Further evidence that the housing crisis was about screwy beliefs, not moral hazard

Ing-Haw Cheng, Sahil Raina and Wei Xiong have a new paper in the AER, here is the abstract:

We analyze whether mid-level managers in securitized finance were aware of a large-scale housing bubble and a looming crisis in 2004-2006 using their personal home transaction data. We find that the average person in our sample neither timed the market nor were cautious in their home transactions, and did not exhibit awareness of problems in overall housing markets. Certain groups of securitization agents were particularly aggressive in increasing their exposure to housing during this period, suggesting the need to expand the incentives-based view of the crisis to incorporate a role for beliefs.

There are other versions of the paper here.


Or the mid-level managers are stupid and didn't know a bunch of people doing shitty things could cause the whole system to blow up.

Isn't that what "expand the incentives-based view of the crisis to incorporate a role for beliefs" means?

I.e., it wasn't that they were incented to ignore what they knew about the oncoming storm because they had no downside exposure at work, it was that they honestly didn't see the crisis coming. In their private lives, where they had plenty of downside exposure, they acted like there was no crisis coming.

Right, the 80s never happened in their view of economics. Real estate prices started climbing in 1776 and never dropped until the shock of 2008 when for the first time in American history, real estate prices fell.

I spent the 90s and 00s telling people that real estate prices could not keep rising forever, but could never sustain a price in excess of the original real cost to build and maintain it for long. Not being in the building trade, I can only use indirect evidence that prices were capped pretty well by costs until around 2000. By 2005, it was like 1985 when prices were so much above costs for competent builders, the cowboys who did not know what they were doing had jumped into property development and spec construction.

That I bought at the peak in 1985, fearing it was in a bubble, but buying a place to live for decades, and then saw the price crater far more than I could imagine, but the value not change a penny, I was perhaps far more tuned to the idea price does not equal value, and houses are most definitely not a way to "create wealth".

Still anyone in the financial industry should have studied history just since Reagan even if you think Reagan changed economics for the better.

@mulp - there was a scholar named Anthony Downs, free-market Reagan oriented, that predicted a crash in the 1980s that never happened (or maybe he was early), kind of like you. As for buying at the peak, we bought in the Washington, DC area in both 1989 (a peak) and 2006 (a peak) and both times, after a dip, we are now ahead, way ahead in the case of the 1989 purchase. Location, location and location. BTW, here in the Philippines you can buy 3 acres of prime farmland in a nice location, outside of Manila, for about $18k. Same in Greece, but for English speakers I would recommend PH. The catch? There are zoning laws that forbid multiple homes from being built on farmland, but you can build one house on it for about $25k (PH) or $100k (GRE) and enjoy your retirement with the caribou or goats, as the case may be.

My wife has a small house in PH. Agriculture in the Philippines is apparently somewhat unique in the emphasis on preventing losses as opposed to maximizing yields. And then there's the endemic corruption in both countries.

An olive grove in Boeotia is tempting, though.

"in the Philippines" and "in a nice location" are mutually exclusive.

i very recently bought a home in a very heated market (I give folks one guess which metro area). I told myself I was choosing buying rather than renting for good reasons, but the general atmosphere of craziness here definitely played a part - more than I think I would have admitted while I was looking/bidding etc

The nature of great bubbles is that virtually all insiders become true believers at the end. In the Tech bubble, the VCs (some of them) stopped taking outside money (and only used their own) because they thought the opportunities were too good to share.

Note that AOL bought Time Warner, not the other way around.

Back in 2007, I had a few meetings on Wall Street. Some of the Wall Street folks admitted that the Street was already in crisis (this is before Bear Stearns). I asked them how much commercial real estate had gone up in recent years. The answer was that the index had doubled of late.

I then asked this group (commercial real estate investors) if they saw any downside. Without exception they saw no risks in the commercial real estate sector. The fact that a crisis was already well underway and that the index had doubled didn't diminish their faith at all.

The funds they managed ended losing 80% of the invested capital.

The big developers like KB Homes started laying people off and diminishing inventories in mid-2006, exactly when house prices peaked.

Some people knew.

A banker might have been drinking the kool aid, or he may have thought higher priced homes would not fall far for long. They got the first part right. Lower priced homes rose the most and fell the most.

Of course they could have timed the market better in theory, but would they have been looking at the same set of homes six years later when prices bottomed? Would they still have equity for a 20% down payment? Could they have sold at the peak?

Goldman knew in '06; in December it began to more aggressively mark its mortgage paper (down)

In Nate Silver's book, he talks about how he was a professional poker player in Las Vegas during the Poker Bubble (which seems to have exactly coincided with the Housing Bubble -- people in California, Arizona and Nevada were using their houses as their ATMs and taking the spare loot to Las Vegas to lose it to beady-eyed pros like Nate). Then, in late 2006, the "fish" suddenly disappeared from Vegas poker games leaving only pros like Nate to prey on each other, so he started losing money and decided in 2007 to give up poker and start 538.com.

Oddly, Silver hasn't noticed yet that he missed the biggest score of the decade: that the end of the Vegas poker bubble should have told him that the housing bubble was over, but he hasn't noticed yet:


Commercial real estate wasn't the problem in 2008.

Yeah, it was. It's just that the problem was created earlier and only surfaced in 2008.

Commercial booms typically follow on the heels of housing booms. Businesses go where homes are. In this case, enterprises bought their own properties in record numbers, debt leveraged of course. They were betting both on a profitable business and capital appreciation. Refinance, and your monthly payments are lower than rent. And, you cant lose your business when you lose your lease. If anyone suspected a bubble, then ownership was a free option they could exercise later.

In this timeline at least, the collapse in 2008 was due to the deflation of the residential real estate bubble.

In the not too distant future, I will be executor of an estate in which the largest asset is a large property in one of the most desirable parts of Silicon Valley. If anyone has any advice on how to do sell this thing the right way, I'd be interested in suggestions.

I've been thinking I should plan on creating a website for the property. And doing some sidewalk sandwich-board handing out of flyers at Google and Facebook. (It's about three minutes drive from 85, which goes straight to those places.) Apple is about 2 miles north from here.

Geez, realtors get 9%? That seems like an absurdly high fee for handling an easy transaction that would not be less than $2 million, and likely far north of that. It makes no sense to me that a realtor fee would be a percentage of the value of the property. It takes the same effort to sell a $2 million property as a $1 million property, so why should the fee be twice as much?

I thought about running ads in a Hong Kong newspaper. It seems like ex-pat Chinese are everywhere around here. I guess if I create a website, it should be in Chinese as well as English.

Doubt it is the same level of experience and skill though. The effort to sell a higher priced home is probably much higher, but obviously worth it at the margin.

Realtors get 6%, and for high end properties you can usually get the seller's agent (yours) to drop their fee to 2% so the total is 5%

If you sell it yourself you save 2%, if you only sell to buyers without agents you save the whole 5% but you probably have far fewer buyers which will cost you far more than the saved commissions.

I think most agents can justify their 2-3%.

2-3% sounds reasonable and most likely quite worth it.

Use the wechat app to list it. You'll have an all cash Chinese buyer within hours.

Second finding a Chinese buyer. There are sites in China that list U.S. homes for Chinese buyers as well.

Here are two such sites: http://us.fang.com/ and http://www.juwai.com/US

They have relationships with U.S. realtors.

Well, not exactly - incentives! middle managers may *know* there is a housing bubble, but if they don't generate as much revenue as their nearest neighbor they get a lower bonus. It's hard to tell a bunch of competitive lemmings who are trying to out-earn each other they are running off a cliff. Nobody wants to be last.

If they *know* there is a housing bubble, why do they act privately like they *do not know* there is a housing bubble?

This study does not really measure whether they did not know, It merely measures whether they acted on it. If I find a lot of money, in the form of an undeserved bonus, I still spend it. Nobody ever said, gee you overpaid for that Maserati. In fact, for many people in securitized finance, including mangers, having a lot of money to burn is a sign of status in and of itself, as in: Look how great these new marble inlay toilets seats with warmers are

That hypothesis requires an additional assumption about how undeserved profits changes the proportion of housing spend devoted to consumption versus investment, as well as housing consumption versus other forms of consumption.

