NO ONE AT THE CONFLUENCE was blaming the borrowers. Again, this is a deliberate misconstrual of what was written. The blame was, and always will be, on the people who ran Fannie Mae and Freddie Mac who took a deliberate hands off approach to predatory lending practices. That does not mean that we think it is a bad idea for Fannie and Freddie to lend to all people, *who can afford it*. But the efforts of the quasis was not put towards steering these people to safer loans even if it meant that it would take more time and effort for them to qualify. Fannie and Freddie were negligent of their oversight responsibilities. BTW, the quasis are only one little portion of this whole mess. We find it odd that you would concentrate all of your attention and rationalization for claims of racism, on this one post that y ou have deliberatly misinterpreted. In fact, this is a very simple concept. It doesn't take a master logician to sort it out. Loans to underserved populations= good. Bad loans to underserved populations = not good. The people who were responsible for the bad loans and who by their own admission took a passive attitude towards it, should be held accountable.
Does that mean we think that the quasis should be abolished? I have read nothing at The Confluence that suggests such a thing. Do we think that lending to poor people is a bad thing? No, again, there is no evidence of this. What we believe, and what is consistent with our principles, is that there is an equality of opportunity. We believe that people shouldn't be expected to pull themselves up by the bootstraps if we refuse to give them boots. BUT do we think these people were badly served when the mortgage industry was allowed to operate through the quasis to provide substandard and expensive loans? Yes, we do. Any other interpretation is in your heads.
In the spirit of interbloggy friendship, we would really appreciate it if you dropped this line of accusation. It is contentious and divisive as well as being demonstrably untrue.

This needs to become common knowledge. Fast!

Blaming the victims is pretty widespread. I cringe everytime a Dem (particlarly Obama who has the biggest bully pulpit) says that. Its easy to believe that the victims were to blame because its truthy. But banksters were essentially betting on loans they *knew* were too risky. They knew their behavior could lead to much bigger catastrophe than losing a single house. Which is another thing: people are yelling at folks for a few hundred thousand dollars, but the banksters screwed up to the tune of hundreds of billions. Seems like folks have their anger directed at the wrong people. But not only is the scale of the victims "mistakes" chump change, they were really a small fraction of the problem.

Noting that a single story does not count as "data", I offer up my own home buying experience, done in spring of 2007 when the shit was hitting the fan and anyone paying attention knew that the gravy train was coming to an end. We bought in one of the worst housing markets in the country, San Diego CA, with hyper-inflation on the upside and crashing values on the downside. At that time, the market was declining around the county, but the neighborhood we were buying in was still appreciating.

We wanted a conforming loan with a 30 year fixed rate. We had full documentation of income and assets. Our credit scores were over 800 for each of us. The loan officer looked it all over, then said if we would withdraw our documentation and just go with credit scores, he could get us "a better deal". What was a better deal? More money, lower (variable) interest rates, and cash out. We declined, got the conforming loan (which was sold multiple times and now is owned by BofA/Countrywide), and are not underwater.

The recommendation to engage in fraudulent activity came from the lender, not the borrower, based on an expectation by the lender that he could get a better deal *for himself* if the borrower would take on more individual risk. If we had been less aware of the housing market (i.e., listening to the TV instead of reading Calculated Risk), had been less sophisticated borrowers, had been less stubborn about sticking to the financial plan we had set for ourselves, we probably could have been talked into a loan less favorable to us. It might not have been a toxic loan, per se, but it would have increased the level of risk. In a deteriorating market, slightly more risky can become unacceptably risky in the matter of a few weeks.

Why would someone be "so stupid" as to accept a loan deal that was that risky? Why not just say no?

The mortgage crisis is highly concentrated in a few geographic areas, most prominently CA. The prices of homes there were able to hyper-inflate *because* of fraudulent lenders willing to push risk onto individual borrowers. If people couldn't borrow that much, the homes could not be sold for that much. Something people pushing the GSA argument keep overlooking is that the price of these homes was well above the conforming limit - in short, Fanny/Freddie could not have purchased the loans in the first place. To get down to a conforming limit in our case, we had bring more than a 20% down payment to the table. Even very responsible borrowers are unlikely to have that much cash on hand (We had the unfortunate luck to have inherited a house in another state due to the death of a relative, which we sold.) and so it is a very, very small number of California borrowers who could have negotiated a deal like ours, given the asking prices and high cash requirements to get a conforming loan. The upward price spiral required a reliable supply of fraudulent loans. When the supply of loans stops, the prices stop going up.

