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Thread: A new narrative of the subprime mortgage crisis

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    SEÑOR Member Aimless's Avatar
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    Default A new narrative of the subprime mortgage crisis

    https://qz.com/1064061/house-flipper...w-study-shows/

    Link to paper in the article, haven't examined it in detail yet. Initial reaction: jerks
    “Humanity's greatest advances are not in its discoveries, but in how those discoveries are applied to reduce inequity.”
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    ======== Timbuk2's Avatar
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    Interesting new perspective.

    You'd think banks would hold some sway over those who default and foreclose on second homes and investment properties. You can't afford the mortgage on your second home, you must sell up your primary home too at whatever price and pay off the mortgage of the second home, and any remaining on the primary too.

    Would have limited the run on the banks somewhat.
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    As a perspective it's absolutely interesting. However I wonder if it really goes as far as 'flippers caused it'; the underlying problem is that obviously mortgages in the US are just a lien on the property, rather than a personal debt. Sub-primers may not have been the only cause, but they sure as hell formed the consistent weak link in the system.
    Greece shows us that there is a kind of politician worse than the ones that break their election promises; the ones that keep their election promises.

  4. #4
    Quote Originally Posted by Timbuk2 View Post
    Interesting new perspective.

    You'd think banks would hold some sway over those who default and foreclose on second homes and investment properties. You can't afford the mortgage on your second home, you must sell up your primary home too at whatever price and pay off the mortgage of the second home, and any remaining on the primary too.

    Would have limited the run on the banks somewhat.
    Depending on the state and the details of the loan, banks can get a 'deficiency judgement' and go after other assets. It may not be worth it, though, especially if the borrower is overleveraged; it's typically a judicial process and takes money/time when the returns might be quite modest. Banks certainly have used deficiency judgments but not universally.

    The problem with any story that tries to pin blame on one group is that it doesn't look at the system holistically. They're essentially now deciding to blame house flippers for taking on too much leverage in a market that seemed to have no limit - which is about as accurate as blaming retail investors for the crash of '29. The real problem was too-easy credit which inflated the housing price bubble in the first place - causing both subprime and prime borrowers to take on too much debt. I don't have data to back this up, but I bet some of the logic for house flipping was that the expanding subprime market ensured continued rises in demand. If underwriting and interest rates had been tighter across the board this could not have gotten so bad. Of course, it's also simplistic to just blame the over provision of credit by banks et all; there were many contributors to the crisis.

    Hazir - perhaps this is a nomenclature thing but are you suggesting mortgages should be treated as unsecured debt?!
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

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    The part that isn't covered by the sale of the property? In Holland that's a personal debt then. Defaulting on your mortgage is not a common problem in the Netherlands.

    Especially because bankruptcy is a bitch of a very mean kind.
    Greece shows us that there is a kind of politician worse than the ones that break their election promises; the ones that keep their election promises.

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    SEÑOR Member Aimless's Avatar
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    “Humanity's greatest advances are not in its discoveries, but in how those discoveries are applied to reduce inequity.”
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    Quote Originally Posted by Hazir View Post
    The part that isn't covered by the sale of the property? In Holland that's a personal debt then. Defaulting on your mortgage is not a common problem in the Netherlands.

    Especially because bankruptcy is a bitch of a very mean kind.
    Okay, so this is definitely a nomenclature thing. In the US, 'personal debt' (especially 'personal loan') typically refers to unsecured debt in relatively pedestrian quantities issued to people with relatively good credit.

    As I intimated above, as a general rule banks can go after more than just the house upon default on a mortgage. It depends on whether the debt is considered 'recourse' or 'non-recourse' - AIUI most states have non-recourse mortgages, which means banks can use courts to establish a 'deficiency judgment' that allows them to go after other assets of the defaulter. I think that nearly every state allows this for mortgages on second homes, or home equity loans, etc (non-refinanced mortgages on first homes are in some states considered non-recourse, but that's about it).

    I think the bigger reason why default becomes an attractive options in some circumstances in the US is because loan to value ratios are so high, even without a falling property market. It's entirely feasible to get a mortgage on a house with only a minimal downpayment - 3 to 5% of the value - even after the crash. You'll have to pay somewhat higher interest and fees to offset the higher risk to the bank, but it still means that if your situation gets dire enough default seems like a no-brainer - you're not walking away from much (if any) value and you typically won't have a lot of other assets that are easy for a bank to target.

