The Consumer Financial Protection Bureau Will Fail to Prevent Housing Bubbles

The latest regulatory body created by Congress and the Obama administration will fail to prevent future housing bubbles because they lack the understanding of what is required.

Irvine Home Address … 35 NIGHTHAWK Irvine, CA 92604

Resale Home Price …… $845,000

It's hard not to cry

It's hard to believe

So much heartache and pain

So much reason to grieve

With the wonders of science

All the knowledge we've stored

Magic cocktails for lives

People just can't afford

Say it's not true

You can say it's not right

It's hard to believe

The size of the crime

Queen — Say It's Not True

The scope and scale of the housing bubble is hard to comprehend. Lenders created four trillion dollars in excess debt, 12 million borrowers are delinquent on their mortgages, and 6 to 8 million loan owners are going to be forced to leave their family homes. And what was gained? There was no innovation or advancement, no long-lasting infrastructure that will enhance future economic growth, nothing we can point to as a silver lining — unless you consider a sea of McMansions in the hinterlands a great societal investment. And don't forget the rampant consumerism from HELOC spending.

Never in the course of human events has so much been given to so many for doing so little. In my opinion, the housing bubble was a colossal waste.

Buyer, Be Aware


Published: August 13, 2010

During the great housing bubble and bust, journalists spent a fair amount of time searching for the perfect mortgage victim. This victim would be someone who played by the rules, took a conservative approach to his finances and simply wanted a decent place to live. He made his monthly payments on time, right up to the day that the bank informed him that his payments would balloon because of a fine-print technicality that no borrower could have understood. Just like that, the homeowner was facing foreclosure.

By and large, these searches failed.

That's because Responsible Homeowners are NOT Losing Their Homes. They were searching for a borrower that did not exist.

The stories of the housing bust tended to be more complicated. Many borrowers stretched to buy homes, figuring that they would be making more money soon enough or that housing prices would keep going up. In Southern California, one homeowner told me he was well aware that his monthly payments would eventually balloon. He thought everything would work out, though, because he assumed that ever-rising home values would allow him to refinance. Much of the country shared this belief.

This is also why education is not the answer. You can't educate the kool aid intoxicated. I know; I have tried for several years now, and by and large, I am preaching to the choir.

Banks, mortgage brokers and real-estate agents were only too happy to encourage these fantasies, of course. In many cases, their encouragement crossed the line into malfeasance. But the bubble grew as large as it did because this malfeasance fed on human frailty, naïveté and even irresponsibility.

I dig this guy calling out the corrupt players.

This summer, with the bubble long gone, Congress and the Obama administration enacted a sweeping new law meant to change the business of lending and borrowing money.

The bubble is not long gone.

The part of the law that will directly affect the most people will be the new Consumer Financial Protection Bureau, which has already been the subject of heated debate. And the central question facing the bureau will be how to distinguish between corporate malfeasance and consumer frailty.

It is not an easy task. For as long as there has been money, people have been doing stupid things with it. We borrow more than we can afford. We pay higher interest rates than we need to. We play the lottery. The new consumer bureau can prohibit some of the banks’ worst practices. But figuring out precisely where to draw the line will be much more nuanced than the past year’s black-and-white, left-and-right debate over whether an agency should exist at all.

Elizabeth Warren — the Harvard law professor who first proposed such an agency, in a 2007 article in the journal Democracy — has pointed out that the history of consumer financial protection is a history of “thou shalt not.” The government bans lenders from doing something, and the banks stop. Quickly, however, they come up with new ways to separate people from their money. Last year’s credit-card legislation, for example, cracked down on overdraft fees (the frequently steep charges for people who tried to withdraw more money on a debit card than they had in their account). Banks have responded by raising other fees.

The writer's view that the credit-card legislation was flawed because lenders raised their fees is short sighted. Lenders raised their fees because they could. They have a large number of borrowers treading water that could not avoid the fees if they tried. The fees that were banned should have been banned long ago. Just because legislation is difficult and the results are delayed doesn't mean the legislation is not the right solution to problems of bad lender behavior.

This is why the thou-shalt-not approach, Warren says, “means you’ll always be behind.” Or, as Richard Thaler, the University of Chicago behavioral economist, puts it, “Regulating what financial companies can and cannot charge for is a losing game, because they’ll always think of something else.”

Their agreement on this point is notable, because Warren has come to represent the muscularly progressive vision of the new bureau, while behavioral economists like Thaler (who is close to several Obama advisers) are seen as more technocratic. And there is no doubt that the bureau will need to make judgment calls that some regulators would make differently than others. But the basic vision for the bureau is not in dispute, at least not among the people who are likely to run it under Obama.

When the Republicans get back in, they will gut the bureau like they did with the EPA.

