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And for those who don't know what was Born asserting in the 90s? That derivatives (ie CDOs and CDSs) needed greater supervision and/or regulation or they would pose a huge risk to the economy.
Born lost the argument and derivatives went largely unregulated. Part of the regulations on derivatives that occurred after the fact in the Dodd-Frank law have already been rolled back.
Also, because Born went up against the bankers, they created an article in the Washington Post to muddy her name.
The banksters need to be thrown out of Washington DC.
Do you realize that low and moderate income =/= subprime. Also do you realize that 24 of the top 25 subprime lenders in 2006 were non bank lenders (aka shadow banking system I have been referencing which you clearly don’t comprehend) who were not subjected to federal housing affordability standards?
.......... the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
=============
Giving Credit Where Credit Was Denied
Even quasi-governmental agencies have primed the subprime pump. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have recently developed computerized underwriting systems that allow lenders to speedily and reliably evaluate an applicant's credit-worthiness.The loans rejected by the automated system are, by definition, subprime.
''In the past, if a loan was rejected by Fannie Mae or Freddie Mac, that was it,'' Mr. Hornblass said. ''They weren't touching that business.
''But now both agencies have set up arrangements with lending companies that buy those subprime loans coming through the automated systems. Freddie Mac and Fannie Mae take a fee, the loans get funneled to a lending company that's willing to buy them, package them and then sell the securities to investors.''
.
.
.
.
.
The loans rejected (for bad credit, low income ) by the automated system are, by definition, subprime.
.......... the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
=============
Giving Credit Where Credit Was Denied
Even quasi-governmental agencies have primed the subprime pump. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have recently developed computerized underwriting systems that allow lenders to speedily and reliably evaluate an applicant's credit-worthiness.The loans rejected by the automated system are, by definition, subprime.
''In the past, if a loan was rejected by Fannie Mae or Freddie Mac, that was it,'' Mr. Hornblass said. ''They weren't touching that business.
''But now both agencies have set up arrangements with lending companies that buy those subprime loans coming through the automated systems. Freddie Mac and Fannie Mae take a fee, the loans get funneled to a lending company that's willing to buy them, package them and then sell the securities to investors.''
.
.
.
.
.
The loans rejected (for bad credit, low income ) by the automated system are, by definition, subprime.
Interesting link considering it indicates that the GSEs were not buying the loans but directing them to companies that would. So the GSEs had a higher standard then the non-agency securitizers.
As has already been pointed out in this thread is its the size of the market that changed in the 2000s. The non-agency securitizers ended up dominating the dramatically expanded subprime market; so much so that the GSEs overall dominate position fell to 40% while the non-agency securitizers had 60% and they were not restricted to the standards used by the GSEs.
Interesting link considering it indicates that the GSEs were not buying the loans but directing them to companies that would. So the GSEs had a higher standard then the non-agency securitizers.
As has already been pointed out in this thread is its the size of the market that changed in the 2000s. The non-agency securitizers ended up dominating the dramatically expanded subprime market; so much so that the GSEs overall dominate position fell to 40% while the non-agency securitizers had 60% and they were not restricted to the standards used by the GSEs.
I understand that the size of the market that changed in the 2000s, however...the root cause was back in the 90's
say I interduce a widget in 1985... some people by it but now very popular...in 1995, I lower the prices...it STARTS to take off in the late 90's, but in the 00' it explodes in popularity..... was it because of the 00's (a time-frame of the bust)...or was it due to the price drop (standard drop) in 95??
subprime or the secondary market, or the technical term mortgage backed securities was NOT THE PROBLEM.... the problem is those 'secure' ( EVERYONE assumed they were secure since housing historically does nothing but go up) mortgage backed securities were packaged with BAD PAPER, garbage loans (IAW government standards) to non credit worthy , never would have gotten the mortgage under the pre-1995 policies
remember this was the time when ''house flipping' was so popular, they even had a tv serier on the home network called 'flip this house' because of the housing bubble(boom at the time)
I understand that the size of the market that changed in the 2000s, however...the root cause was back in the 90's
say I interduce a widget in 1985... some people by it but now very popular...in 1995, I lower the prices...it STARTS to take off in the late 90's, but in the 00' it explodes in popularity..... was it because of the 00's (a time-frame of the bust)...or was it due to the price drop (standard drop) in 95??
