Were poor people to blame for the housing crisis?

by on January 19, 2015 at 11:46 am in Data Source, Economics | Permalink

When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007.

There is also this:

Poorer areas saw an expansion of credit mostly through the extensive margin, i.e. a larger numbers of mortgages originated, but at DTI levels in line with borrower income.

That is from the new NBER working paper by Adelino, Schoar, and Severino.  In other words, poor people (or various ethnic groups, in some accounts) were not primarily at fault for the wave of mortgage defaults precipitating the financial crisis.  The biggest problems came in zip codes where home prices were having large run-ups.  Their conclusion is:

These results are consistent with an interpretation where house price expectations led lenders and buyers to buy into an unfolding bubble based on inflated asset values, rather than a change in the lending technology.

Changes in policy, of course, also for this context would count as “a change in the lending technology.”

1 Ray Lopez January 19, 2015 at 12:08 pm

Greed is good.

2 mulp January 19, 2015 at 1:12 pm

Price defines value….

not the cost to produce a new one or the utility of the good.

Thus banks loaning $90 of borrowed cash for a fee of $5 at 2% to buy a banana priced at $100 is economically sound because that banana will only increase in price as it is eaten.

Capital always gains in value.

That’s way all the bridges need to be privatized – government ownership means they have no price. They will increase in price when privatized and that means their value will increase and that means they will be undecaying.

3 China Cat January 19, 2015 at 2:19 pm

Thank you, this was perfect.

4 JWatts January 19, 2015 at 4:32 pm

Well Perfect in this way:


Emphasis on the straw man, but the caption seems relevant as well.

5 Steve Sailer January 19, 2015 at 10:44 pm

Since almost nobody in our culture publicly dissents from our worship of Diversity, or really even notices anymore how much it keeps us from noticing what is in front of our noses, we are left with only two ideologies:

Double Down on Diversity

The Randians have the problem that while a lot of government programs exacerbated the mortgage meltdown, good old hog-stomping greed played a huge role as well.

The Double Down on Diversity conventional wisdom about how the problem is, as always, Rich Old White Men blocks us from noticing that the Rich Old White Men who were up to their elbows in this debacle (e.g., Angelo Mozilo, George W. Bush) were outspoken enthusiasts for Double Down on Diversity themselves. Indeed, the Double Down on Diversity view prevents us from noticing the High-Low coalition in which elites use designated victim groups as mascots to get more of what they want, even though it is central to understanding the way of the world in the 21st Century.

6 cawley January 20, 2015 at 6:32 am

“Indeed, the Double Down on Diversity view prevents us from noticing the High-Low coalition in which elites use designated victim groups as mascots to get more of what they want …”

IOW it’s Rich Old White Men’s fault?

7 Greg Lorensen January 20, 2015 at 11:17 am

Steve I seem to recall you blaming it on loans to illegal aliens at the time? So now it’s because of diversity? Why are you so determined to avoid blaming it on rich white people and their gambling addictions?

8 Steve Sailer January 20, 2015 at 9:51 pm

Rich white people like Angelo Mozilo of Countrywide and Kerry Killinger of Washington Mutual played the public using Diversity rhetoric to undermine traditional credit standards.

9 Brandon January 30, 2015 at 11:27 am

Oh, Steve. You never change.

10 Steve Sailer February 15, 2015 at 6:03 am

This is a dumb study that understates the amount of stated income fraud that was going on during the Bubble: see this NYT article for a debunking:


11 The Anti-Gnostic January 19, 2015 at 12:11 pm

Let me guess: the Justice Department is preparing to launch another wave of lawsuits over ‘discriminatory lending.’

12 The Original D January 19, 2015 at 2:03 pm

Let me guess: the DOJ won’t touch Wall Street.

13 Careless January 21, 2015 at 12:33 am

You guess…poorly.

14 jtf January 19, 2015 at 12:11 pm

They may not have been at fault, but they sure as hell were hurt by it…

15 Brian Donohue January 19, 2015 at 12:12 pm
16 Art Deco January 19, 2015 at 12:53 pm

Federal Reserve acts generated abnormally low Federal Funds rates from the fall of 2002 to the fall of 2004. The run up in home prices both antedated and post-dated that. (The Case-Shiller 10 city index would indicate the point of origin was 1997).

17 Kevin Erdmann January 19, 2015 at 1:18 pm

Art Deco,

By what standard do you determine that the Fed Funds Rate was abnormally low?

18 A January 20, 2015 at 2:35 am

Why bother? You will just get an “asset inflation” response.

19 Art Deco January 20, 2015 at 11:05 am

Look at the data series, and you will see.

20 Brian Donohue January 19, 2015 at 1:40 pm

I was referring to the crisis, not the ‘bubble’.

21 Kevin Erdmann January 19, 2015 at 12:15 pm

Unfortunately, they replace one bogus conclusion with a different bogus conclusion. But, this is a nice confirmation in the right direction. Eventually, 50 years from now, economic historians will share a consensus view that the housing boom was not a bubble. But, the idea that it was the product of irrational buyers and predatory banks will have been firmly ensconced in the public mind.

Baby steps, I guess.

22 The Anti-Gnostic January 19, 2015 at 1:44 pm

Can you send me a link to your seminar on how you’ve made millions buying and flipping underpriced houses?

23 John Thacker January 19, 2015 at 12:19 pm

Changes in policy, of course, also for this context would count as “a change in the lending technology.”

Well, some changes in policy. Changes in policy where, for example, Fannie Mae and Freddie Mac decided to lower requirements for all income levels are consistent with this paper. That holds regardless of whether Fannie and Freddie did so initially, or chasing the market so as not to lose market share in owning loans. Efforts to encourage homeownership (and maintain Fannie and Freddie’s positions, considering that they end up owning most loans even if they don’t originate or service them) were spread across all income levels. There was no direct “aimed at the poor” change in policy.

24 Art Deco January 19, 2015 at 12:54 pm

IIRC, Freddie Mac slashed underwriting standards in 2003.

25 djb January 19, 2015 at 2:35 pm

it was shown over and over that the crisis was caused by private lenders
Freddie and fannie ‘s contribution was small compared to them

26 The Anti-Gnostic January 19, 2015 at 2:43 pm

Already, this is being spun as if a huge secondary market fueled by GSE’s with the implicit backing of the taxpayer didn’t exist.

27 EMichael January 19, 2015 at 4:59 pm

And that market already existed for years without any problem, and exists now without a problem.

The GSEs lost 40% of their market share during the bubble. Wonder who picked that up?

28 Dave January 19, 2015 at 12:33 pm

What do people think caused this?

zip codes where home prices were having large run-ups —

It was all about marginal buyers, including a lot of immigrants, trying to grab a foothold on the ladder of success. Those heady pre-crash years of 2006 and 2007 saw a frenzy of price appreciation from unqualified buyers bidding up purchase prices using loans they couldn’t afford. Unscrupulous lenders filled out “liar loan” paperwork on their behalf and insisted that the gullible buyers could flip the home to the next buyer. Even more unscrupulous Wall Streeters were raking in their million dollar bonuses and packaging this crap as “A” grade investments. The change in policy was that lies were as good as the truth…until it wasn’t.

29 Harun January 19, 2015 at 1:48 pm

“Unscrupulous lenders filled out “liar loan” paperwork on their behalf and insisted that the gullible buyers could flip the home to the next buyer.”

So Buyers would never review documents before signing and buyers never lie. No sirree, its all the lenders fault!

Another big problem was flippers. These people created “artificial demand” that fell apart quickly once prices fell, causing even more falls in price.

30 The Anti-Gnostic January 19, 2015 at 2:44 pm

Flippers are post hoc.

31 Boonton January 19, 2015 at 4:24 pm

Not for nothing it is lending 101 to know that borrowers will be tempted to lie on their applications and the solution for that is to verify anything that doesn’t look right….and even verify a few things that do look right just make sure. Of course it is wrong to lie on loan applications but at the same time if a corporation is going to make hundreds of millions in loans you’d figure they’d keep an eye on things. Likewise if a finance firm is going to buy billions of dollars worth of loans, you’d figure they’d check out their quality.

32 Thomas January 19, 2015 at 9:49 pm

If the loan is just going to be sold to a GSE, or a TBTF, it doesn’t matter what the probability of recovery is.

33 Boonton January 20, 2015 at 11:25 am

Loans sold to a GSE have a whole set of conditions placed on them. During the bubble the goal wasn’t to sell loans to a GSE but to sell them to Wall Street who wanted them to package into securities. On paper at least loan quality was an issue. The buyer of the mortgages had a right to force you to buy them back if it turned out the supporting documentation consisted of fraud.

