3 ms·

> The financial crisis was partially a result of mortgages being given to people whose financial data would have suggested that they had no business borrowing

by vmarsy 10y ago

> The financial crisis was partially a result of mortgages being given to people whose financial data would have suggested that they had no business borrowing so much money. In that case, the opposite of your point is true. This shows that attention to data is beneficial to a mortgage system because it helps avoid questionable loans. Were credit score non existing in 2008? If so, were they completely ignored? Also, in comparison, European countries with non existing credit scores didn't have a crisis with subprime mortgages, probably because they paid attention case-by-case to the loan applicants. They surely used data, but it does not mean that this data has to be centralized and behind black box algorithms.

chrisfosterelli 10y ago
> Were credit score non existing in 2008? If so, were they completely ignored? I think the parent's point may be incorrect in this example. The financial crisis didn't happen because the lenders weren't aware the clients had a high likelihood of default, it was because the lenders didn't care the clients had a high likelihood of default. The mortgages were packed into packages and sold to other entities so the lenders who initiated the loans passed along the risk. They knew very well that the clients were high risk, but they were incentivized to ignore those risk factors.
- totalZero 10y ago
  Parent here...I agree with you, and if you read my comments again you will see that I never said the lenders were unaware. I said the credit history data were available and would have indicated a lack of suitability for the borrowers.
  - chrisfosterelli 10y ago
    Ah, I thought you were trying to argue that they were unaware. Thanks for clarifying :)
  - sgt101 10y ago
    I think that the lenders were aware and thought that the borrowers were unsuitable but thought that they had discovered a way that would allow high risk loans to be made safely. A lot of really clever Ph.D's had said that securitisation of these loans would work to manage and distribute the risk. I remember going to a dinner party and being lectured by one of these guys and thinking that it made no sense to me, I felt like I always do when I get a new maths problem and I can't figure it out at all and every one else seems to understand it! I was embarrassed by my lack of ability. The said "lecturer" was patently earning several multiples of my salary (I guess that he earned, gross, 10*). He wasn't ostentatious about his wealth, but his watch was nice, not showy, they had come in a new Range Rover, and they lived in the Surrey communter belt. All of this communicated success and authority, his Ph.D came from a big, important university, mine comes from a little and not prestegious one, I struggled to get through my Ph.D - I found it really really hard. I suspect this guy had cruised. And yet, he was spouting complete rubbish; all the assertions that he made were contrary to straightforward treatments of the data and common sense. I can't even remember the technical justifications he made, I think that I probably didn't make appropriate challenges to get these. So, I went back to my job as the telco doing pedestrian things with telematary data (n things not working = problem). The lesson of the conversation is that the smart people who were figuring out risk and investment strategies in these places are not smart. Also I was not of the caliber required to smoke that out. An actionable lesson that I have run with since (ok, I thought this out in a slow way about 18mths after the crisis while chewing over past humiliations and social disasters in which I have participated), is that critical thinking is the most important skill in my portfolio, and I'm not good at it - and almost everyone I meet is worse than me. So I have focused on trying to recruit people who seem capable of thinking round problems, and then have invested time and energy in getting them to be able to understand problems and become domain experts. This is different from the normal strategy of recruiting experts, doesn't deliver results reliably (which is challenging in a business environment - I have missed my scorecard a few times since this experiment began and I am rendered nervous about my career as a result) but has produced a business capability which to me seems qualitatively different from the previous capability that I took over when I got my current role. Anyway - it makes for more fun at work.
    - totalZero 10y ago
totalZero 10y ago
FICO scores existed and were ignored, yes. Lenders would make money by originating loans and selling them to larger financial institutions, so they had no skin in the game when it came to counterparty risk. Lenders certainly had access to FICO scores, but they had a profit incentive to pitch and approve loans to unsuitable borrowers, and there is a strong argument to be made that they used passable FICO scores to justify bad loans to people with no income and no assets. https://en.m.wikipedia.org/wiki/Predatory_lending https://en.m.wikipedia.org/wiki/Predatory_lending https://en.m.wikipedia.org/wiki/Subprime_lending https://en.m.wikipedia.org/wiki/Subprime_lending https://en.m.wikipedia.org/wiki/NINJA_loan https://en.m.wikipedia.org/wiki/NINJA_loan Separately, one of the many differences between Europe and the US leading up to the crisis was that thanks to years of comments from Alan Greenspan, it became culturally acceptable and even encouraged for American borrowers to "tap into their home equity" by taking second mortgages. So, when houses got cheaper, many people who had been paying loans for a while still owed plenty of principal. One might argue that there was negligence on the part of second mortgage lenders here.

