Friday, October 31, 2008

The Mortgage Crisis - What Caused It

A friend of mine sent out an email recently making a case for regulation causing the mortgage crisis, as opposed to de-regulation. I've asked him if I could post or link to (if available) his argument.

In either case, I wanted to post my rebuttal. Please feel free to chime in with questions or comments.


I think you missed some stuff while overstating the case in other places.

First off, Fannie and Freddie didn't even get into the mess until 2006 (here) or so, well after the bubble began and these bullshit loans started. And even then they don't make loans, but purchase existing loans. So to imply that they were forced to make loans to low-income families and thus caused the whole thing to come crashing down is a bit dishonest.

Second, the CRA didn't force private banks to do anything, and certainly didn't force them to change underwriting rules and make up NINJA loans and the type. It was also enacted in 1977. It is just now becoming an issue? Hardly. Here is a different take on it.

Third, the poor don't exactly have a lot of money and the loans they were getting were pretty small in the grand the scheme of things. The big guys, like Bears and Lerhmann brothers were the ones making the bad bets and then packaging them with good ones and reselling them as derivative securities to companies like, well...Fannie and Freddie who have always been tasked to do so since their creation. Their entire point of existence was to help guarantee loans to banks so that more people could get into houses. It was the greed of the lenders, their willingness to throw out rules and no oversight that allowed this to fester and explode like this. In fact, this study shows that CRA banks only made up between 20 and 25% of the subprime loans and were less likely to make such a loan. So who is responsible for the remaining 75% or so?

Forth, let us not forget the rating agencies complicity in this. They went along and rated these derivatives highly even though it was a load of crap. How were they allowed to do this? Deregulation! Nice write up on all of this here.

Fifth, $127,000 is dick compared to the nearly $2 million McCain's campaign manager was paid by Fannie and Freddie as president of an advocacy group whose purpose was to defend them from, you guessed it, regulation (here)! Opps.

Finally, regardless of the responsibility for the mortgage issue, it has gone well beyond that into the credit industry because of CDS that were not regulated at all and had no transparency. That is the bigger issue here and the cause for all of these banks to fail and the $700 bailout. The mortgage crisis just brought about the inevitable sooner than later.

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