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MBSADVISORS
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Did Subprime Loans Cause The Housing Crisis?

December 30th, 2014, 10:19 am

Now that the dust from the great recession appears to have settled, it may be a good time to take a closer look at our financial system with 20/20 hindsight. Much has been written about who is to blame for the housing crisis. No one seems to be immune from the onslaught of public criticism. Main St blamed Wall St while in private Wall St blamed Main St, and what about those nasty, complicated subprime mortgages and credit default swap contracts? In retrospect, we must ask ourselves this question: Would we have had a major housing crisis if subprime mortgages did not exist? We should note, subprime mortgage programs and credit default swaps had been around well over a decade prior to 2008. Furthermore, The Credit Characteristics of loan pools between 2003 to 2005, were virtually the same, however defaults in 2003 were approximately 1%, well within acceptable range. Contrary to the belief of some, the majority of home loans which defaulted were prime loans. Subprime loans at their "peak" rose to approximately 20% of all mortgage origination, of which 35% defaulted. Therefore, Subprime mortgage defaults accounted for approximately 7% of the entire housing market. The Cumulative Default rates for Fannie Mae at their peak, surpassed those of subprime at 12% (Freddie Mac was virtually the same). It should be further noted, the housing crisis began when housing default rates were approaching 6%. Leading to only one conclusion, a severe housing crisis would have occurred with or without the influence of subprime loans, for conventional loan defaults had risen to 12%. All the data suggests something else is at hand causing substantial defaults approximately every ten years. If there are any lingering doubts, you need only look back to the last three major recessions when the impacted of subprime mortgages were was virtually nonexistent. Still, no one would argue subprime mortgages made the last housing crisis measurably worse than it would have been. Now that all the stats are in plain view, it may be a good time to review the Simple Math from a fresh prospective here http://20-yearsimp.blogspot.com.
 
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bearish
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Did Subprime Loans Cause The Housing Crisis?

December 30th, 2014, 3:51 pm

If you had been willing to show us your simple math, maybe we wouldn't object so much to your spam.
 
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Traden4Alpha
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Did Subprime Loans Cause The Housing Crisis?

January 3rd, 2015, 6:03 pm

Methinks your math is too simple (to the point of being simply wrong) and your focus on overall rates of default is entirely misplaced.You've ignored the fact that the volume of subprime loans AND securitization of said loans surged after 2003 and the effects of that on the broader system:That surge in subprime lending enabled a surge in demand for housing from people that would not have been able to buy housing at all under more restrictive lending and downpayment standards in the past. The growth of subprime lending drove the growth in housing asset prices. Subprime created the bubble. And as long as housing prices were appreciating, subprime mortgages maintained a low default rate because subprime buyers could flip the property to payoff the loan or refinance with another cash-out subprime mortgage. Subprime lending both created the illusion of wealth in housing (attracting more money to the sector) and made housing too expensive relative to household income to the point where housing could only collapse.It was only after housing prices stopped growing (e.i., 2006) that subprime borrowers (who never really had the resources to repay the loans in the first place) were forced into default and all the elements of the economy that depended on unsustainable growth in housing (construction, real estate, mortgage lending, retail, and even automotive) started to collapse. The rise in defaults in subprime mortgages preceded the rise in defaults in prime mortgages by almost 1.5 to 2 years:The surge in defaults in subprime mortgages caused the later defaults in prime mortgages via at least three mechanisms: the near-collapse of the financial system (prime borrowers could not refinance or find sellers who could get mortgages), a collapse in housing asset prices (defaulted and forced-sale housing flooding the market), and damage to the broader economy (holders of prime mortgages losing jobs that depended on housing bubble industries and then defaulting + businesses could not get loans)Your "one conclusion" is simply wrong and your proposed 20-year mortgages would have made the crisis worse because it would have enabled even more conversion of equity into cash which would have fueled an even steeper bubble in housing prices and larger misallocations of economic activity into the unsustainable housing bubble.
 
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MBSADVISORS
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Did Subprime Loans Cause The Housing Crisis?

January 3rd, 2015, 10:30 pm

Happy New Year Traden I am afraid you are confusing the definition of delinquency rates with actual "defaults". May I suggest you review both definitions as defined by the souses used in the charts I have provided then your own chart definitions in small print very carefully. I would also compare both sources, yours and mine before drawing any further conclusions.Best
 
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Traden4Alpha
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Did Subprime Loans Cause The Housing Crisis?

