Thursday, June 23, 2011
What Caused the Financial/Housing Collapse?
Let’s do the math. Over 97% of U.S. mortgage debt has been handed out by commercial banks, savings institutions, credit unions, government sponsored programs, agency and government sponsored programs, asset backed programs, and financial institutions. We can model mortgages handed out through these programs/institutions as well as those mortgage backed securities (MBS - both private and government that were handed out by the before mentioned mortgage institutions and programs), that are believed to have caused the financial/housing collapse, against the results of the Dow Jones, S&P500, NYSE, NASDAQ, foreclosure rates, home ownership rate, home vacancy rate, and the mortgage payment delinquency rate. The data used in the model came from the Census Bureau, Market sites, and SIFMA statistical research company. Here are the results (I will draw conclusions at the end of each section. I will cover the market results in this post and the economic indicator results in Part II):
Dow Jones
R2 0.87
Adjusted R2 0.75
SE 1699.374
Term Coefficient 95% CI SE t statistic DF p
Intercept -9154 -23045 to 4737 6234.4 -1.47 10 0.1728
Commercial Banking 7.901 -39.748 to 55.550 21.3851 0.37 10 0.7195
Savings Institutions 8.797 -13.315 to 30.908 9.9237 0.89 10 0.3962
Credit Unions -100.2 -301.3 to 101.0 90.28 -1.11 10 0.2932
Government sponsored -2.618 -30.477 to 25.241 12.5034 -0.21 10 0.8383
Agency and Government Sponsored 9.434 -4.832 to 23.700 6.4027 1.47 10 0.1714
Asset Backed -3.34 -20.37 to 13.69 7.644 -0.44 10 0.6714
Finance Corporation -24.58 -71.01 to 21.85 20.838 -1.18 10 0.2655
Non Agency MBS (B) 11.34 -5.62 to 28.30 7.613 1.49 10 0.1673
Total U.S. Gov MBS (B) -3 -9 to 3 2.7 -1.10 10 0.2956
S&P 500
R2 0.79
Adjusted R2 0.60
SE 243.213
Term Coefficient 95% CI SE t statistic DF p
Intercept -837.7 -2825.8 to 1150.4 892.26 -0.94 10 0.3699
Commercial Banking 0.7569 -6.0626 to 7.5764 3.06061 0.25 10 0.8097
Savings Institutions 0.8265 -2.3381 to 3.9911 1.42027 0.58 10 0.5735
Credit Unions -7.911 -36.701 to 20.879 12.9210 -0.61 10 0.5540
Government sponsored -0.5208 -4.5080 to 3.4664 1.78947 -0.29 10 0.7770
Agency and Government Sponsored 1.087 -0.955 to 3.128 0.9164 1.19 10 0.2631
Asset Backed -0.68 -3.12 to 1.76 1.094 -0.62 10 0.5482
Finance Corporation -3.472 -10.117 to 3.173 2.9823 -1.16 10 0.2713
Non Agency MBS (B) 1.876 -0.551 to 4.304 1.0896 1.72 10 0.1158
Total U.S. Gov MBS (B) -0.4876 -1.3542 to 0.3791 0.38897 -1.25 10 0.2385
NYSE
R2 0.89
Adjusted R2 0.80
SE 1041.118
Term Coefficient 95% CI SE t statistic DF p
Intercept -3636 -12146 to 4875 3819.5 -0.95 10 0.3636
Commercial Banking 4.888 -24.304 to 34.080 13.1015 0.37 10 0.7169
Savings Institutions 3.411 -10.136 to 16.957 6.0797 0.56 10 0.5872
Credit Unions -37.9 -161.1 to 85.3 55.31 -0.69 10 0.5088
Government sponsored -1.798 -18.866 to 15.270 7.6602 -0.23 10 0.8191
Agency and Government Sponsored 4.823 -3.917 to 13.563 3.9226 1.23 10 0.2470
Asset Backed -2.759 -13.193 to 7.675 4.6830 -0.59 10 0.5688
Finance Corporation -18.36 -46.80 to 10.09 12.766 -1.44 10 0.1810
Non Agency MBS (B) 9.863 -0.529 to 20.255 4.6640 2.11 10 0.0606
Total U.S. Gov MBS (B) -2.265 -5.975 to 1.445 1.6650 -1.36 10 0.2036
NASDAQ
R2 0.59
Adjusted R2 0.22
SE 792.941
Term Coefficient 95% CI SE t statistic DF p