The media likes to focus on the really crazy 105% LTV, NINJA loans made to dishwashers and other people they like to scorn, but the fact is that many CA borrowers would have preferred to have a conventional loan if the real estate and mortgage markets had made them viable. The home prices are sky-high, and the lenders deliberately push risky loan vehicles (none of them GSA qualified) through hard-sell and deceptive practices. If you look at your stagnant/declining wages, look at the increasing house market, and try to see where wealth generation is ocurring, well, isn't the risk that you might mis-time the market and go in too late to resell out of it worth taking?

In CA, assuming you were willing to risk being the person holding the bag/house when the music stopped, "risky" borrowing was a rational response to rotten economic times where real estate speculation was commoditized for ordinary borrowers. Anglachel

All I can say is this post must have been a low call to Goldberry---that is, ugly but true. . .

Not to be a cheerleader, but, hell, we (and I like to think I'm on the fringe of the "we") are sooo lucky to have these forums - Correntewire, Confluence, etc. I would be a much, much sadder and uninformed participant without these bastions of truth and knowledge. And thank you to all who have created and supported these blogs by contributing many hours and dollars.

My god! Sarah, Myiq2xu, Lambert, Goldberry (Riverdaughter), Leah, Jawbone, Katiebird, Gqmartinez, Dakinat....damn, the list goes on and on...fabulous, fabulous insight and information. Thank you, thank you, thank you.

This post by Hilzoy* (via Atrios) is about a Financial Times report on just how bad the toxic assets are, based on inside investigations by some of the Big Banksters, in this case JPMorgan, Chase. Alas, free registration required, but you can read the nut graphs at Obsidian Wings.

The comments mention a Wired article which talks about the infamous formula used by the math (and physics) whiz kids, the Quants, to find that mixing assets of varying qualities could result in a pate which would/could not fail.

The mathematician who comments below notes that the whiz kids and their managers did not want to know what would happen if they failed. So I guess this aphorism, attributed to Upton Sinclair, "It is difficult to get a man to understand something when his salary depends upon his not understanding it," applies to those supposedly dedicated to the scientific method.

I have a PhD in math. I had no idea that such lucrative work was available for someone with my credential. I'd have been more than willing to work for half the salary these guys were getting, and I'm sure I could have produced better results. [From earlier comment]

I do too, I did know, and in fact a number of my friends went and did just that. I'll be honest, the grinding poverty and "lifestyle" of graduate school made me jealous of their wealth and success. And I'll be even more honest and admit that, for me, the one bright spark in all this tragedy is the thought that, finally, they're falling back to my level.

[Plus, those innumerate hedge fund managers? Many of them were Type-A assholes I knew in college, and you have no idea how gratifying their comeuppance is to me.]

Let me also add one other factor not mentioned in the Wired article: hubris. Last summer one of my friends left town to become a financial analyst on Wall Street, using sophisticated modelling techniques developed by his college roommate. At a party just before he left, I caught him earnestly explaining to another friend how (what we now know were the beginnings of) the financial troubles were a completely anomalous event; and about how those models were almost always right, and they had only failed because of an incredibly unlikely series of events that no-one could have predicted.

I wanted to punch him in the face.

Never mind the fact that those events were in fact predicted. This is the thing that the Wired article missed: they knew the model didn't work. They being the quants, they being the managers. They knew it didn't work; they just convinced themselves that the events in question could never happen, and if by some miracle they did, they convinced themselves they could survive them. So -- and this is the part that burns me more than I can say -- they never looked at what would happen if it failed.

First rule of being a mathematician: when someone hands you a theorem, figure out why it doesn't work. Second rule: if it's true, figure out why it can't be applied to a broader context. That's just what you do. That's how we're trained. But these yoyos decided that because the risk was epsilon, the penalty for failure was irrelevant. As if epsilon were zero and therefore the negative outcomes need never be calculated. As if they could not fail.

They believed they'd conquered risk.

And now we're all paying for their sins.

Posted by: Anarch | February 27, 2009 at 11:36 AM (My emphasis)

Per the FT article, reality bites, hard and destructively:

The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs [out of $450B] has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.

Think Geithner knows this? If so, why is he recommending the actions he does? Or does he know more, that it is so bad that perhaps Soros could be right? There is no bottom? Yikes.

What have the Banksters wrought?

*Aha! Hilzoy hatips to Yves at Naked Capitalismm whose post has more from the FT article.