“Housing was terrible.” So begins Tim Geithner’s lecture on housing in his new Coursera course, “The Global Financial Crisis.”
Tim Geithner, U.S. Treasury Secretary from 2009 to 2012, explains what the government did to stop the financial panic of 2008 from becoming another Great Depression. (Geithner is quite fond of making comparisons to the Great Depression in the course.)
The two modules in the free Coursera course that Geithner teaches are sort of a play-by-play of how the government saved the world.
I have a new respect of Geithner after watching his lectures. Because he was head of the New York Fed for five years before he became Secretary of Treasury, I had him pegged as a Wall Street guy. I figured his motto must be “Save Wall Street, Save the World.” (My apologizes to the cheerleader in “Heroes”.)
Although, to be fair, Geithner was probably less invested in the success of Wall Street than his immediate predecessor, Henry Paulson, who was CEO of Goldman Sachs for several years before taking over as the head of the U.S. Department of Treasury.
Red line added by me.
Failures Before the Crisis
In the Coursera course, Geithner briefly mentions the origins of the crisis.
Geither’s top cause, “Home equity was too thin.”
Current Failures
In another section, Geithner asks, “How do we balance the imperatives of mortgage accessibility and market stability?”
I’ll translate; “Low down payments make homeownership more affordable but they also make home prices more unstable. How do you handle a policy that increases homeownership slightly but also increases home price instability greatly for all current homeowners?”
He goes on to say on one of his slides, “Should we have mandatory down payment requirements? And how high should those down payments be?”
It seems to me that Geithner thinks we should have mandatory minimum mortgage down payment requirements but he chickens out and doesn’t say so directly.
I wonder what Geithner’s reaction would be to the return of the 3.5% down payment mortgage.
Digression: Minimum Down Payments
Canada has a minimum 5% down payment and that’s one reason why Canadian home prices didn’t crash when ours did.
A 5% minimum down payment in the U.S. would have muted the home price increases during the boom and it would have also muted the number of foreclosures and the home price decreases during the bust. A nice, simple, double-edge price stabilizer.
But that part about “muting home price increases” would be very unpopular in the U.S. It seems the U.S. is in favor of all policies that increase home prices, although they’re often pitched as altruistic, affordable housing policies.
Personally, I’ve never been able to wrap my head around the idea that policies that increase home prices are “affordable housing” policies. But everyone from the banks to affordable housing advocates seem to think that extremely low down payments are good. Meanwhile, Americans spend more and more of their incomes on housing. More expensive homes seem less affordable to me.
Housing Finance Still Broken
In his section on “Unfinished Business,” Geithner’s second item has this unusually blunt statement, “The housing finance system is still broken.”
Moral Hazard of Bailing Out Everyone
I was surprised how self-aware Geithner was about the “moral hazard” of bailing out the irresponsible people who were responsible for creating the financial crisis. Moral hazard seems to be a big concern for Geithner.
His point of view is that in normal times you would let an irresponsible company fail but during a panic you just can’t because each failure ratchets up the panic making controlling the panic even more unlikely and expensive.
Geithner seemed fully aware of the unfairness of bailing out those who created the crisis, unfortunately, that was the only way he thought he could stop the panic. And it probably didn’t hurt that he has was also bailing out the industry and the people he had known for years, Wall Street.
“It cannot be morally responsible to allow depression in the hopes of deterring future risk-taking.”
I’ll translate; “It’s wrong to punish the irresponsible jerks who caused the crisis if that causes the economy to go into a depression.”
“What seems unjust is just.”
Bailing Out Everyone… except Homeowners
Another surprise to me was Geithner’s regret over not being able to save homeowners in the same way they saved finance and Wall Street.
Geithner seemed pretty proud of his accomplishments in the crisis, except for housing.
He lists proposed housing policies that would have helped homeowners but which didn’t get implemented. He complains that Congress didn’t create the programs or give the agencies the powers they needed and, by the way, debt forgiveness for homeowners would have been very expensive.
His top non-approved proposal was to treat mortgage debt like other debt in bankruptcy courts which would allow federal judges to reduce the mortgage debt during bankruptcy, AKA “cramdowns.” The fact that twice they couldn’t pass such a difficult-to-abuse policy – you have to be going through bankruptcy, after all – makes me sympathetic to Geithner’s complaint.
