Subprime mortgages and the financial crisis

first_img 4SHARESShareShareSharePrintMailGooglePinterestDiggRedditStumbleuponDeliciousBufferTumblr,Jordan van Rijn Jordan is Senior Economist for the Credit Union National Association (CUNA) and has nearly 10 years of experience in economic development, microfinance and economic research in Latin America, Africa, Southeast … Web: www.cuna.org Details CUNA economists often report on the wide-ranging financial and social benefits of credit unions’ not for-profit, cooperative structure for both members and nonmembers, including financial education and better interest rates. However, there’s another important benefit of the unique credit union structure: economic and financial stability. During the 2007-2009 financial crisis, credit unions significantly outperformed banks by almost every possible measure. In fact, evidence suggests that if credit unions ruled the market, it’s quite likely we never would have had a financial crisis. What’s the evidence to support such a claim? First, numerous complex and interrelated factors caused the financial crisis, and blame has been assigned to various actors, including regulators, credit agencies, government housing policies, consumers, and financial institutions. But almost everyone agrees the main proximate causes of the crisis were the rise in subprime mortgage lending and the increase in housing speculation, which led to a housing bubble that eventually burst. As home values plummeted and the stock market crashed, the U.S. entered a deep recession, with nearly nine million jobs lost during 2008 and 2009. Who engaged in this subprime lending that fueled the crisis? While “subprime” isn’t easily defined, it’s generally understood as characterizing particularly risky loans with interest rates that are well above market rates. These might include loans to borrowers who have a previous record of delinquency, low credit scores, and/or a particularly high debt-to-income ratio. To be clear: Not all subprime lending is bad. Many credit unions take pride in offering subprime loans to disadvantaged communities. However, the particularly large rise in subprime lending that led to the financial crisis was certainly not this type of mission-driven subprime lending.Run-up to the crisis Using Home Mortgage Disclosure Act (HMDA) data to identify subprime mortgages—those with interest rates more than three percentage points above the Treasury yield for a comparable maturity at the time of origination—we find that in 2006, immediately before the financial crisis:Nearly 30% of all originated mortgages were “subprime,” up from just 15.1% in 2004.At nondepository financial institutions, such as mortgage origination companies, an incredible 41.5% of all originated mortgages were subprime, up from 26.5% in 2004.At banks, 23.6% of originated mortgages were subprime in 2006, up from just 9.7% in 2004.At credit unions, only 3.6% of originated mortgages could be classified as subprime in 2006—the same figure as in 2004. This is an incredible statistic because it indicates that while banks and mortgage companies significantly increased their sub-prime lending in the run-up to the financial crisis—likely in search of short-term profits and bonuses—credit unions didn’t increase their subprime lending at all.What were some of the consequences of these disparate actions? Because many of these mortgages were sold to the secondary market, it’s difficult to know the exact performance of these mortgages originated at banks and mortgage companies versus credit unions. But if we look at the performance of depository institutions during the peak of the financial crisis, we see that delinquency and charge-off ratios spiked at banks to 5.6% and 2.6%, respectively, in 2009 versus only 1.82% and 1.21% at credit unions. The difference in mortgage performance is even more stark. Among mortgages that remained on the books, 7.25% of mortgages originated at banks were delinquent in 2009 (versus only 1.97% at credit unions), and 3.95% of all bank mortgages were charged off (versus only 0.55% of credit union mortgages). That’s despite the fact that in 2007, 58.4% of bank mortgages were sold to the secondary market versus only 20.6% of credit union mortgages.Bank failures Risky lending at commercial banks helped precipitate the failure of 331 banks between 2009 and 2011, while only 64 credit unions failed during that same period despite there being roughly the same number of banks and credit unions in 2008. In fact, the Federal Deposit Insurance Corp.’s (FDIC) Bank Insurance Fund became insolvent in both 2009 and 2010, while the National Credit Union Share Insurance Fund (NCUSIF) was remarkably stable during that time, declining only 6% between 2006 and 2009. NCUSIF retained a strong balance of $1.23 per $100 in insured deposits versus a negative $0.39 per $100 in insured deposits at the FDIC. Thus, via the Troubled Asset Relief Program (TARP), the government provided emergency loans totaling $236 billion to 710 banks—or 1.93% of all bank assets.On the other hand, only 48 credit unions received TARP funding for a total of $70 million, or just 0.008% of credit union assets. While there are many reasons credit unions didn’t engage in the same kind of subprime lending as mortgage companies and banks, credit unions’ unique structure is the main reason. As not-for-profit, member-owned entities, credit unions have significantly fewer incentives to seek short-term profits and bonuses that clearly aren’t in their members’ best interests. This creates greater financial stability—benefiting both members and the overall economy.last_img read more