Intercept -1534 -8015 to 4948 2909.0 -0.53 10 0.6096
Commercial Banking 0.6868 -21.5465 to 22.9202 9.97844 0.07 10 0.9465
Savings Institutions 0.9137 -9.4037 to 11.2310 4.63046 0.20 10 0.8475
Credit Unions -7.779 -101.642 to 86.084 42.1261 -0.18 10 0.8572
Government sponsored -1.026 -14.025 to 11.973 5.8342 -0.18 10 0.8639
Agency and Government Sponsored 2.488 -4.169 to 9.145 2.9876 0.83 10 0.4244
Asset Backed -1.98 -9.93 to 5.97 3.567 -0.56 10 0.5910
Finance Corporation -8.576 -30.240 to 13.088 9.7230 -0.88 10 0.3985
Non Agency MBS (B) 4.971 -2.944 to 12.886 3.5522 1.40 10 0.1920
Total U.S. Gov MBS (B) -1.314 -4.139 to 1.512 1.2681 -1.04 10 0.3246
The mortgage model results when compared against the markets are mixed. Although the four models are not super strong in predicting outcomes (NYSE best and NASDAQ is the worst – by R² data), the models show that there is an inverse relationship between Non Agency MBS and Total U.S. Gov. MSB. Non Agency MBS are those toxic Mortgage Backed Securities (MBS) assets issued by private sector companies and Total U.S. Gov. MBS are those toxic mortgage backed securities issued by government entities Fannie Mae, Ginnie Mae, and Freddie Mac. Non Agency MBS work to drive up market values whereas; Total U.S. Gov. MBS work to drive market values lower. It is not all bad news for the government since agency and government sponsored mortgages drive up market values, but government sponsored mortgages drive down the market. I am not sure of the difference between these two, but I suspect they include VA, FHA, and GSE mortgage loans. Unfortunately, I am not sure how this data is divided between the two programs. Commercial banks and savings institution mortgages tend to drive the market up; whereas credit union and finance corporation mortgages drive the market value down. However, it is important to note that the correlation is strongest between Non Agency MBS and Total U.S. Gov. MBS with the markets than the other variables (based on higher t statistic and lower p results).
Here are the model results for the economic indicators when modeled against commercial banks, saving institutions, credit unions, government sponsored, agency and government sponsored, asset backed, finance corporations, non-agency MBS, and total U.S. government MBS mortgages.
Foreclosure Rate
R2 0.99
Adjusted R2 0.98
SE 0.087
Term Coefficient 95% CI SE t statistic DF p
Intercept 0.8404 -0.4088 to 2.0896 0.55222 1.52 9 0.1624
Commercial Banking -0.001989 -0.004591 to 0.000613 0.0011501 -1.73 9 0.1178
Savings Institutions 0.0006746 -0.0014666 to 0.0028159 0.00094655 0.71 9 0.4941
Credit Unions 0.009413 -0.008600 to 0.027427 0.0079630 1.18 9 0.2674
Government sponsored -0.0006434 -0.0022507 to 0.0009639 0.00071051 -0.91 9 0.3888
Agency and Government Sponsored 0.0003073 -0.0006934 to 0.0013079 0.00044233 0.69 9 0.5048
Asset Backed 0.001188 -0.000392 to 0.002768 0.0006984 1.70 9 0.1231
Finance Corporation -0.0007006 -0.0031269 to 0.0017257 0.00107256 -0.65 9 0.5299
Non Agency MBS (B) -0.001926 -0.003387 to -0.000465 0.0006458 -2.98 9 0.0154
Total U.S. Gov MBS (B) 0.0004141 0.0000832 to 0.0007451 0.00014629 2.83 9 0.0197
Home Ownership Rate
R2 0.96
Adjusted R2 0.93
SE 0.5043
Term Coefficient 95% CI SE t statistic DF p
Intercept 57.73 53.61 to 61.85 1.850 31.20 10 <0.0001
Commercial Banking 0.000874 -0.013267 to 0.015015 0.0063465 0.14 10 0.8932