The overriding goal of the bureau will be to help people understand their financial choices. More often than not, it will allow banks to continue a given practice — but force them to explain, in clear terms, what it means for consumers. Earlier this summer, I refinanced my mortgage and was reminded yet again of how much modern finance depends on obfuscation. Nowhere in the pile of documents was there a simple explanation of the only information that mattered to me: how much the bank was charging in fees, how much the lawyer was charging, how much the government was charging and how much my monthly payment would fall. Instead, I was confronted with a blizzard of terms that I did not fully understand: origination, title services, release tracking and the like.

Done right, the new bureau can begin to change this. It can require banks to speak in the language of customers, not internal bureaucracy. Another part of last year’s credit-card legislation offered a preview. As of February, banks have had to give people the often-bracing calculation of how much it will cost them to pay off their balance if they make only the minimum monthly payment, as well as how many years it will take. To see if such steps are working — and to keep pace with Wall Street ingenuity — the new bureau will have a research budget allowing it to test whether consumers truly know what they’re signing up for.

I challenge anyone to find a way to explain the Option ARM in language plain enough for the financially illiterate to understand. In fact, I challenge anyone to explain it to experts in the industry in a way that they understand. There are some loan products that are simply too complex for mere mortals to comprehend. To me regulation would be much simpler if we banned all loan products where payments can increase. That is the only method of ensuring people understand the risks they are taking on because they won't be taking on much risk. Do you really think the average Joe understands interest-rate risk? Do you?

The ultimate goal is pushing banks to compete in ways that benefit consumers, rather than having them compete over which methods can most cleverly fool consumers. If people know the true costs of their mortgages, credit cards, debit cards and mutual funds, they are more likely to gravitate to those offering low costs and good benefits. This will have the added feature of reducing the enormous, historically abnormal profits that Wall Street has enjoyed in recent years. It is also the way a market is supposed to work.

Still, no matter how well we grasp the implications of fees and interest on our credit cards, we may still decide to use a card to buy a new television or kitchen we can’t really afford. The new consumer bureau will not try to stop us. And it almost certainly will not be enough to prevent another bubble, in some other realm, sometime in the future.

But that is probably not a realistic goal anyway. Prohibition, after all, has a decidedly mixed record. A better goal may simply be making sure we understand what we are doing and hoping that is enough to make us a little less frail.

Nonsense. We could regulate lending in a positive way. Education is not enough.

Educating Borrowers is doomed to fail

The first step in a borrower education program would require a consensus on what borrowers should be taught. Lenders will game the system to peddling unstable loan products as safe if borrowers can be taught how to use them. I saw a scholarly study from the bubble that said the Option ARM was a great loan program if borrowers could be educated. Obviously, that is crazy.

Lenders will also use the political system to create doubt as to what loan programs are safe and which are not. I recently wrote about Another Ignorant and Misguided Attack on the 30-Year Fixed-Rate Mortgage. This appears to be an attempt by some right-wing political operatives to create a smoke screen to obscure the real danger of adjustable rate mortgages.

Adjustable rate mortgages are a dangerous loan product, and any reasonable education effort should encourage people to use fixed-rate financing instead, particularly at the bottom of the interest rate cycle. No amount of education will stop the use of adjustable-rate mortgages, and those loans will almost certainly lead to more foreclosures when interest rates rise.

With poorly reasoned attacks on the 30-year fixed-rate mortgage floating around, it creates the impression there is some legitimate difference of opinion on the matter. There isn't. However, if lenders can create enough confusion and dissent, it will make the job of a government-sponsored education bureau impossible — which is what lenders want. The Consumer Financial Protection Bureau will fail because it will get bogged down in the political process.

Further, the goal of education is unattainable: borrowers will not make good choices. Borrowers will borrow all they can no matter how much they are educated on the risks. Most ignore the risks or don't believe it will happen to them. Half of my masters curriculum was real estate finance, so recognized the risk and chose not to participate. However, there were plenty of Ivy League educated MBAs that didn't recognize the risk and got wiped out by the housing bubble. Education is not enough. We must have laws that limit lending.

There is a better way….

How regulators could prevent the next housing bubble

The regulatory solution proposed herein is simple, yet far reaching. It comes in two parts, the first is to limit the amount lenders can loan to borrowers with a rather unique enforcement mechanism, and the second is to increase the penalties for borrowers who commit mortgage fraud. The following is not in legalese, but it contains the conceptual framework of potential legislation that could be enacted on the state and/or federal level. A detailed discussion of the text follows:

Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance:

  1. All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
  2. The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income.
  3. The total debt-to-income of all debt obligations cannot exceed 36% of a borrower’s gross income.
  4. The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs.

Any sums loaned in excess of these parameters do not need to be repaid by the borrower and no contractual provision is permitted that can be interpreted as limiting the borrower’s right to exercise this right, make the loan callable or otherwise abridge the mortgage agreement.