Hong Kong police arrest more than 300 protesting China’s ‘birthday gift’ of security law

first_imgHong Kong police fired water cannon and tear gas and arrested more than 300 people on Wednesday as protesters took to the streets in defiance of sweeping security legislation introduced by China to snuff out dissent.Beijing unveiled the details of the much-anticipated law late on Tuesday after weeks of uncertainty, pushing China’s freest city and one of the world’s most glittering financial hubs on to a more authoritarian path.As thousands of protesters gathered for an annual rally marking the anniversary of the former British colony’s handover to China in 1997, riot police used pepper spray and fired pellets as they made arrests after crowds spilled into the streets chanting “resist till the end” and “Hong Kong independence”. “I’m scared of going to jail but for justice I have to come out today, I have to stand up,” said one 35-year-old man who gave his name as Seth.Police said they had made more than 300 arrests for illegal assembly and other offences, with nine involving violations of the new law.The law punishes crimes of secession, subversion, terrorism and collusion with foreign forces with up to life in prison, will see mainland security agencies in Hong Kong for the first time and allows extradition to the mainland for trial.China’s parliament adopted the law in response to protests last year triggered by fears that Beijing was stifling the city’s freedoms, guaranteed by a “one country, two systems” formula agreed when it returned to Chinese rule. Beijing denies the accusation. Topics :center_img Hong Kong police cited the law in confronting protesters.”You are displaying flags or banners/chanting slogans/or conducting yourselves with an intent such as secession or subversion, which may constitute offences under the … national security law,” police said in a message displayed on a purple banner.Authorities in Beijing and Hong Kong have repeatedly said the legislation is aimed at a few “troublemakers” and will not affect rights and freedoms, nor investors’ interests.’Heartbreaking’But critics fear it will end the pro-democracy opposition and crush freedoms, including an independent legal system and right to protest, that are seen as key to Hong Kong’s success as a financial centre.US Secretary of State Mike Pompeo said the new law was an affront to all nations and Washington would continue to implement President Donald Trump’s directive to end the territory’s special status.Britain said it would stand by its word and offer all those in Hong Kong with British National Overseas status a “bespoke” immigration route.British Foreign Secretary Dominic Raab described Wednesday’s protests as heartbreaking and reprimanded HSBC and other banks for supporting the new law, saying the rights of Hong Kong should not be sacrificed for bankers’ bonuses.Britain and Canada also updated their travel advisories for Hong Kong, saying there was an increased risk of detention.A former employee of the British consulate in Hong Kong, Simon Cheng, said he had been granted political asylum by the British government after being beaten by Chinese secret police last year in mainland China during 15 days of detention.In a post on Facebook after the enactment of the national security law, he said he hoped other Hong Kong people would be offered protection by Britain.Police fired water cannon to try to disperse the protesters. A game of cat and mouse reminiscent of last year’s often violent demonstrations followed, with protesters blocking roads before running away from riot police charging with batons, only to re-emerge elsewhere.Police posted pictures on Twitter of an officer with a bleeding arm saying he was stabbed by “rioters holding sharp objects”. The suspects fled while bystanders offered no help, police said.On July 1 last year, hundreds of protesters stormed and vandalized the city’s legislature to protest against a bill that would have allowed extraditions to mainland China.Those protests evolved into anti-China demonstrations and calls for democracy, paralyzing parts of the city and paving the way for Beijing’s new law.’Birthday gift’In Beijing, Zhang Xiaoming, executive deputy director of Beijing’s Hong Kong and Macau Affairs Office, told reporters suspects arrested by a new Beijing-run security office could be tried on the mainland.He said the new office abided by Chinese law and that Hong Kong’s legal system could not be expected to implement the laws of the mainland. Article 55 of the law states that Beijing’s security office in Hong Kong could exercise jurisdiction over “complex” or “serious” cases.”The law is a birthday gift to [Hong Kong] and will show its precious value in the future,” Zhang said, adding the law would not be applied retroactively.Speaking at a flag-raising ceremony to mark the handover, the city’s Beijing-backed leader, Carrie Lam, said the law was the most important development since 1997.”It is also an inevitable and prompt decision to restore stability,” Lam said at the harbor-front venue where the last colonial governor, Chris Patten, a staunch critic of the security law, tearfully handed back Hong Kong to China.Some pro-Beijing officials and political commentators say the law is aimed at sealing Hong Kong’s “second return” to the motherland after the first failed to bring residents to heel.Luo Huining, the head of Beijing’s top representative office in Hong Kong, said at the ceremony the law was a “common aspiration” of Hong Kong citizens.Some pro-democracy activists gave up membership of their groups just before the law came into force on Tuesday, though they called for the campaign to carry on from abroad.”I saw this morning there are celebrations for Hong Kong’s handover, but to me it is a funeral, a funeral for ‘one country two systems’,” said pro-democracy lawmaker Kwok Ka-ki.last_img read more