The Subprime Meltdown
February 13th, 2009 . by tgirschAs anyone who’s looked at this issue with even a shred of intellectual honesty knows, Fannie and Freddie and especially the CRA had almost nothing to do with it:
Commentators say that’s what triggered the stock market meltdown and the freeze on credit. They’ve specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie’s and Freddie’s financial problems.
Federal housing data reveal that the charges aren’t true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.
Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.
Federal Reserve Board data show that:
* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.
…snip…
Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.
During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.
In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.
Fueled by low interest rates and cheap credit, home prices between 2001 and 2007 galloped beyond anything ever seen, and that fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market.
About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve.
See also here:
Notice that the delinquency rate is highest in the years after Fannie and Freddie are constrained in terms of their subprime holdings.
You got that? The overwhelming majority of bad loans — over 84% — were not made or backed by Fannie and Freddie. Twenty-four of the top twenty-five subprime lenders (96% of them) were not covered or regulated in any way by the Community Reinvestment Act. Of course, silly “facts” won’t stop the True Believers (like John Sununu) from parroting their Fox News talking points.
UPDATE: The best overall summary I’ve seen of what happened can be found here (PDF). H/T: Econbrowser.
Tgirsch, these companies took these risks because they knew they could be capitalists on the way up and socialists on the way down. In other words, they knew that the government would never let them fail, since they “were too big to fail”. If an enabling parent stops “helping” the addict, the addict usually gets better and becomes more responsible. If these banks knew that there would be no bailouts, they would have never engaged in these risky practices.
Yet you supported the bailout. Unfreakingbelievable! If a company does things that cause it to fail, it should fail. Then another company should come in and buy it’s assets for pennies on the dollar. But you guys and your weird central planning philosophy actually believe that failure should be rewarded or subsidized. Once again, its all about the power. You all can’t wait to further nationalize the banks.
Glen, the first paragraph of that comment displays a stunning ignorance of what has actually happened. It’s no wonder you have such odd views of what should and shouldn’t be done about it: you haven’t got the first freaking clue what you’re talking about. Take a look at the top 15 subprime lenders, and tell me how many of them got government bailouts.
P.S. Further evidence that you haven’t got the first freaking clue what you’re talking about: nationalization is the polar opposite of a bailout. So which is it that I supposedly want? Or am I happy with either extreme, in your estimation?
You’re happy with the government controlling the companies that took money. That’s a de-facto nationalization. Is it not?
Regardless Tgirsch, if it was a failure in the market, then the market should correct itself, not government. Bubbles burst at the end of every business cycle. Let them burst.
Glen:
And that, in a nutshell, is the problem with libertarians. They don’t give a shit (not even a tiny one) about the human impact of the philosophies; the ideology is all that matters. The private sector and private citizens should police themselves, and problems should not be collectively addressed, no matter how much misery that means, and no matter how many innocent people get caught up in that misery.
That’s the part that you just don’t seem to get. If we were just talking about wiping out fat-cat CEOs and a few other bad actors, I wouldn’t have a problem with “letting them die.” But between the job losses and the wiped-out life savings, you’re talking about ruining literally millions of lives, most of whom are in no way responsible for the economic problems we currently face, and doing absolutely nothing about it. You’re talking about setting aside the rule of law in favor of the rule of the jungle. You want to do away with civil society, and replace it with Lord of the Flies.
Fortunately, the overwhelming majority of Americans don’t share your naive and/or heartless view of how the world ought to work.
Oh, and by the way, it can only be described as a failure of the market if one believes, as you do, that the market should be left completely alone; that we should have football games without referees. I happen to view it as a failure of government (or, more accurately, a series of such failures), for failing to properly regulate the market, and allowing unsustainable and predatory lending practices to run rampant.
That BIS report is so much crap.
The BIS, there’s a gang of crooks if there ever was one.
They certainly have no interest in “civil society”, I assure you.
That’s just my “opinion”.
The problem was not a “failure of the market”, unless by that you mean a failure a of a currency manipulation scheme.
After Bretton Woods II, the “free market” floating currency regime was supposed to balance trade. Well, we can see how that worked out. Now, the whole international banking system is fried, because a bunch of assholes thought they could get rich spinning funny money out of thin air. (Hint: BOJ ZIRP+shady derivitaves=disaster).