Foreclosures are what killed home prices. Anything that lowered the number of foreclosures would have lowered the downward pressure on home prices. Allowing mortgage debt reduction in bankruptcy wouldn’t have lowered the number of foreclosures a ton, there weren’t a ton of bankruptcies, but it would have had some impact.
Punish The Little Guy
My pet peeve about the housing bust was that the banks and Fannie and Freddie would foreclose on people and sell their homes for an amount many of those foreclosed homeowners would have been willing and able to pay for the house! But lenders preferred to foreclose instead of renegotiate the mortgage debt.
So millions of additional foreclosures hit the market further tanking home prices. In addition, those foreclosed upon homeowners were put in a penalty box and couldn’t get new mortgages for years which lowered demand.
I assume the bank and government thinking at the time was, “If we bail out one homeowner, they’ll all demand to get bailed out and that would be too expensive.”
Unlike with the financial institutions, it seems the goal here was to punish homeowners even if it made the banks worse off by increasing the number of foreclosures and thereby lowering home prices even more.
It seemed, for whatever reason, that what I’ll call the Geithner Rule, ‘Ya gotta bail out everybody to save the world’ wasn’t applied much in housing.
And remember, many of the mortgages the banks foreclosed on were guaranteed. The foreclosing banks didn’t absorb the majority of those losses.
Too bad there weren’t guarantee programs for homeowners as well as for bankers.
Residuals
I have a lot of new respect for Tim Geithner after watching his two modules on the Coursera course, “The Global Financial Crisis.”
However, he worked for the Fed before becoming Treasury Secretary so, unsurprisingly, Geithner doesn’t mention as a cause of the real estate boom that the Fed kept interest rates too low, too long in 2002-2004. Those low adjustable rate mortgage rates enabled a lot more money to chase homes and home prices took off.
Today, it’s easy to see why many Americans feel the system is unfair. All the bad actors on Wall Street got bailed out but responsible home buyers whose only mistake was buying in 2005, 2006, 2007 or 2008 didn’t.
Millions of Americans are still underwater on their homes after making monthly payments for 10 years! That’s gotta hurt.
It could even make people have bad feelings toward the political establishment of both political parties.
Conclusion
“The housing finance system is still broken.”
– Timothy Geithner
Here’s Geithner’s short “Conclusion” lecture.
###
Note: All the quotes in the graphics were take from the transcript of the Coursera course, “The Global Financial Crisis,” however, I created the headings above the quotes. The other graphics are taken directly from the course slides.
16 Responses to Tim Geithner’s Class on Financial Crisis – Housing
Great article. Very easy to grasp from an “average person” perspective. I especially like how you pointed out the ridiculousness of banks foreclosing on owners rather that allowing them to renegotiate their loan, causing ripples of destruction spreading far and wide.
While I do understand what was at stake during the financial crises, I just don’t understand why it wasn’t prevented. Was there no one on Wall Street etc. willing to speak up?
I grew up with a couple who had a custom home building business that they started alone and broke their backs for. By 2005 theye couldn’t build them fast enough and had more work than they could handle-Not surprising in the Phoenix area at the time. I kept saying that the rise of home prices was not sustainable – with $90,000 houses going for $250,000 to $500,000. His reply was that with so much undeveloped land in the Valley it would continue. He was wrong and they lost everything.
If I could see that the, “If you have a pulse, you qualify” type loans couldn’t continue, WHY wasn’t someone who was in a position to do so, stop this? I’ve been “house poor” and at first it’s ok but 5-8 months in having no money to do anything but sit in the house that is taking 70% of your income gets tiresome. Of course I’m hardly alone in knowing this “bubble would burst” but truly where were the checks to balance out the greed?
Great comment! Thanks.
First of all, I’m so sorry your friends lost everything in the real estate bust. I guess their only consolation might be that they certainly were not alone.
“I just don’t understand why it wasn’t prevented.” That’s the big question!
