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Did Reagan Admin Start the Housing Crisis?

The Giant Noodle

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Did they? Please read.......

Garn-St Germain Depository Institutions Act
Federal law enacted by Congress in 1982 authorizing banks and savings institutions to offer a new account, the Money Market Deposit Account -a transaction account with no interest rate ceiling to compete more effectively with money market mutual funds; gave savings and loan associations the authority to make commercial loans; and gave federal regulatory agencies the authority to approve, for the first time, interstate acquisitions of failed banks and savings institutions.

The following are highlights of the numerous provisions of the act:
(1) savings and loan associations were authorized to make commercial, corporate, business, or agricultural loans up to 10% of assets after January 1, 1984.

(2) the deposit interest rate differential, allowing savings and loans and savings banks to offer rates on interest-bearing deposit accounts l⁄4 of 1% higher than commercial banks was lifted, as of January 1984.

(3) the act authorized a new capital assistance program, the Net Worth Certificate Program, under which the Federal Savings and Loan Insurance Corp. And the Federal Deposit Insurance Corp. Would purchase capital instruments called Net Worth Certificates from savings institutions with net worth to assets ratios under 3%, and would later redeem the certificates as they regained financial health.

(4) the act permitted savings associations to offer checking accounts (demand deposit accounts) to individuals and business checking accounts to customers who had other accounts.

(5) savings and loans were authorized to increase their consumer lending, from 20% to 30% of assets, and to expand their dealer lending and floor-plan loan financing.

(6) the act raised the ceiling on direct investments by savings institutions in nonresidential real estate from 20% to 40% of assets, and also allowed investment of 10% of assets in education loans for any educational purpose, and up to 100% of assets in state and municipal bonds.

(7) the act preempted state restrictions on enforcement by lenders of due-on-sale clauses in most mortgages for a three year period ending October 15, 1985, and authorized state chartered lenders to offer the same kinds of alternative mortgages permitted nationally chartered financial institutions.

(8) authorized the Comptroller of the Currency to charter Bankers' Banks, or depository institutions owned by other banks.

(9) made state chartered industrial banks eligible for federal depository insurance.

(10) raised the legal lending limit for national banks from 10% to 15% of capital and surplus

Garn-St Germain Depository Institutions Act: Definition from Answers.com
 

PeteEU

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Would say no. Did the above help? Sure, but the back breaker was under Clinton by the Republican congress, because it was here that liberalization of the market was done to such an extreme that a pizza delivery guy could become a loan officer with no training and the whole private subprime market (non Fannie and Freddie) became unregulated. And it was exactly this market (along with a few other things) that caused the problem we are in now.
 

drz-400

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Would say no. Did the above help? Sure, but the back breaker was under Clinton by the Republican congress, because it was here that liberalization of the market was done to such an extreme that a pizza delivery guy could become a loan officer with no training and the whole private subprime market (non Fannie and Freddie) became unregulated. And it was exactly this market (along with a few other things) that caused the problem we are in now.

If it were just that market there never would have been a recession.
 

PeteEU

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If it were just that market there never would have been a recession.

Yea in fantasy land. The fact is that the private subprime market was near full free market. There was no regulation what so ever and that lead to the problems we are into today.
 

drz-400

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Yea in fantasy land. The fact is that the private subprime market was near full free market. There was no regulation what so ever and that lead to the problems we are into today.

What lead to the problem we have today is the lack of a good and transparent market. If certain private lenders had just lent money to people they should not have, the entire financial market would not have collapsed. The panic that it spurred nearly ran otherwise profitable banks out of business.
 

oldreliable67

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What lead to the problem we have today is the lack of a good and transparent market. If certain private lenders had just lent money to people they should not have, the entire financial market would not have collapsed. The panic that it spurred nearly ran otherwise profitable banks out of business.

