Mar292012
Bernanke erroneously claims Federal Reserve didn’t cause the housing bubble
The Federal Reserve did not directly cause the housing bubble. The lowering of interest rates in 2002 did help boost prices and may have served as a precipitating factor contributing to the housing bubble, but monetary policy of the Federal Reserve itself was not the cause.
That doesn’t mean the Federal Reserve doesn’t have significant responsibility for the housing bubble.
The primary cause of the housing bubble was the influx of private capital into the mortgage market through mortgage-backed securities. So why did this happen? First, when the Federal Reserve lowered interest rates to 1% under Alan Greenspan, investors sought out higher yields. Mortgages became the vehicle of choice because the relatively low yields were still better than competing investments, and there was the perception of little risk in mortgages backed by real estate. After all, real estate only goes up.
This leads to the second policy of the Federal Reserve that contributed to the housing bubble. Alan Greenspan decided not to regulate the complex financial insurance arrangements known as credit default swaps. Through the sale of credit default swaps, lenders were able to package MBS pools and insure them against loss. With no risk of loss, investors dumped trillions of dollars into residential mortgages and inflated a massive housing bubble.
An extention of Alan Greenspan’s failure to regulate credit default swaps was his failure to regulate exotic mortgage products like Option ARMs. The negative amortization loan allowed borrowers to obtain mortgage balances twice as large as they could support. Options ARMs were the delivery mechanism that injected the air in the housing bubble.
These three errors inflated the housing bubble. To recap: first, the federal reserve lowered interest rates prompting investors to chase yields in mortgages. Second, credit default swaps foolishly unregulated by the federal reserve emboldened investors to pump nearly unlimited amounts of capital into what were perceived as riskless investments. And third, the unregulated Option ARM enabled individual borrowers to pump up the mortgage balances on properties to ridiculous and unsustainable levels. If the Federal Reserve had not lowered interest rates to 1%, decided to properly regulate credit default swaps, or prudently banned negative amortization loans — all of which was within their powers as master regulator of American banks — the housing bubble would not have inflated here in the United States.
Bernanke himself noted the housing bubble was a worldwide phenomenon; therefore, the Federal Reserve was not the cause. While it’s true that the Federal Reserve’s policies did not inflate the housing bubbles in other countries, it’s worth noting that many other countries made the same mistakes we did. The housing bubbles did not inflate on their own, and many countries with more regulated banking did not participate in the world housing bubble.
“A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him. It is necessarily part of the business of a banker to maintain appearances, and to confess a conventional respectability, which is more than human. Life-long practices of this kind make them the most romantic and the least realistic of men.”
— John Maynard Keynes, “The Consequences to the Banks of the Collapse in Money Values”, 1931
Bernanke: Fed didn’t cause housing bubble
By Annalyn Censky @CNNMoneyMarch 22, 2012: 3:04 PM ET
Federal Reserve Chairman Ben Bernanke gave a lecture to a class at George Washington University, telling students that monetary policy did not cause the housing bubble.
NEW YORK (CNNMoney) — The Federal Reserve isn’t to blame for the housing bubble, Ben Bernanke told a lecture hall full of college students Thursday.
But the students wouldn’t let the Fed Chairman off the hook.
“The slides on the housing bubble show how clearly one thing led to another,” said Daniel Lippman, a senior at George Washington University. “When you were observing the economy in the 2000s, what did you think would happen to rising house prices and the housing bubble?”
Bernanke responded: “Well, as I tried to argue, the decline in house prices by itself was not obviously a major threat.”
The fact that he made such an argument just prior to a catastrophic collapse in national house prices underscores how clueless he really is.
“It was that whole chain of events that was critical,” he added.
Earlier in the lecture, Bernanke said the Fed had little to do with home prices that rose rapidly in the early 2000s, and then came crashing down.
Bernanke pointed to housing booms and busts around the world as evidence that the rise in real estate prices was not limited to the United States and the Fed’s area of influence.
What Bernanke points to as evidence of powers beyond his control is actually evidence of the collective incompetence of central bankers around the world.
He also cited research by economist Robert Shiller showing the housing bubble began in 1998 — three years before the Fed started slashing interest rates — making it cheaper to get a mortgage.
Robert Shiller made no such claim. The housing bubble began to inflate in the early 2000s on the coasts, but it wasn’t until the widespread use of the Option ARM in 2003 that prices really got stupid nationwide.
