The Coder Behind the Mortgage Meltdown

axjms writes "New York Magazine has a confessional/abdication from the man who wrote the software that turns mortgages into bonds and those nasty little things called CMOs. An interesting first-person account from a coder whose work reached far beyond what he or anyone could have anticipated."

Comments

Re:This topic is too hot to handle.

[MozeeToby]

Yep, you can pretty much say that the financial crises was caused by just about anyone, and you'd probably be right to some extant or another. Homeowners, loan officers, big banks, small banks, the FHA, AIG and companies like them, investors, the media, the non-journalistic media, republicans, democrats, and government regulators just to name a few and I'm sure you can come up with more if you try.

There's plenty of blame to go around, anyone who claims one group is responsible is pushing an agenda or very short sighted.

Buck passing...

[owlnation]

Can you say scapegoat?

Of course, it's a geek who is to blame for it all with his immoral software witchery. It couldn't possibly be the result of a large number of greedy, thieving scum, who were regulated by greedy, corrupt scum, and they in turn were regulated by a greedy, corrupt government.

The writing was on the Wall(street) for the subprime meltdown for a very long time before this software was written. It was obvious to anyone with Economics 101, a long time ago.

Re:This topic is too hot to handle.

[dkleinsc]

I've argued the issue of the CRA on many occasions, but I guess I have to do it one more time. For starters, I refer you to an earlier Slashdot discussion on exactly why the CRA had very little if not nothing to do with it.

The short version: The vast majority of bad loans originated from brokers (e.g. DiTech, Countrywide, Ameriquest) who weren't covered by the CRA. Banks who were under the CRA actually did considerably better than other financial companies. Furthermore, CRA borrowers had to meet identical loan standards as anyone else.

The reasons that various groups have blamed the CRA has a lot to do with hating that regulation since at least 1990 or so, and very little to do with reality.

Requirements?

[zm]

The guy coded it. Who created his requirements?

Re:Requirements?

[conteXXt]

Ah the trillion dollar question at last.

Coders don't design faulty business logic. Coders code what they are told to code.

Re:This topic is too hot to handle.

[Dionysus]

Why would anyone in the market have had an interest in loaning to high-risk individuals,

When it's not your money your lending out.

Say, I'm a loan officer. I see someone being high-risk. Do I loan out to that person? Well, if I'm at risk, I might not, but since the home prices are going up, I give the loan, and then sell the loan to someone else. I'm not stuck with the loan, and I make money on loaning out money. See where my incentive is to loan out money whether the person can pay back or not?

Re:This topic is too hot to handle.

[tcopeland]

> the financial crises was caused by just about anyone

Except for folks who bought within their means and paid their mortgages on time. Sadly, they will now end up paying for everything else.

Re:This topic is too hot to handle.

[vlm]

In fact, renting is even more expensive than owning when you consider that you don't get to keep any of the equity, and the landlord needs to make a profit.

Actually, no. The whole point of the psychological aspect of the bubble was/is that "housing only goes up". Therefore landlords didn't care that the typical rental cost was a fraction of their mortgage payment.

For example, say the cost was $500K. That would imply, at a reasonable rent to cost ratio of 100, a rental cost of $5000 per month. But the going rental rate for a SFR is only $1800. Thus each month a landlord loses $3200 in cashflow.

However the whole point of the bubble is to mix up cash flow and balance sheets. So, if that $500K house cost $250K two years ago, it's gonna double in two years, right? Because housing only goes up, right? So, if you expect to gain $500K on the balance sheet in two years, that is simplistically a monthly gain of $20833. A new car each and every month....

So, the bubblehead thinks he gains $1800 a month from rent, lost $3200 a month in expenses, and gains $20833 per month in bubble prices. Sounds highly profitable. Now what happens when real estate no longer goes up? What if it drops by half, thus a balance sheet loss of 10K per month, every month? Ooops. Mail the keys back to the bank and tell the bank, tough luck. Don't worry about the bank, taxpayers will bail them out.

Another way renting can be cheaper is looking at opportunity costs. If the "savings" of ownership are less than the money lost thru peasant work of maintaining the house, then you're better off outsourcing property management to the landlord. People whom get alot of money by working crazy hours are far better off outsourcing toilet plunging and lawnmowing to a landlord. Also some people are willing to pay alot for someone else to handle the hassles for them.

The final way renting can be cheaper, is if you know anything about economics, and see whats going on in the inflation adjusted prices over the long term over the last century, in the ratio of house prices to rent over the last century, in the ratio of median income to median home price, in the ratio of median home price to... heck just about any commodity, in the historical graph of interest rate vs house price with attention given to the current temporarily multi-generationally low interest rate implying a very temporarily multi-generationally high house price, in the trends of median middle class income over the years, in the demographics of baby boomers flaming out with not enough younger folks to move in/up, in the graphs of house construction vs population change (supply vs demand), it's not too hard to see whats going to happen to prices. On one side you've got all the math and graphs that are worth considering, and on the other side, you've got slogans like "real estate only goes up", pretty easy to evaluate what will happen soon. So, pay a small rent to the landlord whom will take a staggering huge capital loss. Some homes in CA have been/are dropping in the high five figures per month, an order of magnitude larger than their rent...

Re:This topic is too hot to handle.

[Pontiac]

Well really what happened is the bank gave Joe Foreclosure a loan.. They knew Joe is a bad risk so they bought insurance for that loan from AIG.
Now that loan is 100% guaranteed to pay off so the debt of off my books (balanced by the Insurance policy) repeat over and over again.... Ohh since these loans are fully insured they run out and package bundles of them up as AAA bonds and sell em off to market investors.

This is all fine and dandy, AIG wrote policys out for trillions in mortgages. To bad and they only had the cash to pay on a handful. No big deal they thought.. Home values have only gone up for 30 years..

The the bubble burst.. record numbers of homeowners were defaulting on mortgages. The Banks turned to AIG for the insurance. AIG didn't have the cash..

Now the banks are over leveraged and all those bad loans are wrapped up out there as AAA bonds they are liable for.

Thats why the feds have to keep pumping billions into AIG.. If they fail the policies fail. then the banks fail and the bond market fails..
You know the rest..