It ain't that simple. The subprime market was largely a product of the encouragment provided by administrations, GOP and Dem alike, for lenders to engage in "creative lending", as I believe Clinton's HUD Secretary Cisneros referred to it. Encouraged by the very permissive political atmosphere, the mortgage banking industry proceeded to innovate to the point of absurdity. Moreover, under both Clinton and Bush, the likes of Dodd and Frank and other key congresspeople defended Fannie Mae and Freddie Mac almost to the day they entered into conservatorship. The few congresspersons to sound warnings were heavily critisized as being "anti-homeownership."

In 1994, Clinton directed HUD Secretary Heny Cisneros to come up with a plan to increase home ownership. Cisneros, after meeting with housing industry officials, came up with “The National Homeownership Strategy: Partners in the American Dream.” Here is one key paragraph [emphasis added]:

"For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership."

A follow-on document was more explicit:

"The National Homeownership Strategy commits both
government and the mortgage industry to a number of initiatives
designed to:

Cut transaction costs through streamlined regulations and
technological and procedural efficiences.

Reduce downpayment requirements and interest costs by making
terms more flexible, providing subsidies to low- and
moderate-income families, and creating incentives to save for
homeownership.

Increase the availability of alternative financing products in housing
markets throughout the country."


Source: Urban Policy Brief, Number 2,August 1995


Bush, of course, embraced these goals because they were consistent with his "Ownership Society." Congress was also very much in favor; this was, after all, the flavor of the month (for several years) with their constituencies.

Clearly, not all of the blame can be laid at Clinton and/or Bush's feet. But if you take the permissive, even lax, regulatory environment they encouraged/provided and add to it the opportunity for substantial profit via securitization, add an era of low interest rates and easy credit, and stir in a touch of market mania ("They will never go down again; they can only go up!") and you have a complete recipe for disaster.
 
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PeteEU

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What lead to the problem we have today is the lack of a good and transparent market. If certain private lenders had just lent money to people they should not have, the entire financial market would not have collapsed. The panic that it spurred nearly ran otherwise profitable banks out of business.

The market cant be transparent because of its nature. The loan officer (good or bad) will always have more information than the person wanting the loan. Hence we get predatory lending.

That is why we need regulation to protect the public from things like predatory lending and worse. We dont allow people to be doctors without the correct credentials and education and the same should be for bankers and loan officers.

I agree many of the bad loans (non fannie and Freddie) should never have been done, but they were done because there was no regulation like there is with Fannie and Freddie when giving loans on the sub-prime/lower end of the market. No one was watching over the private lenders, and as long as the lenders could earn money from re-mortgaging over and over again because of rising house prices and selling on the debt in packages to financial institutions, then they would continue to do that. There was no transparency on the debt packages who were given AAA rating by the rating agencies and zero control over the lenders and hence they kept doing what they were doing till the bitter end even though any idiot could see it was going wrong.
 

Solidus

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PeteEU;

You're whole, "free-market run amok" story is full of 'fail'.

"they [bad loans] were done because there was no regulation like there is with Fannie and Freddie when giving loans on the sub-prime/lower end of the market."

As others have pointed out, a vast majority of regulators wanted these loans to happen anyway. Furthermore, BASEL II regulation created a demand for securitized loans and the market expanded it's lending pool to meet this regulation induced demand.

If Fan/Fred regulation kept them out of the sub-prime market, why did they turn around and start buying securities based on these sub-prime loans?

"There was no transparency on the debt packages who were given AAA rating by the rating agencies"

Right and there was no regulation at all that required the use of agency ratings? BASEL II anyone? I agree the rating agencies reduced transparency, but this was a result of regulation not the absence of it.
"No one was watching over the private lenders, and as long as the lenders could earn money from re-mortgaging over and over again because of rising house prices and selling on the debt in packages to financial institutions, then they would continue to do that."

Again, BASEL II. Securitization was what regulation favored. "Lend and hold" was deemed a higher risk than "lend and securitize", as reflected in risk weighted capital requirements. If "any idiot" could see that this was wrong, why was the US and EU in favor of it?
"The loan officer (good or bad) will always have more information than the person wanting the loan."