34 Brandon January 30, 2015 at 11:28 am

I thought the banks were supposed to be the knowledgeable financial professionals here?

35 Albigensian January 19, 2015 at 3:34 pm

Surely one shouldn’t discount all those appraisers who would conveniently produce whatever number was necessary for the loan to go through?

Although I see no reason to go easy on the buyers of those AAA-rated CDOs., as most of these buyers were investment professionals, or others (often acting as fiduciaries) who should have had the knowledge as well as the duty to assess whether the return was worth the risk on these financial products.

It’s harder to see why Moody’s and S&P still have any credibility (and if they don’t, what do they have to offer)?

36 Steve Sailer January 19, 2015 at 7:07 pm


I’ve skimmed the article and it is intentionally lacking in examples that might allow readers to perform reality checks.

In reality, there were two mortgage meltdowns, one that began in 2007 and was a major cause of the financial crash of September 2008, and one that followed in 2009 and was a result of the financial crash. (For example, northwest Indiana had a lot of foreclosures in 2009 and beyond, which was due to the collapse of the local motor home industry, which was due to the U.S. entering a general recession in 2008. But northwest Indiana’s troubles in 2009 were more effect than cause of the overall recession, in contrast to, say, the Inland Empire of California’s troubles in 2007.)

The first mortgage meltdown was concentrated in the four Sand States of California, Nevada, Arizona, and Florida. The zip codes with the largest dollars losses due to default were not those of rich people in Beverly Hills or Pacific Heights. Nor were they of poor people, even in Detroit, where housing pricers were already low. The big losses tended to be in the exurbs — not San Francisco but Vallejo and Stockton, not Santa Monica, but San Bernardino — or in potentially gentrifiable places like South Central L.A..

The typical defaulter was not a poor person living in a housing project nor a rich person living on Malibu Beach, but somebody in the second or third quartile in social status. Some of those people enjoyed very high temporary incomes during the Housing Bubble of the mid 2000s, often from housing-related activities, such as construction and mortgage brokering. And others were encouraged to state incomes implying that.

Both the Clinton and Bush Administration had stated goals of increasing homeownership from 66% to 70%, which would suggest that the focus on the margin was on the working class or lower middle class. The Bush Administration, at its October 15, 2002 White House Conference on Increasing Minority Homeownership called for 5,000,000 incremental minority homeowning families by 2010. President Bush warned his regulators not to get overly picky about downpayment requirements or documentation requirements, since those were impediments to attaining racial equality in the American Dream of homeownership.

This was part of the Bush-Rove “ownership society” political offensive to win Hispanic votes, and indeed Bush did fairly well with Hispanics in November 2004.

But subsequently Hispanics defaulted in huge fractions and have turned to the Democrats in the 2008 and 2012 Presidential elections.

Bush tersely but graciously apologized for his “ownership society” in his “Decision Points” memoirs and we should take him at his word on his culpability.

In defense of Bush and Rove, they are Texans and their housing policies were not disastrous in Texas, where houses are cheaper for geographic and regulatory reasons, and the mortgage industry was more regulated due to the Texas mortgage meltdown of the 1980s.

Hispanic immigrants tended to be able to afford Texas home prices, but not Arizona, Nevada, Florida, or California home prices.

The really scary thing is that it’s now 2015 and we’re still not supposed to think about the role of diversity and immigration and political correctness in the Recent Unpleasantness in the economy.

37 EMichael January 19, 2015 at 7:51 pm

Nice links.

38 Steve Sailer January 19, 2015 at 9:01 pm
39 Steve Sailer January 19, 2015 at 9:05 pm

Mortgage Default by 2009: Effects of Race, Ethnicity and Economic Standing During the Boom Years

Heather Luea
Vanderbilt University
Adam Reichenberger
Bureau of Labor Statistics
Tracy Turner
Kansas State University

Abstract: This paper examines the determinants of 2009 mortgage delinquency by race and ethnicity using new household-level data on mortgage distress from the Panel Study of Income Dynamics. Controlling for homeowner and loan characteristics as well as residence in a nonrecourse state, we find startling differences in mortgage delinquency rates that cannot be explained by observables. The unexplained black/white gap corresponds to a 44% higher likelihood that black homeowners will be delinquent on their mortgages relative to non-Hispanic white homeowners. The unexplained difference in Hispanic mortgage delinquency relative to non-Hispanic white homeowners is even greater, at double the black/white delinquency gap.

… The economic decline that began in 2007 was preceded by nearly two decades of government-aided, rapidly rising homeownership rates among minority households (Bostic and Lee, 2007). Given this and the severity of the recent economic crisis, it is important to understand the extent to which minority households have weathered the crisis as well as non-Hispanic white households, all else equal. Indeed, the recent and historical role played by the US government and nonprofit agencies in boosting access to homeownership by underrepresented groups makes understanding these groups’ outcomes particularly relevant.4

Footnote 4: As recently as June 2002, President Bush announced a goal of closing the homeownership gap for minority households by 5.5 million households by the end of 2010 through innovatiosn such as zero-down-payment loans. That administration’s efforts followed more than a decade of housing market interventions, including President Clinton’s National Homeownership Strategy, a trillion dollar commitment by Fannie Mae, the Campaign for Homeownership of the Neighborhood Reinvestment Corporation, and expanded lending to low-income and minority households in part as a result of the implications of the Community Reinvestment Act (Turner and Smith, 2009).

… As a preview of our findings, we find that black and Hispanic households that own their housing in 2005 are significantly more likely to become delinquent on their home loans by 2009 than non-Hispanic white homeowners. We find an unconditional, weighted likelihood of delinquency of 11.3%, 16% and 3.4% for black, Hispanic, and non-Hispanic white homeowners, respectively, making black homeowners 7.9 and Hispanic homeowners 12.6 percentage points more likely to be delinquent than non-Hispanic white homeowners. …

Conditioning on extensive borrower and particularly loan characteristics reduces the race and ethnicity gaps in mortgage sustainability considerably, but does not entirely eliminate these gaps. In the full specification, we find that black and Hispanic homeowners remain 1.5 and 3 percentage points more likely to be delinquent than non Hispanic white homeowners, respectively. These unexplained effects are large relative to the underlying mortgage delinquency rate of 3.4% for non-Hispanic white households….

We find startling differences by race and ethnicity in mortgage delinquency rates that cannot be fully explained by observables …

40 Steve Sailer January 19, 2015 at 9:06 pm

Let’s break those delinquency-by-2009 rates out:

Whites: 3.4%
Blacks: 11.3% (3.3X the white rate)
Hispanics: 16.0% (4.7X the white rate)

Statistically adjusting for everything they can come up with (e.g., income), there are still unexplained racial gaps:

Whites: 3.4%
Blacks: 4.9% (1.44X the white rate even after adjustment)
Hispanics: 6.4% (1.88X the white rate after adjustment)

In many ways, the first set of numbers is the more important. As the population shifts from whites to Hispanics, the delinquency rate would tend to get worse.

But the second table can help explain why money-hungry but politically true-believing lenders like Angelo Mozilo of Countrywide could mess up so badly. You are not allowed to use race/ethnicity in credit modeling, but it turns out that race/ethnicity still matters a lot even in cases where the facts you are allowed to look at are all the same. During the 1990s, Mozilo became convinced that it was sheer racism to worry that Hispanics could default at higher rates than the model predicts.

41 EMichael January 19, 2015 at 10:10 pm


42 Steve Sailer January 19, 2015 at 10:18 pm
43 Steve Sailer January 19, 2015 at 10:23 pm

Also, you’ll want to check out the graph created by Dr. Carolina Reid of the SF Fed Reserve Bank on Foreclosure Crisis by Race/Ethnicity:


My summary:

In January 2007, foreclosures were centered around Greater Detroit

Not surprisingly, in those first two years, while the price of houses was still high, blacks had the highest foreclosure rates. The financial cost of these mortgages defaults was low, however, because home prices in the Great Lakes area are not particularly high.

But, by 35 months later, at the end of 2010, the landscape was dominated by the red of the Sand States of California (the Big Kahuna of real estate values), Arizona, Nevada, and Florida, all of which had above-average priced-homes (California exceptionally so):

As the top graph demonstrates and the second map implies, the Hispanic rate skyrocketed between January 2007 and January 2009. By January 2009, the Hispanic foreclosure rate (about 6%) was roughly three times the white rate (about 2% rate), and the Hispanic rate was now significantly higher than the black rate. The Hispanic foreclosure rate accelerated from January 2009 to January 2010 (roughly the second map), reaching about 10.5%, before its rate of growth moderated from January 2010 to 2011.

