The Coder Behind the Mortgage Meltdown 379
axjms writes "New York Magazine has a confessional/abdication from the man who wrote the software that turns mortgages into bonds and those nasty little things called CMOs. An interesting first-person account from a coder whose work reached far beyond what he or anyone could have anticipated."
More than anyone could have predicted? (Score:4, Informative)
Here's one reason the financial system failed. (Score:5, Informative)
Two words: Information asymmetry.
CMO vs. CDO vs. CDS (Score:5, Informative)
The end of the article starts to get to the heart of the problem, which really happened after he was involved. It was when they started doing this with all debt that it got really bad. And even then its only half the picture without looking at the other piece of this the Credit Default Swap. Another thing he alluded to when he talked about default models. The problem was much more complicated than this one guy.
Re:This topic is too hot to handle. (Score:5, Informative)
Frontline on PBS had a good explanation of the mortgage meltdown. The problem wasn't the securitization of mortgages itself. The problem was that financial institutions borrowed money to buy more mortgage securities than they had in available cash, creating an insatiable demand for securitized mortgages. In an effort to keep the supply of mortgages to meet the demand, mortgage companies lent money to anyone who could breathe, even if they clearly couldn't repay the loans (i.e. "subprime mortgages"). When the homeowners defaulted on their loans, the bank seized their properties, which were the collateral for the loan. Because so many homes foreclosed, it created a huge supply of houses for sale on the market. This huge supply made housing prices drop, so that other home sellers owed more money on their mortgages than they could sell their house for. This in turn led to their houses going into foreclosure. Wash. Rinse. Repeat. For each foreclosure, the supply of money to the securitized mortgages dried up, making those securities drop in price. Because financial institutions had borrowed money to buy those securities, they ended up losing more cash than they originally had, which any investor knows can happen if you buy on margin.
It's all pretty simple, really.
Re:Oh, jeez, not more CRA-blaming (Score:5, Informative)
Some citations for those interested:
http://www.ccc.unc.edu/news/news.021809.php [unc.edu]
http://www.clevelandfed.org/research/Commentary/2000/1100.htm [clevelandfed.org]
http://www.treas.gov/press/releases/ls564.htm [treas.gov]
All are very clear that the CRA had little to nothing to do with the subprime mortgage foreclosures.
No surprise... (Score:1, Informative)
I worked for a financial structuring company about a decade ago. One of the things we specialized in was subprime default predictions. We were able to predict with frightening accuracy the number of loans (and which ones) in a portfolio that would default and helped companies structure portfolios around the expected defaults and cashflows.
Why is this whole fiasco not exactly a surprise? Well, no one was buying. Nobody _cared_ that the loans they were handing out would default. The company I worked for closed its doors.
The tools were available, but nobody used them. People were making bonuses off of the number of loans they sold, not the cashflow that was expected. They'd give loans to people who had no way in hell of being able to pay it back.
Assuming the guy's software was sound, greed is really the culprit in this case, not the software or the analysis...
Re:More than anyone could have predicted? (Score:5, Informative)
Is it any surprise that when a government (whether under Clinton or Bush) promotes "affordable housing" as an end in itself, by manipulating interest rates and bank regulations, that they're bound to create a bubble, and bubbles by definition cannot last?
I think they key problem here was the lack of regulation than too much of it.
First, subprime lenders were lending money to people who didn't even meet federal standards, then bundling this toxic debt into CDOs and then selling it off to people who didn't even look at the credit of the people in the inside and then sold it to other people.
Secondly, the subprimes were talking these people and other borderline credit score people into adjustable loans.
Then federal reserve twiddled its thumbs about raising interest rates when it needed to calm the situation but because everyone had adjustable loans, the had no choice to default en masse making the situation worse.
Oh and don't forget about the uptick rule [wikipedia.org] that the SEC removed that prevented short sellers from shorting on stocks on downward movement that had originally been in place for 70 years because of the 1929 market crash! And people have to ask why the market did what it did.
So yes... More regulation would have stopped this.
1. Banks and subprimes should have been regulated into not giving loans they knew could not be paid back.
2. Uptick rule needs to be reinstated which they are doing soon under the new head of the SEC.
And don't bitch and moan about free market because it has been historically observe that free market does correct itself but always... AND it always creates boom and bust cycles through the past 500 years of free hand markets. Which is why we get depressions.
Re:This topic is too hot to handle. (Score:5, Informative)
Wow.
That's all I have to say about that one.
Wow.
Hyperbole, Check!
Misogyny, Check!
Confusing Causation and Correlation, Check!
Re:This topic is too hot to handle. (Score:3, Informative)
Then we, as individuals, started chemically castrating ourselves because we saw the writing on the wall. And the rich and the powerful encouraged us, because single people make better wage slaves.
I was at least thinking about what you said up until this point. The idea that an unmarried man or woman without children makes a better wage slave than a parent is just ridiculous. When I was single, if I fucked up my life that was my own fault and caused me and only me pain. Now that I have a spouse and we're thinking about kids, screwing up my life hurts a lot of other people. Some of us take that responsibility very seriously, to the point of sticking with a dead end job that we hate because it puts food on the table and pays the mortgage (not that I hate my job, far from it, but even if I did I wouldn't be risking it unless I had a fallback ready to go).