And the BIS are among those that want to restart this insane funny money status quo, and run American debt to infinity.
tgirsh, you picked an old, tired article from McClatchy News Service (voted most popular by Huffingpo, DU and KOS for 3 years running!) (Enjoy “speaking truth to power” McClatchy, all the way to bankruptcy!) that skims over decades of Democrat involvement; looking to blame everything on Republicans?
Fact: JImmy Carter’s CRA forced banks to lend money (at previously unacceptable risks) to people who were not in an AAA position to repay. Then, Bill Clinton: “In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied “AAA” rating. The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.”
There you go…AAA guarantee ratings to worthless loans, guaranteed by the U.S. Government. The world’s investors snapped ‘em up. We saw more and more of these bad loans, then the super bubble of the sub-prime real estate market, where greed was king. Sure, everyone got a piece of that action.
But the last best chance to stop this evolving debacle was in 2003; Democrats blocked Bush’s legislation that would’ve prevented this mess..
NYT, 2003.
Also, in 2004. http://www.youtube.com/watch?v=_MGT_cSi7Rs
Again, in 2005.
g00gle it.
CRA may not be fully to blame, but as we in the NRA say, it was the ‘foot in the door’ introductory legislation that lead to more and more bad laws and policy decisions; and in the end, we now see fully the fruits of the CRA. Banks have had to subsidize the poor, at the behest of Democrats; so, OWN IT.
tgirsh, you picked an old, tired article from McClatchy News Service (voted most popular by Huffingpo, DU and KOS for 3 years running!) (Enjoy “speaking truth to power” McClatchy, all the way to bankruptcy!) that skims over decades of Democrat involvement; looking to blame everything on Republicans?
Fact: JImmy Carter’s CRA forced banks to lend money (at previously unacceptable risks) to people who were not in an AAA position to repay. Then, Bill Clinton: “In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied “AAA” rating. The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.”
There you go…AAA guarantee ratings to worthless loans, guaranteed by the U.S. Government. The world’s investors snapped ‘em up. We saw more and more of these bad loans, then the super bubble of the sub-prime real estate market, where greed was king. Sure, everyone got a piece of that action.
cont..
But the last best chance to stop this evolving debacle was in 2003; Democrats blocked Bush’s legislation that would’ve prevented this mess..
* “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.”
NYT, 2003.
Also, in 2004. http://www.youtube.com/watch?v=_MGT_cSi7Rs
Again, in 2005.
In 2005, the Finance Committee, that was lead by a Republican, proposed regulation on Fannie and Freddie that would have prevented Fannie and Freddie from buying many of these bad loans. However, while all the Republicans on the committee voted for the proposal, all the democrats voted against it (including Chris Dodd (D) and Barney Frank (D), the current leaders of the Finance Committee). And, unfortunately, because of the Democrat vote, the bill did not get out of committee.
g00gle it.
CRA may not be fully to blame, but as we in the NRA say, it was the ‘foot in the door’ introductory legislation that lead to more and more bad laws and policy decisions; and in the end, we now see fully the fruits of the CRA. Banks have had to subsidize the poor, at the behest of Democrats; so, OWN IT.
Yeah,
banks having to subsidize the poor. That must be it.
Good grief.
They WANTED to make these bad loans. Because they thought the derivatives beast would eat their risk.
But, because this impossible, the derivitaves beast is eating them instead.
So they came up with a plan to feed We The People to the derivatives beast and then off to party like nothing ever happened.
And Congress went along with it in an act of dispicable treachery.
So the issue is not what political party enabled all this, but simply which criminals should go to jail, and there are many in both parties both currently “serving” in government and not.
Tgirsch, there is a lot to address there.
First of all, your argument has nothing to do with the will of law. You are willing to set aside that and anything for situational ethics. You think it is more honorable to decide what is right situation by situation, than to stand on principle. T, it is never right for the United States government to de-facto nationalize banks. Not only that, but it is stupid. You trust corrupt politicians, men who haven’t ever even worked in the private sector, except for the muckraking they get to do as a result of having been in government, you trust these people to micromanage the financial sector and any other sector.
As for the collective misery, people live better as a result of capitalism. No other system of economics has produced a better standard of living for the people of this world. Unemployment is around seven percent and you people are scared to death. In France, where the type of economy that you support is practiced, double digit unemployment is a way of life. It is principles that produce a better standard of living for people Tgirsch, not shoot from the hip situational ethics. Unfortunately, you guys never see the big picture, the long run.
