Did Subprime Loans Cause The Housing Crisis?

[Salvatore R. Gulino]

Now that the dust from the great recession appears to have settled, it may be a good time to take a closer look at our financial system with 20/20 hindsight. Much has been written about who is to blame for the housing crisis.

No one seems to be immune from the onslaught of public criticism. Main St blamed Wall St while in private Wall St blamed Main St, and what about those nasty, complicated subprime mortgages and credit default swap contracts?

In retrospect, we must ask ourselves this question: Would we have had a major housing crisis if subprime mortgages did not exist? We should note, subprime mortgage programs and credit default swaps had been around well over a decade prior to 2008.

Furthermore, The Credit Characteristics of loan pools between 2001 to 2005, were virtually the same, however defaults in 2003 were approximately 1%, well within acceptable range. Contrary to the belief of some, the majority of home loans which defaulted were prime loans. Subprime loans at their "peak" rose to approximately 20% of all mortgage origination, of which 35% defaulted.

Therefore, Subprime mortgage defaults accounted for approximately 7% of the entire housing market. The Cumulative Default rates for Fannie Mae at their peak, surpassed those of subprime at 12% (Freddie Mac was virtually the same). It should be further noted, the housing crisis began when housing default rates were approaching 6%.

Leading to only one conclusion, a severe housing crisis would have occurred with or without the influence of subprime loans, for conventional loan defaults had risen to 12%.

All the data suggests something else is at hand causing substantial defaults approximately every ten years. If there are any lingering doubts, you need only look back to the last three major recessions when the impacted of subprime mortgages were was virtually nonexistent.

Still, no one would argue subprime mortgages made the last housing crisis measurably worse than it would have been.

Now that all the stats are in plain view, it may be a good time to review the Simple Math from a fresh prospective here http://20-yearsimp.blogspot.com .

 

[Kann]

As long capitalism exists, as long will these depressions exist. It doesn't really matter what cause them to exist.
The only real reason for depressions is greed in mankind. Go back in history and take a look.

 

[Salvatore R. Gulino]

As long capitalism exists, as long will these depressions exist. It doesn't really matter what cause them to exist.
The only real reason for depressions is greed in mankind. Go back in history and take a look.

Your points are well taken Greed "isn't" good, it kills. We agree, however I would stop short of getting rid of capitalism. I believe history has proven, in order for mankind to have the incentive to strive ahead the balance of risk vs reward must remain in tacked. You may recall in the not so distant past there was a experiment with an opposing view called Communism which settled this argument once and for all.

 

[Kann]

I'm not sure i understand your communism point. Do you mean, that there is no depressions in communism and communism isn't a capitalistic society?

Otherwise i want to point out that a it isn't necessarily a bad ting to get depressions. It get the society back on track and it stops inflation.

 

[CasanovaJ]

You are totally missing the main lesson from the financial crisis. America has become a second rate power. Its trade deficit and its fiscal deficit are now at nightmare proportions. In the days of the free market when America was a top industrial power, there was accountability to the stockholder-- The Carnegies, the Mellons, the people who built this industrial empire made sure of it, because it was their money at stake. Today, management has no stake in the company. The new law of evolution in corporate America is “survival of the unfittest”… but in my book, either do things right, or you should be eliminated. The fact is that “greed” (at lack of a better word) is good. It's right. It works. It cuts through, clarifies, and captures the essence of the evolutionary spirit. Greed—in all of its forms— greed for life, for money, for love, and for knowledge—has driven the upward surge of mankind, and it is exactly what will save our malfunctioning corporation known as the USA.

 

[bigbadwolf]

After the dot-com bubble got punctured in 2001, there was a need for some other bubble -- the eviscerated economy of the US has become dependent on asset bubbles over the last few decades -- and the likeliest candidate was the property market. For the property bubble to continue after a certain point -- 2005? -- it was essential to lend to people who had no real chance of paying back (i.e., subprime). But it's also true that even those deemed credit-worthy were having trouble paying and default rates were going up. The reason was arguably high levels of household and personal debt, linked with stagnating wages. This high level of indebtedness remains and many economists argue that this contributes to the on-going economic stagnation (or euphemistically, "weak recovery"). Behind the stagnation and indebtedness there are arguably other more primary factors: the de-industrialisation of the USA and high fuel costs (the present dip is probably an anomaly).

 

[Salvatore R. Gulino]

Casanova,

Awsome referance! As much as I love the dialog, Gecko's use of the word "Greed" is not only used out of context, his conclustions are "wrong". By definition, Greed serves no purpose other than the sake of being "Greedy".

Re: U.S
I am curious to know,,, if the USA is as you say, a second rate power, who has taken its place and by what measure ??


Best