House flippers triggered the US housing market crash, not poor subprime borrowers

[mfcorey1]

http://www.msn.com/en-us/money/realestate/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers/ar-AAqWEBx?li=BBnb7Kz&ocid=mailsignout

The grim tale of America’s “subprime mortgage crisis” delivers one of those stinging moral slaps that Americans seem to favor in their histories. Poor people were reckless and stupid, banks got greedy. Layer in some Wall Street dark arts, and there you have it: a global financial crisis.

Dark arts notwithstanding, that’s not what really happened, though.

Mounting evidence suggests that the notion that the 2007 crash happened because people with shoddy credit borrowed to buy houses they couldn’t afford is just plain wrong. The latest comes in a new NBER working paper arguing that it was wealthy or middle-class house-flipping speculators who blew up the bubble to cataclysmic proportions, and then wrecked local housing markets when they defaulted en masse.

Analyzing a huge data set of anonymous credit scores from Equifax, a credit reporting bureau, the economists—Stefania Albanesi of the University of Pittsburgh, the University of Geneva’s Giacomo De Giorgi, and Jaromir Nosal of Boston College—found that the biggest growth of mortgage debt during the housing boom came from those with credit scores in the middle and top of the credit score distribution—and that these borrowers accounted for a disproportionate share of defaults.

As for those with low credit scores—the “subprime” borrowers who supposedly caused the crisis—their borrowing stayed virtually constant throughout the boom. And while it’s true that these types of borrowers usually default at relatively higher rates, they didn’t after the 2007 housing collapse. The lowest quartile in the credit score distribution accounted for 70% of foreclosures during the boom years, falling to just 35% during the crisis.

[flygal]

1. THIS is what I always thought!

There were late night infomercials selling get rich quick in real estate schemes from the already rich selling THEIR investment properties!

[Not Ruth]

2. Stream The Big Short

[Weekend Warrior]

3. Making money available for loans...

Without penalty and often subsidized was the problem. That was the single problem. Poor people, flippers, etc were not the problem. Make money easily available, sometimes at a discount, all while backing off regulations and qualifications. That's the problem. Not all of the individuals that then used said money. That includes "flippers".

[Adrahil]

16. I'd argue that the biggest problem....

was the hiding of the actual risks.

By assembling Mortgage Backed Securities which included a high proportion of high risk mortgages, but still rating them as AAA, the banks kept getting the money flowing in to fund these junk mortgages. MBS and CDS buyers largely had no real perception of the risk and kept funneling money into the "easy money" of MBS's.

And banks had no incentive to not do it. CDS's were (and largely still are) unregulated, and greed performed its usual function.

[Weekend Warrior]

17. That is a huge part of what I'm talking about.

Thanks for adding and fully agree.

[Maggiemayhem]

4. People were buying multiple houses in new subdivisions

With no intention of ever living in them. The prices were already inflated and for awhile they were able to resell and then the bottom fell out and multiple homes were now unoccupied and foreclosed which would piss me off if I was a resident in one of the legit bought homes. Never buy into a subdivision that allows sales to investors with no intention of occupying.

[Hortensis]

5. I was a real estate appraiser in that era. Interesting, but arguing what "triggered"

is mostly irrelevant. What caused the growth of the real estate bubble over years was neither flippers nor (as the right would have it) the undeserving poor greedily reaching out for a piece of the American dream that they hadn't earned.

Many factors came together, definitely including the increased means of two-income families, but their ability to pay more only ran prices up so far, so that eventually two incomes would be required to purchase the same house one could before. The underlying engine of the housing bubble that grew beyond that is what it always is -- the finance and real estate industries eager to exploit the powerful desire for homes for all they could.

Very much assisted by corrupt (always mostly right wing) legislators. Regulation is what keeps people from doing wrong by the nation and makes them do right, and strong conservative legislators don't believe that is a role of government. Liberal, and many moderate conservative, legislators do.

Bad government driven by business-serving conservatives not only allowed but actively participated in causing the real estate bubble.

[roomtomove]

9. I would agree....somewhat....

it was of course the easy money, no or little money down or no equity loans (I sold my house to a buyer like that just before the crash), overvalued (and over-appraised) property resulting in easy equity loans that financed all of our middle class toys and goodies, and also collusion between banks and appraisers in many cases (which is still happening today). And finally if you did get a loan, the bank itself immediately flipped the loan itself, which became the SOP with every bank, AND IS THE REAL REASON FOR THE CRASH (ie easy risky loans consolidated into risky investments sold to unknowledgeable buyers), that were sold and resold using bogus ROI numbers. >>>>>>>>>blaming the buyers is like blaming the people who got conned.
It was ultimately THE BANKERS who caused the crash. One would be a total fool to believe otherwise.

