omnibus: Fucking moderation.

  14. 14
    Suffern ACE says:

    @Baud: I was worried that we’d have to start taking votes on our preferred editorial direction. My experience is that if we threaten blog democracy, we start to get posts galore.

  15. 15
    Pogonip says:

    Jump you fuckers! Then climb back up and jump again!

  16. 16
    Violet says:

    @Lord Baldrick: Wow, that’s interesting.

  17. 17
    Hill Dweller says:

    People thought borrowers were to blame because Republicans(and Wall Street) mounted a massive campaign blaming Fannie Mae and Freddie Mac. In other words, blah people were to blame, which working class white people were all too eager to believe.

  18. 18
    srv says:

    We need a new bubble.

  19. 19
    Pogonip says:

    Since this topic mentions big lies, bringing up Sarah Palin seems at least somewhat relevant. Joe McGinniss, who wrote a book about her, has died. He is best known for Fatal Vision, about the Green Beret murder case at Fort Bragg back in the day. His Palin book must have been insufficiently worshipful, the Freepers are partying hearty over his demise.

  20. 20
    Omnes Omnibus says:

    Of course there is no reason that a post relating Russian protests with events in Wisconsin should be in moderation all night.

    ETA: Never mind.

  21. 21
    ulee says:

    @srv: From Jaws. “You’re gonna need a bigger bubble.”

  22. 22
    Howard Beale IV says:

    One of the lesser known things that happened during the housing bubble was when some states (GA) decided to crack down on the more predatory aspects of the lending apparatus, Standard and Poor’s came down from on high and said they they would not grade any MBS pool where mortgages issued in states with anti-predatory laws were included in the pool.

    Wrap your head around THAT little tidbit.

  23. 23
    tybee says:

    @Howard Beale IV:

    i want the beer concession.

  24. 24
    LeftCoastTom says:

    The fact is that defrauding a bank that actually cares about the quality of a loan is actually rather difficult, no matter how aggressive or deceitful the borrower.

    “This”…

    I actually don’t understand the argument as to whether we should hold “greedy borrowers” or “greedy lenders” “more” “responsible”. There was, and remains, a major problem. Would we rather regulate the behavior of 10,000 lenders who should reasonably be presumed to be experts in the market (whether they really are or not), or would we prefer to regulate 100,000,000 borrowers who cannot reasonably be presumed to be experts in the market?

    Which regulatory approach seems more likely to produce results? Which one seems less costly?

  25. 25
    srv says:

    @Lord Baldrick: I think O2 alarm would have had one of the pilots under oxygen pretty quick unless it was catastrophic.

    Transponder and autopilot failure better explained by something like this:
    http://www.avherald.com/h?arti.....#038;opt=0

  26. 26
    Omnes Omnibus says:

    @tybee: Guillotine concessions involve wine.

  27. 27
    joel hanes says:

    And after pushing risky loans on unqualified creditors, the banks triple-compounded their villiany
    by setting up MERS to circumvent the slow-and-poky title-transfer process required by law (i.e. FRAUD)
    by “robosigning” and forging or ignoring the lack of notary signatures (i.e. FRAUD),
    by slicing and dicing the titles into pieces and then stitching “tranches” of those misbegotten pieces into “tranches” ,
    and by creating derivative securites with those tranches as capitalization.

  28. 28
    ulee says:

    where have all the disappeared people gone? It’s very strange. It seems extradimensional.

  29. 29

    top officials at the bank routinely pressed subordinates to override due diligence standards and accept questionable loans

    Right. We’ve heard this already. The system was horribly corrupt and there were no laws to stop it. The banks were and are a cesspit of MBA thinking.

    Respondents to a Rasmussen poll

    A pro-GOP polling company famous for the unreliability of their work produced a poll that didn’t put the blame on Wall Street? Astonishing.

    To the extent that Dodd-Frank fell short of the root-and-branch reform that followed the last great crash in 1929, EITB is to blame.