    IMO the solution to this is not to make bankruptcy in the US as dysfunctional as it is in much of Europe (can't speak to NL specifically) but instead to reduce instability by mandating higher LTV ratios. Sure, it'll drive down housing prices a bit and make it harder for the young to purchase homes, but it dramatically enhances financial stability and insulates the system from some amount of market downturns. Other countries have tried this, semi-successfully, to dampen housing speculation and bubbles; it tends to make retail banking much more boring, which IMO is a good thing. Obviously this won't really restrain bubbles too much in the event that it's driven by limited supply (rather than inflated demand), but even then it can discourage flippers and the like by increasing the capital cost of housing as an investment - which in turns frees up some supply for owner-occupiers.


    I kinda get people who bought into the bubble, though. When real estate prices seem on an unstoppable upward trajectory, it seems almost inevitable that demand will continue to skyrocket indefinitely. I've been living in a bizzaro-world town for a number of years now, where prices have gone from absurd to ridiculous to ludicrous, barely stopping to briefly plateau during the crisis. And plenty of Americans live in neighborhoods that seem to have broadly similar dynamics, though rarely as dramatic. The mistake people make is thinking that just because certain areas are fairly well insulated from market turmoil due to restricted supply and high desirable location/schooling/etc. means that broader real estate investments in other areas will have that kind of market risk. It's hard to recognize the exceptions in an environment of globally increasing prices. And everyone got pulled in - not just subprime or prime borrowers, or retail investors/flippers, but also all sorts of smart money, too.
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

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    Administrator Dreadnaught's Avatar
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    Thoughts after reading-

    1) Isn't one other issue that credit scores proved relatively meaningless? This person doesn't have the actual income or debt-to-loan stats for those borrowers. High credit score does not equal high income.

    2) If the housing crisis was just filthy rich people buying multiple homes while honest poor people just bought one...wouldn't it stand to reason that homelessness didn't increase during the recession? Unfortunately there isn't great data on homelessness, and the data is probably fuzzy because there was also a recession going on.

    Interesting, but seems too eager to lay blame on some segment of the population.

  9. #9
    Quote Originally Posted by Dreadnaught View Post
    Thoughts after reading-

    1) Isn't one other issue that credit scores proved relatively meaningless? This person doesn't have the actual income or debt-to-loan stats for those borrowers. High credit score does not equal high income.

    2) If the housing crisis was just filthy rich people buying multiple homes while honest poor people just bought one...wouldn't it stand to reason that homelessness didn't increase during the recession? Unfortunately there isn't great data on homelessness, and the data is probably fuzzy because there was also a recession going on.

    Interesting, but seems too eager to lay blame on some segment of the population.
    Your points are flawed. On the first one, their specific point is that prime mortgages - that are tied to credit score, not income - were as much or more of a problem than subprime mortgages - which had low credit scores. It's not a question of income directly.

    Your second point is a bit more complex. The paper clearly acknowledges that subprime mortgages went into default and foreclosure at a MUCH higher rate than other mortgages - they already had higher default rates, and things got even worse during the crash. But measure on a dollar value basis, because the prime mortgages were generally much larger and quite numerous, the increase in prime defaults had a larger dollar effect on bank balance sheets. So it doesn't argue that subprime borrowers didn't default and, potentially, lose their homes, but rather that the effect of subprime defaults was not as pivotal to the financial crisis as the larger (dollar value) effect of the prime defaults.

    I think their argument is flawed, as I have noted above - first off being that it's not really possible to separate the subprime from the prime borrower when it comes to the housing market, and secondly because of subtleties in how perception shaped credit availability, and said perception was focused on the subprime loans. But that doesn't mean that they don't have a reasonable point.
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

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    Senior Member GGT's Avatar
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    In other words...the idea of "Home Ownership" in the US is severely flawed, and exposed to exploitation by a number of powerful entities.

    Today's *house flippers* couldn't have gotten a foot-hold in the RE market without cable TV show influences (see HGTV), but also multiple magazines and web sites that make money by selling people the idea that they can buy a dump and turn it into a gem. Even banks and mortgage companies bought into the propaganda, because they could make money every time someone simply *applied* for a home mortgage or HELOC.

    I call it House Porn.

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    Senior Member GGT's Avatar
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    Also, it's probably no accident that President Trump is considered a "good business man" by his base supporters, even though he's used RE debt as leverage and has used bankruptcy laws to his advantage. The propaganda is heavily ironic.

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    Quote Originally Posted by GGT View Post
    In other words...the idea of "Home Ownership" in the US is severely flawed, and exposed to exploitation by a number of powerful entities.

