High credit score borrowers caused housing crisis?

[Dicast]

I just read this article and found it interesting that people with supposedly higher credit scores were potentially more responsible for the defaults. I had always taken it as shown in "The Big Short". Just curious what others think.

https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/?utm_source=fark&utm_medium=website&utm_content=link&ICID=ref_fark

[ITEngineer]

If you wealthy Doctors   caused the housing crisis.....how did you default and hide your money and sock it to the banks so well?
If I was a bank and a Doctor defaulted (or any high income/wealth person), I wouldn't be losing too much money. I would come after you with my lawyers and get it back. You have assets. You have income. You owe me what I lent you. You can afford to pay it back. The courts will make you (in general)

The article assumes that high credit score = high net worth/wealth. We all know that is not true. Statements like this "Since owning a home is one of the best ways to build wealth in America..."  tells me the author has a limited idea on how wealth is built. I had a high credit score when I had -$47k net worth because I paid all my bills on time.

I know a number of people who pretended to have money, taking HELOC out after HELOC, fully leveraging a house they lived in for 30 years to maintain a lifestyle/appearance they couldn't afford. Maintaining a high credit score is easy if you borrow and repay monthly. Until you cannot afford to borrow anymore. They lost their house when their income fell and they couldn't refinance anymore.

Some places like Vegas clearly had too much housing stock/capacity built.

My $0.02

[Kamban]

ITEngineer wrote:

If I was a bank and a Doctor defaulted (or any high income/wealth person), I wouldn’t be losing too much money. I would come after you with my lawyers and get it back. You have assets. You have income. You owe me what I lent you. You can afford to pay it back. The courts will make you (in general)

Click to expand...

The bank can only repossess the collateral that is put up for the mortgage - namely the house. Unless clearly expressed by personal guarantee, the bank cannot come after personal assets.

That is why many mortgage owners deposit the keys of their house to the bank when the property is under water and walk away. Their credit score might ding but not their personal money.

[Zaphod]

Any explanation that surmises its the borrower with primary fault is wrong from the beginning and what follows is trash. Banks and financiers have thousands of people working in positions labeled "risk management", "derivatives", etc....they know and have the tools to assess risk and applicants. If its anyone's fault its those who more than willingly gave loans to people that it was quite obvious could not pay.

Obviously the system was at fault and the reasons banks did that is because they didnt feel they were ultimately on the hook if they sold to the government, etc...makes sense in isolation, but obviously everyone figures out the same game and collectively it was a disaster.

[ITEngineer]

Kamban wrote:

The bank can only repossess the collateral that is put up for the mortgage – namely the house. Unless clearly expressed by personal guarantee, the bank cannot come after personal assets.

That is what many mortgage owners deposit the keys of their house to the bank when the property is under water and walk away. Their credit score might ding but not their personal money.

Click to expand...

That's not true. You are still on the hook for the loan unless you declare bankruptcy or the bank agrees to a short sale. They won't agree to a short sale if you have other assets.

[ITEngineer]

Zaphod wrote:

Any explanation that surmises its the borrower with primary fault is wrong from the beginning and what follows is trash. Banks and financiers have thousands of people working in positions labeled “risk management”, “derivatives”, etc….they know and have the tools to assess risk and applicants. If its anyone’s fault its those who more than willingly gave loans to people that it was quite obvious could not pay.

Obviously the system was at fault and the reasons banks did that is because they didnt feel they were ultimately on the hook if they sold to the government, etc…makes sense in isolation, but obviously everyone figures out the same game and collectively it was a disaster.

Click to expand...

People who behaved badly leading up to the housing crisis....

1. Banks / Lenders

2. Fannie and Freddie

3. Federal Reserve

4. Rating agencies (Moody's / S&P)

5. Consumer taking out loans at ridiculous terms.

Did I miss anyone?

I still remember being pushed to get an interest only loan in 04. You'll sell the house in 2-3 years for a huge profit...why pay down principle? (still there 13.5 years later)

[Zaphod]

ITEngineer wrote:

Kamban wrote:

The bank can only repossess the collateral that is put up for the mortgage – namely the house. Unless clearly expressed by personal guarantee, the bank cannot come after personal assets.

That is what many mortgage owners deposit the keys of their house to the bank when the property is under water and walk away. Their credit score might ding but not their personal money.

Click to expand…

That’s not true. You are still on the hook for the loan unless you declare bankruptcy or the bank agrees to a short sale. They won’t agree to a short sale if you have other assets.

Click to expand...

It depends on what state you're in and how foreclosure works there, but even in states that do allow lenders to sue for deficiencies it doesnt happen that often. In many states there are rules against it even.