    This is what makes me call bullshit on this article. Dodd-Frank fell short because the GOP has gone completely bugfuck crazy and half the country will blame Obama for ANYTHING, and actively praise murderers and the rich men they know quite well are screwing them over. Dealing with McConnell’s ‘one term president’ campaign and the Tea Party’s loading the House with ignorant nihilists is the political conflict that defines everything in our government since Obama took office. White butthurt sheltered the banks. Period.

    if you wonder why, six years after the fact, no significant Wall Street figure has been criminally prosecuted

    No, I don’t wonder. What they did wasn’t illegal. Immoral, unethical, disastrous, disgusting, but forty years of Reaganism removed all legal barriers. ‘Everyone is to blame’ has nothing to do with it.

    lawsuits by attorneys general around the country have all found was very much systemic.

    This is my only real hope. The housing default mess may not have been criminally illegal, but the rules about what you can be sued for are very different. There’s nothing criminal about all of those houses whose ownership can’t be validated because regulations weren’t followed. Law suits are a possibility. Unfortunately, just a possibility. I’m guessing that if they haven’t gone through by now, there wasn’t anything big enough for anyone to put significant screws to the banks with.

  30. 30
    Suffern ACE says:

    We get bits and pieces, but has someone put all of this together? I don’t think that the mortgage problem was one bank, but it wasn’t all banks. Some banks wrote a higher percentage of loans that ended up in delinquency than others. There used to be a site, the mortgage graveyard, that tracked insolvent mortgage lenders, and Calculated Risk helped with its troubled banks list. The Mortgage bankers association tracks who had the delinquent mortgages. I think if we looked at the owners and investors and geographies, we might get some interesting patterns and more names.

  31. 31
    ulee says:

    I don’t think they are all murdered or suicides. They’re just gone.

  32. 32
    danielx says:

    Nice of the Times to notice, now that the statute of limitations is running out.

    If the administration had ever been serious about indicting corporate wrongdoers, they would have been indicted – one way or another.

    There are lots of ways the government/DOJ can make those who are targets of government ire piss blood six times daily before they’re ever indicted, let alone arrested. Way back when during and after the savings and loan crisis, a lot of S&L executives were indicted, arrested, found guilty and sentenced to actual prison time for various forms of control fraud. Hard to believe in 2014, but yes, finance industry executives used to go to jail when convicted of criminal actions. It was believed that putting people in the graybar hotel was not only just but served as a deterrent and example to future possible ill-doers. Well-to-do white people do not thrive in prison, as a general rule.

    Given the proliferation of federal laws making activities of every sort criminal violations, it’s hard to believe that nobody at JP Chase Morgan, Goldman Sachs, et al, could be charged with anything whatsoever. Yes, it would have involved a lot of work and dealing with a lot of motions and arguments from very expensive white collar criminal defense lawyers, but so what?

    So what? Well, one could make an argument that staff attorneys and investigators for DOJ, SEC, etc etc have a personal vested interest in not pursuing criminal charges against finance industry executives, as such prosecutions would make it difficult to leave their government positions for industry positions paying five times their government salaries. *cough*Lanny Breuer*cough*. One could also make the argument that putting Lloyd Blankfein’s (to name one example) pasty white ass in a hard time federal joint like, say, Marion IL would tend to dry up the flow of campaign contributions. One could also make the argument that fraudulent activity was so pervasive that prosecutions according to the letter of the law would put thousands in prison, mostly low level employees unable to afford either $800/hour defense counsel or five figure campaign contributions, and there’s certainly some truth to that.

    Only a cynic would make such arguments….

  33. 33
    Violet says:

    Heard on the radio the other day that hedge funds are buying up housing stock as investments. They spoke specifically of Florida and said people who owned houses before the financial crash now have to rent them from hedge funds. They discussed the problem that at some point the hedge funds will want to unload their “investment” at either a profit or loss and either way a large number of properties coming on the market will have an effect on the housing market.