More than any other ethnic group, Hispanics blew up and then popped the bubble.

Interestingly, the Asian rate grew sharply over the course of 2009, almost catching up to the black rate. The white foreclosure rate lagged the other ethnicities rates, finally closing some of the gap by January 2011, suggesting that white borrowers tended to be less cause than victim of the recession.

The more I look at the recent studies, the more I keep coming back to my initial reaction: Diversity, in the multiple meanings we assign that term, played a major role in the Recent Economic Unpleasantness. You might think that knowing this would be relevant to immigration policy, but that just shows you are a bad person.

44 EMichael January 19, 2015 at 10:42 pm


8000 households is anecdotal at best. See below where hundred of millions are “anecdotal.”

As my stomach is turning, I have not looked deeply into this study, but I have not seen any listing of what they considered to be “statistically adjusting for everything they can come up with (e.g., income)” Without that information, I have no idea if the specific difference between the loan performance is racial. And neither do you.

Finally, I love this part(which you repeated, “In the full specification, we find that black and Hispanic homeowners remain 1.5 and 3 percentage points more likely to be delinquent than non Hispanic white homeowners, respectively.

Because of their lack of information on how they classified the borrowers, this means almost nothing. Especially combined with the small sample they used. However, that is nothing compared to your statement that

“More than any other ethnic group, Hispanics blew up and then popped the bubble.”

Let’s take everything you cite as gospel despite the obvious problems. Ever think to figure out what % of the bubble mortgages were taken out by Hispanics? What % of the total loan amounts were owed by hispanics?

Nah, too easy to talk about “those people” crashing the housing market.

You got one post to make me think you are not a stone cold racist pig. And it better be a good one.

45 Steve Sailer January 19, 2015 at 10:47 pm

Sorry, but you, like most people, are about a half dozen years behind on the social science of the Mortgage Meltdown. You’ve got a lot of catching up to do.

46 Steve Sailer January 20, 2015 at 9:54 pm

Here’s a small but valuable study by the San Francisco Fed of the mortgage brokers in Oakland and bankrupt Stockton:


In one sense the subprime bubble was an affinity scam …

47 Steve Sailer January 19, 2015 at 10:29 pm

Here’s a regional study on Prince George’s County, Maryland:

“Analyzing Foreclosures Among High-income Black/African American and Hispanic/Latino Borrowers in Prince George’s County, Maryland”

“Katrin B. Anacker, James H. Carr, and Archana Pradhan

“Although Prince George’s County, Maryland, is the wealthiest Black/African American county in the nation, the national foreclosure crisis has had a profound effect on it. Using a merged data set consisting of Home Mortgage Disclosure Act (HMDA), U.S. Census, and Lender Processing Services (LPS) data and utilizing a logistic regression model, we analyzed the likelihood of foreclosure in Prince George’s County in the Washington, DC metropolitan area. We found that the borrowers in Black/African American neighborhoods with high-income were 42% more likely and Hispanic/Latino neighborhoods with high income were 159% more likely than the borrowers in non-Hispanic White neighborhoods to go into foreclosure, controlling for key demographic, socioeconomic, and financial variables.”

These race differences are after they statistically adjust the heck out of everything. I think it’s also useful to highlight the raw foreclosure rates in Prince George’s County, Maryland:

White: 1.91% (372 foreclosures)
Hispanic: 6.42% (3.4X the white rate, 1,091 foreclosures)
Black: 3.62% (1.9X the white rate, 4,219 foreclosures)

That’s a lot of Hispanic foreclosures for a county famous for its large affluent black population.


48 EMichael January 20, 2015 at 6:59 am

” they statistically adjust the heck out of everything”

You are an absolute horror of a human being. Throwing out such conclusions based on links that show absolutely nothing close to what you claim.

Humorously, you are not real smart about it either. You make claims with links as “proof” that go absolutely nowhere near where your claims are. But linking to studies as proof that actually show the opposite of what you claim is beyond chutzpah. From your link:

” Research has shown that regardless of their FICO score, Blacks and Hispanics were much more likely to receive a high‐cost loan, especially when that loan was facilitated by a mortgage broker. This hold strue even when we control for other factors, such as local housing and mortgage market conditions, fico score, and loan to value and debt to income ratio.

Indeed, in a multivariate model that controls for the majority of underwriting variables, we find that origination by a mortgage broker has a large statistically significant effect on the likelihood of getting a high cost loan for certain borrowers, and that this effect is greater for Hispanics and Blacks. (Figure 5) The marginal effect of using a broker is 22 percent for Hispanics, and 18 percent for Blacks. While it may not seem like an extremely large effect, it is approximately equivalent to a 200 point decrease in a borrower’s FICO score.”

Geez, I wonder how you missed that?

49 ezra abrams January 27, 2015 at 2:45 pm

by your own numbers, most of the problem occured either long before Obama took office, or shortly thereafter in response to pre obama events
so, how, exactly is Obama responsible ?
like Benghazi, where the GOPs *own* committee found no problem ? Like IRSgate, where 1,000s of teaparty groups committed crimminal fraud by pretending to qualify for tax free status (ok, most of em were probably confused by the tax code, it happens)

A poll found that 1/3 of people in the state of LA (I forget if all people or republicans) blamed Obama for teh poor response to Katrina….you should get inline bub

50 ivvenalis January 19, 2015 at 12:34 pm

Well, lending firms definitely mispriced risk when making loans, often for identifiable political reasons (the same drive to disregard actuarial data in favor of political considerations has been seen in Obamacare) but to the extent that this contributed to the housing crisis it can’t be blamed on the borrowers. Also, the mispricing of risk in CDOs wasn’t even tangentially related to the personal virtues of poor borrowers, nor was it the fault of the Fed as far as I can tell except maybe that they didn’t try to stop it. The market still tried to fix that (via the crash in value of mispriced instruments) but that would have involved the Masters of the Universe losing money, and we can’t have that.

51 Tom January 19, 2015 at 12:42 pm

I think the impression of low-income borrowers having a big impact comes from observing neighborhoods like the poorer boroughs of New York where subprime and default were rampant and price volatility was extreme. But granted many of those buyers were fraud gangs not low-income and the weight in the national mass of defaults was small.

52 Boonton January 19, 2015 at 1:07 pm

The ancedote got away from the raw facts with this one. Ten poor homes might have jumped in price from $80K to $120K. That’s $400K but that can be equaled by a single overpriced McMansion or a few middle class homes rising from $300K to $400K.

Homes at the bottom of the scale have a zero bound putting a limit on how low they can go. It also gets harder, even in a bubble, to price them too much higher. But there’s really no easy way to judge a home that costs $5M versus one that costs $10M.

53 JWatts January 19, 2015 at 4:36 pm

“Ten poor homes might have jumped in price from $80K to $120K ”

Wow, I didn’t realize I was in the poor bracket at the time.

54 Boonton January 20, 2015 at 11:20 am

Do you encounter many normal homes that sell for less than $80K?

55 Tom January 19, 2015 at 5:37 pm

It was a lot more extreme than that in areas like Bed Stuy, Jamaica (Queens). Roughly, values tripled then fell back by half (and have since recovered about fully). As I said a lot of these weren’t really poor buyers. It’s about the impression one gets seeing that kind of volatility in relatively poor neighborhoods.

56 Steve Sailer January 19, 2015 at 9:10 pm

No, the big losses in the first wave of the mortgage meltdown were in places like exurban California where dumpy 1600 square foot houses jumped from, say, $160,000 to $400,000 then fell back down toward where they had started.

The four Sand States of California, Arizona, Nevada, and Florida accounted for over 80% of home price appreciation during the Bubble.

57 ziel January 19, 2015 at 12:52 pm

These are extraordinary claims. Claiming that poor people didn’t cause the financial crisis is one thing, but the corollaries to this (described in the paper) are stunning: Mortgage sizes leading up the crash were not inflated vis a vis income; and that “liar loans” were not in any way a significant contributor.

Their analysis needs to be reviewed very carefully. It would be nice if instead of just PDF tables summarizing their analysis, they provided the raw data (with masked privacy info as needed) in computational-friendly datasets so others could gain some comfort in their work.

58 Jonfraz January 19, 2015 at 3:27 pm

On the contrary, “liar loans” did play a big role since they enabled house flippers with modest middle class incomes to qualify for loans on multiple properties by claiming to have six figure incomes or more.

59 Art Deco January 19, 2015 at 12:56 pm

Steve Sailer’s head will explode.

