Posted on 05/01/2010 9:15:09 AM PDT by Johnny_Longtorso
...In early 2005, largely at the behest of the banking sector, the Office of Thrift Supervision implemented new rules that were widely perceived as weakening the CRA. Supervision of banks with under $1 billion in assets was loosened, and larger banks were allowed to voluntarily reduce the amount of regulator scrutiny of their "investment" and "service"-two long-standing categories of assessment under the CRA.
This had two unintended consequences that would later prove to be very costly. In the first place, it increased CRA scrutiny of larger banks, who were now the main focus of regulators. This put even more pressure on the banks to make CRA loans. Secondly, by allowing banks to de-emphasize "investment" and "service," the new regulations created an even greater incentive for banks to meet CRA obligations by making home loans....
...It appears that this aggressive expansion of Fannie Mae and Freddie Mac into subprime lending was a political strategy adopted by their leaders in response to heightened congressional scrutiny and criticism in the wake of the accounting scandals at the agencies that emerged during 2003 to 2004 and which threatened to lead to a revocation of their favored status as government-sponsored enterprises. Fannie and Freddie aggressively restyled their lending operations as the promotion of affordable housing and actively encouraged retail lenders to generate mortgages with those characteristics. As a result, not only did the number of subprime loans explode in the 2005 to 2007 period, but a disproportionate number of these loans were made to the riskiest borrowers or had extremely high risk characteristics, such as negative amortization, interest-only, high-LTV, or very low FICO scores....
...Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations....
(Excerpt) Read more at limitedmodifiedhangout.blogspot.com ...
Frankly, I do not buy this. Quite a few large banks made very few or no subprime loans. I would cite JPMorgan Chase, Wells Fargo, and US Bank.
So if they could refrain, what about everyone else? It was not regulation, but greed and fraud, that led Citi, WaMu, and Golden West to make these loans. Just as long as they thought they were reaping huge profits, they were happy to do it.
I just listened to an interview of Peter Schweizer who is the author of this book: Architects of Ruin.
I recommend reading this based on what I heard him discussing.
Anyone here read this one yet, care to add in?
Agreed, there was no one single cause to the financial crisis - there were many. I think there was one underlying factor, thought - a belief that systemic risk was a thing of the past. So mortgages were made to people with limited ability to pay, leverage was increased, and deriviates created with no regard for the risk those were piling into the system.
I guess giving government mandated mortgages to deadbeats and illegal aliens wasn’t such a good business afterall.
Why loan someone money if they don’t have the means to pay it back?
When the government CRA forced institutions to violate this common sense business practice, the seeds of destruction were sown.
Wall Street’s greed just poured Miracle Grow on the bad seed.
Dude, You’re drinking Wall Street’s Kool Aid. Mortgage brokers were writing these loans because they made real high fees. They got bundled into securitized loans because people made real high fees. They got sold for the fees. Some snakes needed crummy loans to have something to bet against.
Stop blaming the poor folks for the loans. Government screwed up a lot of stuff here, but greedmeisters on Wall Street are the really big villains. Wall Street doesn’t want regulations that will cut down on the gambling, so they spread crap like this to throw people off.
If you wish to learn about this stuff, hang out some at naked capitalism dot com. Professionals writing about it. Hang out at market ticker dot com. That guy, Karl Denniger, has a good grasp of it all.
parsy, who likes some kool-aid, but not this variety
Well stated.
Thanks. This resurfaces regularly. My understanding is that CRA loans were never more than about 3% of the market. The slimeballs who were putting loans together were even cramming good credit risks into the sub-prime type stuff.
parsy, who would like to see Fuld, among others, doing the perp walk
"Subprime loans were the vehicle banks used to satisfy CRA compliance, and Clinton and his regulators encouraged their use. Before Clinton took office, subprimes were virtually unheard of. By the time Clinton left office, Sub-prime they made up more than 9% of the market for mortgage origination. Today they're 20%.
"It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA," ex-Fed chief Alan Greenspan said in recent testimony on the roots of the crisis."
Every scenario of the cause starts with the creation of the sub-prime bubble in 1993 at HUD/CRA/Fannie Mae. It was the catalyst. Without that catalyst, the subsequent Wall St. Bubble would never have occurred. The Wall St. Bubble occurred because of Clinton/Rubin passing the Commodity Futures Modernization Act of 2000. This allowed unregulated leveraging (45 to 1). Bush spent all 8 years trying to regulate the dems bubbles before they exploded, and the dems voted against it all 8 years.
Someone (Fannie & Freddie & Dems & Fed) wouldn't change the environment that allowed Banks to make risky loans - in fact they encouraged it. Wall St seeing alot of high risk bet against it and won.... I wish I saw it coming.
It's frustrating to see people get mad at “greedy” people - which happens to be the motivation of just about every corporation in America.
You can't put all the blame people on either end (making or taking the loans) for doing what they think is good for them - you have to blame the people that set up the situation for allowing it to happen.
“
The Cause of the 2008 Mortgage Crash
“
Simple.
Bill Clinton, who threatened banks if they didn’t make loans to
people that would never be able to keep up the payments.
Heck, I even heard a clip of Robert B. Reich (a Clintonista) saying
this was the case...as played on Rush’s radio show.
Other conspirators:
Franklin Raines
Fannie and Freddie
Barney Fwank
Christopher Dodd
And to some degree...
George W. Bush (with his claim that everyone should own a house)
That told me Dubya (as much as I still like him) was never a landlord.
I am not aware of any such thing.
While JPMorgan Chase did dabble a little in subprime, in October of 2006 Jamie Dimon ordered his bank to sell off all subprime loans, and make no more. He also told them not to buy or sell any SIVs made up of subprime loans.
FWIW
“It was the second week of October 2006. William King, then J.P. Morgan’s chief of securitized products, was vacationing in Rwanda, visiting remote coffee plantations he was helping to finance. One evening CEO Jamie Dimon tracked him down to fire a red alert. “Billy, I really want you to watch out for subprime!” Dimon’s voice crackled over King’s hotel phone. “We need to sell a lot of our positions. I’ve seen it before. This stuff could go up in smoke!”
********************
“But what about the CDO’s the bank still held? Weren’t they all AAA rated?
“Yes, they were, but the price of credit default swaps on even AAA-rated CDO’s told a different story:
“Winters and Black [investment bank co-heads] saw that once they bought credit default swaps to hedge the AAA CDO paper J.P. Morgan would have to hold, the fees from creating CDOs would vanish. “We saw no profit, and lots of risk, in holding subprime paper on our balance sheet,” says Winters.
“The combined weight of that data triggered Dimon’s call to King in Africa. “It was Jamie who saw all the pieces,” says Winters.
“Not only did Dimon instruct the bank to start selling its CDO’s (including more than $12-billion subprime mortgages that JP Morgan had originated), he took action across the entire institution. Trading desks were ordered to dump loans on their books, and to stop making markets in subprime loans for customers. The private bank, that manages money for wealthy clients, started advising them to sell. The corporate treasury department started hedging and placing bets that credit spreads would widen (profiting by hundreds of millions of dollars when that turned out to be precisely the case).
http://www.adamsmithesq.com/archives/2008/09/lessons_from_jp_morgan_ch.html
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