> 2. Banks lend people the money to buy houses, but the government encourages them to do so by guaranteeing the loans.
> 3. Banks lend people the money to buy houses, but someone else guarantees the loans. There’s a big Mortgage Guarantee Company ... Mortgage Guarantee Company is a regular public company, owned by shareholders, but it is a large good safe company with sterling credit. And the Mortgage Guarantee Company is carefully regulated by the US government to make sure that it is well capitalized and safe, so banks will happily rely on its guarantees. They’re not government guarantees, but they’re AAA-rated, government-regulated guarantees, almost as good as the government. The government, in this approach, is not providing a financial guarantee, but it is putting its seal of approval on the Mortgage Guarantee Company’s guarantee, saying “you should trust this guarantee almost as much as you would trust our guarantee, because we endorse this company and regulate it carefully.
> The approach that the government settled on for many decades was “mostly 2, but kind of really 3.”
I like Matt Levine explicitly spelling out these details. Why? Because many people in the general public, especially leftists and socialists, believe that the 2008 Great Financial Crisis was caused by greedy US banks lending out money to unworthy people who had no ability to pay back loans, and take a profit from each transaction, and sell the toxic debt to other parties. It's a story directly attacking the greed and corruption in capitalism.
While those 3 points in the story are true, what this ever-popular narrative misses out is that the banks were motivated to make these loans because someone else - FMAC and FMAE - guaranteed them. And FMAC and FMAE basically have the full backing of the US government. The banks weren't risking their own money if loans fail; they were risking someone else's money. If the banks were the ultimate underwriter of these mortgages and thus defaulters would impact the banks, then the banks would've been way more diligent and restrictive about loaning out the money. So in the end, this is more a story about socialism and government interference that underlies the capitalistic greed. The bad loans were subsidized by the public at large, and that is a good example of socialism in practice.
Straw man. Left commenters know perfectly well about the roles of Fannie and Freddy. The left critique is not just greedy banks. It's also government collision in pumping property values, as well as interest and fees banks make, via Fanny and Freddy.
If your opinion is that using government policy to enrich property owners and banks is socialist, then you have a very unorthodox view of socialism.
The idea that this was all about devious consumers taking advantage of poor innocent banks is laughable.
The narrative that the banks had no incentive to be intelligent about who they lent money to is absolutely true because good credit bad credit no credit, the banks didn't care - the bank's money was backed by the Feds, and that was it. The banks got their cut, and made off like bandits. They knew what was going on.
I'm not an expert in socialism but governments underwriting a capitalist housing market does not appear close or aligned with socialism at all.
I will say I've never associated the US government with socialism, at any level, so perhaps this bias is part of why I find a difficult argument to envisage.
"Socialism" in common parlance means "the government does stuff. Any stuff. With the possible exception of things that benefit them, which are of course right and necessary.
What a lot of people want is "democratic socialism", which is actually capitalism with strong government regulation and safety nets. It often includes strong mandates about the necessities of life: food, housing, health care.
There are few genuine socialists any more, though many democratic "socialists" take note of the failures of capitalism and try to mitigate them.
The worlds governments intervention in 2008 and since seem closer aligned to propping up capitalism, whilst ironically also invalidating a lot of the basis that capitalism actually is a coherent system.
It's not entirely incoherent to be prepared to backstop losses when they would become systemic. But that mandates limits on risk, or it just tells people that the joke is actually reality. Balancing that requires constant vigilance... which corporations deter by calling it "socialism".
Imagine a fund with a 100 people in it that need a 100k each to goto medical school. What are the chances all 100 people become doctors? Who cares.
Tell people you have a fund with DOCTORS in it. Woah, a whole fund of doctors. Bundle all the loans given to the med students into a financial instrument that you price at it 5% more. Sell off the financial vehicle, remove the liability of human failure (yall ain’t all gonna become doctors).
Collect my 5% profit, do that shit again, at scale.
Hope all those doctors become doctors, I personally don’t care. Ya feel me?