  34. 34
    Omnes Omnibus says:

    @ulee: ?????

  35. 35
    ulee says:

    @Omnes Omnibus: Where are all these people? They either wandered off into the woods or were killed. There is something going on and I don’t know what it is. And now we have a jetliner gone.

  36. 36
    efgoldman says:

    @Omnes Omnibus:

    Guillotine concessions involve wine.

    and knitting needles. Don’t forget the knitting needles.
    Does Hertz rent tumbrels?

  37. 37
    Omnes Omnibus says:

    @ulee: Aside from the Malaysian flight, who the fuck are you talking about?

  38. 38
    Villago Delenda Est says:

    Who was one of the prime lobbyists for Credit Suisse?

    Why, Phil Gramm.

    Who should be flayed alive for his role in this, along with his wife.

  39. 39
    🍀 Martin says:

    It wasn’t borrowers making up that income, it was brokers. That’s clearly established in “The Giant Pool of Money“, which its worth noting was recorded in May 2008 – before the financial crash, but during the housing crash. The strategy of where to shift blame wasn’t yet established.

    But the rules that the banks agreed to stated that all you had to do was tell the broker what you did for a living, the broker could establish a ‘plausible income for that job’, and qualify the loan based on that. The broker had every incentive to lie – it was the only way they could close the loan. The borrower had no idea what they were submitting to the bank, and the bank had allowed no documentation of actual income.

    Now, that’s not every loan, but it sure as fuck was a lot of them, particularly in places like where I live where NINA loans were common.

  40. 40
    Omnes Omnibus says:

    @efgoldman: The real cash is in wine. Or yarn. Knitting needles are a one time sale, Jesus, learn the rules.

  41. 41
    ulee says:

    @Omnes Omnibus: I’m talking about all the people who go missing. It’s a genuine phenomenom. Investigate it if you want.

  42. 42
  43. 43
    ulee says:

    @Omnes Omnibus: Spinal Tap. OK, great stuff. I’m not looking to argue. I’m just wondering what the hell is going on here.

  44. 44
    Omnes Omnibus says:

    @ulee: A plane went missing over a big ocean. It is probably a horrible event, but it is probably explainable by mechanical failure, human error, or a combination of the two. I am not inclined to speculate.

  45. 45
    LeftCoastTom says:

    @🍀 Martin:

    The borrower had no idea what they were submitting to the bank,

    The thing I don’t get…any mortgage refi I’ve done has involved a mountain of paper which, I’ve gathered, was less than half the height of the mountains of paper for various flavors of adjustible, interest-only, “fixed minimum payment” less than the actual interest, etc, loans. I probably irritated folks by actually looking through that mountain before agreeing to sign any of it – I knew damn well what I was signing.

    Loan papers are in English and borrowers don’t speak English? Of course the borrower doesn’t know what they’re signing, but the counter is that the borrower shouldn’t sign. Bank doesn’t care about income, job, etc. (NINJA loan)? That’s the bank failing to protect the loan, right? Has nothing to do with the borrower, and is a direct consequence of a regulatory environment where the bank thought it didn’t have any liability (and, in the case of some of the subprime outfits in Orange County, they didn’t really have any liability because they had no assets that could survive a downturn).

    But really, why even get into those weeds? By all means I wish the administration would be a bit more creative with prosecution decisions in this area, we probably do need a Sam Insull, but going forward…why do we care about these weeds? It is much cheaper and easier to regulate banks and pseudo-bank institutions than it is to either 1) regulate individual borrowers who are far more numerous and far less expert in banking, or 2) whine at individual borrowers to no effect then be “amazed” when the same thing happens again. There’s a happy coincidence where the Progressive Answer coincides with the simplest possible answer to implement.

  46. 46
    Original Lee says:

    @LeftCoastTom: This this this.