“You’ll probably hear different points of view, but the evidence that I’ve seen and that we’ve done within the Fed suggests that monetary policy did not play an important role in raising house prices during the upswing,” Bernanke said.
The lecture was part of a four-part series at George Washington University that continues next week. The Federal Reserve posts Bernake’s slides and full videos online.
Bernanke is fortunate he was addressing an audience who was not in a position to call him on his laughable arguments and false claims. If I had been there, he would not have been so fortunate.
The fed is beholden to its shareholders, NOT the American people. The cold hard reality is that the only way to service impaired debt is to skim the surplus from labor and debt-serfs. Once you understand that, the boom/bust cycles they engineer make perfect sense.
FHA wants to increase the mortgage insurance premium up to 2.05% at the same time FHA claims it’s not in financial trouble
by Mike at North Orange Housing News
I usually don’t report on pending legislation. I usually just report what is law and policy. However, this increase in the insurance premium will have a big impact on mortgage qualifications and home values. FHA is now the insurance for sub prime borrowing and has 30% of the total mortgage market.
MORE
15.8% of Government-Backed Loans Non-Performing
Overall, little change was reported in the performance of first-lien mortgages serviced by national and federal savings banks during the 2011 fourth quarter, but the percentage of initiated foreclosures did see a steep drop, according to the Office of Comptroller of the Currency (OCC) Mortgage Metrics report.
The percentage of current and performing loans decreased to 87.9 percent, a mere 0.1 percentage point drop from the previous quarter, but a 0.4 percent increase compared to the same period a year ago.
The number of newly initiated foreclosures dropped 16 percent from the previous quarter and 17.9 percent a year ago. According to the report, the decrease in new foreclosures reflects the continued emphasis on home retention actions, a decrease in the number of seriously delinquent loans over the past few quarters, and the effects of foreclosure settlements.
The inventory of foreclosures in process decreased to 1,272,287, down 4.1 percent from the previous quarter and 3.1 percent from a year ago.
The number of completed foreclosures increased by 2.5 percent from the previous quarter and 22.1 percent a year earlier.
Seriously delinquent mortgages, loans past due 60 days or more and bankruptcies 30 or more days past due, went up a smidge, going from 4.9 percent to 5 percent during the fourth quarter, but down from the 5.3 percent a year ago.
The number of mortgages that were 30 to 59 days delinquent decreased by 2.1 percent from the previous quarter, and the number early-stage delinquencies decreased by 6.7 percent from a year ago.
Fannie Mae and Freddie Mac mortgages made up 59 percent of the overall portfolio, down from 61 percent last year. The percentage of GSE mortgages that were current and performing at the fourth quarter’s end was 93.1 percent, unchanged from the previous quarter and up from prior year’s 92.6 percent.
The performance of government-guaranteed mortgages fell, with 84.2 percent of these loans current and performing, compared to 85.2 percent at the end of the third quarter and 85 percent a year ago. More than 79 percent of these loans were comprised of FHA loans and 15 percent were VA loans.
The portfolio performance of reporting banks and thrifts remained almost unchanged from the previous quarter at 87.9 percent, which is only a 0.1 percent drop, but a 0.4 percent increase compared to last year.
Home retention actions
Servicers implemented 460,213 new home retention actions-loan modifications, trial-period plans, and payment plans-during the fourth quarter of 2011, which is a 0.3 percent increase compared to the previous quarter, but 3.1 percent drop from last year.
Servicers implemented 116,153 modifications during the quarter, a 15.5 percent drop from the previous quarter. New HAMP modifications decreased 21.6 percent to 42,275 during the fourth quarter, and other modifications decreased 11.6 percent to 73,878. Almost 47 percent of all HAMP modifications during the fourth quarter were GSE loans.
Servicers have modified 2,395,565 mortgages since the beginning of 2008 to the end of the third quarter of 2011. At the end of the 2011 fourth quarter, 48.3 percent of those modifications remained current or had been paid off, 8.5 percent were 30 to 59 days delinquent, and 17.4 percent were seriously delinquent. In addition, 10.6 percent were in the process of foreclosure and 6.1 percent completed the foreclosure process.
On average, non-HAMP mods reduced monthly payments by 26.5 percent during the fourth quarter or $430, and HAMP mods reduced payments by 36 percent, or $593.