Geithner barely touches the issue. I think he thinks it’s a divisive subject and the best he can do is to emphasize that the mortgage finance system is still broken and that we haven’t made enough changes to prevent future preventable real estate bubbles.
A lot of it is this; “It is difficult to get a man to understand something, when his salary depends on his not understanding it,” Upton Sinclair.
The whole real estate industrial complex got wrapped up in the mania. Some could see that it was nuts but no one said, “Stop the music!” since they were making so much money.
In the summer of 2004, I thought prices were too high and advised a client against buying a particular home. By Christmas I was so glad I didn’t talk those clients out of overpaying $4K for their home because the home was worth a lot more than they “overpaid” just 5 months earlier. I realized I didn’t know what the hell was happening in the market. During the first 6 months of 2005, prices went up $10K per month in Phoenix.
I remember reading an interview with a mortgage executive after the bust who said something along the lines of, “We knew homes were way overpriced but what were we to do? Shut down the business for a few years until prices corrected?”
Looking further back, one school of thought gives partial blame to “affordable housing.” From the banks to the affordable housing advocates, everyone thought that anything that made it easier to buy a home was a good thing. Politically, the affordable housing movement got a big push under Clinton and Bush had a slogan, “Ownership Society” so he also supported pretty much anything to make it easier to buy a home. That was the justification for the explosion of subprime loans. They all thought there was negligible risk with subprime loans and they were making the world a better place.
Although the justification for the lower and lower lending standards was to make housing affordable for low and moderate income people, the boom really took off when middle class Americans started using subprime loans. They could borrow more money to buy homes and, more importantly, they could afford to bid up home prices.
Another big factor was that the Federal Reserve lowered the Fed rate too low for too long. The Fed rate has little impact on the 30 year fixed mortgage rate but it has a huge impact on adjustable rate mortgages. Adjustable rate mortgages when from something like 5% to 40% of all mortgages and by switching to adjustable rate mortgages people could borrow up to about 50% more money to bid up home prices.
One more factor. Some people predicted a real estate bubble as early as 2002. Home prices kept skyrocketing and the bubble people were totally discredited. “They’ve been saying it was a bubble for years and look what’s happened to prices. They’re cranks. I bet you wish you bought back in 2002. If you don’t buy a home now, you may never be able to buy a home for the rest of your life.”
There were a lot of other factors.
But why wasn’t it prevented, I think a lot of it gets down to, there were economic incentives to ignore and increase the danger and no economic incentives to defuse the danger.
Don’t forget the power of the herd instinct. Before 2006, those who said publically that it was a bubble were belittled by the banking and real estate industry. There was no money to be made in saying it was a bubble, so why do it? Your voice would be drowned out by the voices of those with an economic interest in the status quo.
Wow, this is loong! I’ll use it as a first draft for a future post sometime.
[…] 1. Review of Geithner’s Coursera course on the financial crisis. […]
Foreclosing and selling for an amount the original homeowner would have been willing to pay may seem odd, but there’s actually logic behind it. The problem here is that renegotiating the mortgage to lower the principal is *not* the same thing as being paid the full amount in cash by a new buyer. And most of those banks desperately needed cash ASAP.
interesting wrinkle! So if the mortgage is for $200K and they foreclose and get $100K at the foreclosure auction, there is an advantage to the banks to doing that versus renegotiating the mortgage down to $100K. Is that right? Where can I learn more about that?
Nice, lucid article. But the 12-zillion pound gorilla that’s not mentioned here is disparate impact. Sure, a “5% minimum down payment in the U.S.” seems a perfectly sound and reasonable idea, until you hit the brick-wall realization that this would then preclude x% of ethnicity A or B from getting a mortgage, while presenting little or no problem for ethnicity C or D. So whichever body introduced any such 5% requirement would be exposing itself to lawsuits and race-hustler shakedowns. So, “How do we balance the imperatives of mortgage accessibility and market stability?” Any objectively fair way will invariably run into disparate impact, so from what I can see there’s no solution in sight; this problem will continue to occur ad infinitum, since no one is willing to implement a system that’s actually based how likely it is that a buyer will be able to pay off his debt, as any such system would be politically radioactive.
