The US subprime mortgage crisis is a series of events and conditions that led to the financial crisis and subsequent recession that began in 2007. This is characterized by an increase in delinquency and subprime mortgage foreclosures, and a decrease resulting from the securities backed by the mortgage. Several major financial institutions collapsed in September 2008, with significant disruptions in the flow of credit to businesses and consumers and the onset of a severe global recession.
Government housing policies, excessive regulation, regulation and deregulation have all been claimed as the cause of the crisis, along with many others. While modern financial systems are evolving, regulations do not follow and become incompatible with development risks in the economy. The Financial Crisis Investigation Commission (FCIC) charged with investigating the causes of the crisis reported in January 2011 that: "We have a 21st century financial system with a 19th century security framework."
Increasing home ownership has been the goal of several presidents, including Roosevelt, Reagan, Clinton, and George W. Bush. FCIC writes that the US government's affordable housing policy and the Community Reinvestment Act (CRA) are not the main cause of the crisis, as those events are mainly driven by the private sector, with large investment banks at the core of the crisis not subject to banking regulation banking such as CRA. In addition, housing bubbles appeared in several European countries at the same time, although the US housing policy did not apply there. Further, subprime loans are about double (from under 10% of origination mortgages, to about 20% from 2004-2006), although there were no major changes to the old housing laws around that time. Only 1 in 10 FCIC commissioners believes that housing policy is a major cause of the crisis, especially in the context of the steps Fannie Mae and Freddie Mac take to compete with aggressive private sector competition.
Failure to regulate non-depository banking systems (also called shadow banking systems) has also been blamed. Non-depository systems grow beyond the size of the regulated depository banking system, but investment banks, insurance companies, hedge funds, and money market funds are not subject to the same rules. Many of these institutions suffered the equivalent of bank runs, with the collapse of Lehman Brothers and AIG during September 2008 that triggered the financial crisis and subsequent recession.
The government has also revoked or implemented some laws that limit the regulation of the banking industry, such as the revocation of the Glass-Steagall Act and the implementation of the Modernization of the Commodity Futures Act of 2000. Formerly depositors and investment banks that merged to merge while the latter restricted the regulation of financial derivatives.
Note: The general discussion on the causes of the subprime mortgage crisis is included in the Subprime mortgage crisis, Cause and Cause of the global financial crisis 2007-2012. This article focuses on a subset of causes related to affordable housing policies, Fannie Mae and Freddie Mac and government regulations.
Video Government policies and the subprime mortgage crisis
Ikhtisar legislatif dan peraturan
Deregulation, excessive regulation, and regulations that have failed by the federal government have all been blamed for the subprime mortgage crisis of the late 2000s in the United States.
In general, conservatives have claimed that the financial crisis is caused by too many rules aimed at increasing the level of home ownership for low-income people. They have designated two specific policies: the 1977 Reforming Society (CRA) Act (especially those modified in the 1990s), which they claim is pressuring private banks to make risky loans, and affordable housing goals for companies HUD government-sponsored ("GSEs") - Fannie Mae and Freddie Mac - which they claim led to GSE to buy risky loans, and caused general damage in underwriting standards for all loans.
The Liberals present data showing GSE loans are less risky and perform better than loans securitized by more lightly regulated Wall Street banks. They also state that government-mandated CRA loans are better than subprime loans that are purely market-driven. They also present data demonstrating that financial companies that lobby the most aggressive governments also have the most risky borrowing practices, and lobby to free themselves from regulations that limit their ability to take greater risks. In testimony before Congress both the Securities and Exchange Commission (SEC) and Alan Greenspan claimed a failure in allowing the bank's own investment arrangements. Furthermore, the five largest investment banks at the core of the crisis (including Bear Stearns and Lehman Brothers) are not subject to CRA or other storage banking regulations, and they do not come from mortgages.