By the way, is anyone else getting rerouted to Google Bolivia when they click on the links?

No, it just means for some people in finance, housing and other items are a "veblen" good: http://en.wikipedia.org/wiki/Veblen_good

It's quite interesting how so many people posting on a blog purportedly about economics and who seem to be familiar with finance in the United States fail to grasp the concept of revealed preference.

If you got a large bonus like that, why would you plow it into housing you knew was going to lose value instead of another Maserati?

It makes one wonder why they get paid so much. The receptionist at my dentist told me home prices were too high in 2005 and she was paid 1/10 of what they earned. In is not average that is over, it is common sense

Everyone and their brother, and their dental hygenist, was telling me this in SF in 2000, heck my house in the foggy wastes of the city sold for 15k in 1972 and I actually knew the listing agents son, he remembered it because he thought it was overpriced back then.

So considering that trend in 2000, you would have been a fool to not buy then considering. Anyone can predict the great depression in 1921, heck even in craptastic third tier cities like Spokane and even Stockton, even inflation adjusted, you would still be ahead buying then.

The question isnt whether they would be better off now, but rather was the house the best use of their funds. Clearly if you know prices will drop, it is better to wait. But i suggest above that the quality of houses available for sale at the bottom isnt the same as those at peak prices. Some losses are rational since a house is primarily a consumption good. The ability to finance later is also important.

Good lord, you mean people buy houses to live in them -- and not as investments? How old fashioned.

nice, very neo-austrian

(the tendency of the hypothetically austrian crowd to hop onto the chicago moral-hazard bandwagon is a wee disappointing, really - shows who was in that camp just to yell about the government, rather than any conviction in the central ideas)

I wasn't aware that a scientist had to swear loyalty to a theory and abjure all other theories.

scientists dont. economists do

the explanations conflict, so one of them's gotta go. either one prices correctly or doesn't.

the tension between ratex and austrian pricing failures being one issue TC himself emphasized way back in 1997

Could someone help me understand Table 3? Does it show incomes increased not just from pre-boom to boom, but also boom to bust? Also, please help me understand this: "Row A tests whether the boom minus pre-boom difference in averages was positive by projecting person-level income onto an indicator for the boom period in a two-period unbalanced panel of person-level income."

With this study you can't reject the hypothesis, that these managers knew about a bubble, but failed to time the market. Also expectations may have taken off due to supply side changes (i.e. CDOs being sold to outsiders, here Europeans).

In the summer of 2007 I was interning at one of the many mega investment bank as a modeling and risk management quant in the structured products group (i.e. those were originating and trading sub-prime mortgage backed securities). By far the biggest risk concern at the time was interest rate exposure, with default risk on the super-senior tranches being considered an extremely unlikely scenario. Furthermore even the opinion of which banks were the riskiest was quite screwy. At the time, everyone thought that if a crisis was to occur it would certainly be Goldman that exploded, since they were perceived to be a hedge fund masquerading as a bank, and hence most exposed to various risks. Bear Stearns was viewed as actually one of the most conservative players in the space, and were described as a "moving company, not a storage company", i.e. they held on to very little risk.

All of this seems very silly with the benefit of hindsight. And the whole story tends to get simplified down to something like Wall Street bet that housing prices could never fall. In reality the better characterization would be that the products being traded had highly complex, non-linear, layered and opaque exposures to various exotic risk factors. Estimating a bank, or even a desk's riskiness, involved not just computing these exposures on single instruments, but across a portfolio of instruments whose correlation with each other was very complex and regime-sensitive. Furthermore many of the instruments had only existed for a few years, so people had very little experience or historical data to assess how they would perform across a wide range of scenarios. (Unlike say stocks or treasuries, where you can look at 1987, 1998 or 2001 to assess would your positions might perform in a panic or recession).

You're attesting to the sophistication of traders who turned out to be catastrophically wrong. Maybe if we ran this experiment 1000 times, you might be right. In this universe, they blew up.

My point is that the structured products market of 2007 differs from a classical bubble. In the case of Tulips or Pets.com, speculators ignore the underlying fundamentals in favor of chasing the mania of the price movement. This probably describes the housing market in overheated areas at the time, and in turn people assume the same thing dynamic was at play on Wall Street. I don't really think that's the case. Banks tried to figure out new financial technologies to synthesize safe assets out of the very quickly growing pool of risky subprime mortgages. This in itself is not an insane idea, the very purpose of a bank is the synthesize safe assets from risky ones. Your checking account is a pool of risky assets masquerading as hard money. They weren't attempting to bet on housing the same way home flippers were, rather they were attempting to profit off the financing without taking exposure. Much the same way brokerages finance margin accounts, without taking a significant underlying exposure to the speculators' positions.

A better analogy is the way options markets behaved prior to 1987. Before then the well-known volatility smile/smirk was absent from options prices. The Black-Scholes vol remained constant across the surface. Options only really started heavily trading in the early 80s, so there was little understanding about how to price far out of the money strikes. The financial methods used to price options were flawed, but not in a way that indicated a lack of common sense, like buying Pets.com in 1999. Rather it was a surfeit of knowledge and experience made by many extremely smart people who were doing their best to trailblaze a new and complex domain.

Some of Wall Street's problem was an over-investment in quant models and an underinvestment in shoe leather. Hiring a few cynical old auditors to wander around the Inland Empire and the like interviewing buyers and mortgage brokers would have exposed much of what's going on.

You're more right than you know; but most iBanks and hedge funds have adapted: http://www.muddywatersresearch.com/

Thanks, very interesting.

Thanks Doug, for sharing your experience and analysis.

We learn by doing, I agree.

The problem with correlations on risk assets is their tendency to move toward 1 during a crisis.

"Estimating a bank, or even a desk’s riskiness, involved not just computing these exposures on single instruments, but across a portfolio of instruments whose correlation with each other was very complex and regime-sensitive."

My friend who used to audit hedge funds has said the same thing. Just determining whether their clients finished the day long or short on a given security was a challenge.

"We find that the average person in our sample neither timed the market nor were cautious in their home transactions"

That's how you'd expect people existing in the shadow of moral hazard to behave.

Also: Rational bubble. As long as you're not the last one who invests, buying a bubble is perfectly rational.

1. Period under study was 2004 to 2006...would have been interested to see a period up to 4th quarter 2008.

2. Income levels for the group also probably rose faster than historical average as well, meaning that they may have had an income effect which led them to speculate (hey, I'm now rich, look at my bonus), or they may have rationally sought to purchase a house for the mortgage deduction.

3. In a bubble, there are always those who think that what matters is the existence of a greater fool to save therm. If you look at some of the bubble experiments involving grad MBA finance students, you will find that finance folks bid up assets, and did not dump them, even though they knew they were overvalued, thinking that they could get out just in time, and were themselves not the bigger fool.

Here's what it felt like inside the bubble from a mid-2000s Hawaii sales conference of Washington Mutual:


And more on the mind of Kerry Killinger, CEO of WaMu.


It could also be evidence that there wasn't a bubble, and that the insiders were rationally taking part in a reasonable bullish market.

Were they supposed to be able to guess in 2006 that the FOMC in 2007 and 2008 would be peopled with sadists?

I'm with you, but this is not the story people want to hear.

As I've said a million times, the Housing Bubble was in large part a bet on Diversity. As Bush, Mozilo, Killinger, Cisneros, etc. said over and over, the lower home ownership rates among minorities evidenced market failures due to bigotry, which they saw highly profitable opportunities increase racial equality and social justice by lending more to marginal borrowers. The big bets were made in the four Sand States, where huge Hispanic populations combined with high average home prices.

We all ought to know by now how that worked out -- in particular, the data on Hispanic defaults has been tabulated by economists and it's amazing -- but it remains difficult to put the true lessons of the last decade into words in public because that would involved expressing skepticism about the sacred tenets of Diversity Think.

No, the housing bubble was not a "bet on diversity." It was a bet on rising home prices providing the collateral that had previously come from down payments.