[Donnie]

Kamban wrote:

ITEngineer wrote:

If I was a bank and a Doctor defaulted (or any high income/wealth person), I wouldn’t be losing too much money. I would come after you with my lawyers and get it back. You have assets. You have income. You owe me what I lent you. You can afford to pay it back. The courts will make you (in general)

Click to expand…

The bank can only repossess the collateral that is put up for the mortgage – namely the house. Unless clearly expressed by personal guarantee, the bank cannot come after personal assets.

That is why many mortgage owners deposit the keys of their house to the bank when the property is under water and walk away. Their credit score might ding but not their personal money.

Click to expand...

This isn't generally true.  In the majority of states the bank can sue you for any deficiencies after a foreclosure and sale.

Zaphod wrote:

Any explanation that surmises its the borrower with primary fault is wrong from the beginning and what follows is trash. Banks and financiers have thousands of people working in positions labeled “risk management”, “derivatives”, etc….they know and have the tools to assess risk and applicants. If its anyone’s fault its those who more than willingly gave loans to people that it was quite obvious could not pay.

Obviously the system was at fault and the reasons banks did that is because they didnt feel they were ultimately on the hook if they sold to the government, etc…makes sense in isolation, but obviously everyone figures out the same game and collectively it was a disaster.

Click to expand...

But the borrowers were the ones primarily at fault.  It is the borrower's responsibility to pay back a loan.  If you want to say the banks didn't manage risk properly, that's fine, but the borrowers caused this problem by not repaying their loans after borrowing too much money.

Simply because you can borrow money according to a bank's risk model doesn't mean you should.  The notion that the "government,"  "Wall Street," "banks" or whatever other boogeyman people dream up is to blame for a person's irresponsible action is ridiculous.  I suppose McDonald's is responsible for obesity because they make such tasty culinary delights.  The person eating that garbage shouldn't be blamed because they can't be expected to know that eating 4k calories a day might be bad for you.

 

[ajm184]

ITEngineer wrote:

Zaphod wrote:

Any explanation that surmises its the borrower with primary fault is wrong from the beginning and what follows is trash. Banks and financiers have thousands of people working in positions labeled “risk management”, “derivatives”, etc….they know and have the tools to assess risk and applicants. If its anyone’s fault its those who more than willingly gave loans to people that it was quite obvious could not pay.

Obviously the system was at fault and the reasons banks did that is because they didnt feel they were ultimately on the hook if they sold to the government, etc…makes sense in isolation, but obviously everyone figures out the same game and collectively it was a disaster.

Click to expand…

People who behaved badly leading up to the housing crisis….

1. Banks / Lenders

2. Fannie and Freddie

3. Federal Reserve

4. Rating agencies (Moody’s / S&P)

5. Consumer taking out loans at ridiculous terms.

Did I miss anyone?

I still remember being pushed to get an interest only loan in 04. You’ll sell the house in 2-3 years for a huge profit…why pay down principle? (still there 13.5 years later)

Click to expand...

I would add Congress in the 90's/early 00's.  Congress mandated to Fannie/Freddie the percentage of borrowers who would be 'disadvantaged' borrowers as a result of CRA (Community Reinvestment Act). This percentage continued to move up throughout the 90's/00's.  Throw on the banks who wanted to merge as a result of revoking Glass-Stiegel and the need to get governmental (i.e. Local) sign-off under CRA before your meger could go through.  Banks responded by a. casting a wider net of CRA credited mortgage loans; including using mortgage brokers in 'disadvantaged' areas, b. changing mortgage loan products, c. ramping up Securitization side, etc.

Review of the story and a smidge of the actual working paper; my take:

a. 'Working Paper'- I'm sure most folks understand the concept but not peer reviewed.  Stated upfront but a critical point to understand.  I'm not sure this particular paper will be peer-reviewed and published.

b.  I don't accept the 'broadly accepted narrative' stated in the introduction.  Blame was cast far and wide almost immediately, you saw Jamie and the heads of S&P, Moody's, and AIG raked over the coals in front of Congress.

c. The narrowness of the 'subprime' relating only to a consumers credit score.  For an actual mortgage loan, 'subprime' refers to the amount of downpayment on each loan being less than 20%, with any percentage less being an 'airball'.  Though I may have a stellar credit score, borrowing and hence lending is at best a single point consideration factor in weather to provide a loan in the first place.  A person's income, existing debt, collateral value, personal balance sheet all are far more important factors.  If I have stellar credit score, yet have two properties in which I have 5% equity, that is still a subprime loan.

d. Banks sill had to lend the money.  They trusted folks they should not have (certain mortgage brokers who pencil whipped info), they were lazy in following their own processes, and they competed by offering poorly thought out products from a structuring standpoint to folks who should not have been offered in the first place.

e. Securitization- This is primarily where the banks got bit hard with fines, basically knowingly securitizing loans without the appropriate documentation.  In addition, the banks didn't have sufficient 'skin in' with their loans being securitized. Though there were some high profile collapses, this part from a ratings standpoint and subsequent performance actually did its job for the most part by diversifying risk and over-collatalization of the various tranches.

f. loan products- When everyone is playing the yield curve game (short term rates for a long term asset) and banks are enabling the consumer behavior by not risk differentiating on both product and borrower, you've got a huge problem.  I remember this 'dream house' show in 2004/2005 where this younger couple (mid 20's) in Chattanooga, TN were having this $1 million plus home built and one was a social worker and the other personal banker and were borrowing for the construction/home loan.  What part of a $60 - $70K gross income service the debt on this home; doesn't happen without alot of folks totally overlooking alot of red flags.

