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Looking inside the 'Subprime Solution'
"The Subprime Solution" book cover.
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Dr. Robert J. Shiller, Yale University economics professor.
I am a retired mortgage banker. I was a consultant to buyers of mortgages owned by failed banks & savings & loan companies in the period from 1987 to 1990. Some of the companies I worked with included Bear Stearns, Lehman Bros. & other wall street firms. Almost all of the loans were of sub standard quality & were being purchased at substantial discounts to par. These loans were packaged into mortgage backed securities & sold at l03% of par to investors both individuals & corporate entities such as pension funds etc. They had an investment grade of AAA from either Standard & Poors or Moodys. Their investment yield was substantially above anything available from a conventional bond offering. The marketing success of these initial offerings was so dramatic that other wall street investment houses became active in that market & continued until the backlog of junk loans were cleared up by a yield seeking public. Now I want to emphasize that the loans I worked on were really bad - various credit items such as charge-offs, past foreclosures, delinquencies, questionable appraisals etc. When these wall street firms discovered that they could market this kind of junk they made a conscious effort to acquire new loans or new loan sources. This sparked a new cottage industry that produced what we now call sub-prime loans. New loan companies proliferated for the purpose of creating these loans. They had to produce a higher yield than the conventional competition and to do this they relaxed their qualifying requirements. Low down payment or no down payment. This practice led to a dramatic escalation of housing prices because anyone could qualify to buy. It could happen again. It is not difficult to stop but the changes are not evident in any of the discussions I have read about. Nobody seems willing to point out who the real culprits were. I suppose they fear lawsuits.
It's "economists" like Shiller who got us into this "sub-prime" mess. Until we realize that real "investments" aren't the same as a bet at a Vegas blackjack table, our country will not have a financial system at all- just a casino called Wall Street- where the only winners are the house (until they screw up and the taxpayers are asked to bail them out). It's time to stop this nonsense and get back to non-derivative, simple finance and accounting, so we have a system where we can really tell if the cards add up to 21 or not.
I had to listen to the definition of Robert Shiller's proposed "continuous workout mortgage" four times to be sure that I understood it. I could listen to it a hundred times and not believe that an educated person could say something like the following: "The mortgage contract lowers your balance if home prices fall and protects you against price falls." Whom, exactly, does he propose to take the loss in such a circumstance? How likely is it that a lending institution would make a loan in a situation in which the value of the house might decline? People who can't afford to buy in a neighborhood with reliably appreciating values could kiss their chance getting a mortgage goodbye. The previous writer who applied the term "ivory tower" to Shiller was spot-on. I guess that things like this are what I've expected from Shiller ever since, years ago, I heard him ask if San Francisco is really a better place than Cincinnatti. It made me wonder when the last time was when he got out of New Haven...or, even, the house!
Professor Schiller has identified the
causes of the sub-prime problems that continue to weaken the credit markets and tighten liquidity in the U.S,.in his new book. Creative financing, better known as financial engineering,has made fortunes for the Derivatives Firms,and destroyed the American Dream of owning a home.His solution of reducing the number of U.S.regulators to oversight future debacles lacks authenticity, in light of the fact that most Regulatory Staffs of the S.E.C.,N.Y.S.E.,N.A.S.D.,do not hold Doctorates in mathematics and physics, which are necessary to create the creative financing that has has initiated the Global recession.The Regulatory Staffs are not equipped with either the knowledge, tools, or experience, to decipher the risk factors in any derivative instrument.The U.S. public needs assurance that someone is watching the Banks and Investment firms,given the elimination of Glass-Steagall that enforced the seperation of Banks and Brokers reducing overall U.S. risk to the financial sector.The damage that has been done to once powerful Triple AAA Banks and Investment firms is still aggregating, as firms continue to write down assets, and the impact on this spectre of greed will be carried as a burden on the shoulders of those least able to bear the burden, the poor and middle class of America and Europe.
I strongly aggree with Dr. Shiller, in that there were a lot of people in Washington who should have been sounding alarm bells as the housing bubble began to from. However, I strongly disagree with his long term solution. Fancy loans are not the solution. In fact, we should hope that the financial institutions will burn thier fingers so badly that they will never go near another fancy loan. Creative financing brings people into the housing market who should not be there, and drives prices up for people who do things the right way by having good credit and a down payment. Home prices must correct back to what people can afford, and that is the painful truth. However, the end result will be a lot of affordable housing for working class people who are willing to make the sacrifices. necessary to own a home.
I have to strongly DISAGREE with one of Prof. Schiller's comments: "[In this country] we don't let people get thrown out of their houses."
What ivy-covered academic tower does he work in at Yale ? Has he actually TALKED to real people who have been evicted from their homes?
I am writing because I have been forced to leave my house two times in the last 11 years!
In September 1991, I was terminated from a good job. It tooke me 4.5 years to find a good replacement job. In the meantime, HUD allowed the mortgage payment to be lowered for 2 years, and then, when I did not find a good enough job to afford the original payment - they raised it back to 100%. At that point, I quit making payments, lived in the house for "free" for 2 years, and waited for the foreclosure process to start. In addition, I consulted an attorney and was advised to file for bankruptcy, to avoid owing the balance of the mortgage loan. I did that. Two weeks after we moved out, I started working at a good job that allowed me to pay the rent for the apartment we moved into (not knowing when we signed the lease how we would pay for it!).
Again in 2006, after buying our third house (with $100 escrow money only!), I was laid off from a new job - without the promised $12,000 severance pay. I paide the mortgage at 50% for 8 months until the unemployment money and my cashed-out retirement money ran out. Then we put the house up for sale - for 8 months - with no sale. Now, the lender is working through the foreclosure process (they might take a deed in lieu of foreclosure). In the meantime, my wife has been living apart from me in Iowa for 14 months, and I am staying rent-free with my mother.
Next time you interview an economist, make it one who works with "applied" real-world economics, and who knows the real-life stories of people like me - for whom the "mortgage bailout" law will most likely do nothing!!!!!!
Thank you - please do not edit this...
The federal gov't is cutting programs that U.S citizens badly need,the gov't continuously sends billions of tax payer dollars to Mexico Many of these people are not only here illegally,but they have criminal intent. The U.S gov't seems to be more concerned about treating people by ethnic or racial groups,not individual need. It is those vitimised groups that abuse low income housing,and many other programs ,using the race card as protection. I don't think the Obama or McCain will do anything to solve the mass illegal immi9gration issue,they will continue to pander to quote unqquote minority groups be they legal or otherwise for votes,and to hell with the common ordinary voting public.
David From not only hit the nail on the head,he built half the barn with one swing as far as immigration is concerned