Lenders cared about making money, not helping minorities and plenty of white people with bad credit also got mortgages. Before they blew up subprime mortgages were the most profitable by far to lenders.

Lenders may not have cared about helping minorities, but they were rushing in to buy at rates never seen before because affordable products were available and regulators weren't picky about ITIN loans to landscapers with a stated income of $100K.

Many lenders like Angelo Mozilo of Countrywide and Kerry Killinger of Washington Mutual stated repeatedly that they were going to profit by lending more to traditionally underserved minorities. They had come to agree that racist redlining had irrationally restrained lending to minorities, especially to the fast-growing Hispanic population.

Here's Mozilo's climactic press release from January 2005, just after he'd gotten Fannie Mae to buy his mortgages:

Countrywide sets $1 trillion goal for real estate loan program
Funding aims to help minority, low-income borrowers

Countrywide Home Loans today announced an expansion of its We House America initiative to fund $1 trillion in home loans to minorities and lower-income borrowers and communities through 2010.

"The $1 Trillion We House America Challenge, expanded from $600 billion announced in 2003, embodies Countrywide's long-standing commitment to lead the mortgage industry in closing the home-ownership gap for minority and lower-income families and communities," said Angelo Mozilo, Countrywide Financial Corp. chairman and CEO, who announced the initiative at the International Builders' Show in Orlando.

"For several years now, Countrywide has been a leading lender to minorities and lower-income households," Mozilo said. "I am proud of our lending record and pleased to announce the expansion of our lending commitment to $1 trillion." The We House America program has already placed 2.4 million families into homes, Mozilo said that number should nearly triple by 2010.

The company will continue to develop innovative programs emphasizing non-traditional lending criteria, according to the announcement, such as calling for improved underwriting systems that eliminate the over-reliance on traditional credit scores that can mask a borrower's true credit-worthiness.

Countrywide last year launched Optimum Loan, a program that addresses obstacles for hard-to-qualify borrowers, such as allowing for non-occupant co-borrowers, other secondary income, and pooled funds for down payments. ...

"To ensure that this objective is achieved, we intend to expand upon our existing partnerships with specific community groups," Mozilo said.

Henry Cisneros, a Countrywide director and a former secretary of Housing and Urban Development, said, "This company is leading the industry in closing the homeownership gap through ambitious lending commitments, innovative programs, and a strong corporate culture that constantly looks for ways to improve."

Countrywide formalized its commitment to affordable lending more than a decade ago by launching We House America, an initiative to provide increased homeownership opportunities for all Americans. The previous commitment covered the years of 2001-10 and has provided $341 billion of home loans as of Dec. 31, 2004. The company is now extending the goal to $1 trillion by 2010.


A trillion dollars here, a trillion dollar there, pretty soon you are talking about real money.

Oh please Steve. It's amazing how gullible you can be when you want to be. The rhetoric from sub-prime lenders about helping minorities (and shareholders) was just cynical P.R (not to mention B.S.). Most of these loans were bad for borrowers and shareholders.

They were wildly profitable in the short term. They were good for the executives of these companies. Executives in these financial companies were hired, fired and compensated based on short term results. They got rich quickly under this system and they got to keep that money whether or not the loans went bad, whether or not their companies blew up and whether or not their companies got bailed out. If they couldn't show short term profits comparable with their competitors they were likely to be replaced. Incentives matter. Except when you don't want them to.

Minorities got a big share of sub-prime loans because they were the last big pool of live humans that didn't have mortgages.

And that's exactly my point.

Bush's 2002 White House Conference on Increasing Minority Homeownership sent a strong message to the Mozilos that the President didn't want his federal regulators enforcing traditional credit standards such as down payment and documentation requirements that had a disparate impact on blacks and, especially, Hispanics. Mozilo, who wanted to triple Countrywide's share of the mortgage market from 10% to 30% jumped on this opportunity to lend more, especially to Hispanics, as he repeatedly stated.

The problem is that in current American culture, while praising minorities, as Mozilo repeatedly did in explaining that he was giving a trillion dollars to people who would have gotten the mortgages before if not for bigotry, is highly acceptable, criticizing minorities can get you into trouble. So, there was almost no public pushback against the strategies promoted by Mozilo, Killinger, and so forth, especially not against their contentions that it's racist to think Hispanics would default at higher rates and not be able to create desirable neighborhoods where homes could be flipped at a high price if the borrower ran into financial problems.

Well no Steve, not "exactly." Your point is to claim that "current American culture" is too easy on racial minorities.

My point is to claim that current American culture is too easy on white collar crime. Not "exactly" the same thing.

Greg G:

Evidently, after all these years, you still don't get how white white collar criminals like Angelo Mozilo used anti-racist diversity rhetoric to get out from under traditional credit standards:


I realize that it's difficult for individuals in the 21st Century to understand how powerful crimestop has become in their own minds. Orwell defined crimestop as "of being bored or repelled by any train of thought which is capable of leading in a heretical direction. Crimestop, in short, means protective stupidity."

Another major factor is that our culture encourages what Freud called "projection." If you are feeling bored and repelled by a train of thought, a good way to protect your protective stupidity is to denounce the person who has come up with the heretical insights as "stupid;" it's easy to just to assume that the person who is pointing out facts and logic that make you uncomfortable is advocating a stupid version of his position. If you took the trouble to read what I've written, you'll discover it's sophisticated and quite original. But, you are feeling bored and repelled so why bother to put in any intellectual effort?

Youve got lernin to do:


Yeah, many minorities came late to the game, but that really isn't the issue. No one is saying that minority lending, alone, caused this crisis. Minority lending was part of a broader strategy of politics and self-enrichment. Minority lending was cutting them in on the deal. The dems found a money-making machine in the Housing Industrial Complex.


I am not arguing that the anti-racist diversity rhetoric wasn't there. It was there. Lots of it. It was window dressing. There never was much real political opposition in either party to letting big financial companies do whatever they wanted.

The political payoff wasn't really in minority votes since there never was a real political controversy about it until after things blew up. The real payoff was in money and lucrative jobs funneled to politicians of both parties in ways that were almost entirely legal.

Sorry if I've offended you by not seeing your analysis as nearly as sophisticated and original as you claim. Thanks for the psychoanalysis. Maybe I need some sensitivity training.


I was not accusing you of stupidity. When I said you were choosing to be gullible on this issue I was accusing you of being disingenuous which requires considerable intelligence to practice at the level you have done here.

As for how Orwellian it all is, the reality is that you are free to say whatever you want and others are free to criticize those comments. This is a pretty good good system and one that would have shocked Orwell a lot less than you claim.


Sure minorities were "cut in on the deal" in the sense that some of them got to live in better houses than they could afford for a few years before they lost them. And they were in on it in the sense that those of them who could get into positions of political power got paid like everyone else. Republicans were mostly on board with this too which is one of the things Steve gets right.

Take a look at what Newt Gingrich got paid for "consulting." Not all the payments took the form of political contributions which always normally move toward those who are increasing in political influence.

And several western European countries had massive housing bubbles without Fannie, Freddie or CRA. What they did have in common with us was financial companies with similar short terms incentives in executive compensation and a belief that the market knew best about credit allocation.

You just don't give up, do you ?

And he never responds when his arguments are demolished, like Greg G's comment above. Plenty of while folks got loans they shouldn't have too. I'd wager the % of poorly issued loans (liar loans or just poor credit risks) probably roughly tracked racial composition.

In other words, just to pick a number, let's say the 'Sand States' were 30% Hispanic...I'm guessing roughly 30% of the 'bad' loans went to Hispanics.

Actually, in one study using a national database, the PSID, Hispanics defaulted at 4.7 times the white rate.


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. "

SES: 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)

Ssatistically 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, unadjusted 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.

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

Here's the URL for this study:


Here's a study of just Prince George's County outside Washington DC:

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 black population.


