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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