Who really caused the sub-prime crises Democrats?
The Subprime Debacle
by Dr. Kuni Michael Beasley
30 Years in Gestation
The Democrats are doing a lot to try to pin the subprime debacle on the Republicans and the Bush administration. However, there is a long tail to this problem that just happened to pop at this time.
Now, for the rest of the story. Definitions first.
Fannie Mae is the Federal National Mortgage Association (FNMA), founded in 1938 as a publically traded government sponsored enterprise (GSE) that is stockholder owned that makes loans and issue loan guarantees.
Its cousin is Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC), founded in 1970 as another GSE created to expand the secondary market for mortgages. Freddie Mac buys individual mortgages on the secondary market, pooled them into packages, and sold them to investors on the open market.
The secondary market packaged mortgages as collateral and issues securities called collateralized mortgage obligations (CMO) and collateralized debt obligations (CDO), to reduce the risk of individual loans. CMOs are a separate entity that is the actual legal owner of the mortgages it has in a "pool." CMOs sell bonds to investors based on the value of the mortgages. Investors receive payments based on the increased value of the loans in the pool. The collateral for the bonds are the actual mortgages.
CDOs are a separate entity like CMOs, but are more focused on fixed income assets such as, but not limited to mortgages (and can include commercial mortgages and corporate loans). The focus is cash flow and slices (tranches) of these cash flows are sold to investors.
The subprime mortgage crisis surfaced first in 2007, but it had been incubating for years, indeed, decades. Though roots can be traced back to the New Deal legislation in the 1930′s, the current crisis actually draws its source from the Community Reinvestment Act (CRA) [1977] during the Carter administration that forced banks to lend money to less credit worthy clients. Lending institutions were evaluated to determine if it met the "credit needs of the community" and this was factored into regulatory decisions of the federal government such as applications for facilities, mergers, and acquisitions.
Interest in the CRA resurfaced in the Clinton administration when regulations in the CRA (which could be manipulated without any participation of congress) essentially forced institutions to offer loans to higher risk individuals and businesses. The term "Ninja" loans emerged describing high risk loans made to people with No Income, No Job, and no Assets, but completed a particular bank’s portfolio sufficient to keep federal regulators off their backs.
As access to easy money for high risk borrowers increased, certain institutions began to take advantage of these new opportunities to score fed points and make easy money. Name dropping here: Countrywide began to process, package, and offer investment instruments (CMOs) based on these loans. Revisions to the CRA by the Clinton administration allowed mortgage companies to offer loans without the relative reserve of deposits normally required of banks and other financial institutions.
In addition, this allowed for securitization of sub prime mortgages based on the pooling and packaging of cash-flow producing assets into securities that could be sold to investors – with the asset value not tagged to actual value of the property, but to the value of the cash flow produced by the asset held (sounds weird). The first public securitization of CRA loans was started in 1997 by (familiar name) Bear Stearns!
Now, let’s understand sub-prime loans for a moment. A sub-prime loan is a mortgage offered at a deep discount on interest the first year or two so the borrower could qualify for a larger loan and more expensive house, betting that their economic profile would get better and they could afford large payments later. Adjustable Rate Mortgages (ARMs) are a form of this where the entry rate is low and rises based on certain criteria such as the rates for government securities.
Simply put, lenders (not necessarily banks, but more often mortgage
companies) offered low cost, low entry rate mortgages to people who would not normally qualify for that amount of debt.
These loans were "warehoused" by financial institutions, where a financial institution like Merrill Lynch would set up a separate, but wholly owned mortgage company (First Franklin) to attract loans.
Merrill Lynch would retain control of the loans as a "trustee" or "servicer," and derive benefits from fees for "managing" the loans and increase assets by keeping escrow deposits. In turn, these loans would be sold to Fannie Mae or Freddie Mac (who were assumed to guarantee the loans), who, in turn, repackaged them for the secondary market.
In 2003 the Bush administration tried to head-off what they saw as a potential crisis by moving the supervision of Fannie Mae and Freddie Mac under a new agency
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11 comments
koalatcomics on October 27, 2009 at 4:52 am
Henry Cisneros under the Clinton adminisration authored the entire mess.
Hater Police on October 27, 2009 at 4:52 am
Both parties are to blame AND financial companies AND consumers.
beyond_politics on October 27, 2009 at 4:52 am
Dr. Kuni Michael Beasley??? Isn’t he a fox news contributor?????
Baby James on October 27, 2009 at 4:52 am
The causes are:
The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.
no one person is responsible for the whole calamity. But the deregulation of the market and the irresponsibility of congress, the president, and CEOs are the enablers.
Magma H on October 27, 2009 at 4:52 am
Going to war and increasing the deficit didn’t help at all.
Let’s be brutally honest here.
And the trade deficit between America and the rest of the world, especially with China is nightmarish.
And last but not least, all this started the day America was attacked by terrorists on Sept 11th.
Ask yourself this, why did the terrorists decide to attack the WTC on that?
Cause that’s the iconic symbols of capitalism of the Western world, and terrorists succeeded not only in demolishing that icon, but creating a huge economic depression 7 years later.
This was all under the "watchful" eyes of the Bush administration.
They are at the helm of this sinking ship.
mmm snarf snarf on October 27, 2009 at 4:52 am
yeah not a reliable source there buddy. try again.
lack of oversight by a bush controlled government got us here, and Obama is getting us out.
and if you don’t like it, you can move. maybe to Alaska?
flika on October 27, 2009 at 4:52 am
The list of contributors is endless…you can’t point the finger to any single entity.
William A on October 27, 2009 at 4:52 am
Accept the fact people. You can’t really blame the government completely. It was really Americans and the rest of the world trying to Live The American Dream. People were way overspending on their homes, cars, toys, etc. Credit was too easy. People should have been content to live with a lot less. Advertising sucked a lot of people in as well. The chickens have come home to roost.
Dr Death on October 27, 2009 at 4:52 am
Greed caused your crisis.
Greed was the culprit.
America needs to learn that Greed is A Bad Thing, and ultimately destroys communities, countries and individuals.
Lyle G on October 27, 2009 at 4:52 am
Wasting time and space.
You will get four kinds of answers.
From Republicans:
Yeah, we knew that. You’re late for that bus.
From Democrats:
LIAR!
Huh?
I still think it was a good idea.
Batik on October 27, 2009 at 4:52 am
This is easy. Ronald Reagan and the Voodoo economics of Friedman.
We have had deregulation and shady banking practices with the following collapses since Charles Keating and the old Savings and Loan collapse in the 1980′s. Arizona is always into this kind of scam and is always, therefore, one of the hardest hit during these crisis. Congressman Rick Renzi is still our Congressman although under indictment for public fraud and 32 other counts of white collar robbery. He has not gone to trial yet. One of the US Attornies fired by Alberto Gonzales for poltical reasons was Paul K. Charlton who was working on the Renzi case. So it just goes on and on here.
Naturally, I am not voting for McCain. All this does is create higher taxes on our homes during the land flip and easy credit period then crashes to below what the house is worth the rest of the time. I am tired of the roller coast.