Talk:Subprime mortgage crisis

Useful article

This press report from 1999 may be of help: http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1 Martin Baldwin-Edwards 08:52, 6 October 2008 (CDT)

I also found this (pdf download) a good source too. The growth of the mortgage bond market in the 80s is described in Michael Lewis' "Liar's Poker" (Chapter 5 et seq). J. Noel Chiappa 13:57, 25 October 2008 (UTC)

Article title

Most coverage I have seen uses the term Subprime mortgage crisis (i.e. singular) - should this be there? J. Noel Chiappa 13:59, 25 October 2008 (UTC)

I'm afraid I don't understand this question. Nick Gardner 15:00, 25 October 2008 (UTC)

Should the article be named Subprime mortgage crisis (singular) rather than Subprime mortgages crisis (plural)? Most news coverage I have seen uses the former (singular). J. Noel Chiappa 16:35, 25 October 2008 (UTC)

I agree with Noel. This article should be written in U.S. English and in U.S. English "subprime mortgage crisis" is correct. --Larry Sanger 12:48, 26 October 2008 (UTC)

I have no objection. Nick Gardner 14:02, 26 October 2008 (UTC)

According to CZ rules, this article is written in British English. I do not understand why you think it should be in US English, Larry. The use of singular or plural in the title is a matter of convention, and there is no problem with conforming to popular usage if it is the dominant one. Martin Baldwin-Edwards 14:54, 26 October 2008 (UTC)

Text clarification

At one the article says:

Bank mortgages came to account for a substantial proportion of a market that had previously been dominated by the government-sponsored agencies (Fannie Mae and Freddie Mac)

But I'm a little unclear on exactly what's meant here. Does it mean that banks were turning mortgages they held into securities without going through FNMA/FHLMC (either directly themselves, or by selling them to investment banks which did the repackaging), whereas prior to that most such securitization had been performed by FNMA/FHLMC? J. Noel Chiappa 13:57, 25 October 2008 (UTC)

I'm afraid that I know no more than is contained in the references. Nick Gardner 14:40, 25 October 2008 (UTC)

What I was saying was that I didn't understand what you meant by the sentence fragment I quoted. Could you rephrase it to make it a little clearer? J. Noel Chiappa 16:35, 25 October 2008 (UTC)

I do not have up-to-date figures, but the October report of the Senate Joint Economic Committee [1] Part 3 says - in the paragraph headed "Most subprime loans are securitized via non-agency conduits" - that in 2004 the two Government-sponsored enterprise were responsible for 28% of issues in the lower-priced part of the market and a negligible proportion elsewhere. That is what the paragraph was intended to convey. If you know of later figures, please let me know. Nick Gardner 14:49, 26 October 2008 (UTC)

Confession and invitation

I have been mainly preccupied with the "Crash of 2008" etc, and I may not have consulted some ot the important sources of material for this article. I will try to get round to doing another search, but in the meantime I should welcome a contribution from someone else Nick Gardner 14:57, 25 October 2008 (UTC)

I'm not sure if you consider the New York Times a good source, but I've found a number of their articles to be pretty enlightening. If you'd like, I can look some up and list them here. J. Noel Chiappa 16:35, 25 October 2008 (UTC)

Yes please! Nick Gardner 18:08, 25 October 2008 (UTC)

Hi, I trawled through my clippings file, looking for US mortgage-mess-related stories, and this is a good chunk of what I have on a first pass from the last couple of months:

February:

• Mortgage Crisis Spreads Past Subprime Loans

March:

• What Created This Monster?

July:

• Mortgage Fears Depress Shares at Two Agencies
• Loan Pains Turned Site Into a Hit
• About Those Loans - Editorial
• Loan-Agency Woes Swell From a Trickle to a Torrent
• Protected by Washington, Companies Ballooned
• Fannie, Freddie and You, by Paul Krugman
• The Future of Fannie and Freddie
• Too Big to Fail?

