They grow up so fast don’t they?
We didn’t get to where we are today overnight. The crisis we face is the result of a million bad decisions.
Let’s start with us, the public. Many of us thought it was ok to stretch it on a mortgage, after all, prices only go in one direction, up. Plus it was more important to keep up with the Joneses than it was to live within your means. Another set of consumers thought that flipping houses was the way of the future, so they bought and sold, fudged some numbers on their loan docs and many eventually ran into a buzzsaw when the market turned. The third group of consumers as I see it are on the low end of the economic ladder, those who were offered mortgages, often at the behest of the government, that they either couldn’t afford or understand.
The geniuses of Wall Street saw all of this mortgage activity as a form of product development. A technology company develops next generation hardware and software products to sell. Wall Street R&D develops next generation financial engineering which result in new products to sell, like collateral debt obligations.
The purpose of these products is to create tiered cash flows from mortgages and other debt obligations that ultimately make the entire cost of lending cheaper for the aggregate economy. This happens when the original money lenders give out loans based on less stringent loan requirements. The idea is that if they can break up the pool of debt repayments into streams of investments with different cash flows, there will be a larger group of investors who will be willing to buy in.
What about the government? Plenty of blame to go around here too. Attempts by the Bush administration to regulate Fannie and Freddie in 2003 were rebuffed by Democrats like Barney Frank,
”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
The GOP has to shoulder some of the blame as well, they controlled government for six years while this travesty was allowed to fester. They clearly saw the need for increased regulation as demonstrated by the administration’s attempts to regulate Fannie and Freddie in 2003 and again in 2005. The fact is the GOP had the majority yet didn’t get it the increased regulation they knew to be necessary in place. Same deal with the House Democrats yesterday, they have the majority, and they too failed to get something done.
Everyone is to blame, but some more than others. However, when did this all start? Was there an event that we can point to that led to these millions of bad decisions and the subsequent crisis we now face?
If you believe that Fannie and Freddie are at the core of the crisis, then the answer is yes.
New York Times
September 30, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.