Why would a buyer want to take that fund off your hands? Why do they think the fund will generate good returns and you sold it to them at a good price? What is guaranteeing/backing the fund?
Just because you declare an asset for sale, it doesn't mean buyers magically appear to take it from you - especially not at the price you're hoping for. The buyer must personally expect a higher value from the asset than the price you set.
The attraction to investors is something like - doctors are paying 7% interest on their loans, government 10~30yr treasuries are yielding 4.5-5%. Individual doctors have a much higher risk of defaulting than the US government. If you pull 1000s of them together, some will still default but you need like 30%+ of them to default for the increased yield to not reward you for the risk. For certain types of investors (pensions, insurance companies, etc) having something that pays a little more than "risk free rate" without taking on too much risk is a big benefit.
Someone who knows fixed income more than me may chime in with lots of other nuances like early repayment risk, forbearance, re-financing, loan modifications, etc but this is the general framework.
And the guys structuring these things make money off commissions on sale, making a market between buyers&sellers of these products (the spread) and probably some some sort of management fees.
With the hopes of selling it off to the next guy for more. There's nothing backing crypto either.
These are rational hopes, because a lot of people played that game of hot potato and got rich. And in the end, the government bought all of that trash at par and nobody went to jail.
I worked in auction-rate municipal bonds when the (first and last) auction failed. People thought they were going to jail. They knew they had been selling garbage. And to little towns for their teacher's retirement funds at that.
Separately, pooling loans generally makes the aggregate product less sensitive to default risk because you're talking about many loans instead of just one.
This is a lot like the cost of college and student debt load. A large cause was unlimited, government-backed loans. With buyers who weren't price-sensitive, colleges started competing with each other on things like amenities, and there wasn't a mechanism to say "maybe a $200k loan for an art degree isn't worth it."
And speaking of free market distortions, one of my favorite example is externalities, e.g. pollution. If the government doesn't charge a price on pollution (e.g. carbon dioxide), then obviously every business would pollute as much as they want because it's free. The polluters impose a cost onto other people - e.g. health, loss of human productivity, cleanup costs, loss of land value.
They can still lose - the borrowing party may never earn enough to repay fully. Or may just stop paying for many reasons.
So even if you are 22 and $80k in the hole, but the time you are 50 you are likely to have hundreds of thousands more in net worth than those who forwent that early $80k debt to go right into high school diploma level labor.
2. The mortgage meltdown started with subprime loans, which were not guaranteed by Fannie and Freddie. It was private lenders selling loans to clients and then selling the mortgage-backed securities on the private investor market.
3. Fannie and Freddie were not under federal conservatorship at the time. They were regulated by the government as government sponsored entities (GSE) but were corporations with shareholders and profit motive. The regulation under the Bush administration was extremely lax. There was no FHFA or CFPB.
4. The real damage happened between 2001-2006. That's when option ARMs, pick-a-pay loans, and NINA/SISA (no documentation) loans were being made. The fact that these loans would age poorly was well understood in the industry. It was just assumed that continually rising property values would offset how genuinely terrible these loans were.
5. After the clusterfuck, Fannie and Freddie were brought into conservatorship by the federal government to prevent a repeat, and it has largely worked. The quality of mortgage paper is much, much higher than it was 20 years ago.
Yes, it was 100% stupid greed. And to be clear, nobody learned the lesson. The Trump administration is going to defang CFPB and probably bring Fannie and Freddie out of conservatorship. Another mortgage meltdown is a predictable outcome of this and I would expect it around 2032.
This is not true. The mortgage lending pipeline is quite different today compared to pre-GFC. There is considerably more due diligence required by lenders and banks in order to back loans. Conventional loans backed by the GSEs these days have a much higher quality control. If the originating lender lied to push the loan through or didn't due diligence, they'd be on the hook for paying the defaulted principal.
> The Trump administration is going to defang CFPB and probably bring Fannie and Freddie out of conservatorship.