    Also consider the appraisal fraud briefly mentioned in the article. The biggest national appraisal firm and one of the bigger home mortgage originators had a cozy little mutual kickback arrangement during the locust years. If you thought you knew the value of the home you were interested in, but the bank came back and told you it was significantly more, would you question it? Unlikely – the average buyer would think something like “wow, home values in that neighborhood are really going up!” What you wouldn’t have any chance of knowing was that the appraiser and the bank were in cahoots to inflate the size of the loan you were taking out. The appraiser got a cut of the points, the bank got a bigger loan to sell, and before you knew it, you were upside-down on your house, except the new, lower value of the house you were now trapped in was probably closer to what the appraiser should have said. NOT YOUR FAULT.

  47. 47
    danielx says:

    @Frankensteinbeck:

    What they did wasn’t illegal. Immoral, unethical, disastrous, disgusting, but forty years of Reaganism removed all legal barriers.

    Untrue. Goldman Sachs and JP Chase Morgan, among (many) others, have paid major league fines. What the ratings agencies did in many cases of rating mortgage backed securities was criminal fraud – material misrepresentation, among other mopery and dopery. Even at HSBC nobody was arrested, and criminal activity there went way beyond control fraud. I mean, sending or receiving an email to or from the wrong person or expressing the wrong opinion these days can end up with you in extrajudicial detention for a long fuckin’ time (especially if you’re Muslim), but if you’re big enough you get a pass on laundering money for terrorists and trading with the enemy. In terms of criminal activity, saying that there was control fraud at HSBC is like saying peeing in the swimming pool makes it deeper, and still no prosecution, no yanking the bank charter…etc.

    There is a mindset in place at DOJ – in the upper ranks, anyway – that says actually putting bankers in jail for anything short of an out and out Madoff-style Ponzi scheme is…undesirable. They have no problem with citing the deterrent effect of putting other criminal in prison with punitive sentences, but somehow this doesn’t seem to apply to finance industry executives.

  48. 48
    Villago Delenda Est says:

    @LeftCoastTom:

    This is because the mortgages were immediately sold to someone else. The incentive was to collect the fees for creation of the mortgage, then get rid of it as fast as possible, so you never worried about actually collecting on it. The real money was in the churn, not the interest.

    Then there’s the entire “I’ll be gone, you’ll be gone” phenomenon, where you collect the short term profit and let someone else worry about the potato burning their hands in the long term.

  49. 49
    ulee says:

    @Omnes Omnibus: A plane turning off planned track with no explanation or communication? That doesn’t sound like mechanical failure. Sounds like someone in the cockpit decided to kill everyone.

  50. 50
    Omnes Omnibus says:

    @LeftCoastTom: As the “expert,” all one has to do is say ,”okay now, sign here; now, sign here…” If I chose to I could have had many of my unsophisticated legal clients sign anything. I have never done it, but it would have been easy. I have spent hours explaining things to people (or at least making a valiant attempt at doing so) who I could have told to just sign on that line.

    Many people who are decent at running their own lives are overwhelmed when they encounter legal paperwork for the first time. Don’t be an ass about them. Do you have a mortgage? If so, do you understand all of its bits and pieces? if not, don’t judge.

  51. 51
    LeftCoastTom says:

    @Original Lee: Usually the appraisal came in after the borrower agrees to pursue the loan – it costs money to send someone out to make up lies about the value of a house.

    And in any case, whether I question the lender’s (unbacked) opinion as to the value of my house seems less to the point than whether my current income can service the loan and leave me money for the rest of my life.

    These are the weeds that I think the “let’s assess fault then solve the problem” approach keeps hitting. I think they are irrelevant – I don’t want my taxes to pay for regulating 100,000,000 borrowers, its much cheaper if they simply regulate 10,000 lenders. And I don’t believe moralizing at 100,000,000 borrowers, in lieu of regulating something, could possibly solve anything.

