Regulators: Wall Street reform at risk

The idea hit him as he read a book about the evolution of the U.S. bond market and the creation, in the mid-1990s, at J. P. Morgan, of the first corporate credit-default swaps. He came to a passage explaining why banks felt they needed credit-default swaps at all. It wasn’t immediately obvious—after all, the best way to avoid the risk of General Electric’s defaulting on its debt was not to lend to General Electric in the first place. In the beginning, credit-default swaps had been a tool for hedging: some bank had loaned more than they wanted to to General Electric because G.E. had asked for it, and they feared alienating a long-standing client; another bank changed its mind about the wisdom of lending to G.E. at all. Very quickly, however, the new derivatives became tools for speculation: a lot of people wanted to make bets on the likelihood of G.E.’s defaulting. It struck Burry: Wall Street is bound to do the same thing with subprime-mortgage bonds, too. Given what was happening in the real-estate market—and given what subprime-mortgage lenders were doing—a lot of smart people eventually were going to want to make side bets on subprime-mortgage bonds. And the only way to do it would be to buy a credit-default swap.

http://www.vanityfair.com/business/features/2...

Oregon Is Disgusting wrote:

"Yet Again, It Wasn't the Community Reinvestment Act...
Another attempt to blame the Community Reinvestment Act for the subprime crisis. Don't believe a word of it...
First, there's the timing. CRA came in 1977. The crisis came in 2007. Indeed, by 2004, the Bush administration had weakened the CRA -- and after that (though not, presumably, because of it), bubble lending really took off.
Further, CRA only governs a certain class of federally insured banks. Problem is, half of the subprime loans came from mortgage companies with no CRA involvement at all. Another 25%-30% came from companies with very little CRA exposure.
For those who left their abacus at home, that's 80% of the loans which were fully or largely outside CRA jurisdiction. More than that, the non-CRA mortgage firms made subprime loans at twice the rate of CRA-covered firms. Which basically leaves a stake in the heart of this particular theory.
Indeed, until now, some conservatives have been moaning that no one is talking about the CRA part because it's so racially charged. Poppycock. It's just a false charge..."
EV

we saw the results in 2007 government started digging the hole in 1977, sorry if things aren't so cut and dry for you, that that is what happens when you have a dishonest media. 20% of loans still number in the thousands, with values in the millions of dollars, when a huge amount default at about the same time, it causes problems, and with government interference it only gets worse.

Oregon Is Disgusting wrote:

<quoted text>
Biggest Defaulters on Mortgages Are the Rich
By DAVID STREITFELD
Published: July 8, 2010 NYTIMES
Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.
More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.
By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.
Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.
“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

This article describes what I call "opportunistic defaults," people walking away from mortgages they can afford in a cash flow sense, because the house is worth less than the mortgage obligation. These people also can afford the damage to their credit rating from a mortgage default. In no way do I wish to minimise the extent of opportunistic defaults.

My claim is that if the minimum downpayment of 20% had been maintained since the 1950s, we would not be where we are today. The average price of real estate would be substantially lower, but we would not have had the S&L meltdown of the 1980s or the Great Recession. This would be true no matter who you lend to.

Mortgages where the borrowed amount exceeds about a million or so are called jumbos and are relatively rare, especially outside of California. There are too few such mortgages out there for the higher default rate on them to matter much.

At least 5M USA household are 3 months or more in arrears on their mortgages. It is true that the default rate on prime mortgages is now high enough to be a grave problem in its own right. Of course, that rate is as high as it is because of the Great Recession. Between now and the November 2012 election, we are going to see a lot of foreclosures. The extent of those foreclosures may give rise to a protest vote giving the Senate to the GOP. Obama will be reelected unless a strong challenger emerges, which is unlikely. But that reeelection won't be a lot of fun for him, as he will be a sort of caretaker president, what with not having Congress behind him.