In process
SUMMARY POINTS
The bad idea: Sub-prime lending
The initiator: Government, Fannie Mae and Freddie Mac
Government policies to encourage lower income lending
Attempts to solidify Fannie Mae and Freddie Mac to prevent disaster:
McCain and Bush 2003, rebuffed by Dems
McCain and Bush 2006, rebuffed by Dems
Contributors: Lack of sufficient regulation or oversight
Rating agencies rated sub-prime mortgage bundles as AAA
No one thought real estate could go down
Some financial institutions had too much of their own money in them
Some had too little reserves.
AIG had insured against losses of many companies, so its demise would
cause other companies' demise.
Many lenders took low initial payment in adjusted rate mortgages
Global cash abundance looking for higher interest rates but didn't adjust
for higher risks, so it kept coming blindly
Overspending by consumers
The underlying cause of the collapse was the real estate bubble finally bursting, although subprime lending was one of the most appealing practices to blame.
Sub-prime lending was not the cause of the economic collapse, but was a contributor.
Wall Street was not the cause, but a contributor and largely not a malicious cause.
Lender fraud was a contributor as well as borrower fraud.
Banks and investment firms were too highly leveraged (too much debt).
Everybody assumed real estate would not drop dramatically.
The public was overly leveraged.
A huge amount of liquidity from prospering emerging countries and prosperity worldwide created super easy credit conditions that permitted households to average 134% debt to disposable income. Part of that was from the American practice (also foreign citizens in their country did some of this) of borrowing on their equity every time the price went up.
The cause of the ability to have a large downturn was created by the largest home price bubble in history, exacerbated by speculators (citizens) buying properties to "flip".
According to Inside Mortgage Finance. In 2001, subprime loans made ups just 5.6 percent of mortgage dollars, by 2006 they were 20 per cent of the $3 trillion mortgage market. CNNMoney
By itself the subprime lending could not have caused the economic collapse. It was the real estate bubble that made such a collapse possible - in other words a hugely high price created a bigger potential downside drop (Duh!), which was just waiting to happen.
The crisis could not have happened without the bubble in overpriced real estate.
All bubbles have a domino effect, where the initial domino causes the others to fall.
The financial crisis that caused a domino effect on the world was caused at its source by the excessively high real estate prices, which had been encouraged by the Democrats, despite warnings and efforts in 2003 and 2006 by Bush and McCain. Other causes were blamed but straightforward analysis shows it could not have happened without the value of subprime mortgages dropping dramatically. See Fannie Mae And Freddie Mac.
One assumption, besides assuming housing prices would never decline, was that economic imbalances, such as large trade deficits and low savings rates indicative of over-consumption, were sustainable. Americans were uninformed and were wild spenders.
In 2004, the Federal Bureau of Investigation warned of an "epidemic" in mortgage fraud, an important credit risk of nonprime mortgage lending, which, they said, could lead to "a problem that could have as much impact as the S&L crisis.
By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted, but more were needed to "satisfy" worldwide demand for higher yielding securities.
Banks essentially sell the mortgages and distribute credit risk to investors
In 1995, the GSEs like Fannie Mae began receiving government tax incentives for purchasing mortgage backed securities which included loans to low income borrowers. Thus began the involvement of the Fannie Mae and Freddie Mac with the subprime market.[114] In 1996, HUD set a goal for Fannie Mae and Freddie Mac that at least 42% of the mortgages they purchase be 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
By 2008, the Fannie Mae and Freddie Mac owned, either directly or through mortgage pools they sponsored, $5.1 trillion in residential mortgages, about half the total U.S. mortgage market
Conservatives and Libertarians have also debated the possible effects of the Community Reinvestment Act (CRA), with detractors claiming that the Act encouraged lending to uncreditworthy borrowers, and defenders claiming a thirty year history of lending without increased risk. ] Detractors also claim that amendments to the CRA in the mid-1990s, raised the amount of mortgages issued to otherwise unqualified low-income borrowers, and allowed the securitization of CRA-regulated mortgages, even though a fair number of them were subprime
Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30-35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total a staggering $8.3 trillion. Members of USA minority groups received a disproportionate number of subprime mortgages, and so have experienced a disproportionate level of the resulting foreclosures.