August:

• Housing Lenders Fear Bigger Wave of Loan Defaults
• Calculating Where Home Prices Will Land
• Home Equity Frenzy Was a Bank Ad Come True
• In the Central Valley, the Ruins of the Housing Bust
• Agency's Head Expects Banking's Crisis to Worsen

September:

• Mortgage Giant Overstated the Size of Its Capital Base
• In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans
• As Crisis Grew, a Few Options Shrank to One
• Few Stand to Gain on This Bailout, and Many Lose
• The Power of De, by Paul Krugman
• The Dilemma of Fannie and Freddie
• Reinventing Mortgage Giants: A Big Rebuild or a Teardown?
• Big Payments Are Expected in Credit Default Swaps
• Federal Mortgage Success Stories
• U.S. Holds the Whip Hand in Modifying Mortgages
• All Grown Up and, Some Say, Unneeded
• Some Seek Agency to Buy Bad Debt as Long-Term Answer
• Perhaps, It's Time to Play Offense
• Plan's Mystery: What's All This Stuff Worth?

October:

• Pressured to Take More Risk, Fannie Reached Tipping Point
• Home Prices Seem Far From Bottom

This isn't all of them (there are parts of my collection I haven't had time to check yet) but I wanted to put what I had online as I have to go off for the rest of the day. Note: There are no stories about individual banks which failed, because I don't generally clip/keep stories about individual institutions.

There's also this which contains all their mortgage-related stuff, but it's pretty voluminous; however, for looking further back in time, it might be useful.

Sorry it's all from the NYT - I read other things (e.g. News International Pakistan) but my economic-related stuff mostly comes from the NYT. J. Noel Chiappa 19:10, 26 October 2008 (UTC)

Many thanks Noel. I have used rapid-reading techniques to scan through your clippings, and it has been illuminating in a negative sense - let me explain.

I have been trying to find the origin of Larry's (and others') conviction that Fanny Mae and Freddy Mac were "the catalyst of the crash" and I didn't find it among your clippings. The articles confirmed their dominance of the US mortgage market, but said nothing about their contribution to the issue of the securitised instruments that were the cause of the crash. They say nothing to throw my doubt on my conclusion that it was the discovery of the poisonous nature of those securities that triggered the crash and throws no light on where they came from. I have based my scepticism about the contention that they came mainly from Fanny and Freddy upon evidence to the Senate Joint Economic Committee, and upon the timing of events, and your clips give me no reason to change.

Could you - or Larry, or anyone - tell me where the story of their central role in the crash came from? Nick Gardner 21:58, 26 October 2008 (UTC)

I can't explain the "catalyst of the crash" stuff because I personally don't think they were the catalyst (although they might be more akin to the 'canary in a coal-mine' - something I'll explain in a bit.)

Like I said over at Talk:Crash of 2008#Odd, I view the US and world-wide economic landscape in which the recent crash happened as akin to a rock-slope piled with loose debris, which a whole bunch of separate factors have combined to tilt more and more steeply. (The US housing bubble, and a large number of loans written based on that bubble, and securities based on those loans, are merely one factor.) Eventually the whole thing starts to cascade down in an avalance. However, the pebble that started the avalance isn't important - make the slope steep enough, and the proverbial butterfly landing can start it. (And my impression is that FNMA/FHLMC lending wasn't the biggest factor in raising that slope, either.)

However, my impression is that neither were FNMA/FHLMC utterly innocent bystanders. I have a few comments about what I perceive to be the FNMA/FHLMC role in the housing bubble. In doing so, let me applaud your comments over to T:Co2K8, about how it will take the accumulation of a lot of data, and some careful study of it, to say exactly what happened. What follows are merely my impressions, and I can't say how accurate they are.

First, my 'canary in a coal mine' comment: FNMA/FHLMC lending standards were described by Krugman as "more responsible than average", which may well be accurate; so when they failed, basically wiping out their shareholders (both common and preferred), I think it really spooked a lot of people - because if they could go under, so could any institution, it might seem.

