Interesting Specific Data

[Kevin Yeats]

I'm reading a book about Ben Bernanke and how the Fed handled the economy since he became Chairman in early 2006.

One chapter covering a general overview of the meltdown gives specific data on risky mortgage originations.

Low quality originations (subprime & Alt-A) increased from 7% of originations in 2001 to 33% in 2006.

IO and neg-am loans jumped from 1% of total originations in 2001 to 29% in 2005. (stayed above 25% for 2004-2006).

Any wonder we had a meltdown?

Original authors Martin Bailey, Douglas Elmendorf and Robert Litan (May 2008) The Great Credit Squeeze: How It Happened, How to Prevent Another Economics Studies at Brookings, Washington.

[Brian Levredge]

Let's not forget the Fed's role in helping drive the car off the cliff by maintaining an easy money policy that is still in effect. If you haven't, I would suggest reading The Big Short, my Michael Lewis. Pretty fascinating read about how everyone but a handful of people got caught up in the mania. Also throw in the "Creature From Jekyll Island" for good measure as well.

[Account Closed]

In addition to the issuance of risky mortgage products, the Fed also had a hand in their demise.

After the 2001 crash, the rise in the issuance of subprime mortgages did allow people to buy homes at incredibly low rates, with low monthly payments because of the need of some loans to pay interest only. Or even Alt A loans that give you a variety of options on payment. From 2004 to 2007 the Fed raised the interest rate something like 15 or 16 time straight. So in 01 the prime rate (which is 3% higher than the Fed Funds rate - why it is set like that is a totally different post) was dropped to like 5% and in 03 it was as low as 4%. Skip ahead to 06 and the prime rate is 8%.

Most of the best real estate borrowers are given prime +2% from commercial banks, and many loan products are based off of the prime rate. I think most commercial loan products use the prime rate in their offerings. As we all know, many if not all loan products, not just including but especially on ARMs on HELOCs, home loans, credit cards etc are all based the prime rate when they adjust.

So of course people are going to default!!! This is a seriously dramatic increase in the interest rate in such short of a time. The Fed seeks to contain the economy from inflation. In the mean time, it looks like they over raised the interest rate and all of a sudden anyone who was comfortably making their mortgage was all of a sudden having a more difficult time. Those who were already having a difficult time were then unable to pay. Pop! First give out the easy loans, then squeeze it out of them - thanks a lot Fed!

Here is a nice sheet with basic prime rate history:
http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm

I would love to hear everyone's thoughts on the matter of interest rate increases directly affecting the integrity of the real estate market!

[Bryan Hancock]

The ratings agencies labeling all of this crap sausage "prime" and making investors think they were investing in quality product are the real magicians. How these idiots have escaped scrutiny is beyond me.

How does anyone think they can slice up a bunch of toxic waste and sprinkle it in with a root beer float and think that the whole product is yummy? Clearly we need to be hiring smarter ratings agency workers or have better oversight.

[Kevin Yeats]

Bryan, there clearly were MAJOR PROBLEMS (to put it mildly) with the ratings agency industry - both on an individual firm level and an industry-wide level.

Going forward, their ratings will contain more suspicion.

[Jeff Tumbarello]

Do not forget that Mr. Greenspans panic with Y2K, The FRB lowered rates and pumped money into the economy. That was a tipping point. This is the net result of multiples of money in motion. The speak of just mortgages is basically seeing the tree's and not the forrest. Look at the ratios of m1/m3. That tells the real picture.