  52. 52
    Original Lee says:

    Hindsight is always 20/20, but in 2007 I actually told Original Spouse that when the dust settled, we would see that home mortgages were at the bottom of it all. We had had trouble selling our old house in 2001, in part because the first prospective buyer had trouble getting his mortgage approved. (We ended up selling to someone else six months later.) At one point, we were three days from settlement and the loan officer walked away from his job – just went to lunch and never came back. We found out from our attorney, who had made some phone calls, that the loan officer was being pressured to approve loans that he didn’t think were good risks (such as our buyer).

  53. 53
    LeftCoastTom says:

    @Omnes Omnibus: 1) I had a mortgage (thought that was implicit in what I wrote) – paid it off. 2) Perhaps you missed that MY ENTIRE POINT was that simply pursuing the simplest solution to the regulatory problem a) would give those of us on the left what we want anyway, and b) would avoid a bunch of arguments that are really pointless but are guaranteed to go on for years and years.

  54. 54
    Omnes Omnibus says:

    @ulee: I think that your suggestion is insulting to the pilots and crew of the flight. We have no evidence of bad action on the part of anyone, why presume it?

  55. 55
    Omnes Omnibus says:

    @LeftCoastTom: Oh, I am sorry. I stopped reading before the really whiny part of your comment. My bad.

  56. 56
    danielx says:

    @Villago Delenda Est:

    Got that right. Back in the dark ages (mid-80s) when we bought our first house, the lender did everything but give us a colonoscopy. The underwriting process took weeks, during which time we were required to submit updated financial materials (new check stubs etc) for the loan package. When a loan officer knows that he/she will be held to account for the performance or nonperformance of a loan and that they are responsible for the quality as well as quantity of loans, they can’t be too careful or painstaking. If not…then not. IBG…YBG.

  57. 57
    LeftCoastTom says:

    @Omnes Omnibus: I should have stopped reading when your comment failed to respond to what I wrote.

  58. 58
    LeftCoastTom says:

    @Villago Delenda Est: Yes, on both grounds. Market goes south, not the lender’s problem anymore, the loan’s been sold, and the lending warehouse doesn’t really have assets anyway.

  59. 59
    Omnes Omnibus says:

    @LeftCoastTom: Since you ignored the point of what I was saying, I guess it’s a wash.

    Cheers and have a lovely day.

  60. 60
    Original Lee says:

    @LeftCoastTom: IIRC, that is correct that the borrower agreed to pursue the loan before the appraisal. I was trying for brevity. Also, IIRC, these were usually new homes as opposed to existing homes. I think there was also a real estate firm involved for sales of existing homes, but I don’t remember if there was collusion on the part of the agents.

  61. 61
    LeftCoastTom says:

    @Original Lee: Well, as a follower of Calculated Risk at the time and having read the relevant Nolo Press books before buying my house…in CA the buyer’s agent has a fiduciary responsibility to the buyer even in counties where the seller pays the commission – many states, the responsibility goes to whomever is paying. And…yes, Calculated Risk’s comments had people in the industry complaining about agents in CA colluding, fiduciary responsibility be damned.

  62. 62
    gian says:

    If you lie to get a mortgage doesn’t the bank have to believe/act on the lie for it to really be victim of fraud.

  63. 63
    🍀 Martin says:

    @LeftCoastTom:

    The thing I don’t get…any mortgage refi I’ve done has involved a mountain of paper which, I’ve gathered, was less than half the height of the mountains of paper for various flavors of adjustible, interest-only, “fixed minimum payment” less than the actual interest, etc, loans. I probably irritated folks by actually looking through that mountain before agreeing to sign any of it – I knew damn well what I was signing.

    Loan papers are in English and borrowers don’t speak English? Of course the borrower doesn’t know what they’re signing, but the counter is that the borrower shouldn’t sign. Bank doesn’t care about income, job, etc. (NINJA loan)? That’s the bank failing to protect the loan, right? Has nothing to do with the borrower, and is a direct consequence of a regulatory environment where the bank thought it didn’t have any liability (and, in the case of some of the subprime outfits in Orange County, they didn’t really have any liability because they had no assets that could survive a downturn).