I'm not aware of any chatter on the former and the latter is becoming discussed quite frequently. Though I'm not sure the GSEs are interested in a GFC 2.0
> Another mortgage meltdown is a predictable outcome of this and I would expect it around 2032.
These days I would be more concerned about private credit than the mortgage market...
I don't think the popular narrative misses this point at all. That's key to the lesson that socialists and leftists got from 2008 (and what probably created quite a few socialists as well): Capitalism is compelled to exploit social resources, irrespective of and ultimately to the determent of the public good.
This is purely a misguided (maybe corrupt) government policy in a capitalist country.
The best houses in the best locations go to the nomenklatura, to the governor's cousin, to the nephew of the town party boss, and to black market operators who are capable of providing large bribes to those who decide housing allocations.
Normal people live three hours outside the city center in a low quality concrete highrise.
(Yes, I know, I'm making a point, ye who lives in the United States of "It's not what you know, it's who knows you.")
See Soviet and Mao apartments. Shoeboxes with shared bathrooms and kitchens.
Some housing in the USSR had communal kitchens and bathrooms because they were actually older buildings adapted to house more families (hence the "you'll have to share your house" horror stories told in the West). Other buildings were actually meant to be temporary but lasted more than planned. Most of the housing of the Soviet Union was just plain apartment buildings; the flats might be small by some people's standards, but that was dictated by economic constraints.
I don't know much about China, but I know some regions had multi-family buildings with shared facilities before the revolution. These too were dictated mostly by economic constraints.
Socialist states don't like building anything more than the bare minimum to house workers. They get nothing for it (economically and ideologically) and the land saved can be used for actual productive things.
The prices of homes were inflated by investors overpaying for homes and non conforming loans that were not government backed.
There were a lot of tricks that investors and home buyers could play. I was involved in investment real estate and had my first house built between 2001-2005.
The first and easiest non conforming process that wasn’t government backed was to take out two mortgages - 90/10. I had a my first house built a 2500 square foot home and only put $1000 down. The cost at the time was $175K mortgage and the value of the house went up to $205K before the crash. It was also an interest only first mortgage.
I refinanced it before the crash to get fixed interest rate and had a HELOC for $30K
While one investment property I bought was 10% down, it also wasn’t government backed.
The second investment property not only was done 100% financed because I knew people by then, it was also valued by a bank appointed appraiser at an unreasonable high price, I overpaid for it and the seller gave me cash back for the difference. I knew this was shady. But I later found out that this was illegal.
They also took my word for it that I had enough income from my other investment property to cover the mortgage.
By 2008, I was making $70K from work and had five mortgages totaling around half million.
By late 2012, I walked away from all of them. The value of all three houses put together were worth $250K.
Exactly three years after the last foreclosure to the day, I got approved for a mortgage of $335K FHA and had my house built - 3200 square foot 5 bedroom 3.5 bath in 2016 with 3.5% down and 3.5% interest rate. I just sold it last year for $670K
The house I had built in 2003 and walked away from in 2012 just got back up in value to the price I paid for it in late 2018 and the price I refinanced it for in mid 2020. It sold for $270K last year.
The bank bailouts were because banks were making a lot of risky non conforming non government back loans and as investors like me started walking away from houses, the economy crashed and people saw it made no sense to try to keep their homes, they walked away.
> The banks were the ultimate underwriter of these mortgages and thus defaulters would impact the banks, then the banks would've been way more diligent and restrictive about loaning out the money Banks also lied about the credit worthiness of loans in their portfolio when they sold them off
That’s just the thing, as soon as the banks made even non conforming non government back loans, they bundled them, lied about the credit worthiness of the loans and sold them off - mortgage backed securities. They weren’t ever at risk.
The banks servicing the loans were not the original underwriters
For my home back then, the second mortgage didn’t ask for anything and I believe I was able to negotiate around $10K and the short from what it was sold was around $50k.
The fifth mortgage I never heard anything back. I think it sold for around $50K less than owed in foreclosure.