January 3rd, 2015, 10:58 pm

QuoteOriginally posted by: MBSADVISORSHappy New Year Traden I am afraid you are confusing the definition of delinquency rates with actual "defaults". May I suggest you review both definitions as defined by the souses used in the charts I have provided then your own chart definitions in small print very carefully. I would also compare both sources, yours and mine before drawing any further conclusions.BestWhether one looks at delinquency rates or default rates, the result is the same -- subprime loans started going delinquent AND defaulting about 1.5 to 2 years before prime loans collapsedSubprime defaults just about killed both the financial system and the economy. The damage to the financial system and the economy caused prime loans to default.
 
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MBSADVISORS
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Did Subprime Loans Cause The Housing Crisis?

January 4th, 2015, 4:54 pm

Hello TradenI believe your blind spot stems from ignoring the data I have presented directly from the source, in favor of a third parties interpretation of the data from the same source. The data I have provided clearly shows, both prime and subprime defaults began to rise in 2005. The charts that I have provided from "the source" further shows defaults of non-subprime mortgage rates doubled in 2004- 2005 from 1.5. to 3% then doubled once again from 2005 to 2006 to over 6%. The interpretation of the charts conclusions you have provided are not supported by the original source of the data, thereby its conclusions are unsupported.Second, subprime loan origination and defaults as the data from the source has exposed, was only a fraction of the total amount. Over 2/3 of defaults which caused the housing crisis were in fact prime loans. Keep in mind Borrowers only default when they do not have the ability to either sell or refinance their properties. Property values peaked in 2006, you can read the Simple Math to find out the cause as well as what happens next. Best
Last edited by MBSADVISORS on January 3rd, 2015, 11:00 pm, edited 1 time in total.
 
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Did Subprime Loans Cause The Housing Crisis?

January 4th, 2015, 6:13 pm

QuoteT4A; Subprime defaults just about killed both the financial system and the economy. The damage to the financial system and the economy caused prime loans to default.This is your thesis, in one sentence? Or so it would seem. Are you referring to USA only, or globally?
Last edited by Cuchulainn on January 3rd, 2015, 11:00 pm, edited 1 time in total.
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Did Subprime Loans Cause The Housing Crisis?

January 4th, 2015, 6:47 pm

These are two graphs.How do you conclude graph _sub-prime ==> graph _prime? You might be right, but then maybe not.
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Did Subprime Loans Cause The Housing Crisis?

January 4th, 2015, 6:54 pm

When does a prime loan become a sub-prime loan?Ex. When you remortgage your 1st house to buy a 2nd, 3rd, 4th house?? And credit card usage?
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MBSADVISORS
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Did Subprime Loans Cause The Housing Crisis?

January 4th, 2015, 7:25 pm

Happy New Year Cuchulainn!This is a deceivingly simple question. Without getting into too much detail of the differences between tranches, whole loans and MBS, In general: all prime loans meet or exceed CRA AAA rated underwriting standards. (Sub par) underwriting standards "in general" are considered to be sub-prime. A good rule of thumb would be, any loan that can be sold to Fannie / Freddie "In General" would be considered prime.
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Traden4Alpha
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Did Subprime Loans Cause The Housing Crisis?

January 4th, 2015, 10:17 pm

QuoteOriginally posted by: MBSADVISORSHello TradenI believe your blind spot stems from ignoring the data I have presented directly from the source, in favor of a third parties interpretation of the data from the same source. The data I have provided clearly shows, both prime and subprime defaults began to rise in 2005. The charts that I have provided from "the source" further shows defaults of non-subprime mortgage rates doubled in 2004- 2005 from 1.5. to 3% then doubled once again from 2005 to 2006 to over 6%. The interpretation of the charts conclusions you have provided are not supported by the original source of the data, thereby its conclusions are unsupported.Unnamed sources don't prove anything. Unless you can cite a public document showing what you've said, I don't see how we can trust it.If anything, I've got two named sources of data (the Mortgage Bankers Association National Deliquiency Survey and the Standard & Poors data from CoreLogic) vs. your one unnamed source of data. Both of my sources show the same pattern of subprime loans having problems much earlier than prime loans had problems. And unless you have data showing that subprime loans are more likely to pull out of delinquency more often than prime loans, the delinquency data is a good leading indicator of defaults. Also, articles on the collapse of various banks and financial firms in 2008 cited problems with subprime loans much more so than prime loans Prime defaults were more a result of knock-on effects.QuoteOriginally posted by: MBSADVISORSSecond, subprime loan origination and defaults as the data from the source has exposed, was only a fraction of the total amount. Over 2/3 of defaults which caused the housing crisis were in fact prime loans. Keep in mind Borrowers only default when they do not have the ability to either sell or refinance their properties. Property values peaked in 2006, you can read the Simple Math to find out the cause as well as what happens next. BestBoth your data sources and my data sources show the prime defaults ultimately exceeded subprime defaults - we have no argument on that. It's the timing of the events that matters and the impact of the influx of subprime borrowers into real estate prices that created the boom in the first place. Some low level of subprime lending is fine, but too much subprime lending (2004-2006) was a disaster.
 
