The U.S. Mortgage Crisis- Whose Fault?

[Minor Axis]

Your premise that the loosening of credit requirements was the result of "pro-business" administration is completely incorrect. Clinton was motivated to do so to increase minority ownership of homes. His administration asserted not to do so would perpetuate the discriminatory criteria established by prior Republican administrations. The fact they any economist with a brain saw what was coming didn't slow Billy-Boy down in meeting his campaign rhetoric. Clinton's decision created a whole new market place for both the legitimate and illegitimate mortgage lender and had the unintended consequence of creating a whole new secondary marketing of mortgage backed (and leveraged) securities that for all intents and purposes was unregulated.

I will confess my ignorance of this fact until recently and apologize to our readers as my original contention was not 100% correct. Thanks for bringing it to my attention.

You are correct that Clinton repealing the Glass-Steagall act (that prevented banks from investing in certain types of investments) played a role. Why he would do this has been described as "triangulation", finding the happy middle ground and make everyone happy.

However, banks investing in mortgages is just one piece of the puzzle. There are the mortgage brokers who initiated these loans and a Federal Government under Bush who especially was not inclined to interfere in business, there could be no other outcome.

Clinton played a role. Correct me if I'm wrong, but if he had not signed that bill, the suspect mortgages would have been created anyway but banks would not be the ones holding the bag? This chart shows that most of the damage was done under the Bush Administration, a pro-business administration who as far as I know had no concerns about mortgages until the shit hit the fan. Bush was first elected in 2000.

Thanks!

 

[Strauss]

I will confess my ignorance of this fact until recently and apologize to our readers as my original contention was not 100% correct. Thanks for bringing it to my attention.

You are correct that Clinton repealing the Glass-Steagall act (that prevented banks from investing in certain types of investments) played a role. Why he would do this has been described as "triangulation", finding the happy middle ground and make everyone happy.

However, banks investing in mortgages is just one piece of the puzzle. There are the mortgage brokers who initiated these loans and a Federal Government under Bush who especially was not inclined to interfere in business, there could be no other outcome.

Clinton played a role. Correct me if I'm wrong, but if he had not signed that bill, the suspect mortgages would have been created anyway but banks would not be the ones holding the bag? This chart shows that most of the damage was done under the Bush Administration, a pro-business administration who as far as I know had no concerns about mortgages until the shit hit the fan. Bush was first elected in 2000.

Thanks!

You're mixing metaphors. First, banks invested in mortgage back securities bundled by Freddie and Fannie as marketable securities. (Your loan papers match the loan papers of guy five states over from you. Standardization.) Freddie and Fannie had been doing this long before Bush or Clinton came into office. Because Freddie and Fannie guarantee a rate of return on bundled mortgages (even if they are refinanced) you have an asset that can be used to leverage more credit (read that as a loan) to purchase more bundled loans. Banks have strict lending ratios imposed by the Fed so the banks went to the brokerage houses (hello Bear-Stearns) and borrowed the money there without violating the Fed imposed ratio. And that is why Glass-Steagall would have prevented this. Clinton liked it because it freed upon HUGH amounts of money for the loan market and God knows that Fannie loved it, helped it equalize accounting quarters to make them seem more solvant then GAAP would allow.

Actually, the concept employed by the banks is fundamentally sound, they just didn't hedge their bets for the downside. Happen before with junk bonds and Milken. The return isn't as good but at least you have a job when the day is done.

 

[pinky]

A little bit of both, but in the end, you're an adult. AND if you go into foreclosure IT IS NOT OK TO BURN THE HOUSE. That's criminal.

 

[Minor Axis]

If you want to read an eye opener see this Newsweek Article- The Predators' Ball, the story of Roy Barnes, a former Governor of Georgia who in 1998 tried to shield the state of Georgia as lending was deregulated, and how the state was subsequently inundated with lobbyists representing financial interests who insisted he could not do that. What did he do? He pushed through a antipredatory lending law that made all of the business entities responsible for loans if those loans were deemed "unfair".

But in the predictable ending, the business interests won out. I've read it's a real problem when you have a private company like Freddie Mac with no oversight, but when they make bad decisions, they know the government will step in and save them and the taxpayers are the ones who end up paying for it. Is there any accountability?

Excerpt:
So when Barnes was elected governor of Georgia in 1998, he decided to push through the toughest antipredatory lending law in the country. The 2002 law made everyone up the line, including investment banks on distant Wall Street and rating agencies like Standard & Poor's, legally liable if the loans they sold, securitized or rated were deemed unfair. "There has to be accountability," Barnes told NEWSWEEK. "In the end you have to be able to say, do I really want to make this loan? Because I may have to eat it." "A victory for Georgia consumers," the Atlanta Journal-Constitution called the new law, which was also hailed by AARP and the NAACP.

It was when Roy Barnes started talking about accountability that the Feds began marching into Georgia. Barnes found himself besieged by lobbyists from major banks and national regulators—as well as Fannie Mae and Freddie Mac, the government-sponsored mortgage issuers whose mandate is to help people obtain affordable homes at fair prices; today, Fannie and Freddie are so financially fragile that the government has agreed to bail them out if necessary.

 

[lumpenstein]

I am no financial wiz but from what I understand of the situation it is the fault of financially ignorant and irresponsible people maxing out their credit, including mortages, then realize 75% of their income goes to paying off just the interest of their debt - and none of the principle. I have no sympathy for them any more than I do for people with $60,000 SUV's bitching about the price of gas and it's all the industry's and government fault they can't afford to fill their tanks. Bugger off! Buy a bike.

 

[boatmom1957]

Actually - the bulk of blame should be on the US government. They allowed regulations to be loosened up. They untied the banks hands. Well suprise suprise - all Bankers are not honest.

Prices soar for no apparent reason, people bought fast and furious into the market which drove values higher, interest rates kept dropping, it was easier to qualify for a home - kinda' the perfect storm.
During this chaos they push Zero interest loans and other insane ideas.
Lenders, Lawyers, and Realtors made lots of money - lots!
Once the adjustable rates began to adjust, the whole mess was doomed to spiral into devastation.

Instead of bailing out banks that they induced to self destruct our government would be better off helping those who pay their salary.

How bad does it have to get before we finally have government officials who get off there pompous asses, roll up there sleeves and get down to the work of governing for the betterment of our welfare?