60 TheColourfield January 19, 2015 at 2:15 pm

And nothing will be found when it does

61 EMichael January 20, 2015 at 8:41 am

Unfortunately, I found something.

In honor of MLK day, I threw it out.

62 Boonton January 19, 2015 at 1:08 pm

Been saying this for a long time now. There are simply not enough poor or non-white people in America to have generated the housing crash. When you look at the changes in homeownership rates you simply don’t see the figures.

63 Dave January 19, 2015 at 1:24 pm

The current oil price slump shows just how sensitive markets are to demand. We’ve had a 50% decline in price based on a 5-10% shift in both supply and demand. The housing market is just as susceptible to small changes. When the market moved to a situation in which every home for sale had multiple-offers, the prospective buyers’ bids escalated to make sure they were the high bidder. Homes were escalating in “value” as much as $10,000 per month because a handful of bidders were chasing home ownership dreams. It was a classic example of market-based pricing driven mainly by desperate-to-own buyers facilitated by a climate of anything goes from the lenders.

64 Boonton January 19, 2015 at 1:33 pm

Oil is a relatively inelastic good, in any short period of time supply is whatever is being pumped that given moment. A small deviation in expected demand could cause wild price changes.

Houses, though, are not quite so inelastic especially as the boom lasted several years. One could always build new homes instead of getting into bidding wars with existing owners.

Where you did get a supply problem was not so much in the homes but in the loans. The bubble was in the financial markets more than the housing markets IMO. The world was conned into believing that the magic of financial engineering could spin crappy loans into high quality bonds. Crappy loans are what was suddenly demanded and to date there was a limited supply of them. This created the bizaar image of big Wall Street firms bidding on sub-prime loan outlets like Countrywide because they were afraid the competition would aquire the ‘loan factories’ leaving them with no supplies and the CEOs of big banks yelling at their employees that they needed to get into the subprime game.

65 Dave January 19, 2015 at 2:22 pm

In theory you are exactly right about elasticity, but in zoning constrained states like California, it is a long term process to build new housing. That’s why the existing stock of middle class homes got bid up so strongly. Texas, on the other hand, avoided almost the entire housing bust for a couple of good reasons. First, they could rapidly respond to increasing demand by building more…and they did. The other factor working strongly for Texas was their mortgage regulations. People don’t normally think of Texas as a strong regulator, but they have safeguards against exactly the type of loans that were problematic in Nevada, Arizona, Florida, and other fast growing states.

66 Boonton January 19, 2015 at 2:57 pm

But were even problematic loans structures the problem? A rather plain 30 year fixed mortgage could be a risky subprime loan if it was made to someone with a low credit score, a high debt to income ratio, and a small down payment.

67 Boonton January 19, 2015 at 3:01 pm

Also do we have any data that Texas was underreprsented in the CMO bonds that collapsed in value? If the theory that the bubble wasn’t in homes but in mortgages and related financial instruments, then Texas might be a useful set of data to look at.

68 Boonton January 19, 2015 at 4:09 pm

http://eyeonhousing.org/2012/08/the-geography-of-the-age-of-the-housing-stock/ would seem to confirm the view that places like CA had fewer new houses built than Texas. But it also appears to argue against the view that the US had a housing bubble.

For one thing, note that in 2009 the median age of a US house was 34 years old. Back in 1985 it was only 24 years old. If the US had such a huge housing bubble, why didn’t the average age of a home at least equalize with the 1985 level? It isn’t like sates like CA were regulatory utopias back in 1985. As strange as it sounds, we might be overdue for a lot of homebuilding still!

This would be consistent, however, with a bubble in home loans causing the production of ‘too many’ mortgages of all different types and quality.

69 Brian Donohue January 19, 2015 at 6:04 pm


There are those (like me) who are suspicious of people who constantly see bubbles everywhere.

Take a look at the historical graphs of housing starts going back to 1970 and changes in residential loan activity going back to 1950 here:


70 Steve Sailer January 19, 2015 at 9:25 pm

State level mortgage regulation is fairly important — Texas had fairly tight regulations on mortgages dues to the mortgage meltdown in Texas in the 1980s following the 1970s oil boom. The clearest example of this was Ohio, which had go-go regulations and a big collapse, versus Pennsylvania, which had tight regulations and wasn’t hit too hard.

But in the big picture, Ohio wasn’t that important because it doesn’t have very high home prices. California was the Big Kahuna of the Housing Bubble, due to its huge population and high home prices, and it’s spillover into Arizona and Nevada. One study came up with the four Sand States accounting for 7/8ths of the national decline in housing value in 2008.

All four Sand States had strong Hispanic immigration and, of course, you could get in big trouble if you put in an email that you were worried that Hispanics might not pay off their loans at the same rates whites traditionally do.

Is it surprising that if the government turns some facts into crimethink, that those are the facts that trip us up?

71 Steve Sailer January 19, 2015 at 9:57 pm

“but in zoning constrained states like California, it is a long term process to build new housing. That’s why the existing stock of middle class homes got bid up so strongly.”

Right — positive demand shocks in 2002 like interest rate cuts and the President telling his federal regulators to go easy on zero down liar loans in the name of diversity and fighting racism translate in Texas into newly constructed homes going on sale in maybe 2004, but not until, say, 2007 in California, and there mostly in the cruddy climatic regions of California. To build near the coast in California takes maybe 10 to 15 years.

72 Brenton January 19, 2015 at 2:56 pm

The bubble took place where the market was fairly inelastic due to zoning and other regulations, and didn’t exist where the market was elastic.

73 Todd January 19, 2015 at 3:32 pm

You comment would be correct if the bubble was only in California. But, it was centered in Florida, Arizona, Nevada, etc.

74 meyerkev January 19, 2015 at 8:12 pm


The impression that I get (not so much for Florida) was that the Arizona and Nevada were in large part overflow from CA.

If you’re a fairly standard middle-class suburbanite out in CA, you can either:

* Buy a house in CA for the better part of $1 Million.
* Buy a house in Phoenix for $200K, put up with 115F temps, and take a 20% paycut.

At which point they bid up Phoenix because even at $400K, Phoenix was a STEAL. Until CA crashed and Phoenix went with them.

75 Steve Sailer January 19, 2015 at 9:31 pm

The four Sand States have geographic as well as regulatory restraints on home building that the eastern half of Texas doesn’t have. Most of the job centers in Texas are located inland on flat plains with some local water supplies but not a lot of EPA protected wetlands either. So, urban areas can expand almost in 360 degrees. In contrast, California urban areas tend to be hemmed in by the Pacific and by mountains. Plus the climate deteriorates the further you get inland.

Arizona, Nevada, and Florida have a variety of geographic constraints that put them in between California and Texas, which led to moderately high home prices in the other Sand States.

76 Harun January 19, 2015 at 1:52 pm

Exactly. Enough people house flipping 5-10 units at a time, creates an artificial demand that goes away dramatically when prices start to fall.

I suspect these guys would not be in the low end of the market either, but in middle class areas. That would explain the locales.

Also, having 2nd and 3rd mortgages – that seems more like a middle class move, too.

77 Steve Sailer January 19, 2015 at 9:18 pm

“There are simply not enough poor or non-white people in America to have generated the housing crash.”

Under the Home Mortgage Disclosure Act, the federal government collects careful data on the race/ethnicity of everybody who applies for a mortgage in order to prevent discrimination. I encourage you to use the government’s interactive website here:


The government does not collect as careful information on who pays back their mortgage debt, but numerous economists and other social scientists have been working on the question of who defaulted in the first wave of the mortgage meltdown for the last half-dozen years using a variety of methodologies. They consistently point to the housing bubble being blown up by marginal buyers, typically working class and lower to middle middle class, and disproportionately Hispanic in areas with high rates of immigration and geographic or regulatory barriers to expanding housing.

78 Steve Sailer January 19, 2015 at 11:54 pm

As economist Tino pointed out to me in 2008, the federal HMDA database says that minorities received half of the subprime mortgage dollars in 2004-2007:


79 EMichael January 20, 2015 at 7:09 am


FHA home loan originations used to come up with total national sub prime loans percentage during a period where FHA home loans were almost a zero market share.

Just horrible.

You should not be allowed to talk to human beings.

80 rayward January 19, 2015 at 1:38 pm

As Cowen pointed out in his interview in the NYT this past fall, the rate of return on capital has been falling for decades. Hence, it’s not surprising that owners of capital would seek a higher return by taking on greater risk. I suppose it’s the debtors’ fault in the sense that less qualified borrowers didn’t have to take out mortgages in amounts and at rates they couldn’t afford, just because owners of capital were willing to make it available to them. I like to say that money’s gonna go where money’s gonna go, and that’s where there are higher returns, including higher returns attributable to higher risk. Financial reform, it seems, can’t change this law of economics,and human behavior. As long as the rate of return on capital is low, money’s gonna go where money’s gonna go. Real reform would address the rate of return on capital.