Savings Institutions 0.005253 -0.001309 to 0.011815 0.0029451 1.78 10 0.1048
Credit Unions -0.04506 -0.10476 to 0.01464 0.026793 -1.68 10 0.1235
Government sponsored 0.0001896 -0.0080783 to 0.0084576 0.00371069 0.05 10 0.9602
Agency and Government Sponsored 0.004247 0.000013 to 0.008480 0.0019002 2.23 10 0.0494
Asset Backed -0.001434 -0.006488 to 0.003621 0.0022685 -0.63 10 0.5416
Finance Corporation 0.004906 -0.008873 to 0.018685 0.0061841 0.79 10 0.4460
Non Agency MBS (B) 0.001022 -0.004012 to 0.006056 0.0022593 0.45 10 0.6606
Total U.S. Gov MBS (B) -0.001057 -0.002855 to 0.000740 0.0008066 -1.31 10 0.2192
Home Vacancy Rate
R2 0.98
Adjusted R2 0.96
SE 0.0846
Term Coefficient 95% CI SE t statistic DF p
Intercept 1.161 0.470 to 1.853 0.3103 3.74 10 0.0038
Commercial Banking 0.001398 -0.000973 to 0.003770 0.0010643 1.31 10 0.2183
Savings Institutions 0.00136 0.00026 to 0.00246 0.000494 2.75 10 0.0204
Credit Unions 0.001868 -0.008143 to 0.011879 0.0044930 0.42 10 0.6863
Government sponsored -0.001912 -0.003298 to -0.000525 0.0006223 -3.07 10 0.0118
Agency and Government Sponsored -0.0006303 -0.0013403 to 0.0000797 0.00031864 -1.98 10 0.0761
Asset Backed 0.0006792 -0.0001684 to 0.0015268 0.00038041 1.79 10 0.1045
Finance Corporation -0.002279 -0.004590 to 0.000032 0.0010370 -2.20 10 0.0527
Non Agency MBS (B) -0.0009889 -0.0018330 to -0.0001447 0.00037887 -2.61 10 0.0260
Total U.S. Gov MBS (B) 0.0005488 0.0002475 to 0.0008502 0.00013525 4.06 10 0.0023
Mortgage Delinquency Rate
R2 0.93
Adjusted R2 0.87
SE 0.239
Term Coefficient 95% CI SE t statistic DF p
Intercept 3.886 0.459 to 7.313 1.5147 2.57 9 0.0304
Commercial Banking -0.003408 -0.010544 to 0.003729 0.0031548 -1.08 9 0.3082
Savings Institutions 0.003294 -0.002580 to 0.009167 0.0025964 1.27 9 0.2364
Credit Unions 0.007254 -0.042158 to 0.056665 0.0218426 0.33 9 0.7474
Government sponsored -0.002348 -0.006757 to 0.002061 0.0019489 -1.20 9 0.2590
Agency and Government Sponsored 6.1360E-05 -2.6834E-03 to 2.8061E-03 1.2133E-003 0.05 9 0.9608
Asset Backed 0.002569 -0.001765 to 0.006903 0.0019158 1.34 9 0.2128
Finance Corporation 0.002907 -0.003748 to 0.009563 0.0029420 0.99 9 0.3489
Non Agency MBS (B) -0.004429 -0.008436 to -0.000421 0.0017715 -2.50 9 0.0339
Total U.S. Gov MBS (B) 0.001141 0.000233 to 0.002049 0.0004013 2.84 9 0.0193
These are strong predictions models with high R² values and they are consistent with the results in Part I of this blog. The strongest correlation exists between Non Agency MBS and Total U.S. Gov. MBS with the economic indicators. While Non Agency MBS works to drive down foreclosure rates, home vacancy rates, delinquency rates, and increase home ownership rates; Total U.S. Gov. MBS works to do the opposite. This would lead me to believe that toxic mortgage assets from the government were the prime culprit in the meltdown and not so much those toxic assets from the private sector. In these economic indicator models savings institutions and credit union mortgages had a positive effect on economic variables; whereas commercial banking and finance corporations were mostly negative. The results for government sponsored and agency and government sponsored mortgages were mixed (in some cases improved and in other cases decreased results) on the economic indicators.
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