THE HOUSING BUBBLE
In the years leading up to the crisis, significant amounts of foreign money flowed into the U.S. from fast-growing economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 contributed to easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.
FRAUD AND PREDATORY LENDING
The mortgage lending operations of Washington Mutual Inc., the biggest U.S. bank ever to fail, were threaded through with fraud, Senate investigators have found.
And the bank's own probes failed to stem the deceptive practices, the investigators said in a report on the 2008 failure of WaMu.
The panel said the bank's pay system rewarded loan officers for the volume and speed of the subprime mortgage loans they closed on. Extra bonuses even went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to the report being released Tuesday by the investigative panel of the Senate Homeland Security and Governmental Affairs Committee.
Washington Mutual was repeatedly criticized over the years by its internal auditors and federal regulators for sloppy lending that resulted in high default rates by borrowers, according to the report. Violations were so serious that in 2007, Washington Mutual closed its big affiliate Long Beach Mortgage Co. as a separate entity and took over its subprime lending operations.
Senior executives of the bank were aware of the prevalence of fraud, the Senate investigators found.
In late 2006, Washington Mutual's primary regulator, the U.S. Office of Thrift Supervision, allowed the bank an additional year to comply with new, stricter guidelines for issuing subprime loans.
(Notice the failure of the regulators.)
Note that this was not enough to cause the whole collapse.
Diagram of how housing bubble bursting cause the subprime crisis: Wikipedia
MCCAIN (and Bush) had tried to stop Fannie Mae and Freddie Mac disaster; 2003 & 2006
Which candidate foresaw the credit crisis and tried to do something about it? As it turns out, John McCain did — and partnered with three other Senate Republicans to reform the government’s involvement in lending three years ago, after an attempt by the Bush administration died in Congress two years earlier. McCain spoke forcefully on May 25, 2006, on behalf of the Federal Housing Enterprise Regulatory Reform Act of 2005 (via Beltway Snark)
In this speech, McCain managed to predict the entire collapse that has forced the government to eat Fannie Mae and Freddie Mac, along with Bear Stearns and AIG.
For years Democrats have told us criticisms of Fannie and Freddie’s embrace of subprime mortgages made to people with bad or no credit history was “racist.”
“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.”
Barney Frank 2003 in response to Bush administration overhaul plan.
See the video, how the disaster was anticipated but stopped by the Democrats::
http://www.youtube.com/watch?v=_MGT_cSi7Rs&feature=player_embedded
http://www.youtube.com/watch?v=cMnSp4qEXNM&feature=related
http://www.youtube.com/watch?v=iW5qKYfqALE&feature=related
http://www.youtube.com/watch?v=2UZ9l_AxKjA&feature=related
Extensive article on government causing extensively looser lending, though Bush & McCain tried to stop it in 2003 and 2005-6: http://spectator.org/archives/2009/02/06/the-true-origins-of-this-finan
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The Speech
May 26, 2006
Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.
The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190,to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I urge my colleagues to support swift action on this GSE reform legislation.
_________________
Quick Info
S-90 Federal Housing Enterprise Regulatory Reform Act of 2005
Last Action: Committee on Banking, Housing, and Urban Affairs. Ordered to be reported with an amendment in the nature of a substitute favorably.
Status: Dead
http://uppitywoman08.wordpress.com/2008/09/21/john-mccains-fannie-maefreddie-mac-warnings-may-2006/
_____________________________________
New Agency Proposed to Oversee Freddie Mac and Fannie Mae
By Stephen Labaton
September 11, 2003
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.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
”There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,” Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.
Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing. ”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.” Representative Melvin L. Watt, Democrat of North Carolina, agreed. ”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,” Mr. Watt said.
And it is more than a little disturbing that there was no mention of John McCain’s words before congress in 2006:
Federal Housing Enterprise Regulatory Reform Act of 2005
The United States Senate May 25, 2006 Sen. John McCain [R-AZ]: Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal. The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac. The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay. I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. I urge my colleagues to support swift action on this GSE reform legislation.
The Democrats killed this measure in Committee preventing the full Senate Vote.
