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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."
That is one of the most fantastic explanations ever offered, and by an AC no less.
A more in-depth explanation for those who want more than 2 words:
1. A mortgage broker knows more about mortgages than your typical homeowner, and uses that advantage to sell a bad deal to said homeowner. The reasons it's a bad deal are buried in the fine print that would take a real-estate attorney to sort out (which a typical sub-prime borrower couldn't afford). The mortgage broker promptly collects the commission.
2. The mortgage company that the broker works for builds a security that nobody really understands that effectively hides the bad loan that the broker gave out. They work with the security rating agencies to make sure it has a good rating even if it shouldn't. Once someone buys the security, the mortgage company has its profits and no risks.
In other words, every step of the way the mortgage brokerage has more information than any other party, and uses that to screw over borrowers and investors.
I am officially gone from
I was contracting at a mortgage company from Summer 2006 to Summer 2007, working on a model to predict mortgage behavior (and watching the office getting emptier and emptier). A few observations.
Why, in the name of the FSM, did my data have "stated income" as a yes-or-no field? Nobody sane would make a major loan to somebody who couldn't even verify his or her income, unless they had absolutely no concern about whether it would be paid. Nobody sane would purchase such a loan from a broker. There was no federal regulation saying "You have to make loans to indigent liars" that I know of.
We had several projections of housing prices. The number of them that showed any sort of decline? A bit less than one. It wasn't that nobody was talking about a bubble, either.
What I saw was idiotic, short-sighted, greed, laid out in 1s and 0s. This had nothing to do with any sort of pressure, other than for the quick buck right now.
"When you have eliminated the unacceptable, whatever is left, however improbable, must be the truthiness" - Holmes
the galactic insanity of the CRA
Whether the CRA was a good idea or not might be up for debate, but if "galactic insanity" implies that it was operating at a scale necessary to be a real driver of the crisis, there are significant indications you're wrong.
Consider, for starters, these statistics:
"Federal Reserve Board data show that:
* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions...
* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics."
There are a number of other relevant resources (such as those posted elsewhere in this discussion and in my comment history) which also examine the idea that the CRA was a significant cause of the current problems. The data seems to indicate that not only were CRA loans not any significant portion of problematic loans, they're actually turning out better than comparable private loans.
Tweet, tweet.