Here's a George Mason study of the Atlanta metropolitan area:

Analyzing Determinants of Foreclosure of Middle-Income Borrowers of Color in the Atlanta, GA Metropolitan Area
Katrin B. Anacker
George Mason University - School of Public Policy
James H. Carr
Federal National Mortgage Association (Fannie Mae)
Archana Pradhan
National Community Reinvestment Coalition (NCRC)

July 14, 2012

GMU School of Public Policy Research Paper No. 2013-01

"Foreclosures have disproportionately affected borrowers and communities of color. Many studies have concentrated on the nation and specific metropolitan areas, but few academic studies have focused on Atlanta. 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 analyze the likelihood of foreclosure in the Atlanta, GA metropolitan area. We find that African American borrowers are 52 percent and Hispanic borrowers 159 percent more likely to go into foreclosure, controlling for key financial variables. We also find that African American middle-income borrowers are 35 percent more likely to go into foreclosure. Moreover, we find that exotic mortgage products, such as balloon mortgages, adjustable rate mortgages (ARMs) and mortgages with a prepayment penalty have a higher likelihood of foreclosure than standard 30-year fixed rate mortgages."

The raw, unadjusted results for the large Atlanta metropolitan area are that foreclosure percentages were:

White: 1.74% (5,692 homes in foreclosure)
Hispanic: 4.65% (2.7X white rate -- 395 homes in foreclosure)
Black: 5.82% (3.3X white rate - 8,271 homes in foreclosure)


You didnt "demolish" his argument, you demolished your own.

It doesnt matter that some/mamy white folks made stupid decisions or got raw deals. What matters is that Hispanics were DISPROPORTIONATELY impacted because they were targeted to be brought into the market. Buying at the low end, they got pounded worse.

I doubt you can show me data that Hispanics got PROPORTIONATELY more bad loans. I may be wrong, but I've never seen actual data showing that. If I see something showing that, Sailer at least has somewhat of a point.

Here's another study of foreclosures by ethnicity, this time by Carolina Reid of the San Francisco Fed, for the 50 largest metro areas. Some striking graphs here:


Reid's data for the 50 largest housing markets shows the Hispanic foreclosure rate was three times the white rate in 2008 and 2009.

Here we are a half dozen years from one of the biggest events of the century, one for which we now have abundant data, and yet I still keep getting accused of making stuff up. By now, the evidence is overwhelming that diversity, in manifold ways, played a major role in pumping up the Housing Bubble and in the subsequent Housing Bust. But diversity has become such a sacralized value in our culture that six years later, crimestop still makes people ignorant and angry when asked to think carefully about one of the great disasters of the age.

You've said it a million times and been wrong a million times. It wasn't so much poor people (of any race) who got in over their heads-- it was middle class house-flippers and HELOC abusers who did so. I worked for a major Wall Street firm during the bubble and bust and I lived in S Florida, on the ground zeros. I had a ring-side seat for the whole mess.

It wasn't the bottom quartile, since they seldom buy houses, it was the second quartile (especially) and third quartiles.

And we now have the data on defaults by race, although there seems to be little journalistic interest in synthesizing what has been revealed.

Well, we agree at least about which income groups were involved at least. And note it was also not so much a problem with people buying houses for the quaint old fashioned purpose of living in them: it was people buying houses to flip for some hoped-for major profit, and also people milking homes they lived in for consumption purposes via HELOCs. House flipping is where most of the liar loans come in: few of those people could have qualified for mortgages on multiple properties without grossly inflated (and false) income statements that were not subject to verification. Cousins of mine in Florida were involved in this; their account of how they coached by brokers to lie on their applications is pretty stomach-churning.
A caution I would add here is that the early defaults (2006 - 2008) need to be separated out from the later defaults (pro-Lehmann collapse) for any purposes of analysis. The former were mostly bubble-driven; the latter largely due to job losses.

An additional comment: I see no reason whatsoever why the racial breakdown should be of any interest to anyone other than racists. We all know that non-white people have lower incomes on the average than white people, and are also more vulnerable to economic disruptions due to similarly lower savings. It's hardly a shocking fact that their housing losses would therefore be higher too.

"the housing crisis was about screwy beliefs, not moral hazard"

1) Does the phrase "screwy beliefs" incorporate the idea of "screwy incentives"?

2) Do we really have to choose? Can't it be all of the above?

No. While we might find it reasonable to think that all of the above were involved, the whole point of experimentation is to discover marginal effects. If what the authors say holds up to scrutiny, then beliefs are convicted and moral hazars exonerated. Of course, proper scrutiny involves the quality of their assumptions, model, data, etc.

If you were a drug dealer and you knew that 20% of your drugs were adulterated such that they had an immediately lethal effect (but your clients didnt know this), would you be using your own drugs? Probably not, unless you were exceedingly risk loving. Thats an information asymmetry example, but it is similar to a moral hazard model. So if you DO use the drugs, then it provides evidence that you didnt know the drugs were contaminated.

I don't think you know many drug dealers

Yeah, I don't know many drug dealers either, but I think it's a pretty safe bet they'd be using their own drugs.

And as such, I think it's a great analogy.

We are not referring to one person, but multiple people. Some may have been directed by beliefs, others by moral hazard. In this way, both played a role in the crisis as a whole.

It's a pretty good paper based on lists of executives who attended a securitization conference v. their own personal home buying behavior.

I'd add the caveat that the higher up the pay scale you were, the less likely you were to get hammered by the housing bust. The big drops in home prices occurred in working class exurbs and the like, not in Malibu or the Upper East Side.

In retrospect, the Housing Bubble was a lot like the Rotherham statutory rape scandal: political correctness means we become cognitively biased. We are encouraged to praise minorities but strongly discouraged from criticizing them. Naturally, that cognitive bias leads to disasters like these.

Racist moron keeps on being a moron.

Sure, because no white people ever defaulted/took out liar loans/made bad housing decisions.

or, you know, created and ballooned the exotic securities markets and credit default swaps that actually tanked the economy. nope, it's all those poor minorities' faults!

From "Lost Bank," Kirsten Grind's book about Washington Mutual, which failed spectacularly in 2008, here's an account of a 2003 focus group hosted by a WaMu market researcher in Orange County, CA:

The 31 people who attended the dual sessions had two things in common: all of them held Option ARM loans, and few, if any understood what that meant.

Jenne listened patiently, as, over and over again, the borrowers described what they believed to be their loan terms. They had gleaned startlingly few details about their loans from the mortgage broker or the WaMu loan consultant who had helped them through the process. Most of them knew they held adjustable-rate loans.

They also thought the loan was cheaper than a regular mortgage, because they didn't have to pay as much each month. Approval hadn't been a hassle, the customers said -- WaMu had required little paperwork or income documentation. That's where their knowledge stopped. "From their perspective, it was a low payment loan, and that's all it was," Jenne said. "No one understood the option thing."

Some of the borrowers in the focus groups were first-time homebuyers, still awed by their new ability to capture the American Dream. Recently, President George W. Bush had announced plans to increase minority homeownership by 5.5 million people, piggybacking on the goals of his predecessor, President Bill Clinton. "We want people owning something in America," Bush declared at an expo in New Mexico. "That's what we want. The great dream about America is, I can own my own home, people say."

The focus group borrowers, some of them members of minorities, were effusive about their buying power. "They had been told by so many people that they couldn't afford one," Jenne said. Now they could.

Few of them understood what negative amortization meant, or that it could make their debt grow in the long run. ...

Half an hour into the first session with borrowers in Orange County, Jenne could tell that quizzing these people on their loan terms was futile -- they didn't know their loan terms. He got up, excused himself, and left the room. ... Jenne walked into another room at the sterile interrogation facility, behind a two-way mirror, where two mortgage production employees from the Home Loans Group had been observing the discussion. ... "I don't think we're asking the right questions," Jenne told them. The questions he had put together seemed useless. But the mortgage employees disagreed. They wanted him to ask about indexing, even though the customers barely understood interest rates. "Find out what the index means to them," they instructed Jenne.

... He asked the group of borrowers: "How does your interest rate change?"

No one responded.

"It changes, right?" Jenne probed.

The borrowers looked around the table at one another. Finally one said, "Yeah, it changes."

"I think it's indexed," offered one woman.

"Yeah, yeah, indexed!" agreed another. They had answered a question correctly!