I don’t know why you keep setting up this strawman and arguing as if I oppose regulation. I do not. I just have a different definition of regulation. When I think of regulation, I think of the government making sure that people do not engage in unfair practices, they don’t prey on the little guy, that they don’t steel or deceive, that they don’t pollute, etc. That’s what I call regulation. You guys want to do something more. You all want to manage the affairs of these companies. You want to control them and force them to sell products that fit your social or enviro-wacko agenda. You all want to regulate risk, so that , heaven forbid, they don’t fail. That is what you all call regulation. I call that socialism, and yes I oppose it. Having said all of that, in a couple of weeks you”ll probably pull this same strawman out of your ass. Oh well.
One more thing, and I know that you will agree with me on this, one thing government should do is overturn the last two bankruptcy bills. They should make it easy, really easy to Chapter 7 and keep your house, regardless of how much equity you have. They should make it to where nobody would want to be in the credit card business. A lot of these refinances and equity loans were used to pay off unsecured debt, which is sad, especially since the banks were engaging in Mickey Mouse appraising.
You think it is more honorable to decide what is right situation by situation, than to stand on principle.
And you don’t?
Remember when Churchill decided to suspend habeas corpus during the nightly blitz attacks on London?
Yeah. Me neither.
Yet you stood right by while the GOP did it, right here.
You have some nerve talking about “principles.”
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The GOP never suspended habeas corpus, you dipshit, not since Lincoln. That was Roosevelt.
People caught on the battlefield can and always have been held. Of course FDR just set up a faux trial and had them executed. That was okay though. Right?
People caught on the battlefield can and always have been held.
Which battlefield was RIchard Reid caught on, again? Battlefield Earth?
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You are right and wrong. They did violate the constitution, but no I did not support it. I thought you were talking about Gitmo. My mistake. In fact, here is a post I wrote about Padilla.
You make assumptions. Ass out of you, but not me.
I did not support it
All that is necessary for the triumph of evil is that good men do nothing.
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I wrote a post. What the hell else could I do, take up arms and charge the White House?
What the hell else could I do
You could have kept the topic front-and-center, here, for starters.
I bet you didn’t write your congressperson, nor senators about it.
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Write your congressman our Senators? Gosh what a joke. It always amuses me when these people call talk radio and say they left messages on Arlen Specter’s answering machine and sent him emails. Like any of that really matters.
This website has only been around a little over a year JP.
So, you support investigations of the Bush administration, now?
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No, of course not. Both Padilla and Reid are behind us. You’d have to be a kook to support investigations. If you want to start doing that, then investigate Clinton. Good grief, the guy sold a pardon to an international fugitive.
No, of course not. Both Padilla and Reid are behind us.
Oh, so there’s a period of time where a potential crime should not be investigated? After all, if someone just killed you, you’re already dead… they should be let off the hook, right?
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Good Lord JP. If every constitutional violation was a punishable crime, every President, including the SOB that’s only been in there for a couple of weeks, would be under the Federal jail.
Eli, where ya at? You’ve got a convert here.
Good Lord JP. If every constitutional violation was a punishable crime, every President, including the SOB that’s only been in there for a couple of weeks, would be under the Federal jail.
Is that so?
Hmmm.
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Both so-called “conservative” and “liberal” positions have their merits depending on the individual details of any given issue. BOTH “sides” are prone to being overly zealous pursuing objectives that for the most part are just not that critical.
Economically, for example, “communism” and “capitalism” are sold as theoretical opposites, and in practice it is the same: One is man exploiting man, and the other is just the reverse.
By-and-large most people are good, they want justice, they just have differing ideas on the most efficient method of working towards it.
But, some people do not want justice. They want to exploit human systems to benefit themselves at the expense of everyone else. Now, these folks do not get up announce this fact. No, they try to pass themselves off as great benefactors!
How can we tell who these people are? Well, if they like to have secret meetings one might think, ‘Hmmmm, I wonder what it is these people don’t want us to know?’
Another clue might be that if, for example, a public official feels the need to always be in an ‘undisclosed location’ that might be a red flag to wonder, “what is this person up to?”.
Corruption is always going to be a problem. But in our case, it has gotten to the point that it is so prevalent that we now have what is known as ‘imperial rot’ and that brings down empires.
Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”.
Well, look at what’s going on? Obama is a “new face”, but his crew and ‘advisors’ are just the same old players that got us into this mess in the first place.
Expecting them to fix things?
Insane.