81 Sam Haysom January 19, 2015 at 1:40 pm

I feel a bit like the citizens of gotham when Batman doesn’t show up for the bat signal. Where on earth is Steve?

82 HL January 19, 2015 at 1:50 pm

He usually wakes up in the afternoon

83 Harun January 19, 2015 at 1:52 pm

He doesn’t take Martin Luther King day off.

84 Careless January 21, 2015 at 12:42 am


85 The Anti-Gnostic January 19, 2015 at 2:52 pm

It’s an old debate, and there’s no winning it regardless. The statements of Clinton, Bush and major players like Mozillo are public record along with the statistics from the Sand States and the extruded, rococo bundling and tranches which never seemed necessary to the secondary market before. That’s why I’m surprised this is still being flogged, and which leads me to wonder if Obama is about to announce a new ‘ownership society’ initiative.

86 Steve Sailer January 20, 2015 at 12:54 am

It’s difficult for contemporary people to wrap their heads around the reality that rich, powerful, influential people exploit our sacred cows for their own ends.

87 msgkings January 20, 2015 at 1:09 pm

Not as difficult for racists to wrap their heads around the fact that people are just people and what makes them similar is far more important and interesting that what makes them different.

88 HL January 20, 2015 at 2:19 pm

we’re all just dust in the wind man

89 msgkings January 20, 2015 at 3:19 pm

Also true, +1

90 Harold February 15, 2015 at 7:02 am

Could you give an example of something that makes people of different races similar that you consider interesting?

91 TheAJ January 19, 2015 at 2:00 pm

(in response to Sam Hayson)

92 EMichael January 19, 2015 at 2:24 pm


Investors were defrauded by the investment banks. End of story.


93 JWatts January 19, 2015 at 4:40 pm

Anecdotal evidence isn’t the same as data.

94 EMichael January 19, 2015 at 4:52 pm

Yeah, “anecdotal evidence” consisting of hundreds of billions of fraudulent loans rated by Citi’s chief underwriter.


95 JWatts January 19, 2015 at 5:09 pm


96 EMichael January 19, 2015 at 6:02 pm

And you think Citi was the only player?


97 JWatts January 19, 2015 at 6:49 pm

I think you aren’t really making a convincing argument. It seems that you believe projecting a single fact or idea makes for conclusive evidence. Just because a single piece of information is conclusive in your own mind doesn’t mean it will be convincing in anyone else’s mind. And honestly this isn’t the blog from which you can expect uncritical agreement.

98 EMichael January 19, 2015 at 8:06 pm


I love the idea that you criticize me for anecdotes by using sworn testimony from the head underwriter of one of the largest investment banks concerning hundreds of millions of dollars in mortgages, while not commenting on the use of anecdotes in every single post in here.

99 EMichael January 19, 2015 at 7:59 pm

I’d look at the lawsuits if I were you. Or the silly, insignificant little deals made with the investment banks in exchange for non prosecution. Or the saving of all of the investment banks by the QE purchases. Ever wonder why you cannot find out which MBSs the FED bought from the GSEs in QE, let alone who originated those loans?

100 8 January 19, 2015 at 2:24 pm

The crux of the argument is not that poor people created the mortgage crisis, but that poor people were the prop used to push through regulations that did lead to the mortgage crisis. The easy credit rules designed to help poor people were used by everyone because equality.

101 Jonfraz January 19, 2015 at 3:20 pm

There were very fewer legal changes: the old safe lending standards were never written into formal law; they were industry-generated and industry enforced, and then industry abandoned with little involvement from the government. The FHA never did change its standards and the GSEs did only late in the game when they noticed they were losing too many mortgages to Wall Street and figured that if the risky loans were good enough for Goldman they were good enough for Fannie and Freddie.

102 Donald Pretari January 19, 2015 at 2:32 pm

Just Poor People? It was Samuel Johnson who pointed out long ago that whatever negative characteristics you can apply to the borrower you can equally well apply a list of negative characteristics to lender, among them being not having the intelligence or perspicacity to know when to loan money or to whom. It’s a two-way street. I think ivvenalis made a similar point earlier.

103 Thomas January 19, 2015 at 10:02 pm

Sure but look who got bailed out and look who paid. I guess that makes taxpayers the counter party to GS, Fannie, Freddy, etc.

104 msgkings January 20, 2015 at 1:13 pm

It’s amusing watching various factions pick the ONE cause of it all. There’s clearly not one reason the bubble happened and popped. It’d be nice to have a simple villain, but life doesn’t work that way. Many authors to this story: poor borrowers, rich borrowers, middle class borrowers, white people, non white people, private lenders, government lenders, the Fed, appraisers, the media, bond investors, bond originators, etc etc.

It was a massive bubble people.

105 Brett January 19, 2015 at 2:36 pm

I remember Joe Nocera’s All The Devils Are Here pointing out that something like 60-70% of subprime mortgages were refinancings, meaning that somebody already had a mortgage and refinanced it higher so they could take out cash from the equity of their home.

106 Steve Sailer January 19, 2015 at 9:33 pm

True, but refinancings have much less impact on pushing up prices than home purchase mortgages. The increase in home purchase mortgages on the margin drove the Bubble which led to the Bust.

107 EMichael January 19, 2015 at 2:40 pm

Not my line(I wish it was), but the idea that “the hairdressers of the world defrauded the Goldman Sachs of the world” is insanity.

108 The Anti-Gnostic January 19, 2015 at 3:40 pm

I don’t know anybody who’s saying that. But I also don’t know anybody other than a few contrarians pointing out that the Goldman Sachs of the world made billions rigging secondary markets for loans to the hairdressers of the world, and getting the downside risk completely underwritten by the Treasury and Fed.

109 Steve Sailer January 19, 2015 at 10:01 pm

Rich and powerful people like Angelo Mozilo, Kerry Killinger, Henry Cisneros, and George W. Bush appealed to our devotion to Diversity as our most sacred value to benefit themselves economically and/or politically. We aren’t supposed to be skeptical when rich and powerful people tell us that people in the past were blinded by racism so that’s why they didn’t give as many home loans to Hispanics as to whites.

110 The Anti-Gnostic January 19, 2015 at 2:53 pm

BTW, I think the same sort of thing is brewing in auto loans, unbelievably.

111 Jonfraz January 19, 2015 at 3:17 pm

Except that no one expects cars to appreciate, so there’s no speculative market in “car flipping”, nor is there such a thing as a “car equity loan”.

112 The Anti-Gnostic January 19, 2015 at 3:30 pm

There is a large and growing secondary market for bundled auto loans, including title-pawn loans which are, in fact, “car equity loans.”

I’m guessing you don’t live in a very ‘vibrant’ part of town.

113 JWatts January 19, 2015 at 4:44 pm

I suspect that the middle man margins are so high in car equity loans as to prevent any kind of bubble.

114 EMichael January 19, 2015 at 4:50 pm

Title loans are a long way from actual auto loans. The people writing about the market in the NY Times don’t have a clue. Bundled car loans have been around for a long time, and are not a danger to anyone as long as the investment banks do not scam the investors again. Funny part of this “current” situation is that the sub prime bubble in car loans happened 10 years ago. Problem for the banks involved was that car loans go bad faster than mortgages; repos are fast; and you can’t sell a loan that is already delinquent. Capital One and AmeriCredit almost went totally bankrupt. HSBC and countless others went out of the business. Investors are not going to fall for that again.

In terms of “I don’t know anybody who’s saying that.” see Robert and several other posts in here. “Immigrants” indeed.

But your contrarian view is absolutely, 100% correct.

115 JonFraz January 20, 2015 at 4:29 pm

There are securitized loans in all sorts of things. securitization (which has been around for a while– nothing new under the sun) was not what drove the bubble, though it was what enabled the rapid metasthesis of the bust into the rest of the economy by dragging down the financial sector.
To have a bubble in cars we would see the price of cars rapidly inflating as people invested in cars as an appreciating assets– the pattern that has been true of bubbles from Tulipomania to the South Sea Bubble, to various land deal bubbles, to the 1920s stock bubble, to our 21st century housing bubble. Cars are not capable of that sort of price appreciation however.

By the way I live in Baltimore’s Pigtown, hardly the worst part of town (“The Wire” took place about two miles north of here), but a far, far cry from suburban Mcmansionland.