"Well, what's it indexed to?" Jenne asked.

Another long awkward pause ensued.

"My loan is indexed to the Nikkei," proclaimed one borrower.

Another long, awkward pause ensued.

"Your mortgage is based on the Japanese stock market?!" Jenne thought to himself. "Of course I didn't say that, he said later. "But I'm going, 'Oh, my heavens.'" Strangely, in another focus group, in Illinois, another borrower also believed his loan was indexed to the Nikkei. Jenned never discovered where borrowers had received that information. "I don't think they were being told this by someone," said Jenne. "I think that the only index they had heard of, like on TV or something, was the Nikkei. It was just bizarre.

The borrowers did seem worried about the loan terms. One of them said, "It's really scary to me what's going to happen in five years." Another echoed the same sense of foreboding with a slightly more compressed time frame. "Something terrible happens in three years." Said a third borrower: "I'm a little nervous about it. I have this feeling of impending doom. It's almost too good to be true."

On the other hand, the borrowers seemed comfortable in their ignorance. "Despite their lack of understanding, participants were almost universally happy with their loan choice," the report noted. ...
The Home Loans Group wanted Jenne to recommend ways to market the Option ARM. So, Jenne and his team noted in their follow-up report that the best way to off-load the product onto customers was to tell them little about it. That avoided the problem of complicated loan terms and words that no one understood. "Focusing on the right 'need to know' information is critical to developing more Option ARM sales. Participants seemed easily overwhelmed by the product details," the report concluded.

... Jenne came to believe that the Option ARM wasn't just a bad idea -- it might be evil. "After awhile, I lost that feeling," Jenne said. "Then I came back to it later on. And then I thought, 'No, no, this product is definitely evil.'"

Whether or not [CEO] Kerry Killinger saw Jenne's research on America's hot new mortgage product -- and it's likely that he didn't se it -- WaMu doubled its annual Option ARM production to $68 billion in one year. By early 2005, WaMu promoted its loan as its "signature mortgage." It made up more than 25% of all the mortgages WaMu made or purchased.


The vast Mexican surge into places like Orange County over the last few generations represented basically Fresh Meat to exploit for Newport Beach MBAs with spreadsheets. When you hear the Donor Class of the GOP talking about the need for "immigration reform," that's what they mean: more Fresh Meat.

Dr. Carolina Reid of the San Francisco Fed did a little study of what the housing bubble looked liked from the bottom, interviewing 80 home buyers in Oakland and Stockton, 84% minority:


She finds that homebuyers who used mortgage brokers were ripped off significantly worse than others. But even after the disaster, most of them really liked their mortgage brokers. One reason was because of the proliferation of minority mortgage brokers in the 2000s. The parallels to affinity group pyramid schemes like Madoff's are striking. Reid's study suggests that in some ways it's useful to think of the mortgage meltdown as a government-sponsored affinity scam.

Eventually it became about "follow the money" by 2003. I bet GWB which he had pushed that multi-trillion dollar space program idea............in 2001. May have caused the money "go elsewhere".

Of course the "managers" would be whining about the space boom crowding out their investments in RE(not panning out).

This is 100% bullshit.

Housing didn't cause the 2008 recession, the Fed's insane tight money policy did.

End of story. Anybody who argues otherwise is retarded.

If a plumber doesn't fix your leak do you then say he caused your leak? Maybe you are being sarcastic and I am not smart enough to figure this out...

you're a moron. but even so, I'm gonna waste my time trying to explain how it works

if I hire a plumber so that he's on call 24/7 and gets paid regardless of whether he has anything to fix or not - and when a pipe eventually breaks, he has a look and says "I should probably fix it, but I won't - because you're lazy and gluttonous and I should teach you a lesson" - then yeah, it's the plumber's fault

get it now, imbecile ?

The pipe did not eventually break. It was broken by a bank. The question asked is whether the bank broke the pipe knowingly. The actions of the plumber are a separate issue. However it is nice to know you feel the Fed can fix any possible problem in the economy even possibly illegal actions by banks.

You are a total moron.

Let me know when you get what aggregate demand and aggregate supply are supposed to model, then we'll talk.

Of course, I'm being generous here by assuming you're capable of abstract thinking - which doesn't seem to be the case.


Anyway, to use you metaphor - the plumber is supposed to fix the pipe (which, I'm assuming, is a metaphor for "aggregate demand") regardless of who broke it.

And yes, the plumber (aka "The Fed") is omnipotent when it comes to fixing pipes (aka "managing aggregate demand"). Anybody who says otherwise is a brain-dead moron who doesn't understand how fiat money works.

We're not a gold standard, imbecile. Get it ? When AD falls, the Fed can always print more money to make up for it. Which is what the law requires them to do, anyway.

Is anything I'm saying getting through to you - or is your lonely little brain cell too overworked ?

It is very hard not to find fault with omnipotent beings. I have given up trying to believe in such a thing. But I agree with unlimited power comes unlimited blame. On this issue even if the Fed does have unlimited power over aggregate demand wouldn't there still have been supply side issues that would impact the economy?

You just love being a moron, don't you.

Yes, there still would have been supply-side issues. But guess what - there will always supply-side limitations.

You know how a supply-side recession would look like ? A fall in output and a rise in inflation.

WHICH IS NOT WHAT WE HAD - namely, a fall in both output AND inflation - that's a clear sign of a demand-side recession.

And who manages aggregate demand ? That's right, the Fed does.

And the fact that you can't grasp that fiat money means THE FED IS NEVER POWERLESS only speaks of your intellectual limitations. That is to say, you're nowhere near as smart as you think you are - but that much was obvious already.

This supply side recession - what would have been the cause of it?

I don't know how things worked out in the parallel universe you inhabit - but over here, WE DIDN'T HAVE A SUPPLY-SIDE RECESSION.

What it would have looked like is clear - a couple of years of low growth and higher than normal inflation. Which would have been much better than the demand-side recession the Fed inflicted on the US economy.

And are you actually asking me what would have been the cause of something that didn't happen ? What's next, are we going to debate how many angels can dance on the head of a pin ?


There are many conservatives (possibly most of them) that would argue an inflationary recession is worse than a deflationary one. Are these people all morons as well?

Are these people all morons as well?

They are either being morons, or engaging in rent-seeking (under deflation, cash has positive return).

Either way, their bullshit (and yours) should be ignored.

Just ask yourself - what's worse, having a job while having to pay more for gas - or being out of work, but with a lower gas bill ?

Not to mention that those conservative morons aren't even considering the political dimension - when the sh*t hits the fan and millions suddenly find themselves out of work, that's when political extremists suddenly find an audience. It wasn't Weimar's hyperinflation that brought Hitler to power, it was Brunning's deflation.

Is anything I'm saying getting through to you, moron ?

I feel a posting of the fed funds rate coming on. But it also shows the plumber installed the leaky pipes in the first place.

I give owners of capital more credit than other commenters. As Cowen has pointed out (in his interview in the NYT), the rate of return on capital has been falling for 30 plus years, so its not surprising that owners of capital have sought higher returns by taking on more risk, risk that sometimes results in bubbles, bubbles that burst, and financial crisis. Why has the rate of return been falling? Sun spots? Global warming? I read this week that that the financial crisis was caused by the failure of the rating agencies to properly assess risk. That's like blaming the iceberg spotters for the sinking of the Titanic. Unless and until we come grips with the falling rate of return on capital we are doomed to rinse and repeat.

The rate of return is falling because markets are getting more efficient due to improvements in technology in various forms.

Everyone thought that nationally, year over year housing prices would be flat at worst. This means if the borrowers couldn't pay, the lenders would be whole, so underwriting didn't matter.

Here's Bob Shiller in Irrational Exuberance (2005), who everyone presents as having called the crisis:

“In cities where prices have gotten so high that many people cannot afford to live there, the price increases may start to slowdown, and then to fall. At the same time, it is likely the boom will continue for quite a while in other cities [page 206].”

A reasonable inference is that a housing bear thinks wasn't even suggesting a year-over-year decline, just a decline in some cities.