My backup plan was bankruptcy. I had a place to stay and all of my assets were in my protected retirement accounts.
How?
When you buy what is called A tranches it always has a layer of toxic non A tranches....
Once housing repossessions rose above 8% all housing mort securities were under water....
Most of the people that I've seen taking this position were conservative, free-market capitalists, giving themselves a little "Bad, me!" slap on the wrist. The leftists and socialists are well-read enough to know that the reason loans were backed the way they were is because the regulatory apparatus has been wholly captured by financial players, from regressive legislator campaign funding to the revolving door at regulators, and everything in between. Further, the fallout from 2008 hit most Americans so hard because insitutions leveraged this "in" to warp the shape of the federal and monetary response to the crisis in order to make them whole at everyone else's expense - a course that was not explicitly called for in law (and that some would say, in many cases, violated the duty of responsible parties to uphold the law). The problem remains the banks.
Countrywide looked at my finances and pre-approved a loan of up to something like $700k.
Since my analysis had told me that was way more than I could afford I only looked at houses under $300k. I wonder though how many people apply without having done their own analysis instead trusting that the mortgage company would not offer more than they can afford?
Anyone else here who was buying around the time with stories of receiving insanely high pre-approvals?
No, because thats not how you make money.
You make money by loaning out as much money as possible for the highest rate possible. When the economy is booming, this works, because you don't need to call in the loans, you can parcel them up and sell them to someone else. This gives you more capital to lend out and so on.
This means that bank failed _alot_ Just go back and look at how many banking runs there were in the states before 1913.
both those companies are secondary market makers, rather than guarantors. Once again high finance likes to make out that they have "fixed" the problem of loans by using a "patented" method for optimum yield. Its always been either a rising market, or fraud that has driven those fancy methods.
Sub prime was just coin clipping but in the 21st century.
With government and without, the business cycle has always oscillated between irrational exuberance and irrational stinginess, even as most of the individual players in the market continue to insist that they are simultaneously entrepreneurial and prudent, ambitious and responsible. It's just a positive-feedback system all on its own.
socialism is publicly-owned houses. it's the public owning equal portions of the major capital forces in the country. it's running large portions of the country without any focus on profit whatsoever. it's not propping up multiple colossal profit-making companies because you're too scared to do anything even resembling government interference. that's government interference, by the way, not socialism. we're so far from socialism here that it's laughable.
what you're demonising is incompetent Keynesianism.
What you describe is ultimately just a principal-agent problem. In a world where the banks have no government protection, it can still be positive for people working at the bank to do things that are very risky for the bank. We see companies do crazy things that hurt them, but help people that work for them all the time.
Saying it's the government's fault is like blaming greed, or capitalism, or the banks. It's just principal-agent problems all the way down.
https://en.m.wikipedia.org/wiki/Subprime_mortgage_crisis#/me...
You’ve probably heard of private equity buying companies, loading them with debt, transferring money to the parent and bankrupting the company and wondering why banks give loans to private equity when we know this playbook. Well the bank loans are guaranteed ultimately by Freddie/Fannie. There’s no risk here and everyone but productive members of society win here. It’s still ongoing too.
They don't buy healthy companies, the people that do that are looking for failing companies that they can buy for pess than their assets are worth.
He essentially leveraged the massive pile of money from Spac investors to buyout UMG for his own fund. Leaving the Spac investors high and dry with no ownership. He keeps making those investors empty promises about some future deal to this day years after the Spac folded.
Ackman only puts out stuff like this public if he needs retail to give him leverage on some angle he has.
Replace "Ackman" with "Any major investor" except for maybe Warren Buffett.
The UMG purchase did not happen. The SPA(R)C money was returned to investors in 2022.
Ackman's fund is now the second largest owner of UMG, and spac investors have worthless sparcs waiting for sec approval years later.
If you follow Ackman you will see his m.o. plays out like this over and over on every deal and boardroom he is a part of.
Edit: Also a large amount of retailers were in warrants and got $0 back.