Modifications that reduced payments by 10 percent or more performed better than those with a lesser reduction. At the end of the 2011 fourth quarter, 55.4 percent of modifications made since the beginning of 2008 with payments reduced by 10 percent or more were current and performing, compared to 34.5 percent of modifications made during that time that reduced payments by less than 10 percent.
Who better to give an Encore to the greatest Ponzi Scheme never told:
http://www.youtube.com/watch?v=fWacc6L9NoU
Regarding the featured house, “They blew their chance at a comfortable retirement.” Very doubtful, maybe they took all this equity out and bought gold or AAPL stock. Turning 9K into 400K would make any Wall St. power broker proud. Other than a dinged credit score, these folks are probably sitting pretty. They got to enjoy their MEW bounty, they might have even set some aside for a down payment on their next ATM machine…err make that house.
I think we all know the blew the money. The fraction of people who borrowed HELOC money and invested at rates of return higher than the rate of interest is very small.
I agree with the analysis of the cause, but I would qualify the Fed’s “lack of regulation” as the reason the mortgage market went insane. Mortgage banking regulation is extremely complex with multiple inter-connected federal and state agencies involved [this is how some of us earn a living ;)]. While the Fed had some regulatory authority over Wall Street banks underwriting and securitizing mortgages, it had none over the brokers and state licensed mortgage companies (Countrywide, Argent, New Century, Ameriquest, etc.) that were originating the option-ARMs.
This is where California should get a lot of the blame that it has yet to receive. The biggest state licensed mortgage companies were headquartered here, under our state’s regulatory authority. Yet we did nothing.
The State of California was reluctant to slaughter its own cash cow. Until the Ponzi scheme actually implodes, they were likely to do nothing.
As master regulator of banks, couldn’t the Federal Reserve has banned the use of loans with negative amortization or other terms it finds objectionable?
The Federal Reserve has broad authority over national banks. So yes, in theory, they could have audited the banks’ practices better to discover the NINJA Option-ARMs they were securitizing and demanded changed practices. I’m not sure if that would’ve been politically feasible in 2006-2007?
“I’m not sure if that would’ve been politically feasible in 2006-2007?”
That is likely true. Plus, Greenspan didn’t believe in regulation anyway.
Yeah, the Fed and the Congress and the IRS and Fannie and Freddie had no idea of, or active participation in, enabling buyers with no assets, no downpayment, no credit really, to buy homes…and there was no seller-induced fraud tolerated, by golly. How soon EVERYONE forgets how the entire apparatus of government and the banks was attuned to create ever larger classes of overhyped, risky, fraudulent deals. Take these comments on “gift” home down payments and closing costs paid directly by sellers through fake conduits, while direct “payment” was illicit (running up the price and value totally fake, of course). Was this widespread in Orange County by 2007-8? and if so, there’s an example of a class of “missing” buyers today.
http://whistleblower.ml-implode.com/
Ameridream and Nehemiah Lobbied to Stop 100% Financing
hmmm… one may have to google search that headline to get to the right date of April 6, 2009.
I wonder how many of these Nehemiah fake pricing-no down payments-were made in 2002-8 and what percentage have defaulted at a loss to the underlying mortgages and what the geographic map of that would look like….I know they were rampant in Vegas and central valley. But real estate only goes up, and up, and up, so what’s the harm?
Here are some actual HUD_fha numbers, it was far more buyers created than I might have thought. Also, this article says that 25% of all FHA buyers as of late 2011 claim to be getting the down payment as a “gift” almost entirely from family; wonder what the mortgage default rate is on that subgroup?
“According to HUD, prior to prohibiting the use of seller funded downpayments, “the share of borrowers using their own funds for downpayments had fallen below 50 percent. As a share of new FHA home-purchase loan endorsements, the very risky seller-funded-downpayment loans were as high as 37 percent in the first quarter of FY 2008.”
I doubt anyone in government will crack down on this practice if they can avoid it. The government believes they need every buyer they can get, and if everyone actually had to save for a down payment, they would lose a significant number of buyers. It’s like many other laws or guidelines which are loosely enforced because there are advantages to allowing lawbreakers to operate.
I think the FHA would rather raise its insurance premium and hope for the best rather than really crack down on this practice.