The decline in housing prices were really two different phenomena: there were the declines, largely in the Sand States, that set off the recession, and there were the later declines that were the result of the recession.

Dear imbecile,

Please explain the mechanism by which, under an inflation targeting regime, a decline in the price of an asset can set off a recesion.

What's that you say ? There isn't any ?

Thought so.


The Nate Silver Effect: the failure of homes in CA, AZ, and NV to continue rising in price past the middle of 2006 meant fewer home flippers were vacationing in Las Vegas because they weren't as wealthy as they had expected to be.

Ok, and how does that lead to less hours worked (that is, a doubling of unemployment) UNDER AN INFLATION TARGETING REGIME ?

Are you going to answer or are you going to dance around the question like the monomaniac idiot you are ?


That is the question.

Can you read, moron ? Can you understand what you're being asked ? Or are you too busy fighting the brown-skinned bogeymen hiding under your bed ?

When you find you're not as wealthy as you expected to be do you go on a long vacation, moron ?

Are you so stupid you can't even grasp the implications of what you're claiming ?

Read about the shuttering of the half-finished $5 billion Echelon hotel development in Las Vegas in 2008:


Right. My bad. Should have known better than to try to reason with someone so retarded he actually buys into austro-cultist bullsh*t.


Hey moron - how does it make you feel to know that you're a liability to your own cause ?

I mean, I actually agree with this HBD stuff, yet I'm embarrassed to be on the same side as you.

Of course, I don't expect you to actually understand anything I'm saying, since that is the nature of the Dunning-Krueger effect.

well fuck my shitting asshole, goddamn you convinced me daniel

You're such an asshole, you could even be a regular contributor of EJMR.

Also, ZLB and heterogeneous MPCs are answers to your question.

ddd, you're such a moron, I'm amazed you're able to breathe and type at the same time

ZLB is bullshit, it exists only in the brains of imbeciles who can't grasp that Keynes' General Theory only applies under a gold standard.

A major cognitive problem was that the rule of thumb that housing prices didn't go down nationally had been rendered irrelevant by the sheer size of the inflated Sand State markets. By 2005 California alone accounted for about 3/8ths of all the home values in the country. In 2008, 7/8ths or so of the national decline in home values was just in the four Sand States of CA, AZ, NV, and FL.

That was enough to kick off a national credit crisis.

I think the phrase "mid-level managers" explains a lot about this apparent paradox. The mid-level managers presumably were not responsible for the strategy of the firm, just the execution. As a mid-level manager they probably did not have the full picture of what was going on as well. So they would not necessarily be more informed than any given member of the public. But this still leaves the paradox at the top level, where many people were highly invested in their firms stock, despite having access to the big picture. My view is that at the top level there were two things going on - first there were people who knew there were risks, but were so highly compensated (not just in money) that they didn't care. Chuck Princes's famous remark about "when the music is playing you have to dance" comes to mind. The second type of person at the top level was the true believers, these tend to arrive at a position not by analytical means but by their characters fitting the current paradigm. Basically they have risen in the ranks because of their hard driving personalities delivering results regardless of the consequences. Its like a specialized ecological niche, if their special nature fits the niche, they can be highly successful but if the niche disappears they are not able to adapt. I know quite a few very rich people and it seems like very often they fit this model. I was always puzzled as to how they could be so successful given they were never particularly highly analytical.

In any event the story here on moral hazard isn't actually the people in the banks, but the people supplying the bond money. The banks actually invested very little of their own money. Bond investors were the ones funneling large sums to banks to make these investments, the banks were acting more like middlemen or agents placing that money into the market. One reason that the bond investors were willing to put so much money into such a risky market is that they believed the US would bail them out because the contagion risk. And they were (mostly) right.

Good analysis. Angelo Mozilo of Countrywide and Kerry Killinger of Washington Mutual fit the model of the not exceptionally-analytical hard-chargers who rose all the way to the top.

It also was not so much the actual banks that were behaving badly (though sometimes they were)-- it was the non-bank lending firms, like Countryside or New Century Inc.

Right, although some banks bought really notorious subprime bucket shops, like Kerry Killinger's seemingly respectable WaMu bank acquired Roland Arnall's Long Beach subprime lender.

In some cases the banks were over a barrel; they had served as warehouse lenders to these firms and were left holding billions in worthless paper when the stuff hit the fan. Absorbing them in the hopes that somewhere amid the dross there would be a few nuggets of gold seemed a possible loss remediation strategy. (The most famous example being BofA's taking on Countrywide)

Turkeys won't never, ever, believe in Christmas. Just because if it ever happens, no matter what, they're dead.

This is a great example of why Sumner is right when he says that there are no bubbles. Prices are a function of what people believe, but expectations change all the time.

OTOH prices can be systemically distorted by destroying information in the financial system through coercion, which is what happened in the US housing market as part of an explicit policy to promote homeownership.

The information was not "destroyed"-- it was certainly out there in firm systems. The problem was that too many people convinced themselves it did not matter-- that they had found a way to do an end run around risk. Add to that an intense focus on short term profits over long term stability and the roots of the crisis are easily understood-- the attitude was "Risk doesn't matter-- or if it does, we don't care because we've made a killing and someone else can clean up the mess". Coercion did not exist-- no lender was ever told by any bureaucrat "Make this loan or else".

Important information was generated by traditional standards such as:

- Being able to make a downpayment

- Being able to document income

George W. Bush explicitly denounced both standards as causing racial inequality in his speech at his 10/15/2002 White House Conference on Increasing Minority Homeownership.

Here's Bush's July 17, 2002 speech promoting his upcoming White House Conference:

"Three-quarters of white America owns their homes. Less than 50 percent of African Americans are part of the homeownership in America. And less than 50 percent of the Hispanics who live here in this country own their home. And that has got to change for the good of the country. It just does. (Applause.)

"And so here are some of the ways to address the issue. First, the single greatest barrier to first time homeownership is a high downpayment. It is really hard for many, many, low income families to make the high downpayment. ...

A third major barrier is the complexity and difficulty of the home buying process. There's a lot of fine print on these forms. And it bothers people, it makes them nervous. And so therefore, what Mel has agreed to do, and Alphonso Jackson has agreed to do is to streamline the process, make the rules simpler, so everybody understands what they are -- makes the closing much less complicated.

We certainly don't want there to be a fine print preventing people from owning their home. We can change the print, and we've got to. We've got to be wise about how we deal with the closing documents and all the regulations,...

And so these are important initiatives that we can do at the federal government. And the federal government, obviously, has to play an important role, and we will. We will. I mean, when I lay out a goal, I mean it. But we also have got to bring others into the process, most particularly the real estate industry. After all, the real estate industry benefits when people are encouraged to buy homes. It's in their self interest that we encourage people to buy homes. (Applause.) ...

That's why I've challenged the industry leaders all across the country to get after it for this goal, to stay focused, to make sure that we achieve a more secure America, by achieving the goal of 5.5 million new minority home owners. I call it America's home ownership challenge.

And let me talk about some of the progress which we have made to date, as an example for others to follow. First of all, government sponsored corporations that help create our mortgage system -- I introduced two of the leaders here today -- they call those people Fannie May and Freddie Mac, as well as the federal home loan banks, will increase their commitment to minority markets by more than $440 billion. (Applause.) I want to thank Leland and Franklin for that commitment. It's a commitment that conforms to their charters, as well, and also conforms to their hearts.

This means they will purchase more loans made by banks after [African] Americans, Hispanics and other minorities, which will encourage homeownership. ...

It means we use the mighty muscle of the federal government in combination with state and local governments to encourage owning your own home. That's what that means.


Low down payment loans have been common for decades-- but they came with with very strict standards and mandatory PMI. The problem was not low down payments as such, but the abandonment of the standards and PMI.
The liar loans, I will agree, were very much one of the prime movers of the bubble. Documented income would have prevented house flipping and in many cases kept HELOC abuse under check.

No, it was destroyed.


Coercion did not exist– no lender was ever told by any bureaucrat “Make this loan or else”

See above. They were in fact told "make these loans or face these consequences."

