The Mortgage Crisis

PLS 480
Greed and Need

Dr. Emerson
Sub Prime Problem

Delinquency rate 2 tenths of 1 % in 1979

Today 2% (10 times higher)

Moyer’s Report
http://www.pbs.org/moyers/journal/071820
08/watch.html
Context: Regulate or Deregulate



Constitution requires
Congress regulate
banks
Congress leaves
regulation to States.
In 1913 FED
authorized by
Congress.
Little Regulation Until New Deal



Unregulated stock
market
Bank’s heavily
invested in stocks
Deposits not insured
Regulation


Glass Steagall Act
FDIC

Security & Exchange
Commission
Freddie Mac/ Fannie Mae

HUD in 1960s

Deregulation



Deregulation of S&Ls
No regulation of
“derivatives”
Mortgages may be
sold in fractions.
Deregulation Continues

Savings/Loan
Scandal

Congress repeals
Glass Steagall Act in
1999.
Federal Reserve Bank Policies




Low interest rates
Sub primes
unregulated
No regulation of
‘innovative financing’
No action regarding
defaults
What is market response?



Over price houses
Piggy back sub primes with regulated ‘primes’
Little or no documentation of house/buyer
GAO Report
 No
piggyback and documentation 0% defaults
 Piggyback
OR little documentation 25-31%
 Piggyback
AND no documentation = 60%
Why No Demands by Lenders?

Don’t know‘decoupling’

If fail then resell at
higher price

Loan is asset not
borrower’s capacity to
repay
Evidence
Mortgage type and loss to homeowner and
investor (Mortgage Banker Association)
 Spillover of Mortgage Subprime to Prime
trends (First American Loan Performance)
 Stock Market Performance (Dow Jones
Industrial Average)
 Jobs (Bureau of Labor Statistics)
 Recover of US (OECD)

Foreclosures By Mortgage Type
Which type serves
mortgage buyer
AND homeowner?
 Difference between
red bar, green and
yellow?

Relationship of Prime
to Sub-prime
Spillover of
subprime default
on prime.
 Top line =subs but
bottom line
=primes

Stock Market Learning Curve
Dips and peaks in
stock market
performance
2000- July 2009
 Prior dip July
2003. Why?

JOBS

Impact of policies
on jobs
(Bureau of Labor Statistics)
Recovery Comparison
US System
Recovery versus
other Industrialized
Democracies
 Red line US vs.
France, Germany
and Japan
(OECD)

Break

Be back in 10 minutes for the analysis
Finish this lecture: (7 groups)
1.
2.
3.
4.
5.
6.
7.
Dem. Capitalist –explain
Dem. Capitalist –policy opt.
Dem. Socialist—explain
Dem. Socialist – policy opt.
Conservatives interpretation
Liberal interpretation
Madison
interpretation/options
Democratic Capitalists Explain

Democratic
Capitalist explain
evidence ---
Democratic Capitalists

Future Policy
Preference

Reasoning
Democratic Socialist

Democratic
Capitalist explain
evidence ---
Democratic Socialist

Future Policy
Preference

Reasoning
Conservative

Interpretation of
Evidence and
Meaning
Liberal

Interpretation
Madison Model
Interpretation/
Explanation
 Policy Options

Conclusion

Justice is the end
of government. It is
the end [purpose]
of civil society. It
ever has and ever
will be pursued
until liberty is lost..
Madison, FP 51
Citations

Alford, Rob (2003). What are the origins of Freddie Mac
and Fannie Mae. Accessed August 28, 2008 at
http://hnn.us/articles/1849.html.

Bitner, Richard (2008). Inside the Subprime Debacle.
U.S. News and World Report. 145 (2) 12.

GAO Report (2007) Briefing to the Committee on
Financial Service, House of Representatives. GPO:
Washington, D. C.
Citations

Jost, Kenneth (2008). Financial Crisis. CQ
Researcher 18(18), 409-422

Phillips, Kevin (2002). Wealth and Democracy.
New York: Random House.

Reynolds, Maura. (2008). Mortgages: Loan
troubles hit new heights: foreclosure rate climbs
to 2% for the 4th quarter. Home equity drop. Los
Angeles Times. C-1.
Q and A
Postscript

Define issue
Use Library Resources, no Wikipedia
(https://blackboard.csupomona.edu/webap
ps/login/)
 See
http://www.csupomona.edu/~library/databa
ses/politicalscience.html

Postscript (cont.)
Use correct APA citations. See:
http://owl.english.purdue.edu/owl/resource
/560/01/
 Looking for: timely, data (e.g. GAO), both
sides of issue.
NOT
http://www.hillbillyreport.com/blog/bear_st
earns//

Postscript (cont.)


Analysis: Freedom, Liberty, Reason and Justice
Conclusions and Opposition argument
Power Point: Common Errors
(http://www.youtube.com/watch?v=HLpjrHzgSRM)
versus
http://www.youtube.com/watch?v=vXFi7AdhhGk&f
eature=related (good example)

Sub-prime
mortgages
The end