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Traden4Alpha
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Did Subprime Loans Cause The Housing Crisis?

January 4th, 2015, 10:28 pm

QuoteOriginally posted by: CuchulainnWhen does a prime loan become a sub-prime loan?Ex. When you remortgage your 1st house to buy a 2nd, 3rd, 4th house?? And credit card usage?Sub-prime is defined by: 1) the credit rating of the borrower which is a function of credit usage and payment history and 2) the loan-to-value. People with lots of debt relative to income (credit card + car loans) or a history of bankruptcy/late payments have poor credit ratings. Subprime also included borrowers who did not have verified income and assets. Given the huge incentives to reveal and verify income in terms of qualifying for lower mortgage payments, it's a safe assumption that most people without verified income probably did not have it (although there are exceptions to that). The second factor was loan-to-value which meant that borrowing more than 90% of the homes value put one in the subprime category.Prime loans have BOTH good credit scores AND loan-to-value < 0.8 (20% downpayment).
Last edited by Traden4Alpha on January 4th, 2015, 11:00 pm, edited 1 time in total.
 
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Traden4Alpha
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Did Subprime Loans Cause The Housing Crisis?

January 4th, 2015, 10:51 pm

QuoteOriginally posted by: CuchulainnQuoteT4A; Subprime defaults just about killed both the financial system and the economy. The damage to the financial system and the economy caused prime loans to default.This is your thesis, in one sentence? Or so it would seem. Are you referring to USA only, or globally?In PCA terms, it's a dominant mode. Subprime lending increased both the rise in housing prices, the crash in housing prices, and the damage to the banking system (and, yes, the bankers did it to themselves). But, of course, there were many other supporting factors behind the housing bubble and financial crisis:1) the Fed's overly low interest rates during the 2000s (spurred by their attempts to reduce unemployment after the dot-com bust which were exacerbated by the growing rate of imports from China which both kept inflation low and unemployment high);2) flight-to-quality issues after the dot-com bust which caused people to rotate out of risky & intangible assets (equities, especially tech stocks) and into "safer" assets (housing);3) rising comfort with securitization (which let investors that normally would never have been able to invest in mortgages to do so and provide lots of cash for real estate lending);4) demographic trends: Baby Boomers reacher there peak levels of affluence which let them buy bigger houses, second homes, and investment properties;5) Government policy changes to increase home ownership by relaxing lending standards;6) Changes in the mortgage industry structure from vertical integration to outsourced origination & mortgage brokerage (which created huge moral hazard issues in which underwriters had incentives to make loans look better than they were);7) Reductions in mortgage origination costs that enabled more people to do cash-out refinancing. Refinancing was SOOO easy in the 2000s!Against this larger array of trends, MBSADVISORS' 20 year mortgages would have done nothing to help reduce the crisis and may have made it worse by accelerating borrower's ability to accumulate equity that they could cash out.P.S. This explanation applies mostly to the U.S. I don't know enough of the real estate and lending landscape of the various EU countries to say how many of these issues affected them, too. I'd guess that factors 2, 3, and 6 contributed to global flows of capital into US real estate and seem to remember that a number of EU banks were damaged by losses on subprime loans.
 
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MBSADVISORS
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Did Subprime Loans Cause The Housing Crisis?

January 4th, 2015, 11:26 pm

TradenOk I will bite, In case you dident know, the source of your third party charts come directly from fannie/freddie and U.S census. Now, do you really believe after reading the charts I provided in the Simple Math which have Fannie Mae and U.S census all over them are unnamed; and all loans which are over 90 % LTV sold to fannie / freddie are sub-prime, or are you just trolling me?By the way the graph which you have provided as non subprime loans stats is taken from (private lenders) not from GSE's which accounted for 80% of all residential mortgages origination. Why would you bother to submit data from third party's when I have already provided you with all the data directly form the main sources?
 
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Samsaveel
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Did Subprime Loans Cause The Housing Crisis?

January 5th, 2015, 4:40 am

A good read on all of this is an investigation into the causes of the financial crisis by Senator Carl Levinit's freely available on the web "WALL STREET AND THE FINANCIAL CRISIS:Anatomy of a Financial Collapse"
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