116 FC January 19, 2015 at 8:45 pm

It’s not a formal market but I can assure you that car flipping exists and can be highly profitable.

117 EMichael January 19, 2015 at 9:02 pm

Classic cars?

I’m in.

Regular cars?

Don’t be silly.

118 Alan January 19, 2015 at 2:54 pm

No matter the details of an economic problem, it is always possible to find data that proves the fault lies with people you don’t like.

119 msgkings January 20, 2015 at 1:16 pm

Exactly, especially when pretty much everyone was partly at fault.

120 Jonfraz January 19, 2015 at 3:16 pm

This is hardly a surprise. Before job loss as a cause came to dominate defaults and foreclosures, an inordinate number of them were related to “house flipping”– people buying up multiple properties, and holding them for resale when the price, presumably, increased. You had to have some money to get started in that game, even with the criminally lose credit standards that applied during the 00s. Poor people were not playing at that gaming table.

121 Robert January 19, 2015 at 3:39 pm

Absolutely they were. Poor people lied about their incomes on mortgage applications, and bought homes they couldn’t possibly afford because they knew there would be no repercussions.

The Mortgage Fiasco transferred at least a trillion dollars of wealth to lower- and middle- class deadbeats.

Nobody “lost their home”. People got to live in nice homes for a few years. Because it took years for a repo to be processed, many people even lived rent- and mortgage- free for years. They never paid income tax on the “imputed income” from the free rent. And not one of them every paid income tax on forgiven debt.

122 JWatts January 19, 2015 at 4:51 pm

“Absolutely they were. Poor people lied about their incomes on mortgage applications, and bought homes they couldn’t possibly afford because they knew there would be no repercussions. ”

Assuming you define Poor, as the lowest 20% of income, then that’s almost certainly not true. Effectively the few mortgages obtained by low income individuals (less than $20K per year) were a trivial portion of the market. Members of the 3rd & 4th quintiles were almost certainly the beneficiaries of the financial crisis, but it’s unclear to me if it wasn’t just a transfer within the quintiles instead of a wealth transfer from the 1st and 2nd quintiles downward.

123 Longtooth January 19, 2015 at 7:39 pm

Actually Robert the banks lied about the person’s incomes and the people just signed the lying documents, trusting the bank was doing this for the person’s own best interests without the bank taking on liability.

And the people were buying homes the bank told them they could afford… and showed them the mortgage payment they would be making relative to their take-home pay. You know only what your take-home pay is and what you can afford to dish out from that …you have no idea whether you can afford the house, only that you can afford the payments shown to you by the bank.

What the banks conveniently forgot to tell the people is that there was this “balloon” payment due (whenever) or that the variable interest loan payments could sky way beyond the means of the people to make payments. Of if they did tell them about these caveats they told them rapidly in financialeze speak that nobody but an accountant understands anyway.

In any event, there aren’t even enough poor people in the entire country who got these loans to account for bubble bursting. The bubble burst because when housing prices began to slow their meteoric rate of appreciation (are you going to blame the poor people home buyers for this too?), the investors in the re-packaged loans decided to sell their loans and then of course the demand for these dropped and so too therefore the prices the market was willing to pay fell even further, which induced even more owners to sell, so the glut of sellers drove the price for these repackaged loans to below their real face value, and hence a loss. Unfortunately for the banks, they hadn’t yet sold all their re-packaged loans so they were left holding a bag full of sub-prime mortgages they were then unable to pawn off, not to mention the loss of asset values of the inflated home prices they had been selling into.

You’d have to go back to what caused the initial abnormal rate of appreciation of home prices to find blame and the facts show that it wasn’t poor people lying on their mortgage applications — but the middle class seeking to buy and / or move into upgraded digs because — BECAUSE the banks were inducing home buying by offering lower entry rate mortgage terms, making it easier to purchase before saving 20% for a down payment. Why did the banks want to induce more home buying? Because they wanted another way to convert their cash to appreciable assets. Once that began, home buying demand exceeded the available equilibrium supply and home prices began appreciating… the rest was a home buyers bidding up prices because they were afraid that if they didn’t get in now they’d be left out by the increasing rates of appreciation…. a buying frenzy developed as a result… hence the bubble. The banks could have put a brake on this simply by increasing the mortgage loan terms again. Maybe you should ask yourself why they didn’t?

124 EMichael January 19, 2015 at 9:08 pm

” the investors in the re-packaged loans decided to sell their loans”

Where in the world does this come from?

Demand for these MBSs stopped when the delinquencies started. Not a whole lot of investors even knew enough to sell.

It’s like people think the investors of MBSs re-underwrite every loan and are familiar with them. Geez, even the rating firms only do a small sample of each package, relying on the reps and warranties of the sellers to keep them in line. Of course that is when the rating firms actually did their jobs as opposed to allowing the investment banks to intimidate them.


Think it wasn’t the investment banks that caused the entire housing bubble?

Take a look at the latest lobbying by the banks to change the penalties for violating reps and warranties on such offerings.

125 Longtooth January 20, 2015 at 3:22 am

EMicheal, the simplest of simple evaluations (and many other just as simple ones) of housing prices by anybody paying attention at all could and did show housing prices had peaked by early to mid 2004 already. A simple evaluation of the 2nd order polynomial (Least Squares) percent change in average prices of the three month rolling average monthly values showed that prices had clearly peaked between early and mid 2004 and were in steady decline to Jun 2005. This was obvious if you began evaluating the data even as late as from October 2002 (no prior data required). It was even nearly twice as obvious if you used the six-month rolling average, but a 3 month rolling average gave you shorter elapsed time to recognize it.

If you kept watching the data then by January 2006 it was even clearer and by mid 2006 you had to be blind or daft not to see it as clear as it could possibly be. By that time the price change had declined to 40% of the trend price change in October 2002.

My point is that a) buyers of the repackaged mortgages knew a-priori a certain percentage of the loans would default… that was disclosed. and b) they saw the price of housing had peaked and was in decline by no later than late 2005 …. no rebound was occurring and so knew that further appreciation in value of their repackaged loan certificate wasn’t going to occur… so began to sell them. This occurred long before defaults occurred at anything even close to the rate they eventually did. You might have forgotten that the packaged mortgages were collateralize assets with interest…. if the collateralized asset was depreciating instead of depreciating, then the interest wasn’t going to cover the principle, much less return the expected high ROI. The mom and pop investors who weren’t traders sat through the price decline fat, dumb and happy, but most purchasers of the collateralized debt were in it for the short term gains…. six months to three years max. They were the ones that began to sell their repackaged certificates and those who sold early enough made out… but that also reduced demand and that demand reduction accelerated as prices continued to fall.

You’re taking the naïve view foisted off on the dumb public by the banking and financial industry that it was all caused by defaulting on loans. The certificates were like equity stocks — made to appear like “index” fund stocks to maximize the proportion of investors looking for a “diversified risk” rising stock value but with the “assured” interest on their principle. They bought them as assets (not for the interest payments on principle, but for the asset value in them. If the underlying asset value appreciated then so would the value of their certificates. Nobody in their right mind was thinking about holding them until the loans matured! They were holding them until they’d appreciated enough… and for a while they did as the housing prices continued to rise… but as soon as they peaked and began to go side-ways the selling began. The rest is history.

126 EMichael January 20, 2015 at 7:04 am

I am speechless.

After this I had to stop:

“if the collateralized asset was depreciating instead of depreciating, then the interest wasn’t going to cover the principle, much less return the expected high ROI.”

And it wasn’t the typo that scared me.

127 EMichael January 20, 2015 at 7:13 am
128 The Other Jim January 20, 2015 at 12:58 pm

>people just signed the lying documents

Oh, well then. Sounds harmless to me! I mean, that’s all the Enron guys did. Nobody got upset about that.

>they told them rapidly in financialeze speak that nobody but an accountant understands anyway

I’m glad you were present at all these millions of home signings. I certainly hope you weren’t illegally wiretapping them. You know that’s a felony, right?

Maybe we need a law that requires lenders to write down the terms of the loan. I mean, other than the law we have the does exactly that.

>there aren’t even enough poor people in the entire country

Really? We have 47 million people on food stamps. How many completely unpaid 100K loans do you need before there is a problem?

129 JonFraz January 20, 2015 at 4:32 pm

The “transfer” was not permanent as those homes were lost and the people who were evicted from them most certainly did not laugh all the way to the bank.
There was really no transfer either: the money that went into the bubble was largely fictitious to start with. We were not as rich as we thought we were. Note however that the 1% types barely hiccuped, and are even richer now than they were before.