I'm not sure if that's an entirely accurate perception, because I think they were playing a little fast and loose. They were pretty highly leveraged, with a relatively small amount of share capital relative to their assets/debts, so all it took was a small decline in the value of their assets (mortgages, etc) to put them underwater. In this they were similar to some of the US investment banks which failed - and were also highly leveraged. In both cases the cause was the same - the institutions were trying to provide relatively high rates of return to their shareholders - but that meant leverage, and also risk; and their gamble failed.

There are also things like this story (now added to the list above) which indicate they made other bad mistakes on their own, too.

I do also think FNMA/FHLMC did have something of a role (the exact size of their contribution remains to be determined by the post-mortem) in the creation of the US housing bubble.

• Although they didn't originate sub-prime mortgage-backed securities (since they are not allowed to purchase sub-primes), they did buy some [2] [3]; apparently in an attempt to increase the return to their shareholders. In doing so, they helped propel the bubble, by routing capital to those lenders who were generating the now-toxic sub-prime securities. I don't know the size of their sub-prime holdings, so I don't know how big a factor they were, though. I'd also like to note that it wasn't these securities alone which did in FNMA/FHLMC - losses in their own non-sub-prime mortgages were also cited as a factor in their collapse.
• They have purchased or guaranteed half the mortgages in the US. To the extent there is a housing bubble, they can't escape all of the blame for it - because they are the single largest player in the market. Sure, maybe it's 20/20 hindsight to say that they should have used more stringent standards (e.g. looking at rent/price ratios, to see if valuations were reasonable - requiring a 20% down payment isn't much good if the house is overvalued by 30%, as many markets were) - I wouldn't disagee with that. However, you can't be the largest player in a market which experiences a bubble and have no responsibility!

I'd also like to point out that sub-prime mortgages and securities are only a part of the problem. That Senate report you linked to speaks of roughly $100B in expected sub-prime losses (as of the date of that report, which is about a year ago, IIRC) - but the total US mortgage-related losses related to the housing bubble are now expected (my impression is) to be many times that. (I recall reading that the $700B number of the rescue plan came from assuming that a certain percentage of all US mortgages would fail.) I'm not sure if anyone has a guess at this point what percentage will be in sub-prime, how much in Alt-A, etc; I guess it will probably partly depend on how severe the economic downturn is.

I seem to recall that the figures in the Senate JEC report seem to indicate that their holdings of subprime assets was very small. Nick Gardner 15:50, 31 October 2008 (UTC)

It also appears that things really started going into the proverbial handbasket once it appeared (earlier this year) that the problems were spreading out of the sub-prime area into other mortgages - that's when the wheels really came off.

Anyway, I could keep going, but I don't want to make this too long. I hope my comments are of some utility, and I would be interested to hear if you think there's anything to any of my points. J. Noel Chiappa 03:37, 27 October 2008 (UTC)

Thank you Noel. I think that all of your points are valid, and you have turned up some fascinating aspects of the story, some of which I had not been aware of - for example the intensity of political pressures on FM/FM. They tend to reinforce my impression that the regulators have a lot to answer for. I expect that more will emerge when the various committees of enquiry get under way.

There is already material here for an interesting article on Fannie Mae and Freddie Mac. Why don't you have a go?Nick Gardner 08:38, 27 October 2008 (UTC)

Thanks for the kind words! I know I'm an amateur, but I like to think I'm a fairly well-informed amateur! :-)

Well, an article on FNMA/FHLMC should cover what they do, their history, etc, as well as their failure, right? Alas, I probably don't have time to research/write good articles - just commenting seems to use all the time I have! J. Noel Chiappa 16:40, 28 October 2008 (UTC)

BTW, you were interested in "the issue of the securitised instruments that were the cause of the crash". In the course of looking for something else (the thing I'd seen on how $700B got picked as the size of the bailout), I ran across this which gives a bit of interesting detail on one particular set of securitized mortgages. (Note that they aren't 'sub-prime', by the exact definition of that term.) I'll add it to the list above. J. Noel Chiappa 16:40, 28 October 2008 (UTC)

I haven't forgotten your points but I have been distracted by demands to change the "crash article". I've since found a bit of time to strengthen this article but I haven't finished the task. Nick Gardner 15:42, 31 October 2008 (UTC)

Accessibility to non-specialists?

