There simply was no effective regulation in these markets
I suppose by including the word "effective" that is technically correct. There was ineffective and harmful regulation, however. Which is what Congress seems to have intended.
Did you read the Village Voice article about HUD's active role in bringing about the mortgage crisis? Is there anything there you can say is not factual?
Is this information (below) not factual? Doesn't it show that regulation of this area was as "effective" as our legislators wanted it to be? That in fact, they repeatedly undercut efforts to impose "effective" regulations?
In 1999, The New York Times reported that with the corporation's move towards the subprime market "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."[11] Alex Berenson of The New York Times reported in 2003 that Fannie Mae's risk is much larger than is commonly held.[12] Nassim Taleb wrote in The Black Swan: "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events "unlikely".[13]
In 2003, the Bush administration recommended significant regulatory overhaul of Fannie Mae and Freddie Mac. However, both Republicans and Democrats opposed that proposal, fearing that tighter regulation could sharply reduce financing for low-income housing, both low and high risk. Under immense lobbying pressure from Fannie Mae, Congress did not introduce any legislation aimed at bringing this proposal into law until 2005. [14]
In 2006, the Federal Housing Enterprise Regulatory Reform Act of 2005 (first put forward by Sen. Charles Hagel [R-NE])[15] where he pointed out that Fannie Mae's regulator reported that profits were "illusions deliberately and systematically created by the company's senior management".[16] However, this legislation too met with opposition from both Democrats and Republicans. This bill was passed by the House, but was never presented to the Senate for a vote. [17]
en.wikipedia.org
In 1995, the Community Reinvestment Act (CRA) was revised to allow CRA mortgages to be securitized.
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In 1995, the GSE began receiving government incentive payments for purchasing mortgage backed securities which included loans to low income borrowers. Thus began the involvement of the GSE with the subprime market.[96] Subprime mortgage originations rose by 25% per year between 1994 and 2003, resulting in a nearly ten-fold increase in the volume of subprime mortgages in just nine years.[98] The relatively high yields on these securities, in a time of low interest rates, were very attractive to Wall Street, and while Fannie and Freddie generally bought only the least risky subprime mortgages, these purchases encouraged the entire subprime market.[99] In 1996, HUD directed the GSE that at least 42% of the mortgages they purchased should have been issued to borrowers whose household income was below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.[100] From 2002 to 2006 Fannie Mae and Freddie Mac combined purchases of subprime securities rose from $172 billion to over $500 billion per year before dropping to $450 billion, thus fulfilling their government mandate to help make home buying more affordable.[101]
en.wikipedia.org
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The basic problem is caused by subprime mortgage lending. And as we've seen that area has basically been government driven for a very long time. Certainly not unregulated, just not "effectively" or wisely regulated.
I think bringing up generic complaints about derivatives, credit rating agencies, and Gramm-Leach-Bliley, hedge funds, and what not is a diversion of attention from the basic subprime mortgage problem.
Fannie and Freddie didn't go under because of unregulated derivatives or the end of Glass-Steagel or because of hedge funds, but because of too many bad mortgages.
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So who was monitoring the credit agencies to make sure they did their due diligence?
Credit rating agencies are private and to my knowledge have never been regulated.
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Another example is the repeal of Glass-Steagel. Because of this, commercial and investment banks no longer had to remain separate. That means that the mortgage loan sourcer doesn't worry about due diligence, because they are in the business of reselling the loan to someone else, instead of holding the loan to maturity.
Mortgage securitization and reselling isn't new and has nothing to do with Glass-Steagel. Its what the GSE's were created to do many decades ago. Re. Glass-Steagel, Bill Clinton says: "I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill."
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Simply saying there should have been regulations over this and that is no panacea. If politicians don't want an area to be effectively regulated, it probably won't be. And when something big fails as a result, the politicians will not take the blame, they'll say the market failed ..... |