Really? So in a NINJA loan the loan officer knows more about the applicant's finances than the applicant? I'll grant that loan officers knew more about teaser rates and balloon payments (predatory lending), but the instances where that information was completely withheld from the applicant are vastly outnumbered by the instances where the applicant was given that information but gambled that he could 'refi' out from under it (predatory borrowing).

Regulation created tremendously perverse demand, and a liberalized market rushed to fill that demand. You don't get to blame the actions of the liberalized market and ignore the perverse incentives of regulation.

J
 

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Crazy accounting schemes such as "mark to market" accounting, coupled with public acceptance of insain and corrupt Wall Street salaries and bonuses, created the housing/banking crises.
 

drz-400

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The market cant be transparent because of its nature. The loan officer (good or bad) will always have more information than the person wanting the loan. Hence we get predatory lending.

That is why we need regulation to protect the public from things like predatory lending and worse. We dont allow people to be doctors without the correct credentials and education and the same should be for bankers and loan officers.

I agree many of the bad loans (non fannie and Freddie) should never have been done, but they were done because there was no regulation like there is with Fannie and Freddie when giving loans on the sub-prime/lower end of the market. No one was watching over the private lenders, and as long as the lenders could earn money from re-mortgaging over and over again because of rising house prices and selling on the debt in packages to financial institutions, then they would continue to do that. There was no transparency on the debt packages who were given AAA rating by the rating agencies and zero control over the lenders and hence they kept doing what they were doing till the bitter end even though any idiot could see it was going wrong.

Adverse selection can be a problem. Except I fail to see why it is always the person lending who has more information. In fact I would place it the other way around. The whole idea of credit rating is so the borrower will pay you back. The whole idea of prime and subprime is to allow people with better credit to get better loans, and to make prime loans more desirable to borrowers.

Which do you think has a lower interest rate (determined by markets), prime or subprime?

Why do you think the market has developed things like downpayments?

Ever heard of a CPA, FRM, CFA?

Why do you think people get subprime loans? Why do you think predatory lending happens? What do you think would happen if we made regulations harder, aka we make credit histories and the such more important? Well, my guess would be that more people would get subprime loans, and we would get an even bigger problem.

Regulation should protect the macroeconomy from systemic risk, since this will affect the entire economy, and pull banks under that even have professionals working for them. I don't think we need to micromanage the entire finance industry because some may make bad loans. That is what bankruptcy is for, we just need to make sure we have a way to prevent a run if certain banks do make bad choices. We have developed things like deposit insurance, which have greatly reduced the number of bank runs. It would be great to extend ideas like this to the rest of the finance industry after seeing what has happened.

No doubt, ratings agencies played a big role, but I am pretty sure subprime was still rated C or junk. Just to think if we had a more transparent market, people could better evaluate the value of assets themselves (maybe like some indexes like a stock market). But once again the same rules apply. Certain banks making bad loans alone will not cause the entire financial system to collapse, that would take a banking panic. The fact is much more than just subprime loans are the problem now, and its not just because of a lack of regulation. They are in trouble because of a financial collapse, a sharp drop in the money supply, disinflation, and a leftward shift in aggregate demand. If we could have avoided crisis by preventing a modern day bank run the subprime market would have been a drop in the bucket, in comparison.

And no, I don't think any idiot could see what was going on. Are you calling the millions of people who bought homes in 2007 idiots, or maybe unlucky, or maybe uniformed? What about the millions of businesses, corporation, and governments who invested in new office buildings? I don't know, but they would fall under the same catagory as the "idiot" bankers who gave them the loans, or bought morgage backed securities.
 
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obvious Child

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What lead to the problem we have today is the lack of a good and transparent market. If certain private lenders had just lent money to people they should not have, the entire financial market would not have collapsed. The panic that it spurred nearly ran otherwise profitable banks out of business.

Not even that. Subprime lending represents a tiny portion of the entire housing market, which in itself represents somewhere between 1 and 2% of our entire economy. A total isolated meltdown of the housing lending market wouldn't have caused this problem. It's when Wall Street started taking large leverage on to gain abnormal profits in the context of housing then we had big problems.
 
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