This last statement is the most critical. This is how the enforcement problem can be overcome. Regulators are pressured not to enforce laws when times are good, and decried for their lack of oversight when times are bad. If the oversight function becomes a potential civil matter policed by the borrowers themselves, the lenders know exactly what their risks and potential damages are. Any lender foolish enough to make a loan outside of the parameters would not need to fear the wrath of regulators, they would need to fear the civil lawsuits brought by borrowers eager to get out of their contractual obligations. If any borrower could obtain debt forgiveness by simply proving their lender exceeded these guidelines based on the loan documents, no lender would do this, and regulatory oversight would be practically unnecessary. One key to making this work is to prohibit lenders from introducing a “poison pill” to the loan documents that would make borrowers hesitant to bring suit, otherwise lenders would make their loan callable in the event of a legal challenge forcing the borrower to refinance or sell the property. Basically, if the borrower brought suit and won, they would see principal reduction equal to the deviation from the standards, if they brought suit and lost, they would have no penalty. Most of these cases would be decided by summary judgment based on a review of the loan documents thus minimizing court costs.

Another pillar to the system is the documentation of income as part of the loan document package–the “borrower’s documented income” from the proposed legislation. One of the most egregious practices of the Great Housing Bubble was the fabrication of income by borrowers that was facilitated and promoted by originating lenders. Stated-income loan programs were widespread, and they were the cause of much of the uncertainty in the secondary mortgage market during the initial stages of the credit crunch in the deflation of the bubble. Basically, investors had no idea if the borrowers to whom they had lent billions of dollars were capable of paying them back. Without proper documentation of income, investors lost all confidence in the secondary mortgage market. Stated-income loan programs were one of the first casualties of the credit crunch. These programs should be eliminated totally due to the inherent potential for fraud and the undermining of confidence in the secondary mortgage market stated-income loans create. If lenders can be sued based on the content of the loan documents, and if borrowers can be fined or go to jail for committing fraud or misrepresentation on loan documents, both parties have strong incentive to prepare these documents completely and correctly. Originating lenders will argue this adds to their costs and will result in higher application fees. The amount in question is very small, particularly relative to the dollar amount of the transaction. A small amount of additional expense here will provide huge benefits by assuring investors the borrowers to whom they are loaning money really have the income to pay them back. The benefit far outweighs the cost.

If such a law were passed, agency interpretation and court case precedents will end up defining adequacy in loan documentation. A single W2 does not establish a work history, but 2 years worth is probably excessive documentation. One of the most contentious areas will likely be documenting the income of the self-employed. In theory, the self employed must document their incomes to the US government either through Schedule C reports or corporate K-1s. The argument the self-employed have traditionally made is that these documents understate their income. Since many self employed take questionable tax deductions, there is probably some truth to the claim that tax records understate their income; however, why should the self-employed get to have both benefits? If the self-employed had to use their tax returns as loan documentation, they probably would not be quite so aggressive in taking deductions. A new business without a tax return or with only one year of taxable receipts probably is not stable enough to meet standards of income necessary to assume a long-term debt.

The poor quality of loan documentation during the bubble was a mistake of originating lenders; therefore, in this proposal much of the burden of paperwork and liability for mistakes falls on the lenders. During the deflation of the bubble, lenders paid an enormous price for some of their lax paperwork standards, but much of the problem was also due to borrowers misrepresenting themselves in the loan documents. There were instances where lenders encouraged this behavior, but in the majority of cases, the document fraud was perpetrated by the borrowers. The only recourse available to a lender is a civil suit as there are few criminal penalties associated with loan documentation and almost no enforcement. It can be very difficult and costly for lenders to pursue civil damages, and few lenders attempt it even when they have a strong case. To create a more balanced set of responsibilities, the borrowers must face criminal penalties for fraud and misrepresentation on loan documents. If borrowers know the lender can turn documents over to a prosecutor who will charge the borrower with a crime if they make false material statements, borrowers will be much less likely to commit these acts.

The parameters of the forming limitations on the debt-to-income ratio and combined-loan-to-value are essential to prevent bubbles in the housing market and to prevent the banking system from becoming imperiled in the future. People will commit large percentages of their income to house payments when prices are rising quickly; however, they do this out of fear of being “priced out” and greed to make a windfall from appreciation. These are the beliefs that inflate a bubble. Borrowers cannot sustain payments above the traditional parameters for debt service without either defaulting or causing a severe decline in discretionary spending. The former is bad for the banks, and the latter is bad for the entire economy. This must be prevented in the future. There are a number of reasons why high combined-loan-to-value lending is a bad idea: it promotes speculation by shifting the risk to the lender, it encourages predatory borrowing where borrowers “put” the property to a lender, it promotes a high default rate because borrowers are not personally invested in the property, it discourages saving as it becomes unnecessary, and it artificially inflates prices as it eliminates a barrier to market entry. This last reason is one of the arguments used to get rid of downpayment requirements. The consequences of this folly became readily apparent once prices started to fall.

