Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming

Got it.  

no. sorry. you can not blame the borrower. at all. The whole point of being a lender is to make sure you are lending responsibly. 

Banks making reckless loans was the problem. Pretty obviously.

Ridiculous. The borrowers were adults, with agency and the ability to reason.  Your infantilization of them is insulting.

There is a general practice of having higher-risk borrowers pay more money on their loans (via higher interest rates, additional 'insurance' payments, etc.) than lower-risk borrowers. 

The banks know these are higher-risk borrowers... but instead of either denying higher-risk borrowers a loan in the first place, or providing them with smaller loans with similar terms to those who are more financially secure, the banks play this game of financial penalties with those who can least afford them. This does not encourage movement towards a more stable financial future for these high-risk borrowers, but instead incentivizes, or financially drives, them to default.

drummerboy said:

no. sorry. you can not blame the borrower. at all. The whole point of being a lender is to make sure you are lending responsibly. 

Banks making reckless loans was the problem. Pretty obviously.

drummerboy - Can the borrower be blamed at all in this case: 

A father buys a house for his daughter to live in with her family. This is a summer home. After about a year the father sells the house to his daughter making $100,000 on the transaction. Daughter obtains mortgage with hardly anything down. Daughter illegally converts a 4 bedroom home to an 8 bedroom home, in order to rent out to college students during the winter (university is one mile away.)  Daughter puts house on market with asking price $600,000 above what she paid father, advertising it as having 8 bedrooms. City learns of illegal conversion to 8 bedrooms and tells daughter to restore house back to 4 bedrooms. Daughter can't get her asking price and walks away from house. Father ends up with $100,000 profit and daughter lived in house for three summers with hardly any down payment. Daughter and family  live with parents in summer, whose house is on same block. Bank is stuck with house since this all occurred during the boom-bust cycle. 

Why would a bank provide a "mortgage with hardly anything down."????

If a person has little money available, and little invested in the property, then they are a 'high-risk borrower'.

Traditional 20% down was developed to ensure the borrower had a financial investment in the house. I.e., they will lose something substantial if they walk away.

The bank gave the daughter free money with nothing to lose.  Bank's fault.

cramer said:

sprout said:

cramer said:

drummerboy said:

Someone will have to explain this one to me:




"The zero interest-rate policy broke the social contract for generations
of hardworking Americans who saved for retirement, only to find their
savings are not nearly enough"

While I do believe there is a retirement crisis looming, I don't see how it is directly tied to low interest rates. The vast majority of retirement accounts are tied to the market, which has rebounded very well.

There is a very large percentage of seniors who don't want to take any risk at all with their savings and depended on CD's, Treasury Bills, interest paid on savings accounts, etc., who have been decimated with zero interest rates. These are people who saved, didn't use their houses as ATMs, and thought that they had saved enough to be able to live comfortably in their senior years. They have been the ones that have been most hurt by the reckless ways of Wall St. and those individuals who used their houses as ATM's and bought houses with low-doc or no doc mortgages. Wall St. was bailed out as were many of the individuals who played the system. The seniors who saved are hurting.

401Ks were decimated in the crash (and without new money going in, it takes many more-folds of increases to make up for previous decreases). Interest policy would have either hurt seniors with CDs and saving accounts, or seniors who needed to sell their house to have money to move into other living arrangements that met their needs.

Since the pension lifeboats are gone, there is no 'social contract for generations of hardworking Americans'. It's just luck of the draw whether your financial choices end up being on the side that gets more pounded, or less pounded, by the unpredictability inherent in the capitalist financial system.

sprout - This time, the zero interest policy has been in effect for 8 years. Yes, it did accomplish what it was intended to do, and caused a gigantic bull market off the lows.  Let's see what happens now that the Fed. has started to raise rates.

CDs and bank Interest rates rarely outpace inflation, which has remained low   

In other words, CDs and bank accounts have always been a ad idea  

sprout said:

Why would a bank provide a "mortgage with hardly anything down."????

If a person has little money available, and little invested in the property, then they are a 'high-risk borrower'.

Traditional 20% down was developed to ensure the borrower had a financial investment in the house. I.e., they will lose something substantial if they walk away.

The bank gave the daughter free money with nothing to lose.  Bank's fault.

"Another big issue was the lack of a down payment in the most recent
boom.  Back when, it was common to put down 10-20 percent when you
purchased a home.  In the last few years, it was increasingly common to
put down five percent or even nothing.  In fact, zero down financing
was all the rage because banks and borrowers could rely on home price
appreciation to keep the notion of a home as an investment viable.