subprime or the secondary market, or the technical term mortgage backed securities was NOT THE PROBLEM.... the problem is those 'secure' ( EVERYONE assumed they were secure since housing historically does nothing but go up) mortgage backed securities were packaged with BAD PAPER, garbage loans (IAW government standards) to non credit worthy , never would have gotten the mortgage under the pre-1995 policies
remember this was the time when ''house flipping' was so popular, they even had a tv serier on the home network called 'flip this house' because of the housing bubble(boom at the time)
" never would have gotten the mortgage under the pre-1995 policies"
The above is the mistake in your logic. The change which generated the demand for subprime was the switch to residential mortgages as the main ingredient in structured credit investments. Prior to 2000 that was not the case. Part of what made subprime mortgages attractive to investment banks was the belief, as you wrote, that home prices wouldn't sustain a prolonged downturn and certainly wouldn't if combined with subprime from around the country. The reasons the investment banks switched was because they had just gotten burned using other ingredients.
" never would have gotten the mortgage under the pre-1995 policies"
The above is the mistake in your logic. The change which generated the demand for subprime was the switch to residential mortgages as the main ingredient in structured credit investments. Prior to 2000 that was not the case. Part of what made subprime mortgages attractive to investment banks was the belief, as you wrote, that home prices wouldn't sustain a prolonged downturn and certainly wouldn't if combined with subprime from around the country. The reasons the investment banks switched was because they had just gotten burned using other ingredients.
questions...I am open minded
1. how was mortgage backed securities not 'residential prior to 2000
2. who changed those rules?
3. I still see (mortgage backed securities) or (asset backed securities) as a good deal in most cases...you are trading/buying a package of ASSETS (not only the physical properties, but also the "accounts receivable" of the loans) not liabilities …. I still see the problem as being bad paper, from the 95 change of standards.... which was a change not only for residential, but also commercial/residential
my research, and being stuck in that mess, in not only the 90's but the 00's, looks at the root CAUSE, not a local symptom.
Banksters
Financial Terrorists is another banned set of words.
Personally, I dunno if I'd refer to any of these as 'terrorists' financial or otherwise.
As is usual, when thinking about these kindsof 'big questions' & how all the'pieces' fit into the 'big picture', I tend to ponder the thoughtviews of wise & trustworthy folks.
Quote:
"Perfection of means and confusion of goals seem to characterize our age. If we desire sincerely and passionately the safety, the welfare and the free development of the talents of all men, we shall not be in want of the means to approach such a state."
~Albert Einstein
Applying the brilliance of Mr. Einstein here in regards to the issues brought up in this thread, I consider many questions, fr'instance:
In any economic system, what are its main goals/objectives?
Within any economic system, what is the role of financial institutions?
Same as above for the insurance industry?
Same as above for real estate industry?
Same as above for government?
...
Also considering this:
Quote:
But because we live in an age of science, we have a preoccupation with corroborating our myths.
~Michael Schermer
One of the mythologies considered here is the myth of the 'Invisible Hand' & how it plays into the most recent global financial imbroglios.
Wasn't everyone along the way doing what was in their own best interest? From the individual or family who wanted a home, to the real estate folks who were providing for their families by selling houses, to the banking folks who were providing for themselves/families by negotiating loans, to the insurance folks ..., to the inventors of financial products ..., to the investors ..., to the folks at the credit agencies ..., to the folks working as regulators, & so on ...
Wasn't everyone along the way doing what was in their own best self-interest?
What happened to the alleged being led, as if by an invisible hand, to advance the best common interest of the global community?
1. how was mortgage backed securities not 'residential prior to 2000
2. who changed those rules?
3. I still see (mortgage backed securities) or (asset backed securities) as a good deal in most cases...you are trading/buying a package of ASSETS (not only the physical properties, but also the "accounts receivable" of the loans) not liabilities …. I still see the problem as being bad paper, from the 95 change of standards.... which was a change not only for residential, but also commercial/residential
my research, and being stuck in that mess, in not only the 90's but the 00's, looks at the root CAUSE, not a local symptom.
1) Well not all MBS involve residential mortgages. However that was not the point I was making. What changed was the demand for MBS composed of lower quality mortgages. Here is one section of the FCIC report talking about the shift.
For the managers who created CDOs, the key to profitability of the CDO was the fee
and the spread—the difference between the interest that the CDO received on the
bonds or loans that it held and the interest that the CDO paid to investors. Throughout
the 1990s, CDO managers generally purchased corporate and emerging market bonds
and bank loans. When the liquidity crisis of 1998 drove up returns on asset-backed
securities, Prudential Securities saw an opportunity and launched a series of CDOs that
combined different kinds of asset-backed securities into one CDO. These “multisector”
or “ABS” securities were backed by mortgages, mobile home loans, aircraft leases, mutual
fund fees, and other asset classes with predictable income streams. The diversity
was supposed to provide yet another layer of safety for investors.