The payment must be measured against “30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used.” One of the worst loan programs of the Great Housing Bubble was the 2/28 ARM sold to large numbers of subprime borrowers. These borrowers were often qualified only on their ability to make the initial payment, and these borrowers were generally not capable of making the fully amortized payment when the loan reset after 2 years. Regulations like this would prevent a recurrence of the foreclosure tsunami triggered by the use of this loan program. It is also important to ban negative amortization because it would allow the loan balance to grow beyond the parameters of qualification, and it invites property speculation. Perhaps borrowers would not be concerned because they would receive debt forgiveness of the expanding balance. Lenders should be wary of these loans after their dismal performance in the deflation of the bubble, but institutional memory is short, and these loan programs could make a comeback if they are not specifically outlawed. This provision is careful to allow interest-only loans. They are still a high-risk product, but an argument can be made that these loans have a place, and there is no need to completely ban them. They will not have a future as an affordability product capable of driving up prices if the borrower must still qualify for the fully amortized payment.

For the lending provisions to have real impact, they must apply to both purchases and to refinances, thus the clause, “Loans for the purchase or refinance of residential real estate.” If the rules only applied to purchases, there would be a tremendous volume in refinances to circumvent the regulations. The caps on debt-to-income ratios, mortgage terms and combined-loan-to-value only have meaning if they are universally applied. The combined-loan-to-value standard is based on the “appraised value of the property at the time of sale or refinance.” The new appraisal methods will have impact here. It is important that the records need only be accurate as of the time of the transaction. If a borrower experiences a decline in their income or if the property declines in value to where they no longer meet the loan standard, it does not mean they can go petition for debt relief.

The regulations would only need to apply to loans “secured by a mortgage and recorded in the public record.” People can still borrow money from any source they wished as long as the lender knows they will not have any claim on residential real estate. If a lender wanted to issue a loan secured by real estate outside of the outlined standards, the borrower would not have to pay back that money. If a borrower has non-recorded debts which create a total indebtedness requiring more than 36% of their gross income, they would not be eligible for a home equity loan even if they met the other qualifications. In such circumstances, it is better to limit borrowing than increase the probability of foreclosure.

Many states have non-recourse laws on their books. These laws serve to protect the borrower from predatory lending because the lender cannot go after other assets of the borrower in the event of default. In theory this should make lenders more conservative in their underwriting; however, the behavior of lenders in California, a non-recourse state, during the Great Housing Bubble was not conservative. These laws do serve to protect borrowers, and they should be enacted for purchase-money mortgages in all 50 states.

Since one of the goals of regulatory reform is to inhibit the behavior of irrational exuberance, the sales tactics of the National Association of Realtors should be examined and potentially come under the same restrictions as securities brokers through the Securities and Exchange Commission. After the stock market crash which helped precipitate the Great Depression, Congress created the Securities and Exchange Commission to regulate the sales activities of securities brokers. There are strict regulations in place governing the representations made concerning the future performance of investment opportunities. These protections were put in place to protect the general public from the false promises made by stockbrokers in the 1920s which many naïve investors believed. The same analogy holds true for Realtors. The National Association of Realtors has launched numerous advertising campaigns suggesting erroneously that residential real estate is a great investment and appreciation will make home buyers wealthy.

The result of these restrictions will be that all homeowners will have at least 10% equity in their properties unless they have borrowed from a government program like the FHA where the combined-loan-to-value can exceed the limits. This equity cushion would buffer lenders from predatory borrowing and a huge increase in foreclosures if prices were to decline. Home equity in the United States has been declining since the mid 1980s, and it actually declined while prices rose during the Great Housing Bubble due to the rampant equity extraction. The lack of an equity cushion exacerbated the foreclosure problem as many homeowners who owed more on their mortgage than the house was worth simply stopped making payments and allowed the house to fall into foreclosure.

The proposals I outlined in The Great Housing Bubble sound extreme by California lending standards, but Texas has had similar laws on the books for the last 150 years, and it was the restrictions on mortgage equity withdrawal that made their market avoid the housing bubble.

If the new Consumer Financial Protection Bureau wanted to curb housing bubbles and restore stability to our banking system, they should implement the proposals I have outlined above. Will they do it? Not if the banking lobby has anything to say about it.

When you read about today's HELOC abuser, ask yourself if you think educating borrowers would have stopped this behavior. I don't think it any amount of government education programs would have made the slightest difference.

Long Term HELOC Abuse

It's obvious from looking through the property records that many borrowers supplemented their lifestyles with regular trips to the home ATM machine. The regularity and the size of these withdrawals is astonishing. It also explains much about why houses are so popular in California. If owning real estate gives you the opportunity to obtain hundreds of thousands of dollars for doing absolutely nothing, ownership will be highly desired; in fact, it becomes the primary reason people buy homes. Californian's live in their own personal ATM machines.