However, it wasn’t long before prices began to peak and eventually
fall, causing all types of problems for borrowers with little or no
equity in their homes.  Those that purchased with zero down simply chose
to walk away, as they really had no skin in the game, nothing to keep
them there.  Sure they’ll get a big ding on their credit report, but it
beats losing a whole lot of money.  Conversely, those with equity would
certainly put up more of a fight to keep their home." 

http://www.thetruthaboutmortgage.com/what-caused-the-mortgage-crisis/

Woot - I would direct you to the article cited by DaveSchmidt:

DaveSchmidt said:

Still not finding a breakdown in my searches, but did come across this:
How Low Interest Rates Are Impacting Retirees



I don't know that Burry is saying that this itself is a looming crisis -- rather, that it has caused pain for enough retirees to be worth mentioning.

"Another big issue was the lack of a down payment in the most recent 
boom.  Back when, it was common to put down 10-20 percent when you 
purchased a home.  In the last few years, it was increasingly common to 
put down five percent or even nothing.  In fact, zero down financing
was all the rage because banks and borrowers could rely on home price 
appreciation to keep the notion of a home as an investment viable.

However, it wasn’t long before prices began to peak and eventually 
fall, causing all types of problems for borrowers with little or no 
equity in their homes.  Those that purchased with zero down simply chose
to walk away, as they really had no skin in the game, nothing to keep 
them there.  Sure they’ll get a big ding on their credit report, but it 
beats losing a whole lot of money.  Conversely, those with equity would 
certainly put up more of a fight to keep their home." 

http://www.thetruthaboutmortgage.com/what-caused-the-mortgage-crisis/

Exactly. The banks played the default game because the assumption was that "banks and borrowers could rely on home price appreciation to keep the notion of a home as an investment viable."

As demonstrated, this assumption was not a viable one. Previously, banks were fine with defaults because they would get back the property... and assumed it would hold or increase its value. 

The incorrect assumption that property would maintain or keep increasing in value is one that the banks need to take responsibility for since they used it as a basis of their lending calculations. I don't expect borrowers to have the probabilities of market corrections on hand.

Haven't finished reading through the entire thread but personal experience is that man people saving for retirement have been pounded. I just want to find a safe place to make 4% interest. Is that too much to ask? Apparently so. My broker says 4% interest is what one can expect in the market with a broker making 1%. So half bonds, half stocks, and dividends and appreciation brings us to 4%. So how much $$ does someone have to risk to make even 20K per year in retirement -- 500K? 20K plus social security for a close to the bone retirement. Yes, zero interest hurts.

I was a higher risk borrower because I was a freelancer with unpredictable income. For our first apartment, I provided 20% down and had a higher interest rate. After some years of paying on time, I earned the right to have a slightly lower interest rate. That is the way it should be.

When banks are no longer required to hold as much money in reserve, it automatically increases greedy behavior. Wall Street is like a kindergarten. Do we really offer children candy for lunch and expect them to ask for vegetables. Dig in folks. Eat up. Don't expect Wall Street to police itself. Greed is the nature of things because there isn't enough accountability. Make your profit and scram. No problem. Play the system. No problem.   

In the early 2000s my brother called me and said, sell your house. There's going to be a housing collapse. They've changed the rules. Banks don't have to hold as much money in reserve. A large percentage of the mortgages in San Diego are interest only. If this is what's happening, it will implode. I said, I can't. I live here. But he was right, he was just 4 years too early. It wasn't like people didn't see what was happening.

breal said:

Ridiculous. The borrowers were adults, with agency and the ability to reason.  Your infantilization of them is insulting.

it's you who are infantilizing the bankers. It's their job to make sure they make money on the loans they make. Vetting the borrower is their most important freaking job. And they failed.

Of course, since they made money on the loans not by ensuring they were paid back but instead by just turning them into mortgage backed securities, the original lender could give a sh** whether they were paid back or not.

cramer said:

drummerboy said:

no. sorry. you can not blame the borrower. at all. The whole point of being a lender is to make sure you are lending responsibly. 