by vmarsy 10y ago

chrisfosterelli 10y ago

> Were credit score non existing in 2008? If so, were they completely ignored? I think the parent's point may be incorrect in this example. The financial crisis didn't happen because the lenders weren't aware the clients had a high likelihood of default, it was because the lenders didn't care the clients had a high likelihood of default. The mortgages were packed into packages and sold to other entities so the lenders who initiated the loans passed along the risk. They knew very well that the clients were high risk, but they were incentivized to ignore those risk factors.

totalZero 10y ago
Parent here...I agree with you, and if you read my comments again you will see that I never said the lenders were unaware. I said the credit history data were available and would have indicated a lack of suitability for the borrowers.
- chrisfosterelli 10y ago
  Ah, I thought you were trying to argue that they were unaware. Thanks for clarifying :)
- sgt101 10y ago
  I think that the lenders were aware and thought that the borrowers were unsuitable but thought that they had discovered a way that would allow high risk loans to be made safely. A lot of really clever Ph.D's had said that securitisation of these loans would work to manage and distribute the risk. I remember going to a dinner party and being lectured by one of these guys and thinking that it made no sense to me, I felt like I always do when I get a new maths problem and I can't figure it out at all and every one else seems to understand it! I was embarrassed by my lack of ability. The said "lecturer" was patently earning several multiples of my salary (I guess that he earned, gross, 10*). He wasn't ostentatious about his wealth, but his watch was nice, not showy, they had come in a new Range Rover, and they lived in the Surrey communter belt. All of this communicated success and authority, his Ph.D came from a big, important university, mine comes from a little and not prestegious one, I struggled to get through my Ph.D - I found it really really hard. I suspect this guy had cruised. And yet, he was spouting complete rubbish; all the assertions that he made were contrary to straightforward treatments of the data and common sense. I can't even remember the technical justifications he made, I think that I probably didn't make appropriate challenges to get these. So, I went back to my job as the telco doing pedestrian things with telematary data (n things not working = problem). The lesson of the conversation is that the smart people who were figuring out risk and investment strategies in these places are not smart. Also I was not of the caliber required to smoke that out. An actionable lesson that I have run with since (ok, I thought this out in a slow way about 18mths after the crisis while chewing over past humiliations and social disasters in which I have participated), is that critical thinking is the most important skill in my portfolio, and I'm not good at it - and almost everyone I meet is worse than me. So I have focused on trying to recruit people who seem capable of thinking round problems, and then have invested time and energy in getting them to be able to understand problems and become domain experts. This is different from the normal strategy of recruiting experts, doesn't deliver results reliably (which is challenging in a business environment - I have missed my scorecard a few times since this experiment began and I am rendered nervous about my career as a result) but has produced a business capability which to me seems qualitatively different from the previous capability that I took over when I got my current role. Anyway - it makes for more fun at work.
  - totalZero 10y ago

totalZero 10y ago

FICO scores existed and were ignored, yes. Lenders would make money by originating loans and selling them to larger financial institutions, so they had no skin in the game when it came to counterparty risk. Lenders certainly had access to FICO scores, but they had a profit incentive to pitch and approve loans to unsuitable borrowers, and there is a strong argument to be made that they used passable FICO scores to justify bad loans to people with no income and no assets. https://en.m.wikipedia.org/wiki/Predatory_lending https://en.m.wikipedia.org/wiki/Predatory_lending https://en.m.wikipedia.org/wiki/Subprime_lending https://en.m.wikipedia.org/wiki/Subprime_lending https://en.m.wikipedia.org/wiki/NINJA_loan https://en.m.wikipedia.org/wiki/NINJA_loan Separately, one of the many differences between Europe and the US leading up to the crisis was that thanks to years of comments from Alan Greenspan, it became culturally acceptable and even encouraged for American borrowers to "tap into their home equity" by taking second mortgages. So, when houses got cheaper, many people who had been paying loans for a while still owed plenty of principal. One might argue that there was negligence on the part of second mortgage lenders here.