  • The owners of today's featured property paid $441,000 on 4/25/1991. I don't have their original mortgage information, but it is likely that they put 20% down ($88,200) and borrowed $352,800.
  • On 5/27/1997 they obtained a stand-alone second for $50,000.
  • On 12/7/1998 they refinanced their first mortgage for $387,500.
  • On 3/26/1999 they got a $47,500 stand-alone second.
  • On 12/28/2000 they refinanced with a $441,000 first mortgage and crossed the threshold of borrowing more than they paid.
  • On 3/31/2004 they refinanced with a $536,250 first mortgage.
  • On 10/5/2004 they obtained a $628,000 first mortgage.
  • On 11/30/2005 they refinanced with a $686,250 Option ARM with a 1.5% teaser rate.
  • On 5/3/2007 they obtained a second mortgage for $15,764.
  • On 7/3/2007, after witnessing the above patter of serial refinancing, World Savings Bank brilliantly loaned them $788,000 in an Option ARM.
  • Total property debt is $788,000 plus negative amortization and missed payments.
  • Total mortgage equity withdrawal is $435,200 including their down payment.
  • Total squatting time was minimal as the bank moved quickly to evict these squatters.

Foreclosure Record

Recording Date: 05/11/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/09/2010

Document Type: Notice of Default

The listing agent is Mike Dunn, and I have seen a prospectus for a fund he is forming to purchase and improve trustee sale flips. My guess is that he is also the flipper on this deal.

If you would like to learn how you can get involved with trustee sales like this one, please contact me at

Irvine Home Address … 35 NIGHTHAWK Irvine, CA 92604

Resale Home Price … $845,000

Home Purchase Price … $711,100

Home Purchase Date …. 6/2/2010

Net Gain (Loss) ………. $83,200

Percent Change ………. 11.7%

Annual Appreciation … 71.0%

Cost of Ownership


$845,000 ………. Asking Price

$169,000 ………. 20% Down Conventional

4.51% …………… Mortgage Interest Rate

$676,000 ………. 30-Year Mortgage

$165,337 ………. Income Requirement

$3,429 ………. Monthly Mortgage Payment

$732 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$70 ………. Homeowners Insurance

$80 ………. Homeowners Association Fees


$4,312 ………. Monthly Cash Outlays

-$818 ………. Tax Savings (% of Interest and Property Tax)

-$889 ………. Equity Hidden in Payment

$283 ………. Lost Income to Down Payment (net of taxes)

$106 ………. Maintenance and Replacement Reserves


$2,993 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$8,450 ………. Furnishing and Move In @1%

$8,450 ………. Closing Costs @1%

$6,760 ………… Interest Points @1% of Loan

$169,000 ………. Down Payment


$192,660 ………. Total Cash Costs

$45,800 ………… Emergency Cash Reserves


$238,460 ………. Total Savings Needed

Property Details for 35 NIGHTHAWK Irvine, CA 92604


Beds: 4

Baths: 3 baths

Home size: 2,600 sq ft

($325 / sq ft)

Lot Size: 5,750 sq ft

Year Built: 1977

Days on Market: 21

Listing Updated: 40386

MLS Number: S626030

Property Type: Single Family, Residential

Community: Woodbridge

Tract: Pl


According to the listing agent, this listing is a bank owned (foreclosed) property.

JUST REDUCED $5,000!!!***FANTASTIC OPPORTUNITY TO CHOOSE YOUR OWN UPGRADES FOR ONE WEEK ONLY BEFORE BUILDER STARTS REMODEL ON 7/30***This is a fixer but a beautiful blank canvas with an excellent location in the back of the development – high cathedral ceilings,guest suite downstairs,pool and spa size yard,two fireplaces,excellent interior location less than 75 yards to park,basketball,volleyball and less than 150 yards to beach club and community pool. Last two sales have been over $975,000. Very low tax rate and HOA dues.

I like Mike's idea to advertise the flip for sale prior to renovation. If a buyer emerges, they can get the property renovated to their taste by the flipper and the costs get rolled into the loan. He does need to lay off the CAPS LOCK, exclamation points, and asterisks though. I wonder if he thinks he can do $20,000 in cosmetic renovations and ask $130,000 more for the property ($975,000). If he can get that, buyers are not very bright.

37 thoughts on “The Consumer Financial Protection Bureau Will Fail to Prevent Housing Bubbles

  1. SanJoseRenter

    Hi IR.

    1) Nice to see the lamprey graphic once again. 🙂

    2) Here’s an idea for a post …

    In the past week, I’ve seen 3 bigshots claim that the housing bubble was impossible to predict. You should call these tools out.

    William Gross, PIMCO on Nightly Business Report last nite. “who knew that Fannie Mae and Freddie Mac would displace private lenders?” (paraphrase)

    Citibank’s Crittenden had information that would have allowed him to detect “cracks” in the subprime investments but that “he didn’t pick up on that.” (an internal miscommunication)

    Third, any of the recent “in 20/20 hind-sight” quotes in the press last week. Just google for them.

