Here are some additions/revisions to that list:
2. Fat cats realize they can make more money by marketing loans to people they know will ultimately be unable to pay.
Actually the government through the Community Reinvestment Act (greatly strengthened by the Clinton adm) coerced lenders to make risky loans. Examiners were instructed to grade banks on their CRA scores. Naturally banks coerced to make risky loans want to get rid of them, sell them to institutions that would package them and sell securities representing ownership of a share of the underlying packaged mortgages to investors all over the world. So it wasnt just greedy fat cats operating on their own in the absence of regulatory oversight like Democratic spinners are saying. There were regulations and they were bad - they caused and encouraged the underlying problem.
3. Fat cats sell their junk to other fat cats before that happens, and make a ton of money for their company.
Thats what the GSE's were created to do. Buy mortgages (of all risk classes), package them and sell securities which own the packaged mortgages. Since these corporations are Government Sponsored Entitities buyers figured on the federal govt guaranteeing the debts ultimately, something which is happening now.
As loans go bad, the institutions holding a lot of these securitized mortgages have to recognize losses. Big ruinous losses.
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Below "entire community" means poor people and people who are bad credit risks based on their (non)payment histories, employment histories, etc:
The CRA was passed into law by the U.S. Congress in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community. Only one banker, Ron Grzywinski from ShoreBank in Chicago, testified in favor of the act. [1]
The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities, including mergers and acquisitions. The CRA is enforced by the financial regulators (FDIC, OCC, OTS, and FRB).
[edit] Clinton Administration Changes of 1995
In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These revisions[1] with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision.[citation needed]
Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. [2] The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent. [3] [4]
[edit] George W. Bush Administration Proposed Changes of 2003
In 2003, the Bush Administration recommended what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago." [5] This change was to move governmental supervision of two of the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac under a new agency created within the Department of the Treasury. However, it did not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enabled them to issue debt at significantly lower rates than their competitors. The changes were generally opposed along Party lines and eventually failed to happen. Representative Barney Frank(D-MA) claimed of the thrifts "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." Representative Mel Watt (D-NC) added "I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing."[citation needed]
en.wikipedia.org
People saw the problem coming - from 2000:
city-journal.org |