Banks making reckless loans was the problem. Pretty obviously.

drummerboy - Can the borrower be blamed at all in this case: 

A father buys a house for his daughter to live in with her family. This is a summer home. After about a year the father sells the house to his daughter making $100,000 on the transaction. Daughter obtains mortgage with hardly anything down. Daughter illegally converts a 4 bedroom home to an 8 bedroom home, in order to rent out to college students during the winter (university is one mile away.)  Daughter puts house on market with asking price $600,000 above what she paid father, advertising it as having 8 bedrooms. City learns of illegal conversion to 8 bedrooms and tells daughter to restore house back to 4 bedrooms. Daughter can't get her asking price and walks away from house. Father ends up with $100,000 profit and daughter lived in house for three summers with hardly any down payment. Daughter and family  live with parents in summer, whose house is on same block. Bank is stuck with house since this all occurred during the boom-bust cycle. 

cramer,

Really? You just described a one in a million situation.

You can pick any single scenario you want to lay blame on the borrower. We're talking about the vast majority of cases. How anyone, at this late date, can still blame the borrower is just beyond belief.

individual borrowers are personally responsible for their own circumstances, whether that be bankruptcy or foreclosure.

But a complete catastrophic failure of the financial system is the responsibility of the institutions that allowed it to happen.  It's not possible for one or one hundred or one thousand or even one hundred thousand irresponsible borrowers to crater the whole system.  That takes malfeasance or misfeasance at a systemic level, which no individual borrower has any control over.  That sort of financial catastrophe can only happen if the institutions have taken on more risk than they can manage.

ml1 said:

individual borrowers are personally responsible for their own circumstances, whether that be bankruptcy or foreclosure.

But a complete catastrophic failure of the financial system is the responsibility of the institutions that allowed it to happen.  It's not possible for one or one hundred or one thousand or even one hundred thousand irresponsible borrowers to crater the whole system.  That takes malfeasance or misfeasance at a systemic level, which no individual borrower has any control over.  That sort of financial catastrophe can only happen if the institutions have taken on more risk than they can manage.

Well stated.  It was not my intention to suggest that individual borrowers were responsible for the financial collapse.  

cramer said:

ml1 said:

individual borrowers are personally responsible for their own circumstances, whether that be bankruptcy or foreclosure.

But a complete catastrophic failure of the financial system is the responsibility of the institutions that allowed it to happen.  It's not possible for one or one hundred or one thousand or even one hundred thousand irresponsible borrowers to crater the whole system.  That takes malfeasance or misfeasance at a systemic level, which no individual borrower has any control over.  That sort of financial catastrophe can only happen if the institutions have taken on more risk than they can manage.

Well stated.  It was not my intention to suggest that individual borrowers were responsible for the financial collapse.  

Burry seems to be saying that.  Unless I'm misreading his statement that a lack of "personal responsibility" caused the crash.

ml1 said:

cramer said:

ml1 said:

individual borrowers are personally responsible for their own circumstances, whether that be bankruptcy or foreclosure.

But a complete catastrophic failure of the financial system is the responsibility of the institutions that allowed it to happen.  It's not possible for one or one hundred or one thousand or even one hundred thousand irresponsible borrowers to crater the whole system.  That takes malfeasance or misfeasance at a systemic level, which no individual borrower has any control over.  That sort of financial catastrophe can only happen if the institutions have taken on more risk than they can manage.

Well stated.  It was not my intention to suggest that individual borrowers were responsible for the financial collapse.  

Burry seems to be saying that.  Unless I'm misreading his statement that a lack of "personal responsibility" caused the crash.

My understanding is that a lack of responsibility did play a big role. Institutionally, the lenders relied on the false beliefs that the wizkids had invented such a sophisticated portfolio management technique by putting together instruments of various risk profiles, and then hedging those, to boot, that a major downside was no longer likely. The process involved the sale of the mortgage instruments almost as soon as they were signed. So the banks and lending entities that entered into the mortgages  with the actual borrowers were not the holders of those mortgages. So, they really had no risk and so no reason to be concerned about the borrowers credit worthiness, since they sold the mortgages immediately and thus were no longer involved. The buyers of those mortgages in the secondary market believed they had sophisticated risk identification models that let them pair debt instruments of higher risk with those of lower risk to create a relatively safe portfolio, and then "insured" their product by hedging it. So, in  a sense, no one felt responsible for looking closely at the credit risk behind these transactions. In the meantime, as wealth was growing in the developing countries, especially the Tiger economies, a great deal of cash was looking for a home that had good returns, and seemed much safer that keeping it at home. So there was a high demand for these instruments, which in turn, created an incentive to attract "iffy" lenders by all concerned. All that in an environment of short term focus - quarter to quarter. Compare that to the old fashioned idea of your local bank holding on to your mortgage for it's life and thus caring greatly about your creditworthiness. 