      1. SanJoseRenter


        The noneofuscouddanode blog post isn’t what I had in mind, since I wasn’t calling out ivory-tower economists. Everybody knows their head is in the sand.

        I meant the executives who should have known better (Mozilo, Brian Moynihan, et al) but who turned out to be mortgage fee whores, not finance professionals, and now hide behind “20/20 hindsight” excuses.

    1. wheresthebeef

      That idiot Alan Greenspan said the same thing regarding bubbles. He mentioned that you can’t see bubbles until after they burst. I’m not sure what planet he was living on…anybody who lived in OC during the boom years (03-07) knew something wasn’t right. Home prices went up 20% per year, the entire economy was based on money created out of thin air and there were zero lending standards or backstops in place. No bubble there…this could go on forever!!!

      1. Anonymous

        When times were booming, Greenspan said lower taxes. Now that times are bad, he says raise taxes. He justifies his position as govt just needs revenue x to function, just take that. That policy would cause wider swings up and down in the US economy – great for hedge funds and bankers looking to profit off the swings, but bad for everyone else in the USA.

        Greenspan Calls for Repeal of All the Bush Tax Cuts;

        1. Anonymous

          Re IR’s “The latest regulatory body created by Congress and the Obama administration will fail to prevent future housing bubbles because they lack the understanding of what is required”

          Or, it could be that the banking sector will ensure that whoever is appointed or employed in the regulatory body, are ex-bankers who will make sure that the rules are useless to make sure the current bankers make the big bucks on the swings up and down (contributing part of that to campaign contributions and board memberships for retired polititions, as usual).

          1. Anonymous

            Older article, but still likely true

            The Quiet Coup
            The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.


        2. snuggs


          Greenspan and Fed members are not idiot, they are smartest (and shameless) persons in the world, that’s why and how they can stay in the power for as long as law allowed (i.e.20 years).

          Honest, IMHO, USA has best democrat system, but nothing is all free, people still need to learn democrat. If you still think they are stupid, then I will pity for you.

          Now, IMHO, Obama is one of the smartest person in the planet, but apparently Bernanke is even smarter than Obama. Somehow Obama believe Helicopter will help him to get reelected and give Ben a free pass to “save” the economics. For that he throws 69,456,897 votes to trash.

          I have been around the world a few time in last couple of years, USA is still richest and best country in the world, thanks to the people for living here pass 200+ years, but we still need to learn how to protect our wealth, it is not all free, the only thing we need to learn is quite simple: how to use them.

          Bottomline, Obama will still get re-elected, Ben still can HELOC more money from other countries.

          1. AZDavidPhx

            Bottomline, Obama will still get re-elected

            This is definitely not a foregone conclusion. His approval rating hit 41% this week. The honeymoon is over.

          2. Anonymous

            It goes like this. Those gaming the system to make huge profits for themselves inflate a giant bubble and then reap the profit bonuses, political donations from those making the bonuses, or get paid in advance to help their bank/hedge fund later by going into “public service”. Then when the bubble collapses and the piper is paid by financial pain to e eruone else,, they say “who knew? We are just dumbasses, my bad”. What do you expect them to say “we engineered a rigged game, ripped everyone off, and now are gazillionaires bwahahah?” Of course not.

          3. wheresthebeef

            History will definitely show that Greenspan and the other idiot Bernanke were definiitely NOT the smartest people in the world…that will be a painful fact. There is no easy way out of the mess we are in. The Fed has been completely complicit with the theft going on. They just left the bank vault open while Wall St. banksters and Politicians loaded up their trucks with the loot. Keynesian economics do not work. This will be proved in the next decade or so when it really hits the fan here.

    2. jb

      I call BS on the BigShots. How about:

      Crash Proof by Peter Schiff, published before the stock market crash and it discussed the housing market.


      The Coming Crash in the Housing Market by John Talbott, published in mid-2003. Brilliant book.

      Bill Gross is lying. Chris Cox was a puppet.

  2. winstongator

    I think the most dangerous mortgage products of the bubble were loans on non-owner-occupied homes. Related is the idea that people were using option-arms so that they could lever up with more properties (heloc for the dp & use the extra cashflow to make the investment property payment).

    40% of all sales in 2006 for second+ homes? Do you think that large DP’s were required?

    A lot of your ideas could be easily and quickly implemented by the GSE’s. The GSE’s also should never touch a loan on a second home.

    The master Lereah:

    Lereah said, “Vacation-home sales will remain strong for the foreseeable future given the fact that baby boomers are favorably positioned in terms of affordability, as well as being at the stage in life when people are most interested in making that kind of a lifestyle purchase.”

    Investment homes purchases, however, may drop, according to Lereah, as stagnant prices and rising interest rates will discourage buyers.