Risk doesn’t matter– or if it does, we don’t care

They couldn't see the risk. That's why their investment patterns weren't different.

Here, I'll even excerpt:

What about "No Money Down" Mortgages? Were they required by the CRA?
Actually, yes they were. The regulators charged with enforcing the CRA praised the lowering of down payments and even their elimination. They told banks that lending standards that exceeded that of regulators would be considered evidence of unfair lending. This effectively meant that no money down mortgages were required. A Treasury Department study published in 2000 found that the CRA had successfully lowered down payments not just for CRA loans, but for all mortgages.

Explain the shift in loan to value away from the traditional lending requirement of 80%.
Again, the regulators told banks that much higher LTVs was an appropriate way to meet the CRA obligations.

What about the elimination of payment history? How about income requirements?
Regulators instructed banks to consider alternatives to traditional credit histories because CRA targeted borrowers often lacked traditional credit histories. The banks were expected to become creative, to consider other indicators of reliability.

Similarly, banks were expected by regulators to relax income requirements. Day labors and others often lack reportable income. Stated-income was a way of resolving the gap between actual income of borrowers and reported income. The problem, of course, comes when the con-artists and liars come into the game.

Did the CRA require banks to develop automated underwriting systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?
This was another lending innovation praised by regulators to the point that it became mandatory for banks. Those who were not employing automated underwriting would be putting their CRA ratings at risk. Automated underwriting was seen as a way of eliminating bias in lending.

All of this is flat out propagandist lies told by the reality-challenged Right because it is unable to facet he possibility that the sacred Market can in fact become dysfunctional-- and as a benefit the Right can also blame the poor and the swart of skin and dat ole debil Gubermint.

Analyses of the CRA and the crisis by non-ideologues has shown no connection. (And for the thousdandth time, the worst practices were at non-banks institutions which were not governed by the CRA)

What about “No Money Down” Mortgages? Were they required by the CRA? Actually, yes they were. The regulators charged with enforcing the CRA praised the lowering of down payments and even their elimination.

Sounds like you are saying 'praised = required'. Did they require no-money down mortgages or not? And how exactly do you explain why the biggest and most nortorious lenders in the market were entities like Countrywide that were not even covered by the CRA because they did not take deposits and hence were not considered banks? I remember the era well, when we had done multiple refinancings, never were we doing it through a bank. Even then banks were known for being far too tough and financial firms were the place to go for loans (which, ironically, almost always ended up in the hands of a huge bank after 6 months or so in).

The actual banks only began lowering their standards toward the end of the bubble: c. 2005. They were losing a lot of business to the Countrywide type lenders. Likewise with the GSEs, which were losing business to the Wall Street banks; it was only late in the game that Fannie and Freddie started purchasing riskier loans.

As for the CRA, it would certainly have been possible to place lower income applicants in safe mortgages on properties they could afford-- and the primary responsibility there belongs to the real estate agents who should have been steering clients to affordable housing. In 1995 when I had an income of just 30K a went house hunting and the realtor showed me only lower end properties in my price range-- I bought a house for 70K (well within the traditional standard that a house should be priced at no more than 2.5 times the borrower's annual income). Had this prudent practice continued instead of realtors steering people to pricey properties there would have been no bubble and the CRA folks would have been content as well. It's not that lower income people got mortgages, but that they got unaffordable mortgages.

This is the perfect web site for everyone who wants to understand this
topic. You know a whole lot its almost hard to argue
with you (not that I actually would want to…HaHa). You definitely put a brand new spin on a topic which has been discussed for many years.
Excellent stuff, just great!

This story seems to put the nail in the coffin of Steve Sailor's theory, as well as others, about the Great Recession.

Let me present a hypothetical. Say there's a very big public hospital with a sizeable HR department responsible for hiring the numerous doctors, nurses, and other techs at the hospital. Suppose this HR department is given the mandate to hire for diversity rather than quality. Say that the health benefits for workers at this hospital are very good, they can use the public hospital or an array of private hospitals for their healthcare.

Now, what do you think we would find if we could look at the health records for them and their families? Well if we find that they started getting more healthcare at other hospitals, that would hint to us that they believed the mandate was causing the hospital's quality to decline. What if, though, we discovered they were increasing the use of the public hospital. It would say they felt their actions, mandated or not by policy, were making the hospital better. Granted they might be mistaken, but that's what it would mean.

So sorry, it doesn't fly. Here you have middle managers, the people responsible for supposedly implementing this Community Reinvestment Act (an act that's been collecting dust for over a generation that all in the sudden causes a bubble in 2005?!) indicating by their actions that they didn't believe they were making a bunch of loans to minorities who weren't going to pay, they believed the opposite. They believed the people who got the loans they were making were on the elevator to riches as their property increased in value and if anyone was being cheated it was they who wanted to tap the same loans as much as they could.

That plus a lot of other facts (for example, if you look at the # of minorities in the US and the increase in their homeownership rates during the bubble you realize that there just aren't enough 'black people' to give mortgages too to shift the entire US housing market) tell us that we should reject this theory for lack of evidence and too much evidence to the contrary.

Your hypothetical puts the nail in the coffin of the facts Steve has presented about the federal government's policy to extend mortgages to marginal consumers - disproportionately minority? Uh-huh. Cling to your priors, friend.


You're telling us that loans to Hispanics (and Blacks I assume) were bad but not explaining why that would create a housing bubble...esp. nationwide. Nor are you explaining why that would create a bubble in Mortgage Backed Securities, which is NOT the same thing as a housing bubble.

The MBS bubble basically was a bubble in bad mortgage loans. Financial institutions wanted to mine the market to create bad mortgage loans...just as people wanted to grow tulips in the famous Dutch bubble. That, of course, allowed an increase in homeownership rates for everyone, including the low income and minority communities and politicians, being politicians, were happy to take credit for that 'good news' esp. since it didn't require them to raise taxes or implement unpopular welfare programs to make it happen. But that's no evidence that the gov't created the bubble and the fact is the bubble extended far beyond the loans that would have qualified for the CRA and beyond. In fact, most of the bubble happened not with low income loans for modest houses but oversized McMansions that didn't qualify for any type of gov't incentive. Think about it, if you have a $1M home that inflates to $5M, that represents $4M of 'bubble'. A $100K home that inflates to $400K represents only $300K of bubble. A single oversized loan does more than ten times the damage as a lower income type loan. This is why I say again look at the change in homeownership rates for the poor and minorities. The US simply lacks enough non-white people to give homes too to make a bubble.

"In fact, most of the bubble happened not with low income loans for modest houses but oversized McMansions that didn’t qualify for any type of gov’t incentive."

No, studies of California, say, found the median foreclosed home was about 1600 square feet and the purchase price maybe a little under a half million. Now that's median not mean and no doubt a few publicized examples like Ed McMahon going under stick in people's memories. But the foreclosure crisis didn't happen in Beverly Hills to any real extent, it happened 50 to 100 miles outside of Beverly Hills. You can look up default rates by metro area in California and there was a strong correlation between race and default rates:


The vast amount of money lost was in marginal exurbs like the Inland Empire and Palmdale/Lancaster among working class and lower middle class strivers, often trying to buy their way into a better school district by buying a more expensive house than they could afford.

If you want to develop a feel for what the Housing Bubble in California was like on the ground, I wrote a short story about it in 2008 for The American Conservative. Granted, it's fiction, but you may learn something from it:


No, studies of California, say, found the median foreclosed home was about 1600 square feet and the purchase price maybe a little under a half million

Look again Steve at my example. One McMansion that inflates from $1M to $5M and ten+ modest homes that go from $100K to $300K. Assuming all 11 homes end up in foreclosure, yes the 'median' home will be a modest sized house. That doesn't change the fact that the single McMansion will cause more loss for the lender than all ten modest sized homes put together.

Yes, if you collected all those who had their homes foreclosed on into a 'focus group', you'd see ten modest people sitting in a room and one rich person. That too may lead you to conclude the problem was lending to people of more modest means. Again doesn't change the fact that the higher up you go the amount of damage inflated. The bank could have reduced their damage by over 50% by only getting tough on the McMansion!