Having said all that - I don't think the Fed has had any choice on interest rates, since we no longer use fiscal policy to manage the economy, the Fed was the only game in town to deal with the recession. Without the zero-like rate, and the QE liquidity flows, we would still be looking at horrific unemployment. 

Having said that - I agree that the financial regulatory environment is woefully inadequate and I agree with Bernie Sanders (which surprises me) about Glass Steigel and also about breaking up the large "banks". 

BTW - thank God that the Fed is not an elected body! All we need is for the 1% to control that more directly too! 

it was a lack of corporate responsibility more than a lack of personal responsibility that caused the catastrophe.

ml1 said:

it was a lack of corporate responsibility more than a lack of personal responsibility that caused the catastrophe.

This.  Some borrowers did exacerbate the situation by taking advantage of it. 

Why isn't it a requirement that the institution that vets the loan, is liable if the borrower defaults.  The profit and the risk should stay married. 

Setting aside the ramifications to eliminating the secondary market, why should a bank be liable for a default ten years down the line if it sold the loan in good standing five years prior (and his five years after vetting it)?  Alternatively, why should it be required to hold loans to term?

For the reading pleasure of anyone looking to delve into this tangled web:

http://upstart.bizjournals.com/news-markets/national-news/portfolio/2008/11/11/the-end-of-wall-streets-boom.html?page=all

Five to ten years out wasn't the issue, though. In many cases defaults happened the moment the teaser rate expired... and there were cases of defaulting on the first payment.

I'd not require the issuer hold the note to term, but I think you have to acknowledge the disconnect inherent in selling the loan immediately after writing it. The bank doing that has essentially zero risk. Were the makers/sellers of those loans defrauding or misleading the buyers in the secondary market?

ctrzaska said:

Setting aside the ramifications to eliminating the secondary market, why should a bank be liable for a default ten years down the line if it sold the loan in good standing five years prior (and his five years after vetting it)?  Alternatively, why should it be required to hold loans to term?

And let us not forget how much of this junk was granted AAA ratings.

The people involved in the underwriting, securitization, secondary markets and ratings did this work all day, every day, for rather significant salaries.  To say that these experts were somehow hoodwinked by ordinary home buyers is preposterous.

tom said:

And let us not forget how much of this junk was granted AAA ratings.

The people involved in the underwriting, securitization, secondary markets and ratings did this work all day, every day, for rather significant salaries.  To say that these experts were somehow hoodwinked by ordinary home buyers is preposterous.

Thank you. It was a scam. A legal scam. Many of us were watching and waiting for it to implode, and it just didn't, for a very long time.

If you are suggesting that the buyers had no idea that, if they borrowed money, they would have to pay it back, then I don't believe you.

Saw the movie yesterday. I am even more infuriated than I was before.

There should be a law that the institution that creates the mortgage must hold on to it for 24 months.

ctrzaska said:

For the reading pleasure of anyone looking to delve into this tangled web:

http://upstart.bizjournals.com/news-markets/national-news/portfolio/2008/11/11/the-end-of-wall-streets-boom.html?page=all

ctrzsaka  - I remember that  at the time you and I  admired Meredith Whitney, and that Wall Street hated her. She was a one- call wonder. In 2010, on 60 Minutes, she made one of the worst calls in recent history. She said that within 12 months there would be 50-100, even more, sizable municipal bond defaults amounting to hundreds of billions of dollars. Because she had gained such prominence and influence due to her prior call, she caused panic among individual investors who sold almost at any price. It was a gigantic buying opportunity. 

gerardryan said:

Five to ten years out wasn't the issue, though. In many cases defaults happened the moment the teaser rate expired... and there were cases of defaulting on the first payment.

I'd not require the issuer hold the note to term, but I think you have to acknowledge the disconnect inherent in selling the loan immediately after writing it. The bank doing that has essentially zero risk. Were the makers/sellers of those loans defrauding or misleading the buyers in the secondary market?

ctrzaska said:

Setting aside the ramifications to eliminating the secondary market, why should a bank be liable for a default ten years down the line if it sold the loan in good standing five years prior (and his five years after vetting it)?  Alternatively, why should it be required to hold loans to term?

Of course there's a disconnect.  And while I think that a permanent hold  is unrealistic on a few levels, I've no issue with a mandatory hold period of up to 1-3 years or so.  As to your question, it depends on each case: what was disclosed to the buyer, what was not and whether it should have been, what ratings were assigned and whether the seller had any influence on them, what due diligence was performed, etc. etc.