To the degree that low down payment mortgages cluster in low and moderate income neighborhoods and given that low and moderate income households have less wealth to begin with, during a real estate bust the disparate impact would be even larger declines in home prices for all homeowners in those neighborhoods (and not just those homeowners will little equity) and an even more devastating destruction of household wealth.
Therefore, extremely low down payment mortgages exploit the poor and damage the stability of low and moderate income neighborhoods in the long run.
If you ignore the fact that real estate booms and busts happen about every 10 years then those policies aren’t as bad.
However, if we want to use homeownership as a tool for wealth creation for low and moderate income families, we should take into account how the real world works and how affordable housing policies impact wealth creation in those neighborhoods in the long term.
In the poorest neighborhoods of Phoenix, during the bust, home prices fell 80%. Amazing wealth destruction among the families who can least afford it!
He fails to acknowledge that central banks the world over treated “mortgages” and MBS indiscriminately as risk-free per Basel II. That as much as anything contributed to the problem. If Freddie Fraud’s subprime mortgage yielding 9% and Mark Zuckerberg’s jumbo yielding 1% are both risk-free to regulators, then regulated lenders are going to tell their loan officers “make more loans to Freddy Frauds”!
Good point!
[…] Tim Geithner’s Class on Financial Crisis Real Estate Decoded. Forget the somewhat naive review. This Coursera course Geithner is teaching on the financial crisis is appalling. For example, he claims that his “top non-approved proposal” was to institute cram-down for mortgage borrowers, when his Treasury Department openly lobbied Congressional offices against it, and when he said explicitly in his own book “I didn’t think cram-down was a particularly wise or effective strategy.” It’s almost sociopathic to so nonchalantly tell bold-faced lies under the guise of a lecture to students. And that’s just one of many in this CYA bullshit, where Geithner tries to blame everyone but himself for valuing bank balance sheets over homeowners. […]
“I wonder what Geithner’s reaction would be to the return of the 3.5% down payment mortgage.”
Perhaps it’s only my region of the country (midwest), but the 3.5% down payment returned here more than three years ago. In fact, I just saw an advert in my parent’s neighborhood yesterday (Feb 28) offering the infamous 100% Financing Available. Note that this advert was tied to a USDA loan, not an FHA or military loan. Nevertheless, easy-money loans will sneak back into the entire country again at some point….maybe just in a different disguise.
I’m sure USDA would fall on its sword before giving up their mortgage programs because of the political support they get for the entire agency from the mortgage programs. But I imagine that when Geithner says “The housing finance system is still broken,” that he’s referring in part to the hodgepodge of government mortgage programs competing against each other. To some degree you get this “race to the bottom” effect where the programs try to outdo each other and grow by having (riskier) loans the other programs don’t have… yet.
“His top non-approved proposal was to treat mortgage debt like other debt in bankruptcy courts which would allow federal judges to reduce the mortgage debt during bankruptcy, AKA “cramdowns.”
This a blatant lie from Geithner. He strongly opposed cramdown within the administration and lobbied Congress against it. https://www.propublica.org/article/dems-obama-broke-pledge-to-force-banks-to-help-homeowners
In his own memoir of the crisis Geithner dismissed the efficacy of cramdown. http://blogs.wsj.com/economics/2014/05/13/geithner-we-didnt-have-great-options-on-housing-relief/
Geithner is astonishing in his utter shamelessnes and any journalist who takes anything he says as truthful without thoroughly researching the facts is incompetent.
From the course summary.
“The only reliable predictor of financial crises is an increase in leverage in the overall economy… It is accompanied by a housing boom, which has been present in every major financial crisis in large industrialized economies since World War II.
Summary of the Global Financial Crisis in 12:55. https://www.coursera.org/learn/global-financial-crisis/lecture/3roEO/course-summary
[…] and addictions short of death; we see it in the director of the 2008-2009 bailouts, who laments that the wicked could not be punished without hurting the innocent more; we see it in […]
Geithner and his co-teacher just came out with a Q and A session with questions from students. It’s a good way to get a better feel where they were coming from and where they are now. https://www.coursera.org/learn/global-financial-crisis/lecture/Xms49/question-and-answer
Comments are closed.