I just retried to read this article (an earlier try was months ago) but I got lost soon, since the introduction did not introduce me to the topic. For instance, I would have expected to see context established with respect to mortgage and prime rate, and I personally feel that normal wikilinks to the respective articles (or, in their absence, to the definitions, e.g. by means of lemma articles) would be more helpful (in terms of saved clicks) than the italic pointers to the glossary on the Related Articles page. --Daniel Mietchen 15:11, 18 January 2010 (UTC)

My intention was of course to make it accessible, and help from non-specialists such as yourself, is very welcome. In view of your difficulty with it, I will certainly review the article with that in mind. But without more help than you have provided, I'm not sure what to look for. The omission of "prime rate" from the glossary was an oversight that I have remedied (it was in use in the economics glossary). What else should I do - can you give me some clues?

I can see what you mean about the advantage of a lemma over a glossary, but I am afraid that it is now too late to change. I was encouraged in the practice of using a glossary by Larry Sanger in connection with the crash of 2008 article, and I have allowed the practice to spread to most of the other economics articles. Because there is so much jargon to explain, with so many multiple interactions (such as subprime mortgage>mortgage>prime rate) I had hoped that readers would find it useful to see related terms defined together in one place. Anyway, converting each of the hundred-odd definitions in the economics glossary into lemmas is now a more daunting task than I can bring myself to contemplate! -Nick Gardner 16:41, 18 January 2010 (UTC)

Sorry for having been too general. If I am on a page whose subject is basically unknown to me, I always look for orientation in terms of etymology. In this case, it is not entirely clear from the title whether there is a mortgage crisis that became subprime or whether there is some subprime mortgage that is somewhat related to a crisis (I know we are talking about the latter scenario, but using the term mortgage market without referencing mortgage may or may not imply a different usage of the term in this market context). Also, it is not explained, at least not in the introductory section, that subprime refers to "below the prime rate" (as I assume it does). And if there is a complex relationship "subprime mortgage>mortgage>prime rate", then this could perhaps be illustrated in a diagram. Another cause of irritation is the strangely placed footnote.

As for glossaries, I do find them useful, especially if the definitions are all together, but as a reader in a wiki, I am used to click through if I want details, not to look things up manually. I understand that the system is now not easy to change, and we certainly have other priorities than that at the moment. However, if you were to come to the conclusion that such a change would be an improvement, we could talk about bot support for getting it done. --Daniel Mietchen 20:46, 18 January 2010 (UTC)

I should be happy if a bot could be created to do the job - that would provide the best of both worlds. Nick Gardner 12:39, 19 January 2010 (UTC)

On your prompting (and with the help of quite a lot of Californian merlot) I have attempted an overview that does not use the word "mortgage" or any other terms of the art. It is an outrageous over-simplification that begs many questions, but that may be forgivable because of what follows - I hope! Nick Gardner 08:16, 19 January 2010 (UTC)

I noticed the (or at least some) simplifications in the overview section, but I think this adds value to the entry and makes it indeed much more easy to digest for non-specialists, which may safely drop out thereafter and still get the gist of the topic. I also added some wikilinks in the introductory part to provide further guidance to readers.

As for changing the system, I see you already started a number of lemma articles for which definitions already existed. That part can be automated fairly easily — all I would need is a list of affected pages, such as the Economics glossary. What is not so easy to automate is the replacement of the italics in the articles by wikilinks to the lemma articles because there may be other uses of italics in the text, or an article may not be referenced by its exact page title. --Daniel Mietchen 23:45, 19 January 2010 (UTC)

On second thoughts, I doubt whether the bot would be worth the effort. I can do the lemma conversion in the course of a review of the economics articles that I have started as part of my editorial responsibilities. I am grateful to you for drawing my attention to the possibility of doing so (and I wish somebody had done so earlier!). Nick Gardner 12:21, 20 January 2010 (UTC)

Having had a closer look at the number of articles concerned, I also think a bot is not needed, and I have done a few lemma conversions by hand. --Daniel Mietchen 12:25, 20 January 2010 (UTC)