[Zaphod]

Donnie wrote:

Kamban wrote:

ITEngineer wrote:

If I was a bank and a Doctor defaulted (or any high income/wealth person), I wouldn’t be losing too much money. I would come after you with my lawyers and get it back. You have assets. You have income. You owe me what I lent you. You can afford to pay it back. The courts will make you (in general)

Click to expand…

The bank can only repossess the collateral that is put up for the mortgage – namely the house. Unless clearly expressed by personal guarantee, the bank cannot come after personal assets.

That is why many mortgage owners deposit the keys of their house to the bank when the property is under water and walk away. Their credit score might ding but not their personal money.

Click to expand…

This isn’t generally true.  In the majority of states the bank can sue you for any deficiencies after a foreclosure and sale.

Zaphod wrote:

Any explanation that surmises its the borrower with primary fault is wrong from the beginning and what follows is trash. Banks and financiers have thousands of people working in positions labeled “risk management”, “derivatives”, etc….they know and have the tools to assess risk and applicants. If its anyone’s fault its those who more than willingly gave loans to people that it was quite obvious could not pay.

Obviously the system was at fault and the reasons banks did that is because they didnt feel they were ultimately on the hook if they sold to the government, etc…makes sense in isolation, but obviously everyone figures out the same game and collectively it was a disaster.

Click to expand…

But the borrowers were the ones primarily at fault.  It is the borrower’s responsibility to pay back a loan.  If you want to say the banks didn’t manage risk properly, that’s fine, but the borrowers caused this problem by not repaying their loans after borrowing too much money.

Simply because you can borrow money according to a bank’s risk model doesn’t mean you should.  The notion that the “government,”  “Wall Street,” “banks” or whatever other boogeyman people dream up is to blame for a person’s irresponsible action is ridiculous.  I suppose McDonald’s is responsible for obesity because they make such tasty culinary delights.  The person eating that garbage shouldn’t be blamed because they can’t be expected to know that eating 4k calories a day might be bad for you.

 

Click to expand...

If anything, its at worst 50/50. The point I was making is it is known, and especially by the banks that consumers dont know anything and will over extend. If you're the lender, that is up to you to cover yourself and not lend to people who cant afford it. You cant just say due diligence is one sided, they deserve any losses they got.

The real problem was the incentives of the system as a whole were set up in a way that promoted this end result of everyone gaming for their particular self interest that cumulatively crushed everyone as a whole.

[Craigy]

Garbage article IMO.  As said above, mid to high credit score =/= "wealthy."  Also, subprime, like ajm said above (really great post), does not mean poor people.

Congress was definitely to blame and banks were definitely to blame.  My mother would say Bill Clinton is to blame.   :lol:  Of course the borrowers are the guiltiest but in general irresponsible people will do whatever the banks and the government let them do.  Let enough people make horrible decisions and it becomes an epidemic.

Used to be you had to have some cash to buy a home.  You didn't have to have 20% but you had to jump through more hoops.  Suddenly banks doing their research became two paystubs and a heartbeat.  Not only could you get a 0% down loan, but banks were giving 105% and 110% and 120% loans, allowing you to "borrow against your future equity" since of course the value of your home would continue to go up forever without end.  And the individual lenders didn't care about risk since they bundled and sold their loans to the big banks and institutional investors.

And yes, the bank can absolutely come after you personally for the balance of the loan.  Read your note.  The borrower is responsible for repayment.  There is no cap based on the value of the home, or equity in the home, or what they can sell the home for after the deadbeat moves out.  Sure there are a few states that shield borrowers when they default on their mortgage, but these are unique and generally this is not unlimited.

The reason that banks don't usually come after the borrower for excess is because the borrower is a deadbeat and you can't squeeze blood from a turnip.  You better believe that if the bank thinks the borrower is otherwise flush, or if there is a deep pocket cosigner, the bank will collect.

A loan where the bank can't come after you personally is called a non-recourse loan.  Sure you can absolutely get one of these on a house, but the reason that you don't is because it is substantially more expensive to obtain non-recourse financing because the bank is taking a bigger risk.