    You don’t understand the nature of these categories of loan. The borrower NEVER needs to prove income. Ever. The point of the loan was to service people that had income which was difficult to verify – like a stripper. So the banks look at the history of these kinds of loans (before there was a financial incentive to push them over conventional loans) and find that they are 2% more likely to default, so they charge 2% higher interest. The brokers (being creative and not giving a fuck if they default, because they’re not going to hold the loan, they’ll dump it ASAP) seize these types of loans as ways to get borrowers into homes faster and easier – after all, no income verification makes the whole process much easier. The broker (not the borrower) estimates the income for the occupation and passes that on to the bank. It’s not in the paperwork you sign, but in the paperwork the broker signs. You never see it. Now, I’ve signed enough of these that I’d have noticed that missing, but a new homeowner wouldn’t, and I doubt most people would. It’s not their responsibility to know what ought to be in the loan packet.

    The real catalyst in all of this was the mortgage backed securities that sliced up these loans in a way that the banks didn’t appreciate how many they were buying. They knew there was a certain market size for NINAs, but the brokers made it MUCH larger and sort of hid that through the packagers who were the real ones generating the demand. Not that any one on the banking side deserves any kind of pass in this – this was supposed to be a self-regulating market. The banks sold the public on the notion that they would look out for this kind of stuff, and the simple fact is that they didn’t do it.

    Yeah, in my neck of the woods there were people flipping houses on no income (other than from the houses) and some were making serious money doing it, but it was highly risky because it was self-dependent. The only time they were making money was when they could flip houses and not need to make payments. As soon as they needed the income to make the payment they didn’t have the income, by virtue of their need to make the payment. So, sure, there were some borrower abusers, but the abuse was almost exclusively with the brokers and the folks downstream from them.

  64. 64
    lgerard says:

    If you want to read one book that neatly summerizes exactly how all this happened and why I would recommend Michael Hudson’s “The Monster”

    At the end of the day, it was pretty simple

  65. 65
    JustRuss says:

    I had a friend who was writing mortgages for Countrywide, making big money…by my standards, anyway. I visited him in 2007 and he explained how they operated, it was obvious to my very untrained eye that the system was feeding off churn and sooner or later the whole house of cards was coming down hard. This train wreck was very, very foreseeable to anyone with half a brain.

    My friend ended up writing one of his creative loans for a mutual friend, who lost his house and went bankrupt. My mortgage writing friend is now unemployed and playing rehab whack-a-mole. Good times.

  66. 66
    xenos says:

    I sold out of the market and became a renter in 2004, and just recently bought a house in Europe, where I now live.

    Underwriting was nearly non-existent. Worker protections are so strong here that if you have a permanent contract the bank will simply offer you a loan of 5X your annual gross income.

    That seems way too high to me, even with interest rates around 2.5%. However, much like you had this enormous demand in the US for loans for the banks to securitize, here the banks needs performing collateral that can be pledged for access to financing for liquidity from the European Central Bank.

    So we have the same thing all over again in a new scenario: in a flat economy where there is a political decision to keep interest rates low, the banks need an asset bubble and they go right ahead and create one out of thin air. Once there is a population of homeowners holding overpriced assets there is a political constituency including most of the people who still have any money left who need it to keep going.

    It is amazing – the bank that lent us all that cash with easy repayment terms is the same one that took a bath on 10 Billion $ of alt-A loans in the US. Either they don’t understand the risk, which is bad, or they do understand it, which is worse.

  67. 67
    mai naem says:

    @danielx: Same here. When we bought our first house, our problem was lack of credit . We had to provide tax returns, pay stubs etc. The mortgage payment was going to be quite a bit less than our rent. We had to come up with 9K as a downpayment for a 72K house. Even with all that, we ended up needing a $7K carryback from the owner who was desperate to get rid of the house(Bush 1 recession!).