Multisector CDOs went through a tough patch when some of the asset-backed securities
in which they invested started to perform poorly in 2002—particularly those
backed by mobile home loans (after borrowers defaulted in large numbers), aircraft
leases (after 9/11), and mutual fund fees (after the dot-com bust). The accepted wisdom
among many investment banks, investors, and rating agencies was that the wide
range of assets had actually contributed to the problem; according to this view, the
asset managers who selected the portfolios could not be experts in sectors as diverse
as aircraft leases and mutual funds.
So the CDO industry turned to nonprime mortgage–backed securities, which
CDO managers believed they understood, which seemed to have a record of good
performance, and which paid relatively high returns for what was considered a safe
investment.“Everyone looked at the sector and said, the CDO construct works, but
we just need to find more stable collateral,” said Wing Chau, who ran two firms,
Maxim Group and Harding Advisory, that managed CDOs mostly underwritten by
Merrill Lynch. “And the industry looked at residential mortgage–backed securities,
Alt-A, subprime, and non-agency mortgages, and saw the relative stability.”
CDOs quickly became ubiquitous in the mortgage business. Investors liked the
combination of apparent safety and strong returns, and investment bankers liked
having a new source of demand for the lower tranches of mortgage-backed securities
and other asset-backed securities that they created.
2) Who changed the rules?
There was no rule change per se. One of the most dramatic events was the Commodity Futures Modernization Act of 2000 which left the OTC derivative market largely unregulated. CDOs are OTC derivatives. So this was the free market making up the rules based on what the market would tolerate. To guarantee supplies of lower rated mortgages the investment banks either bought or created their own mortgage originators who were not subject to the same rules as commercial banks.
3) The difference is not with the MBS themselves. There had always been higher and lower rated MBS. Most investors would steer clear of lower rated MBS; it didn't mater on what basis the MBS was marked as lower (pre/post 95), there just wasn't a large market for lower rated MBS.
But that changed. Here again are parts of the FCIC talking about the shift.
Still, it was not obvious that a pool of mortgage-backed securities rated BBB could
be transformed into a new security that is mostly rated triple-A. But math made it so.
The securities firms argued—and the rating agencies agreed—that if they pooled
many BBB-rated mortgage-backed securities, they would create additional diversifi-
cation benefits. The rating agencies believed that those diversification benefits were
significant—that if one security went bad, the second had only a very small chance of
going bad at the same time.
...
Relying on that logic, the CDO machine gobbled up the BBB and other lower-rated
tranches of mortgage-backed securities, growing from a bit player to a multi-hundred-
billion-dollar industry.
This is how you get triple A investments made up of the higher tranches of a CDO that would be attractive to a large swath of investors. Based on the structure of the CDO the only danger was if a significantly large number of the subprime within the CDO defaulted at the same time. Most of the players in the market didn't believe that was possible. AIG was so confident that they set aside almost no reserves to pay off on the CDS they were selling which were being bundled into the CDOs as insurance against default. One AIG executive crowed that they would never have to pay off more then .1% of the CDSs they sold. AIG was just booking the guaranteed revenue from the CDS with zero thought that they were endangering the entire company.
In reply to some of the above in regard to the regulation of derivatives.
Quote:
...It was the deregulation of financial derivatives that brought the banking system to its knees. The leading cause of the credit crisis was widespread uncertainty over insurance giant AIG’s losses speculating in credit default swaps (CDS), a kind of derivative bet that particular issuers won’t default on their bond obligations. Because AIG was part of an enormous and poorly-understood web of CDS bets and counter-bets among the world’s largest banks, investment funds, and insurance companies, when AIG collapsed, many of these firms worried they too might soon be bankrupt. Only a massive $180 billion government-funded bailout of AIG prevented the system from imploding.
This could have been avoided if we had not deregulated financial derivatives.
...Just as derivatives have been around for centuries, so has derivatives regulation. In the U.S. and U.K., derivatives were regulated primarily by a common-law rule known as the “rule against difference contracts.”
The rule against difference contracts did not stop you from wagering on anything you liked: sporting contests, wheat prices, interest rates. But if you wanted to go to a court to have your wager enforced, you had to demonstrate to a judge’s satisfaction that at least one of the parties to the wager had a real economic interest in the underlying and was using the derivative contract to hedge against a risk to that interest.