    1. AZDavidPhx

      One can not help but notice after looking at the photos that the Reynolds are no spring chickens. Just when were they planning on paying off their house? On their 150th birthdays? Even after having their principal cut from 420K to 240K it’s pretty obvious that they will not outlive their loan. One more example of people borrowing big money with no intention of paying back and banks obliging them.

      1. Frank

        “Just when were they planning on paying off their house? On their 150th birthdays?”

        Love it! Thank you, Dave. Thank you.

    2. Anonymous

      Ha ha ha. Check this out. The bond holders know they are holding some turkey loans. The right thing would be for them to acknowledge the loans aren’t worth much and sell them ti a venture fund like in the wsj article, and then the venture fund changes the loan terms to keep the homeowners in like in the article.

      However, here are the bondholding spinmieisters at work again

      They propose the govt refi everyone for the full loan amount at amlowerminterest rate, be use they really care about the homeowners. But of course – when you refi – the previous loan owner (ie. Bondholder) gets paid back the loan in full, right? No venture capital haircut required.

      Oh brother.

  3. AZDavidPhx

    The part of the law that will directly affect the most people will be the new Consumer Financial Protection Bureau

    Classic example of how Government always finds a way to grow itself in the name of “protecting us“.

    The consumer is the son and the Consumer Financial Protection Bureau (Sounds so official!) is the father who is their to look out for the children and teach them how to wipe their asses.

    1. AZDavidPhx

      At least this new Government agency will create some new job opportunities for ex-Goldman Sachs executives. Be ready for the public incredulity in a few years when it is discovered that almost everyone working in the agency is a former Wall Street hustler.

      1. scottinnj

        I can see the articles being written in 2015 “I bought this [insert name of totally inappropriate mortgage or financial product] from Bank of American and it had the stamp of approval from the CFPB. But it turns out the lobbyists from the banking industry totally captured the CFPB and let them sell me this crud. Whocudanode?”

        1. AZDavidPhx

          Yup. And then it will be time to create another agency to watch over the agencies.

          It just becomes ridiculous. You would think that at some point, the people would just throw their hands up in the air and say no to more Government “help”- enough is enough. Yet everytime someone breaks a fingernail – some uninformed boob is out crowing about the need to grow the government and protect us from ourselves.

          1. matt138

            people and business do not need the govt to wipe their asses. they need free market consequence to kick their asses. this is the only way lessons are learned and society benefits by having better business and a smarter consumer.

            This is the only viable solution.

            Govt regulation is a slippery slope. Picture slimy Goldman Sachs cons faking barney fife stupidity and spending your money lavishly – that is regulation.

            The free market is meaningful regulation and costs the taxpayer nothing. Too many believe the way to build a successful long term business is by duping the customer into buying shoddy products. This is ludicrous. Companies compete with quality, price, and service. This free market mechanism can only be turned on its head with the help of govt. Govt cannot save consumers. consumer education comes from making mistakes and learning from them, or learning from others’ mistakes. Let the market be! Let the flash-in-the-pan businesses fizzle and make way for the legitimate.

  4. winstongator

    I still feel the most toxic part of the mortgage market was in second/investment homes. That made up close to half of the national market so if you were looking at just bubble areas it would have been worse. Dive into a segment of a bubble market – Miami condos anyone? – and it was nearly 100% speculative buys.

    Option-arms and helocs helped fuel this, with the heloc’s providing the down payments, and the option-arms easing cashflow.

    I was going to say that the GSE’s could not fund those products, but they weren’t really funding them anyway during the bubble. Could GSE action, absent just purely reducing rates on 30y FRM’s, eliminate a private party offering those lousy products? If GSE loans were at 3%, what would op-arms be at?

    1. AZDavidPhx

      Notice how the government is all about the promotion of “home ownership” yet it has no problem with land barons stockpiling houses and crowding out others from owning their own house.

      If you want to buy up all the houses in a neighborhood and form your own little feudal Kingdom – hey have at it. And enjoy some nice government gravy while you are at it.

      If you rent then you are not contributing to neighborhood stability. However, if you buy and then rent to someone else, you are contributing to neighborhood stability and being a good citizen. Nice circlejerk logic.

    2. scottinnj

      I can see the GSE’s getting back to basics of 30 yr fixed rate 10-20% down mortgages. Those would be the cheapest loans in the market and you could benchmark other loans to that rate.

      I dont think the GSE ever had any regulatory power over the market beyond not buying certain products. I think to eliminate private parties that rule would come from the CFPB? I admit I’ve not read the enacting legislation so I’m not 100% sure if the CFPB has any actual power (ie the FDA, for example, can force a drug recall) or it is just a government version of Consumer Reports that will have a snazzy website with advice but no real power to make anyone do anything.