130 Longtooth January 19, 2015 at 6:46 pm

I went to a large national bank once to get a 2nd mortgage on a rental property. Interest rates were in the 17% range at that time. The bank loan officer told me that “I was getting a “home improvement” loan on my own residence” because they wouldn’t take a 2nd on a rental property. He filled in all the things I was “improving” and their costs so that it added up to the loan I was asking for. Where the paper said that the bank had verified the credible use of the home improvement loan he signed it. I provided my income statement and verification of full time employment, and my most recent three tax returns, and the loan officer filled out the bank’s papers adding 25% my income (he actually used a calculator and then rounded up to the nearest $100). I signed and got the check ten minutes later.

I went to another bank a few years ago for some reason or another and the officer handling my affairs said I needed to take out another home equity line of credit because my old one had expired. I said I didn’t need another one. He said it would cost me nothing to have it and I needed a larger equity line ($250k or some ungainly amount). He had his secretary fill out the application … putting value of the house at 50% over it’s actual market value, inflating my income by the apparently “standard” 25%, and listing my liquid and other asset at another 25% or in some cases 50% more than my own estimates. No verification of employment, income “required”. So I signed and got this new huge home-equity line…. and I did use it… I’ve been paying 2.49% APR interest on whatever balance I’ve had from time to time… no other fees, or annual costs.

So who can tell me banks don’t lie on their own paper to insure the loan goes through? None of the “improvements” listed on the loan I wanted for my rental property were ever done, nor were they intended to be done… the bank just invented them out of thin air. If the bank wants to loan you money they’ll figure out how to make the loan by lying about your qualifications. They don’t need the borrower to lie to them.

When loaning on properties, it’s simple — the property will appreciate in value over the long term unless the bank knows property values are inflated over their real value, so the bank’s assets appreciate in value — since cash deprecates the bank has incentive to convert cash to appreciable assets, especially when competing with other banks for the opportunity. If the risk of depreciation can be taken off their books by selling the risk to others, then so much the better… they get a transaction fee for that as well. Selling the risk to others is easy if the bank can get some other authority to authenticate the level of risk — but where nobody is undersigning the risk

It’s especially easy if the risk is embedded in complicated and unverifiable property values and unverifiable borrower’s ability to pay. It’s called caveat emptor. If it’s even remotely technically legal to swindle somebody out of their money the banks have it covered in spades. And the more-so when it’s not technically legal, but the fines if caught are small by comparison to the gains…. so net gain.

Yep, it must’ve been all those poor people that swindled the banks. Anybody inferring this is a shill for a bank or one of it’s beneficiaries (somebody owning stock or other shares of a bank’s interests), or a mortgage lender.

131 jorod January 19, 2015 at 9:17 pm

Or were the applications fraudulent??

132 TallDave January 19, 2015 at 11:22 pm

Poor people didn’t take out very many mortgages? They needed a study to tell us this?

133 The Other Jim January 20, 2015 at 12:38 pm

It was a 2-pronged disaster, for sure.

(a) Poor people, who had the finances to afford a $10K house which does not exist, went out and bought a $100K house. (b) Rich people, who were doing entirely fine with their $500K mortgage, went out and bought $400K worth of vacation homes and expensive additions. And in both cases, the new stuff was only really worth half of the purchase price.

It’s wrong to look at those numbers and say that (b) is to blame because of the bigger numbers. There were vastly more people making mistake (a), which drove the bubble, and inflated ALL the other prices.

But hey, refusing to loan money to those people was a hate crime, so whatareyagonnado?

134 ezra abrams January 27, 2015 at 2:54 pm

“Poor people, who had the finances to afford a $10K house which does not exist, went out and bought a $100K house”
doesn’t the bank that wrote the mortgage, or the wall street firm that securitized it, have *any* responsibility here ?

I mean, you loan your drunkard nere do well uncle 10,000$, you don’t expect to get it back, do you ?

135 Boonton January 20, 2015 at 12:55 pm

‘Ownership Society’ vastly overstated.

The overall homeownership rate barely changed during the so-called bubble. Look at http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/sonhr14-color-ch4.pdf. In 2000 it was a tad over 67%. It rose to a lofty peak of 69% in 2004 and by 2013 was down to 65%.

This is a swing of 2 percentage points.

Over on http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/sonhr14-color-ch7.pdf Table A-2 you can look at homeownership rates by race from 1995 to 2013.

Back in 1995 the black rate was 42.9% and in 2000 that had climbed to 47.6%. After that period, the so-called bubble and diversity lead expansion of mortgages, the rate peaked at 49.7% in 2004. It then dropped down to 43.8% in 2013.

Hispanics too follow the same pattern, 42.8% in 1995 going up to 46.3% in 2000. Then peaking at 49.7% in 2006 and going down to 46.1% in 2013.

You can see new home prices by year on http://en.wikipedia.org/wiki/United_States_housing_bubble#mediaviewer/File:Median_and_Average_Sales_Prices_of_New_Homes_Sold_in_the_US_1963-2010_Monthly.png

What jumps out at me is:

1. The increase in new home values does not appear dramatically inflated from trend until one gets beyond 2003.

2. If there was a surge in minority homeownership, the bulk of it was done by 2000. The increase from that point to the peak was only a slightly additional increase in homeownership rates (both Blacks and Hispanics saw about a 5pt increase from 95-2000 while the post 2000 increase was less than 2 pts).

3. Here’s a problem, if the increase in minority ownership was premised on making bad loans, the crash for minority ownership would have came before the general crash. By 2005 loans made in 1995 would be 10 years old already, 1/3 of their cycle paid off.

Reality checks:

* The bubble was not about increased homeownership. The change in actual ownership rates barely rises above statistical noise.

* The bubble was not about increased minority ownership. Again the late 90’s were the period of more dramatic increases in minority ownership rates, not the 00’s.

* The bubble was not about building too many homes. The nation’s housing stock is older now than it was in 1980. If we built too many homes in the 00’s we’d at least have a lot of homes today that are less old.

* The bubble was about loans and not houses. Homeowners were the primary targets as Wall Street desired the constant production of new loans. Homeowners without mortgages were ideal for creating new loans. Homeowners with mortgages could also generate new loans via refinancing. Non-homeowers were not ideal targets. Yes if you get them to become homeowners they will generate a new loan and then can generate refinances in the future, but if they are really so bad that they won’t even make the first mortgage payment you’d be wasting your time and money.

In reality the minority homeownership rate almost certainly tracks employment better than the real estate upswing, the financial bubble, and government efforts to improve minority homeownership. Get 5 years of decently low unemployment and you probably a few percentage points worth of minorities who start looking into making the leap from renting to owning. That was the Clinton years but not so much the Bush years hence there was only a modest uptick in minority homeownership.

* Ancedotes that contradict these checks can be true but useless to the analysis. Yes there were huge developments of McMansions left empty after the crash. Yes you’ll find examples of minorities who got liar loans and a few years later were renting again because they lost the homes in foreclosure.

136 JonFraz January 20, 2015 at 4:41 pm

Wall Street was not in the driver’s seat. Rather the clueless asses got taken for a ride by a bunch of con-men running shady mortgage houses– which were not banks and were not regulated and certainly not under the CRA. Countrywide was the best known of these businesses, but google “New Century Inc” for a look at one of the most reckless whose collapse in Feb 2007 started the dominoes falling– and cost their warehouse lenders on Wall Street a cool billion.

137 Boonton January 20, 2015 at 6:40 pm

Wall Street wasn’t in the driver’s seat, but Wall Street’s ignorance was. If the big Wall Street firms had simply sold a bunch of crap bonds built out of crap mortgages, then they wouldn’t have crashed. The worst that would have happened would be that when everyone else caught on they would stop making sales. The firms believed their own snake oil so not only did they sell lots of crap bonds, they also held lots of them in inventory and used them as collaterol for their own borrowing.

138 ezra abrams January 27, 2015 at 2:57 pm

are you actually asserting that the smartest, hardest working people in America – the bankers at Goldman Sachs – got taken by A Mozilo and Country wide ?
That GS, or JPMorgan, or Citi couldn’t afford to hire some CPAs to go thru the mortgages, even hire a couple guys in pickups, drive around a sample of homes , make sure they look ok ?

just not credible

139 Steve Sailer January 20, 2015 at 10:06 pm

Look up the fed’s Home Mortgage Discrimination Act database, especially home purchase subprime mortgages by ethnicity in places like the Inland Empire and Las Vegas. Prices are set at the margin and there was a huge flood of lending for home purchases to Hispanics in the Sand States, especially in the Bad Vintage years of 2005-2007.