Re:This topic is too hot to handle. (Score:1, Informative)
Another thing most people in Europe (including quite a few bankers apparently) didnt realize that in the USA you can actually walk away from your home without debt. A subprime loan in The Netherlands not being paid back means that yes, your house is gone, but any remaining debt will be just that: remaining debt. Until you pay it back.
That provides quite an incentive to not take out impossible loans.
Re:Here's one reason the financial system failed. (Score:4, Informative)
Re:Here's one reason the financial system failed. (Score:3, Informative)
My impression (and I may be misinformed here) was that the majority of these loans are going bad because people were given more than they could really afford, using a short-term ARM with a big uptick to make the payments look low initially. Now I might be out of line, but when signing something as important as a mortgage, isn't it really a good idea to understand it? The "truth in lending" papers are pretty comprehensive and explain exactly what an ARM is and what it means, as well as things like balloon payments. I know I had to sign many disclaimers indicating I had read the sheets and understood them, that my payments weren't fixed, etc.
Sure where there was upselling & fraud the brokers should be held accountable, but there's responsibility on the part of the borrower too, claiming to be too stupid to understand simple math is a pretty poor excuse in my book.
Re:This topic is too hot to handle. (Score:5, Informative)
Problem with this is, you still need somebody in the mix who has a vast sum of money - bank or owner - to provide the financing for the new buyer, or the new buyer will end up paying exorbitant monthly fees to cover the interest & risk on the loan the owner must take out to provide financing.
I'd amend your initial sentence to read: "There's no reason everyone couldn't own a home they can afford." This is the problem - some predatory banks extended too much easy credit to people knowing they didn't have the means to repay, and some unscrupulous people took that credit knowing they didn't have the means to repay. Not everybody is a crook on either side, but both sets of people are guilty of ignoring the simple reality that they were spending (or enabling people to spend) beyond their means.
If you buy a house you can't afford based on the assumption that "home prices will always rise, so I can just refinance once I have equity!" are taking a gamble, not making an investment.
Re:This topic is too hot to handle. (Score:3, Informative)
Re:bomb? (Score:3, Informative)
Use an (x|ht)ml entity, sometimes they work (e.g. & is &).
Re:This topic is too hot to handle. (Score:5, Informative)
Because they aren't allowed to charge interest (too Jewish or something)
It's called usury, and it is prohibited quite explicitly [about.com] by Islamic law. Nothing to do with Jews.
Re:This topic is too hot to handle. (Score:5, Informative)
Exactly. Securitization packages up pools of loans into bonds that get given a credit rating by an agency. A lot of bond buyers just go by the bonds' ratings. These bond buyers are the ones who ultimately provide the easy money that ends up being used for the junk mortgages.
Who are these bond buyers? All sorts of banks, and, more worrisome, retirement pensions and bond mutual funds in people's 401k plans. Look, for example, at what happened to Fidelity Ultra-Short Bond Fund [google.com]. This is a fund that was supposed to be extra-low risk; it lists "preservation of capital" as a goal, and it's supposed to compete with money-market funds and bank accounts. It lost 20% because of exposure to highly-rated subprime securities [kiplinger.com].
Re:This topic is too hot to handle. (Score:3, Informative)
This point is often lost on people. Whether or not you personally participated in the bubble by buying or selling a McMansion, much of our employment and investments was either tied directly to real estate or supported by the general economic growth that was driven by real estate.
Re:This topic is too hot to handle. (Score:3, Informative)
The association between Jews and money lending was formed in medieval Europe, well after Islamic law was written. In medieval Europe, Jews were not allowed to own land, or into most of the professions that were protected by guilds, so they found other ways to make a living - ways that just happened to end up being better ways of generating wealth over the long term than the traditional land ownership of the European upper class.
Re:Oh, jeez, not more CRA-blaming (Score:4, Informative)
If you actually read that, the CRA did not require or force banks to make risky loans. They could deny an applicant based on income, credit rating, or any other relevant factors. What it forbid was red-lining, which was denying loans based on the current living location (used as a proxy for the applicant's race). A person's race and living location does have correlation with risk of defaulting, but a responsible financial institution would have a person's credit and income information. This information points to causitive factors behind the correlation, which means that a person's living location is useless for anything other than discrimination.
The actual CRA law does not require high-risk loans, and the evidence bears this out. CRA loans were given out for three decades with no problems, and all current evidence points to CRAs having little to do with the current financial situation. The citations in Wikipedia article you posted bear this out, in addition to the seven citations the other posters gave.
Furthermore, the criticism in the Wikipedia article you cited is mostly just "he said she said," accusations, devoid of any facts. It would be more convincing if the detractors could point to actual evidence that the CRA loans were a problem as opposed to speculating. How detractors imagine the CRA works in theory is not very interesting to me. What I am concerned with is reality, and the reality seems to be that the CRA makes a convenient scapegoat for free-market advocates, given that they can't give any objective evidence to support their point of view.
If you were hoping to change anyone's opinion, you failed.