    Today's *house flippers* couldn't have gotten a foot-hold in the RE market without cable TV show influences (see HGTV), but also multiple magazines and web sites that make money by selling people the idea that they can buy a dump and turn it into a gem. Even banks and mortgage companies bought into the propaganda, because they could make money every time someone simply *applied* for a home mortgage or HELOC.

    I call it House Porn.
    Actually the problem described is less about home ownership than people thinking they can beat the market while playing with money they got by means of taking one sort or another of credit. A lot of people were guilty of doing that when everybody was thinking you were crazy if you weren't in shares.
    Greece shows us that there is a kind of politician worse than the ones that break their election promises; the ones that keep their election promises.

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    Administrator Dreadnaught's Avatar
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    Quote Originally Posted by wiggin View Post
    Your points are flawed. On the first one, their specific point is that prime mortgages - that are tied to credit score, not income - were as much or more of a problem than subprime mortgages - which had low credit scores. It's not a question of income directly.
    Err, my point is that the definition of a "prime" mortgage is meaningless because credit scores were becoming unmoored from income. Trying to derive income or wealth data from credit scores in the twilight of the housing boom seems like they are missing a big part of this.

    In other words, I hesitate to agree with the idea that prime mortgage borrowers were necessarily upper or even middle income.

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    Senior Member GGT's Avatar
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    Quote Originally Posted by Hazir View Post
    Actually the problem described is less about home ownership than people thinking they can beat the market while playing with money they got by means of taking one sort or another of credit. A lot of people were guilty of doing that when everybody was thinking you were crazy if you weren't in shares.
    Quote Originally Posted by Hazir View Post
    The part that isn't covered by the sale of the property? In Holland that's a personal debt then. Defaulting on your mortgage is not a common problem in the Netherlands.

    Especially because bankruptcy is a bitch of a very mean kind.
    Like I said, bankruptcy isn't such a mean bitch in the US. Sometimes it can even be used as leverage by the biggest borrowers (like Trump) to borrow even more.

  15. #15
    Quote Originally Posted by Dreadnaught View Post
    Err, my point is that the definition of a "prime" mortgage is meaningless because credit scores were becoming unmoored from income. Trying to derive income or wealth data from credit scores in the twilight of the housing boom seems like they are missing a big part of this.

    In other words, I hesitate to agree with the idea that prime mortgage borrowers were necessarily upper or even middle income.
    And my point is that credit scores were never supposed to be tied to income. No part of a credit score has anything to do with one's income, or one's wealth. It almost entirely has to do with one's history in repaying credit and the willingness of people to extend credit to you in the past. This last point is to some extent dependent on income (though for anyone like me who has been given a rather large credit line with essentially no questions asked, I question the strength of that connection), but it's a tenuous linkage at best.

    A prime borrower is just someone who credit agencies think have a good history of repaying their debt. It doesn't mean you're wealthy - you can have shit credit but very high income or vice versa. Obviously there's some basic bar you need to pass in order to get a truly great credit score, but even a middling-to-decent credit score has always been possible for a conscientious person who only rose to modest income and wealth.

    A more subtle point, though, is that provision of mortgages is not based solely on credit score (and maybe this is where you were going?). Mortgage offers are made based on credit history, yes, but also to a large extent on income, income history, and possibly wealth. Mortgage applications use a hell of a lot more than a credit score - in fact, the size of the mortgage and the decision on acceptance has almost nothing to do with credit scoring; it's the interest rate attached to the loan that's driven largely by credit scoring. Thus, one could make the reasonable argument that 'prime' borrowers is a large pool of people that might include those who are bad credit risks for reasons not tied to their credit history, but rather the size of the loan they were taking out scaled by their income and wealth. That is indeed a reasonable critique of the study, though it's only of peripheral importance. The authors don't argue that we only blame poor people for the crisis, but rather that we blame subprime borrowers who, while frequently poor(ish), were not identical with the low income mortgage-carrying population.

    To determine whether your critique is correct, it would be necessary to segment the prime borrowers prior to the crisis by e.g. income (possibly by using size of mortgage as a proxy) and then determine whether the low-income but prime score demographic contributed in an outsized manner to the foreclosures/etc. It's possible this is true but I am not particularly certain that's the case.
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

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    Senior Member GGT's Avatar
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    In other words, using one's credit history is a pretty crappy metric to predict credit risk. Especially for people who have avoided debt.