[Hortensis]

10. Yes. Don't see the "somewhat." The financial industry drove this, assisted

in a greed that rose to genuinely evil levels by mostly Republican legislators. Who were in turn put in office by business to serve business. Who leave office to join and be part of the wealthy business class.

Whenever conservatives dominate government, they always turn it to prey on the vast monetary resources of the 300M+ American they are betraying. That is always the pattern. Back in 1791, when the conservative label was Federalists and the liberal Democratic Republicans, many, not all on the left, were afraid of hamiltontonianism and opposed the right's attempt to establish a central bank, and right-wing laws, because business partnering with government to prey on the people was already a very old pattern.

[IronLionZion]

6. It was all of the above

Mortgage originators know if their client is flipping houses, but they got greedy since they benefit from it. They could deny someone for having too many mortgages too quickly, but they didn't.

Financial firms know what they are packaging into securities, but they got greedy since they are selling it to someone else.

Flipping is definitely a big part of it, but there are many more who enabled and encouraged the problem. For many years leading up to 2007, there were articles calling out the housing bubble. Very few predicted how it would bring down our financial system due to how it was connected to securities.

This book and movie is very enlightening:
https://en.wikipedia.org/wiki/The_Big_Short

[haveahart]

7. I tried to tell people this when it was happening. Poor people will eat dirt to pay their mortgage

or their rent. A home is a point of stability, security, and resource. Poor families will work two and sometimes three jobs to make sure they keep a roof over their heads. They are, however, vulnerable to unscrupulous greedy real estate brokers and others.

[IronLionZion]

13. Poor people can't afford to lose their home and don't have other options

wealthier people can afford to overleverage their credit on several mortgages and lose some of them.

Plus most apartment rentals also check credit history and would deny someone a rental if they had mortgage defaults. Poor people wouldn't want to risk that.

The real estate brokers, mortgage originators, and financial industry preyed upon many normal people who just wanted a home and weren't trying to do anything wrong.

[bucolic_frolic]

8. aka Speculators

who ruin most everything by trying to make or actually making a quick buck

Pioneers, railroads, gold prospectors, forest companies, pyramid marketing, Ponzi schemes ... all the same mentality

[Dustlawyer]

11. When I was traveling up and down the Gulf Coast after the BP oil spill in 2010

I ran into a real estate broker who told me he would pay a commission if I could steer him any waterfront properties from condos to marinas and hotels. He said that he had Wall Street banks with bail out money buying up the distressed properties from the 2008 crash and the oil spill.

They used our bail out money to become the countries biggest landlords, taking advantage of the hardship they had caused. They should have been allowed to fail!

[IronLionZion]

14. Those waterfront properties might get destroyed by the hurricanes

so then the banks will be left holding flooded properties no one wants.

The big wall street banks definitely did not get enough punishment. Many of them used bailout money to acquire their rivals and get bigger.

[no_hypocrisy]

12. In 2003, I worked for an attorney whose cousin was one of his main clients.

The cousin would be in the process of buying a property (usually multi-family or an apartment complex) AND at the same time have a deal to sell that property BEFORE he owned it. A system of flipping properties. I didn't think it was legal or ethical, but the guy had a system where he was never in conflict with selling a property that he didn't own on the day that the sales contract was signed. And it was a win-win for my boss who got fees for closing both the purchase and sale of the same property.

[genxlib]

15. I think this is an oversimplification at best

And a misreading of the data at worst.

When I see the statement "The lowest quartile in the credit score distribution accounted for 70% of foreclosures during the boom years, falling to just 35% during the crisis" I do not interpret it the same way that they do.

What that tells me is that the lowest quartile were failing even when the prices were good. In other words, they had taken loans that were not even re-payable under the circumstances that existed when the loans were made.

On the other hand, flippers survived while prices were up but then crashed when the prices fell.

I knew lots of both kinds of buyers and there is enough blame to go around.

At the end of the day, the credit was simply too easy to get for both kinds of borrowers. Those individuals are responsible for their own decisions but individual loans cannot be blamed for a systemic problem. The finance industry is to blame for that.

[longship]

18. This is utter rubbish. Somebody needs to read "The Big Short"

The banks deliberately sold no-doc mortgages to unqualified borrowers to feed the evil mortgage bond machine on Wall Street. When the Wall Street banks couldn't get enough mortgages to feed their evil bond machine, they replicated those mortgages by selling credit default swaps on the bonds, bundling the CDSs into new bonds, multiplying their risk over and over and over again. When the mortgages went bad, they went bad hundreds of times over, putting the insurers, the banks, and the world economy into the pits.

We all know what brought down the economy in 2007-8, and it surely wasn't house flippers. It was mortgage bond creators and the likes of AIG who duplicated the mortgage bonds by insuring them with credit default swaps, enabling Wall Street to create a mortgage bond doomsday machine.

Read about it here: The Big Short Read this book. Then tell me that it was the fucking house flippers.

What happened in 2007-8 has been fully documented. What a fucking idiot!