140 Boonton January 21, 2015 at 2:46 pm

Prices are set at the margin but the trillions lost in the collapse happened in the meat. If one two bedroom house happens to sell for $1M that normally would sell for $300K that is, indeed, a huge increase in price. But in terms of the millions of mortgage loans out there it is only a drop in the bucket. That one mortgage may mean the end of a job for a loan officer but in terms of the industry it isn’t even a blip.

As I pointed out, Hispanic homeownership rates only went up about 2 points in the 00’s. Not very much at all.

141 Steve Sailer January 20, 2015 at 10:44 pm

“If there was a surge in minority homeownership, the bulk of it was done by 2000.”

Right, Bush’s Ownership Society wasn’t very effective at its stated goals of increasing minority homeownership even before it blew up the world.

142 Boonton January 21, 2015 at 2:47 pm

Ownership society blew up the world by making lots of bad loans.

But the Ownership society wasn’t all that effective at making bad loans.

Just to be clear that is the logic you’re pushing on us?

143 mp123 January 22, 2015 at 12:19 am

Where to begin…

Maybe we should start with your contention that home ownership rate increases were “barely above statistical noise.” Apparently you aren’t looking at the data. Many of your subsequent statements rely on this false assumption as an axiom, and thus they can all pretty much be discarded. http://research.stlouisfed.org/fred2/series/USHOWN

Blaming the problem on refis at lower rates, which often extend duration (reducing monthly payments) shows a lack of understanding. Go ahead and blame HELOCS that were deployed inefficiently if you would like, but Refi’s weren’t the problem. Also, do you understand that someone who owns a home outright and then later gets a mortgage isn’t considered to be refinancing? It doesn’t appear so basis your language.

Finally, while the article focuses on income distribution, it’s worth noting which traunches of home prices saw the largest increases and subsequent decreases (%). Namely, low priced houses. Thus if the article is to be believed, the middle income guys were buying the low priced homes. I suppose it’s possible, if the lowest tier of home prices were still too high for the lowest income generators. However, it’s also quite possible that incomes on all those Alt-A, stated income mortgages were penciled in higher than the truth in order to meet the already low debt to income requirements.

144 ezra abrams January 27, 2015 at 3:01 pm

Dear MP123, I hope you will reconsider your intemperate language, since your quarrel with boonton is not about home ownership rate data, but about the year to choose as basis
Boonton choose 2000, following from this, his conclusions are correct
You are presenting a longer data series

You might, or might not be rigth – but I think you should offer a reason why 1985, or 1990 is correct for looking at events in 2004 or so…I don’t have answers, maybe you do

145 mp123 January 22, 2015 at 12:21 am

Where to begin…

Maybe we should start with your contention that home ownership rate increases were “barely above statistical noise.” Apparently you aren’t looking at the data. Many of your subsequent statements rely on this false assumption as an axiom, and thus they can all pretty much be discarded. http://research.stlouisfed.org/fred2/series/USHOWN

Blaming the problem on refis at lower rates, which often extend duration (reducing monthly payments) shows a lack of understanding. Go ahead and blame HELOCS that were deployed inefficiently if you would like, but Refi’s weren’t the problem. Also, do you understand that someone who owns a home outright and then later gets a mortgage isn’t considered to be refinancing? It doesn’t appear so basis your language.

Finally, while the article focuses on income distribution, it’s worth noting which traunches of home prices saw the largest increases and subsequent decreases (%). Namely, low priced houses. Thus if the article is to be believed, the middle income guys were buying the low priced homes. I suppose it’s possible, if the lowest tier of home prices were still too high for the lowest income generators. However, it’s also quite possible that incomes on all those Alt-A, stated income mortgages were penciled in higher than the truth in order to meet the already low debt to income requirements.


146 Deadbeat January 20, 2015 at 12:58 pm

Here is my simplistic summary of the housing issues:

Bubba needs a Monica distraction, so triangulates with Rubin, Gramm et al, and sells out to Wall Street for Democrat campaign funding and elimination of the checks and balances of Glass-Steagall.
Maestro keeps interest rates too low for too long, in response to Y2K (remember that?) and then to 9/11.
Subsequent events like Iraq and Afghanistan get financed largely by debt and deficits instead of by some contributed revenue, as a rancid echo of LBJ’s Guns and Butter conundrum.

All that capital sloshing around the globe needs and finds a home in various asset classes and related yields, similar to water seeking its own level.
With fewer overall regulations, especially in the Sand States, combined with incompetent regulators, some venal lenders and less oversight, watery assets abound.

For each of those mortgages, 2nds, HELOCs, subprime, Alt-A or whatever else, there was a lender and a borrower that signed the documents.

Sleazy loan brokers and incentivized loan officers are part of the problem, in that they fudged, inflated, cut, pasted and otherwise did a lot of bad things.
They also took advantage of uneducated borrowers by fast talk, manipulation and sundry sordid techniques, all to meet company and personal quotas.
Many of those companies went out of business, taking away jobs, tax revenues and ruining lives of employees and their (choose one) clients, victims, unindicted co-conspirators.
There were also a lot of responsible (read, honest) lenders that followed the rules, had less loan growth and lived to lend another day.
Those lenders had supporting casts of relatively responsible regulators, such as the Texas and Pennsylvania examples noted above.

Borrowers were often, but not always complicit, in signing falsified loan documents.
They can not escape their responsibility and negligence in contributing to the problems.
They had a right to, but may not have requested, copies of their documents.
They also need to ask if they don’t understand, rather than just trusting that all will be okay.
Ask yourself if you would sign blindly whatever was put in front of you?

There isn’t a single bogey, as responsibility is widespread.

147 Steve Sailer January 20, 2015 at 10:02 pm

Right, any huge catastrophe has multiple causes. It’s important not to let the multiplicity of causes let us ignore a particular cause, though.

For example, why did the U.S. have to fight World War II?

For example, one reason was Pearl Harbor.

But surely America being vulnerable to sneak attack from the air wasn’t the only cause?


But it was a cause. And therefore America worked really hard on reducing that vulnerability, which worked for almost 60 years.

Similarly, the way we got exploited by the Mozilos, Bushes, and Cisneroses of America by diversity rhetoric is hardly the only cause of the Great Recession. But it was definitely a cause, and we ought to learn from that unfortunate lesson.

148 Boonton January 21, 2015 at 2:54 pm

Except if you said the reason the US had to fight WWII was because the Axis powers decided to go to war with the US, you’d be absolutely correct.

Asserting Pearl Harbor was the cause confuses tactic with strategy. If Pearl Harbor didn’t exist, Japan would have presumably found some other target to begin the war with the US. So if you emphasized the cause of WWII was the decision to put a base at Pearl Harbor or a lack of alert air defense at Pearl Harbor, you’d be confusing the trees for the forest.

Here the financial markets said “we have a new invention that will spin wool loans into gold ones”. The natural consequence from such a belief will be “well, let’s go get some wool loans and put them into the machine”. A more racist friendly America would not have altered the natural consquence of such a belief (namely lots of bad loans being made coupled with people buying the output thinking they were getting gold when they were really getting wool).

149 Larry January 20, 2015 at 9:37 pm

The defaults were a result of the crisis, not a cause. The flaw was in those who supported (throughout the mortgage supply chain) the explosion of sub-prime mortgages based on the proposition that house prices never fall.

150 mp123 January 21, 2015 at 11:45 pm

Weren’t a lot of the mortgages with the greatest defaults those with stated income? And weren’t those frequently misstated to higher income levels to justify the mortgage? The stated income mortgages carried higher interest rates, which only increased the probability of default. The higher rates (credit spread) weren’t enough to cover the losses because it was based on old algos, but that didn’t really matter to the brokers or banks, because post syndication they would look like AAA credit to be sold to pension funds et al. I’m not exactly sure how the data was collected, but it’s possible that the “middle income” borrower was only middle income in name. Who gets a negative amortization mortgage – people who can’t afford the payment!

151 ezra abrams January 27, 2015 at 2:52 pm

Why do people keep looking for complex conspiratorial solutions when simple ones suffice ?
Doesn’t Occam’s razor apply to conservatives ?

There is a simple story here: when the Reagan/Carter/Clinton cult of deregulation hit the financial industry, bankers and Real Estate people discovered that you could make Huge, enormous, titanic sums of money on quasi fraudulent mortgages and securities.

and of course Gresham’s law applies: people discovered they could just cheat (G Morgenson has some great articles 4 or 5 years go) and write liar loans, and Wall str would package them , and pay off the rating agencies.

why is this narrative, consistent with Adam Smith ( (when two businessmen get together, it is to cheat the public) so hard to accept ?

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