  17. #17
    Quote Originally Posted by GGT View Post
    In other words, using one's credit history is a pretty crappy metric to predict credit risk. Especially for people who have avoided debt.
    I think everyone acknowledges that there are flaws with the way credit scoring works - it has some perverse incentives and definitely misses a lot of people who would be great credit risks but have lowish credit scores. But I think there's a decent defense of them as well: if one has a thin credit history, it's hard to determine based on objective data if you are a good credit risk. If you want a widely usable metric, you need to base it on something, and credit history is a fairly reasonable start.
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

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    Quote Originally Posted by wiggin View Post
    I think everyone acknowledges that there are flaws with the way credit scoring works - it has some perverse incentives and definitely misses a lot of people who would be great credit risks but have lowish credit scores. But I think there's a decent defense of them as well: if one has a thin credit history, it's hard to determine based on objective data if you are a good credit risk. If you want a widely usable metric, you need to base it on something, and credit history is a fairly reasonable start.
    Except when it obviously isn't. Ten years ago I could not easily find financing to buy a house with funds to make a down payment of 2/3 of the purchase price and having a secure job that paid me enough to be able to afford monthly payments. In the end I got a loan which I paid off in 6 years with a Belgian bank trying to build a customer base in the Netherlands. My biggest crimes were having no mortgage on my old home and no debts whatsoever. Not even as little as an overdraft facility on my checking account.
    Greece shows us that there is a kind of politician worse than the ones that break their election promises; the ones that keep their election promises.

  19. #19
    Quote Originally Posted by Hazir View Post
    Except when it obviously isn't. Ten years ago I could not easily find financing to buy a house with funds to make a down payment of 2/3 of the purchase price and having a secure job that paid me enough to be able to afford monthly payments. In the end I got a loan which I paid off in 6 years with a Belgian bank trying to build a customer base in the Netherlands. My biggest crimes were having no mortgage on my old home and no debts whatsoever. Not even as little as an overdraft facility on my checking account.
    You do realize that lenders had essentially zero information about your willingness to pay back loans promptly and in full. Sure, you could have showed them your paycheck and argued that it would be easy for you to cover the loan, but that merely answers the question of whether it's in your capacity to pay it back, not whether you actually will.

    Credit scores are not panaceas, nor do they pretend to be. But they're right in arguing that they can't assign a meaningful credit score to someone with little to no credit history; what they're measuring requires data.
    "When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the first." - Werner Heisenberg (maybe)

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    Quote Originally Posted by wiggin View Post
    You do realize that lenders had essentially zero information about your willingness to pay back loans promptly and in full. Sure, you could have showed them your paycheck and argued that it would be easy for you to cover the loan, but that merely answers the question of whether it's in your capacity to pay it back, not whether you actually will.

    Credit scores are not panaceas, nor do they pretend to be. But they're right in arguing that they can't assign a meaningful credit score to someone with little to no credit history; what they're measuring requires data.
    Actually they knew they would get a lien on a house they could have sold right from under me in case I showed any unwillingness to pay back my loan. A house that wat worth around 200% of the loan they were going to give me. A gold plated security in a market where virtually nobody defaults on his mortgage payments. A bit of common sense goes a long way.
    Greece shows us that there is a kind of politician worse than the ones that break their election promises; the ones that keep their election promises.

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    Senior Member GGT's Avatar
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    Quote Originally Posted by wiggin View Post
    I think everyone acknowledges that there are flaws with the way credit scoring works - it has some perverse incentives and definitely misses a lot of people who would be great credit risks but have lowish credit scores. But I think there's a decent defense of them as well: if one has a thin credit history, it's hard to determine based on objective data if you are a good credit risk. If you want a widely usable metric, you need to base it on something, and credit history is a fairly reasonable start.
    Quote Originally Posted by wiggin View Post
    ...Credit scores are not panaceas, nor do they pretend to be. But they're right in arguing that they can't assign a meaningful credit score to someone with little to no credit history; what they're measuring requires data.
    But we are not the credit rating agencies' clients -- the banks are. They use our 'data' to make profitable loans; we are the commodity, but we don't have any choice or input or control (see Equifax).

    And don't forget that institutional credit rating agencies (like Moody's and S & P) used 'reasonable metrics' to give AAA bond ratings to banks (and SIFIs) that imploded after the CDO/MBS debacle blew up, and led to the financial crisis/great recession. And then there's Wells Fargo, which should be bankrupt and out of business by now....

    I don't have too much faith in credit scores, or the banks that use computer algorithms to reject borrowers straight away. Their history of epic failures is a 'reasonable metric' for my skepticism.

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