Like I've said a million times, my theory isn't about the government holding a gun to bankers' heads and making them make loans they thought were going to bad. My theory is about how censoring and punishing expressions of skepticism about the benefits of 21st Century America's most sacralized value, Diversity, leads to naive thinking.

There has been a huge expansion in the Hispanic population in the Sand States? We should up our efforts to lend more there and lower the petty regulations like downpayment requirements that stand in the way of these new Americans getting their share of the American Dream.

For a good example of this rhetoric, here's Angelo Mozilo's 2003 Harvard speech announcing $600,000,000,000.00 in minority and lower income loans in return for loosened regulations of downpayments and documentation.


What's that, you are shaking your head? You don't think a bunch of Mexicans are likely to pay back half million dollar mortgages? You don't think a bunch of Mexicans who can't scrape together down payments can form nice neighborhoods that they can flip for even higher prices if they run a little short on being able to repay their mortgages? What are you, some kind of racist? Too bad you won't be able to put your racist doubts about my brilliant scheme for market domination into an email because you wouldn't want the feds to get their hands on it in a discrimination lawsuit's discovery process.


1. The $600B figure provided by the Countrywide CEO in the speech/brochure was targetted at 'underserved' Americans. That means Hispanics and lower income whites. Sorry, even among the poor there's more whites than blacks and hispanics.

2. Of course, are CEO's that different from politicians? Do you think a big mortgage company is going to announce, with fanfare, a huge fund for loans to better off white people? Your case here is built on nothing but ancedotes Steve.

Like I’ve said a million times, my theory isn’t about the government holding a gun to bankers’ heads and making them make loans they thought were going to bad. My theory is about how censoring and punishing expressions of skepticism about the benefits of 21st Century America’s most sacralized value, Diversity, leads to naive thinking.

1. If this was the case, why just real estate? If there was a sudden collective decision to give the minorities and low income people more chances...that maybe they weren't higher risks than the middle and upper class...then you'd also be able to point to massive increases in employment and other opportunities for them. After all, if you hire someone you can turn around and fire them tomorrow if it's a mistake....not so easy to fix a half million lent 'by mistake'.

2. This really isn't a gov't issue then. The gov't never required any investor to give Countrywide their money, do we seriously want to believe the gov't conned hard nosed Wall Streeters to buy Countrywide stock by talking them into a do-gooder mission?

3. Why the complexity? If it was simply a belief that blacks, hispanics and the poor were not as risky to make loans too as they had previously been believed, then there's no need for quants and financial engineering. You just make more loans to them. The mistaken belief had nothing to do with the risks of minority lending but the belief that you could make a pile of risky loans safe by cutting them up into complex securities and then buying 'insurance' on them. This belief, ironically, has a gem of truth to it. Mortgages are less risky because they are bundled together and sold in huge securities. A regional crises could destroy an otherwise well run regional bank that made and held all the local mortgages.

In ALL bubbles, lending gets risky, even crazy. That is not because people believe the borrowers have suddenly become more trustworthy. That is because they think the collateral will only go up in price. In a world of unending price increases, it really doesn't matter if you make a loan to a bum. The worse that can happen is after spending 6 months foreclosing you'll just sell the house again for 10% more than you made the bad loan for. Under this mistaken belief, the game becomes one of finding loans to make.

And what happens when you've hit everyone who typically gets a mortgage loan? You try finding people who don't typically have mortgages. Hence you see Countrywide priding itself at finding unbanked individuals to lend money too, just as I'm sure in Amsterdam some financiers where happy they found people who never grew a flower to borrow money to invest in bulbs. Again banks that were regulated by the CRA and other laws to 'encourage' diversity in lending felt the need to go out and buy outsifts like Countrywide because they felt if they didn't have an 'in-house loan factory' they would miss out on the raw materials needed to make their tulips.

Exactly right Boonton. The banks that got into trouble took on way, way more sub-prime than CRA ever required. And none of the biggest banks were significantly impeded from doing what they wanted to do by CRA. It actually gave them cover for doing what they wanted to do anyway.

I have been an outside director at a small community bank for the last 15 years. I have no love for CRA. It is unnecessary at this point and ought to be repealed. But we never failed a CRA exam and never once made a bad loan due to CRA. Not even once.

"That plus a lot of other facts (for example, if you look at the # of minorities in the US and the increase in their homeownership rates during the bubble you realize that there just aren’t enough ‘black people’ to give mortgages too to shift the entire US housing market) tell us that we should reject this theory for lack of evidence and too much evidence to the contrary."

Everybody knows that all the facts must be on their side even though they don't actually know the facts. In contrast, I do keep quoting the facts, but it doesn't seem to have much impact. (Orwell described this as "crimestop" and its a good facility to have in modern American careers.)

If you actually look at the federal database of mortgages by race/ethnicity by market, you can see that the marginal demand in the Sand States that inflated the Housing Bubble came heavily from Hispanics. Without the massive increase in the Hispanic population over the last generation, where would this extra demand for single family homes have come from?

And by looking at the recent studies of default rates, you can see that Hispanics defaulted earlier and at much higher rates than whites (roughly 3 to 1 in 2008-2009).

Yeah but how does that relate to udolpho.com being down?

There were plenty of Hispanics in Texas who didn't default, Steve.

There was a lot of fraud going on, and mortgage brokers taking advantage of people, especially unsophisticated minorities. However, the housing boom and bust could not have happened without restrictive zoning laws that prevented new supply from coming onto the market when prices started to increase above the cost of construction. There was no shortage of Hispanic home buyers in Texas, but prices never ran up much there because zoning is not very restrictive. Houston has no zoning at all, and there were thousands of houses built and sold there. Prices never went up much, so they didn't have very far to fall.

Right. Although keep in mind that it's not just land use laws: there are fundamental natural barriers to exurban expansion in California -- oceans, mountains, deserts -- that are much less relevant in Texas.

Part of the problem was that the Housing Bubble had been launched in part by Bush and Rove's Ownership Society initiative to convert Hispanics into Republicans by making them homeowners. Being Texans, Bush and Rove didn't grasp how increased demand from marginal credit risks was going to blow housing prices through the roof in California. In Texas, when demand for housing goes up, supply goes up shortly thereafter. In California when demand goes up, a million environmental impact statements are launched, and in the meantime prices shoot up, until years later the new supply comes on line.

Designers of mortgages for originators developed products that neither their bosses, home buyers, secondary purchasers, regulators nor themselves fully understood. In part, this was deliberate, if those involved at every level had been able to assess the actual risk the real estate boom and subsequent profits wouldn't have happened. We hear lots of complaints about the real estate meltdown but zero self-congratulation from the many who got out with the cash as the market peaked. If a transaction is so complicated that a normal person can't fully understand it they shouldn't be taking part.

Inexpensive laptops are apt to have build quality and design that's
not the very best, and both Toshiba and Compaq usually are not exception to the.
Founded in 1984 in China, Lenovo laptop comes among one from the best laptops through the world.
Affordable laptops for college students So you ought not face virtually any difficulty at all at the time of buying a computer or laptop for your home.

These laptop bags are designed to protect your laptops and invite
you to handle your device safely. It may be possible that this vendors inside you
place do not hold the laptops to get a particular configurations as you want.

You really make it seem so easy with your presentation but
I find this matter to be actually something which I think I would never understand.
It seems too complex and very broad for me. I am looking forward for your next post, I will try to get the
hang of it!

I really don't understand the moral hazard argument. I was a Wall street trader to 25 years. Trying to avoid losses was a pretty important element of my job... keeping my job. You can't take that many hits and expect to be hired on Wall Street. That applied up and down the chain of command. Moral hazard is a crock argument.

Hi, all is going well here and ofcourse every one is sharing information, that's in fact excellent,
keep up writing.

Right now it appears like Movable Type is the top blogging
platform available right now. (from what I've read) Is that
what you are using on your blog?

Do you have a spam problem on this blog; I also am a
blogger, and I was wondering your situation;
many of us have created some nice procedures and we are looking to swap
techniques with other folks, why not shoot me an email if interested.

Comments for this post are closed