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re: Why were house prices going up like crazy during the housing bubble?
Posted on 9/18/17 at 6:56 pm to Teddy Ruxpin
Posted on 9/18/17 at 6:56 pm to Teddy Ruxpin
Thanks again. You're educating the Langland.
Yes, I can see that. But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
Yes, I can see that. But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
Posted on 9/18/17 at 7:18 pm to Langland
Too many people were making a ton of money.
Posted on 9/18/17 at 9:07 pm to Langland
quote:
Yes, I can see that. But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
I think it's this in a nutshell. And why the hell not. These people were making bank off people's stupidity.
Posted on 9/18/17 at 11:09 pm to Langland
quote:
But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
Tranches were the problem. All these mortgages were grouped together and sold off. Everyone claimed they were AAA rated, including the agencies like S&P they were paid to rate these securities.
The reality is that most of the mortgages were subprime, due to the fact that income verification was not required. The community reinvestment act CRA, required lenders to prove they were not discriminating against buyers. The government loosened restrictions and forced banks to handout subprime mortgages
While it was not the only cause, I believe the original bill set the bar lower for many lenders and they got addicted to the much larger customer base.
This post was edited on 9/18/17 at 11:18 pm
Posted on 9/19/17 at 6:42 pm to Langland
quote:
Yes, I can see that. But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
It is extremely easy to see what happened big picture wise, but the people in the industry weren't really in a great position to do that
The CDO that got it all started
The thing that drove most of this are these things called CDOs, collateralized debt obligation and a failure to understand the risk involved.
Basically a CDO is taking a bunch of debt like mortgages/auto loans etc and grouping all of them together which creates a faux bond / fixed income security. This "bond" then gets a rating similar to government or corporate bond. For example, Wells Fargo takes 10,000 mortgages and sells the repayments from homeowners as a big group
The foundation of why you do this is risk pooling. When you group them together the law of large numbers comes into play and you can better estimate the value. Specifically, this has worked extremely well in consumer debt / auto loan type markets (because they are different than mortgage markets)
People who buy fixed income securities LOVED this. Specifically insurnacecompanies / pension funds because mortgage CDOs lasted 20-30 years which is incredible. They bought so many CDOs, the banks fricking ran out of CDOs based on their normal lending operations.
So what do you do when the supply of your hit product runs out? You order more stock. Banks needed people to buy more homes (create new mortgages) and for more money (bigger mortgage = more debt to sell). They were a production line to pump out CDOs
Housing Bubble
In the traditional bubble sense, people were speculating on home and couldn't afford them. When people decided to sell, the house of cards all fell over
Why no one saw problems with CDOs
CDOs historically have worked with consumer debt because consumer debt is independent. If your neighbor defaults on CC debt, that doesn't have much effect on if you default on CC bills too. The problem is mortgages don't work that way. When your neighbor forecloses on his home, it affects the home value in your neighborhood
This is the concept of independence in probability and is a huge fricking deal. Unfortunately, there was an assumption in the early day of mortgage-backed CDOs that mortgages were independent. Obviously, they aren't independent
Had people realized mortgages in mortgage backed CDOs weren't independent, it wouldn't have been quite as attractive and the production line of pumping out mortgages wouldn't have happened in that way.
Why the financial collapse happened
Not a chance I'm going to take the time to write up how the evolution of CDOs broke the financial markets
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