In this case, the default rate of subprime loans was assumed to be the same as it always was.

But I assure you, it was not related to some kind of mendacious conspiracy on the loan-writing level. It was a miscalculation of risk. It's a simple run on the bank.

Did the default rate climb because of changing market conditions, or because the risk of the loans were deliberately being mischaracterized? I think it's some of both.

[link]

So what are folks up to this weekend?

Tonight: Sing at Maundy Thursday service at my church.

Tomorrow: Stay home with AB, whose daycare is closed

Saturday: Get hair cut and colored

Sunday: Easter music marathon! (3 services, first beginning at 7 a.m.), followed by yummy Easter dinner celebrating end of our semi-vegetarian Lent with ham

So high-risk mortgages get packaged up and sold as AAA securities, with no mendaciousness involved? Huh. How about that.

That's correct. You'll have to give me a little more evidence that either loans were fraudulently bundled or that they were fraudulently rated.

I think there were failings. (I'll let you decide to what extent they were "moral" failings.) We used to have regulatory structures to prevent this sort of thing: many of them were repealed under Clinton, and further weakened under Bush. Too much market worship. Too much, "he governs best who governs least". Bankers and financial markets need tough regulation; weakening those regulations is never good for anybody, including the banks and financial institutions.

First, you should probably state which regulation you mean that would prevent this. Is it Glass Steagall? Second, SOX was really supposed to change things, right? No more market corrections? Third, do you really think we can make markets riskless through regulation? Fourth, what regulation could prevent what happened here?

But there was also a fair amount done wrong. Not verifying employment -- or anything else in the low-doc or no-doc area -- makes it easier for the broker or the borrower to puff or outright lie. Telling a borrower not to worry about the interest rate going up at the end of the teaser period because the home will be worth more, and the borrower can refinance, contains the pretty shortsighted (or at the least, risky) assumption that current conditions will last forever when they don't. Asking a borrower to pay only interest for so many years without worrying about whether the borrower will be able to handle payments when it's time to start paying back the principal runs the same risk of payment shock.

We can argue about how widespread all this was. And I'd be more inclined to talk about herd mentalities or stupidity or shortsightedness than a conspiracy. But a simple miscalculation of risk leaves out the point that a lot of pretty risky things were going on. Things that might have a place in some cases but seem to have become a lot more popular.

Aargh! I just lost $80 cash. I went to the ATM, got $100, bought lunch, and tucked the rest (stupid, stupid) in between my pantyhose and skirt. And now it is gone! Grrr.

That's an economic crisis of another kind, Sophia. God, that sucks.

Oh, Sophia, that sucks! I know you're always on a short margin with money anyway.

ack! hateful.

I know that TMZ likes to think that they're funny, but I think that it is really tasteless to say that a suicide victim who hanged himself was "on the ropes" after a messy divorce.

Lately, I've been reading the Irvine Housing Blog to catch up on what's what in the housing bubble burst. Today's entry directly addresses what y'all are talking about:

This situation is the result of declining home prices; the declining home prices are a direct result of the unsustainable price levels created during the bubble rally; the unsustainable price levels were created by widespread use of 100% financing and the elimination of lending standards

Yesterday's entry follows a foreclosed home that is truly a "WTF were these people thinking of?" situation:

Today’s sellers owe more than $1,214,500 on a house they purchased in 1981 for $265,000.

Can you believe that? After 27 years of ownership, they should have almost completely paid off a 30-year fixed rate mortgage and be looking forward to having a $1,000,000 for their retirement. Instead, they have nothing, nada, zero. They have refinanced themselves into oblivion; either that, or they are have exercised their mortgage “put” option.

Today’s sellers first step to the Dark Side came in 2002 when they refinanced for $450,000. Apparently, the lure of free money was too much for them so they refinanced again in 2006 for $1,175,000. Finally, their journey to the Dark Side was complete in 2007 when they took out an Option ARM for $1,000,000 and a stand-alone second for $214,500.

Even if these sellers get their sales price (this is borderline WTF,) they get $1,221,060 after a 6% commission. Anyone want to guess what the outstanding loan balances total up to? It sure looks like they will sell for a $1,000,000 gain, and they will not get a penny at the closing table. Amazing.

I feel confident in saying that guy is a dick.

And that he likely behaved dickishly (we can debate whether his failings were moral failings) in that file.