If you look at page 23, T2 says that the largest sector, by value, at risk is prime mortgages. Commercial real estate is second. Neither of those are the type of transactions of which you complain.The debate centered on responsibility for the mortgage crisis: GSEs vs. Wall Street. GSEs didn't do much Commerical Real Estate (CRE). Wall Street and insurance comapnies did and they are hurting plenty.
That "the largest sector, by value, at risk is prime mortgages" says nothing, since I'm discussing the current crisis, and past/current delinquencies.
Further, I fault your interpretation of T2 given that the T2 charts on borrowing power (page 9) seem to prove my point--that much of the crisis was demand driven.This makes sense only if Carl means the demand, by Wall Street, for reallly bad mortgages.
Once upon a time, before Wall Street got involved (see the graphs for timing), there was a word that originators had for people who wanted to borrow 9x their income, or have mortgages payments equal to 95% of their monthly take home. That word was "NO". People can have all the "demand" they want - if the lenders had said "no" it would not have mattered. The originators/lenders did not say no, because Wall Street paid them to say yes, as noted here:
The big money for unscrupulous brokers, however, lies in steering borrowers into higher cost loans. A prime, fixed-rate loan at par may earn a broker a fee of one percent or less, but a hybrid adjustable rate mortgage (ARM) can pay four percent or more.Carl further says: That's why T2's page 29 chart shows that 25 percent of prime mortgages also are underwater.
The Center for Responsible Lending (CRL) has said that inflated YSPs are included in 85 to 90 percent of all subprime mortgage loans.
Borrowers of hybrid ARMs, nicknamed "exploding" or "toxic" ARMs, often get stuck with prepayment penalties that penalize a borrower for paying off a loan early
This is more distraction than argument.
In the first case, for prime loans being underwater is just a function of having bought high in the bubble. A prime loan on an underwater house need not turn delinquent, since it's payments are fixed at a low rate relative to the borrower's income, and the borrower having put 20% down makes "strategic default" less likely. It requires a very significant decrease in house-hold salary to cause a default in this case.
In the second place, Carl conveniently ignores 3/4 of the chart on page 29, reproduced below:
As noted before, due to fixed reasonable payments, prime borrowers must experience significant decrease in income to be forced into delinquency.
On the other hand, virtually every underwater Option ARM will inevitably be forced into delinquency when the loan recasts - a process that involves taking the loan from negative amortization to fully amortizing in a shorter term. Low interest rates engineered by Bernanke wil not save these people.
For a quick example of an Option ARM recast, see here:
Lower interest rates do exactly nothing for these people because the original "option" period typically had rates as low as 2% on simple interest, and thus payments could be under $1,000/month on a $600,000 loan during the "option" period...This logic applies to all those who got Option ARM loans and paid the minimum "option". Estimates are that 80% of Option ARM borrowers did so.
When the loan recasts five years after origination (assuming that comes first) even if you can get a 4% interest rate based on current low "adjustable" rates you are now financing $750,000 and must amortize the 4% over the remaining 25 years....
Your payment goes from under $1,000 a month to $3,945.62, a near-quadrupling, overnight.
And since, as previoulsy noted, the Option ARMs happened in the "bubbliest" areas, California and Florida, these will be large amount loans, most above the conforming limits of the time ($417,000), and therefore most funded by Wall Street.
Subprime and Alt-A borrowers have been given some reprieve by Bernanke's fixing of low interest rates. That cannot last forever.
Carl continues: And you haven't justified your concern for the leverage standards of investment banks. How did that cause the crisis?
Yield Spread Premium explains it. It is the causal link between the sudden explosion of I-Bank money and the suden explosion of lousy underwriting.
(In the background, non-blogger obloodyhell maintains his psychotic notion that the I-Banks did all of this only because the GSEs showed them how, and that therefore the GSEs - and Democrats in Congresses that passed no laws relating to the GSEs - are responsible. Suuuure!)