      I’d be a proponent as well of banning any loan that capitalizes interest and/or has a ‘teaser’ rate. If you have an ARM that is x% over y index I’d start the loan at the all in rate day one. If you can’t pay cash interest at the all-in rate you’ve no business buying a home in the 1st place. I’m not a big fan of ARMs but I think it was the teaser and capitilization features that moved these products from ones that will make you ill to ones that will kill you.

      1. winstongator

        My point was originally that if the GSE’s refused to buy op-arms, op-arms would disappear, but the facts of the bubble reminded me that would not be the case.

        The GSE’s definitely should move back to the basics you mention, but that would not prevent private issuers from going off the deep end the way they did up till late 2008. I’d also like to see their max loan eliminate the geographic modification, and in general the max loan lowered to around the median home price. You could qualify for GSE for a higher priced property, but the LTV would have to be lower.

        1. scottinnj

          The toxic crud originally was outside the GSE and they got in the game late.

          The crud sold because people though prices can’t go down so we thought a pool of crud with a 5% level of overcollateralization was riskless AAA paper. I’d like to hope we wont make that mistake again. But I’m sure some Rumplestiltskin on wall stree will find another way to spin crud into gold in a different way and it will be ‘but it is different this time…”

          1. winstongator

            I’ve linked to it many times, but here it is again:

            It was the belief and assumption of continuous home price appreciation which stoked the bubble. That belief was not prevalent everywhere, and the degree of appreciation was not the same everywhere, which is a large factor as to why the run-up and collapse in prices has not been uniform geographically.

            Your comment on the AAA rating is at least one place where changes can be made. Securities should not be eligible for AAA ratings by collateralization alone. GE is AAA because it’s been AAA for 100 years. A collateral based security should start out closer to a neutral rating and then move up/down from there, based on performance. Or toss the ratings altogether and have buyers analyze the securities themselves.

          2. scottinnj

            I think there is a difference between an AAA on an asset class that you have alot of history – plain vanilla car loans, for example (few of which have been downgraded). The problem was that the agencies started to extrapolate innovations without historical data. For example in the early 2000’s it was decided that if you have an 80% LTV first lien loan it didn’t matter too much that some portion of the remaing 20% was borrowed (you see alot of purchase money 2nd lien loans that on houses IR profiles that were bought in the early 2000’s). They made an assumption that was untested – and we know how it worked out. I’d be OK with AAA if you have historical data to back up your analysis however if you are basing the rating on untested assumptions that you should be capped at a lower rating level (say single A or something like that).

      2. Major Schadenfreude

        “I admit I’ve not read the enacting legislation so I’m not 100% sure if the CFPB has any actual power…”

        Don’t worry, there is no need to read the legislation. The purpose of practically all government agencies is to extract wealth from the country’s ever shrinking productive population under the guise of “helping us”.

  5. Borg Collective

    IrvineRenter: “Do you really think the average Joe understands interest-rate risk? Do you?”

    Resistance is futile. Every average Joe will be assimilated. Stupid mindless drones will lose money in any case. One way or another. No matter what regulations are passed, they must work hard, live from salary to salary and retire on Social Security. There is no escape for them.

  6. christian

    “I challenge anyone to find a way to explain the Option ARM in language plain enough for the financially illiterate to understand. In fact, I challenge anyone to explain it to experts in the industry in a way that they understand.”

    Your quote sums up the problem, most people are stupid so they trust so-called experts and if the experts don’t understand the problems you are stuck.
    So you have two choices live with the consequences of stupidity or make it idiot proof. We are living with the consequences of stupidity now, but I am doubtful that we can make it idiot proof, so we will do it all again.

    1. winstongator

      The problem is that people made money selling op-arms, and given the choice, people chose a lower payment than a higher payment. If people can make money selling a product, they’ll do it.

  7. Anonymous

    Just got snail mail spam with the fake check and “Lower your monthly payment and/or CASH OUT” mortgage refi BS. Either scammers or stupidity at work yet again.

  8. winstongator

    ‘Vultures’ Save Troubled Homeowners

    Selene Residential Mortgage Opportunity Fund, an investment fund managed by veteran mortgage-bond trader Lewis Ranieri, acquired the loan at a deep discount and renegotiated the terms with the Reynolds. The balance due was cut to $243,182 from $421,731, and the interest rate was lowered. That reduced the monthly payment to $1,573 from $3,464, allowing the family to stay in their home despite a drop in Mr. Reynolds’ income as a real-estate agent. “It was a miracle,” says Ms. Reynolds.

  9. Preventing housing bubble

    IR writes: “The latest regulatory body created by Congress and the Obama administration will fail to prevent future housing bubbles because they lack the understanding of what is required.”

    I’d say it differently: I think “The latest regulatory body created by Congress and the Obama administration may succeed in engineering a near future housing bubble because they have the understanding that inflation is required” 🙂
    Many politicians and others would love to have a housing bubble now. I saw somewhere that Bill Gross was talking about mortgage forgiveness (principal reduction) as a way to increase home prices by 5% to 10%.

Comments are closed.