...During the roaring 1990s, when financial derivatives were being widely applauded as risk-reducing, highly-efficient (and, for Wall Street, highly profitable) financial “innovations,” the old rule against difference contracts had little appeal. Maybe it has more now.
Why re-regulating derivatives can prevent another disaster
1) Well not all MBS involve residential mortgages. However that was not the point I was making. What changed was the demand for MBS composed of lower quality mortgages. Here is one section of the FCIC report talking about the shift.
For the managers who created CDOs, the key to profitability of the CDO was the fee
and the spread—the difference between the interest that the CDO received on the
bonds or loans that it held and the interest that the CDO paid to investors. Throughout
the 1990s, CDO managers generally purchased corporate and emerging market bonds
and bank loans. When the liquidity crisis of 1998 drove up returns on asset-backed
securities, Prudential Securities saw an opportunity and launched a series of CDOs that
combined different kinds of asset-backed securities into one CDO. These “multisector”
or “ABS” securities were backed by mortgages, mobile home loans, aircraft leases, mutual
fund fees, and other asset classes with predictable income streams. The diversity
was supposed to provide yet another layer of safety for investors.
Multisector CDOs went through a tough patch when some of the asset-backed securities
in which they invested started to perform poorly in 2002—particularly those
backed by mobile home loans (after borrowers defaulted in large numbers), aircraft
leases (after 9/11), and mutual fund fees (after the dot-com bust). The accepted wisdom
among many investment banks, investors, and rating agencies was that the wide
range of assets had actually contributed to the problem; according to this view, the
asset managers who selected the portfolios could not be experts in sectors as diverse
as aircraft leases and mutual funds.
So the CDO industry turned to nonprime mortgage–backed securities, which
CDO managers believed they understood, which seemed to have a record of good
performance, and which paid relatively high returns for what was considered a safe
investment.“Everyone looked at the sector and said, the CDO construct works, but
we just need to find more stable collateral,” said Wing Chau, who ran two firms,
Maxim Group and Harding Advisory, that managed CDOs mostly underwritten by
Merrill Lynch. “And the industry looked at residential mortgage–backed securities,
Alt-A, subprime, and non-agency mortgages, and saw the relative stability.”
CDOs quickly became ubiquitous in the mortgage business. Investors liked the
combination of apparent safety and strong returns, and investment bankers liked
having a new source of demand for the lower tranches of mortgage-backed securities
and other asset-backed securities that they created.
2) Who changed the rules?
There was no rule change per se. One of the most dramatic events was the Commodity Futures Modernization Act of 2000 which left the OTC derivative market largely unregulated. CDOs are OTC derivatives. So this was the free market making up the rules based on what the market would tolerate. To guarantee supplies of lower rated mortgages the investment banks either bought or created their own mortgage originators who were not subject to the same rules as commercial banks.
3) The difference is not with the MBS themselves. There had always been higher and lower rated MBS. Most investors would steer clear of lower rated MBS; it didn't mater on what basis the MBS was marked as lower (pre/post 95), there just wasn't a large market for lower rated MBS.
But that changed. Here again are parts of the FCIC talking about the shift.
Still, it was not obvious that a pool of mortgage-backed securities rated BBB could
be transformed into a new security that is mostly rated triple-A. But math made it so.
The securities firms argued—and the rating agencies agreed—that if they pooled
many BBB-rated mortgage-backed securities, they would create additional diversifi-
cation benefits. The rating agencies believed that those diversification benefits were
significant—that if one security went bad, the second had only a very small chance of
going bad at the same time.
...
Relying on that logic, the CDO machine gobbled up the BBB and other lower-rated
tranches of mortgage-backed securities, growing from a bit player to a multi-hundred-
billion-dollar industry.
This is how you get triple A investments made up of the higher tranches of a CDO that would be attractive to a large swath of investors. Based on the structure of the CDO the only danger was if a significantly large number of the subprime within the CDO defaulted at the same time. Most of the players in the market didn't believe that was possible. AIG was so confident that they set aside almost no reserves to pay off on the CDS they were selling which were being bundled into the CDOs as insurance against default. One AIG executive crowed that they would never have to pay off more then .1% of the CDSs they sold. AIG was just booking the guaranteed revenue from the CDS with zero thought that they were endangering the entire company.
So then what I may not be saying in crystal clear fashion, was on target... , the issues that caused the 06/08 bust was from 95 (mortgages standard changes), 98(liquidity crisis) ,and 00 ( Commodity Futures Modernization Act )…...a perfect storm, especially with jobs being outsourced to over seas...…………..
……………………...,. not from 05 like mets likes to say
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