    @Violet: I didn’t think hedge funds were buying stuff anymore. I can tell you they jacked up the prices on foreclosures in AZ for the past few years but they’ve pretty much stopped buying since last year. They’re in for a rude awakening. Property management is not fun.

  68. 68
    Violet says:

    @mai naem: It was hedge funds and other investment funds and groups. Here’s an article about it.

  69. 69
    Villago Delenda Est says:

    @🍀 Martin:

    It certainly did not help that MERS made it easy to move mortgages around without bothering to talk to the county title offices. As a commenter over at Atrios wrote back at the height of the crises, five years ago, these guys had messed with fundamental laws of the universe, and the result was shit like people being evicted from homes that were not mortgaged, for which they held clear title.

  70. 70
    El Cid says:

    Look, you libruls can give all the so-called “facks” you want. I know in my gut that the economy crashed because Jimmy Carter made the banks give free houses to black people, because ACORN. So there.

  71. 71
    Svensker says:

    @ulee:

    Our mortgage holder — Countrywide — told us to lie about our income when we went for a re-fi in 2007.

  72. 72
    jonas says:

    These stories are completely unpossible because we all know the housing bubble was caused by inner city grifters and the Community Reinvestment Act.

  73. 73
    WaterGirl says:

    @Svensker: My sister’s mortgage holder — Bank of America — simply lied about the value of their house so Bank of America could give them a home equity loan they couldn’t afford to pay back. That was 2007, as well.

  74. 74
    Capri says:

    @ulee:
    Same thing happened to me. When I bought my home at the height of the bubble the mortgage broker told me that I could afford “a lot more house” and it was suggested I keep looking for a bigger home. When i told him I wanted the house I selected, I was told that I should get me mortgage for 125% of the house’s value (which was very common at the time). I ended up in an interest-only mortgage with a variable rate that was linked to the LIBOR index for 100% of the house’s value. And that was the conservative choice at the time.

    Luckily, I re-financed into a vanilla mortgage before everything went South.

  75. 75
    The Mouse says:

    I’m sure our side will respond with the proper outrage: none.

  76. 76

    I have such a hard time understanding why so many Americans reflexively blame the people who get screwed before the screwers. You ever wade into the comments from readers after a newspaper article about some telephone scammer who stole everything from a lot of old people. Most of them seem to be pissed off at the victims. I swear, some soulless dickhead steals millions of dollars from a bunch of 85 year old widows and widowers, and the readers are all screaming about how the old people should have known better, and they deserve what they got and on and on. What is it about people that the first ones they like to dump on are the victims? Is this an American thing? Or does this happen everywhere?

  77. 77
    mac007 says:

    That we’re still debating this nearly six years after the housing bubble burst really boggles the mind. The cause of the bubble was singular: banks. The banks did everything and anything — no matter how illegal, no matter how fraudulent — to keep the money rolling in. They had unbridled greed and became rich beyond the dreams of avarice. The whole trope about people “borrowing more than they could afford” was such a laughable assertion then, even more so now that the facts of that era have been thrust into the light of day.

    If anything, the whole mess just shows how atrociously gullible and unquestionably trusting of authority the American people are. People who had no business getting approved for a mortgage were told not only could they have a mortgage, they could have the homes of their dreams. Real estate could only go up-up-up, and you’d be a fool not to cash in. It’s free money! Who doesn’t want free money?! Then, when everything went to hell, we were all sold a new pack of lies: It’s our fault for taking the free money! There’s no such thing as free money, dummy!

    These banks lied to our faces, used every immoral, unethical, and illegal trick in the book to get rich. When they were exposed for the charlatans they are, we should have broken these too-big-to-fail banks into little itty bitty pieces and thrown the lot of them in jail. Instead, they told us a whole new bullsh*t story, and we believed them … again. It’s amazing if you think about it. And not a little bit depressing. I suppose that is why I don’t have a lot of faith in humanity.

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