The Financial Crisis Investigation Commission issued three closing documents in January 2011: 1) "conclusions" or FCIC reports from six members of the Democratic Commission; 2) the "disagree statement" of the three Republican Commissioners; and 3) the second "disapproval" statement from Commissioner Peter Wallison. Both the conclusions of the Democratic majority and the disapproving statements of the Republican Party, which represents the views of nine of the ten commissioners, conclude that the government housing policy has nothing to do with the crisis. The majority report states that Fannie Mae and Freddie Mac "are not the main cause of the crisis" and that the Community Reinvestment Act "is not a significant factor in subprime lending or crisis." Three Republican authors of the statement did not agree they wrote: "The spread of credit declined not only for housing but also for other asset classes such as commercial real estate.This tells us to see the credit bubble as the main cause of the US housing bubble also informs us that problems with US housing policies or markets do not in itself explain the bubble of US housing. "
However, the statement disagrees Wallison Commissioner really blames the government housing policy, which in his view contributes to a large number of high-risk mortgages: "... I believe that the sine qua non of the financial crisis is a US government housing policy, which led to its creation 27 million subprime and other risky loans - half of all mortgages in the United States - are poised to fail as soon as the massive 1997-2007 housing bubble begins to deflate.If the US government has not chosen this policy line - it is driving unprecedented bubble growth and an unprecedented amount of weak and high-risk housing mortgages - the big financial crisis of 2008 will never happen. "
In a paper released in late 2012 to the National Economic Research Bureau (NBER), 4 economists present their thesis "Is the Community Reinvestment Act Leads to High Risk Loans?" Economists compare the "behavior of bank loans undergoing CRA exams in a particular census channel in a given month (treatment group) on the behavior of banks operating on the same census month that do not face this test (control group). This comparison clearly indicates that adherence to CRA causing more risky loans by banks. "They conclude:" Evidence suggests that around CRA checks, when incentives to meet CRA standards are very high, banks not only increase borrowing rates but also seem to come from highly risky loans. as logical-based. "Fallacy: that the claim to" prove causality "is" impossible given their methodology. "In addition it is criticized for not considering an alternative explanation:" that bank officers deliberately make bad loans. "
Maps Government policies and the subprime mortgage crisis
Deregulation
The FCIC puts a significant blunder for the crisis on deregulation, reporting: "We conclude that widespread failure in financial regulation and oversight is proving to be detrimental to the stability of the state financial markets.The guards are not in their posts, not because in large part because of the accepted confidence in the market trait self-correcting and the ability of financial institutions to effectively supervise themselves Over 30 years of deregulation and dependence on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, backed by administrations and congresses in a row, and actively driven by a strong financial industry at every turn, has stripped off the main safeguards, which can help avoid disasters.This approach has opened a gap in the supervision of critical areas with trillions of risky dollars, such as shadow banking systems and over-the-counter derivative markets In addition, the government No finance companies are allowed to choose the regulators they like in what is the race to the weakest supervisor. "
Mortgages and banking regulations
Alternative Hipotic Transaction Parity Act of 1982
In 1982, Congress passed the Parliamentary Alternative Mortgage Transactions Act (AMTPA), which allowed non-federal housing creditors to hire to write a rate-adjusted mortgage. Among the types of new mortgage loans that were made and became popular in the early 1980s were adjustment rates, adjustment rate options, balloon payments, and interest-only mortgages. This new type of loan is credited with replacing longstanding bank practices by making conventional fixed rate, mortgage amortization. Among the criticisms of the deregulation of the banking industry that contributed to the saving and lending crisis was that Congress failed to enact legislation that would prevent exploitation by these types of loans. Following the widespread lending of predators that occurred with the use of adjustable rate mortgages. About 90% of subprime mortgages issued in 2006 were mortgages with adjustment rates.
Housing and Community Development Act 1992
This law establishes the mandate of purchasing "affordable housing" loans for Fannie Mae and Freddie Mac, and the mandate must be governed by the HUD. Initially, the law of 1992 requires that 30% or more of Fannie and Freddie loan purchases be tied to "affordable housing" (borrowers that are below normal loan standards). However, the HUD is given the power to set future requirements, and HUD immediately improves its mandate. This encourages a "subprime" mortgage. (See HUD Mandate, below.)
Revoking Glass Steagall Act
The Glass-Steagall Act came into effect after the Great Depression. This separates commercial banks and investment banks, in part to avoid potential conflicts of interest between lending activities from past and past activities of the latter. In 1999, President Bill Clinton signed the Gramm-Leach-Bliley Act, which uprooted part of the Glass-Steagall Act. Economist Joseph Stiglitz criticized the revocation of the law. He called his removal as "the top of a lobbying effort of $ 300 million by the banking and financial services industry..." He believes it contributes to this crisis because the risk-taking culture of investment banking dominates a culture of commercial banking riskier, leading to increased levels risk taking and leverage during the boom period.
Alice M. Rivlin, who served as deputy director of the Office of Management and Budget under Bill Clinton, said that GLB is a necessary part of the law because the separation of investment and commercial banking 'does not work well.' "Bill Clinton stated 2008): "I do not see that signing the bill has anything to do with the current crisis." Luigi Zingales argues that the retraction has an indirect effect. It aligns previous investments and commercial banking sectors to lobby for common goals for laws, regulations and reforms that support the credit industry.
Economists Robert Kuttner and Paul Krugman have supported the notion that the revocation of the Glass-Steagall Act contributed to the subprime crisis even though Krugman reversed himself in recent years saying that rejecting Glass-Steagall was "not what caused the financial crisis, which emerged instead.". ' "Andrew Ross Sorkin believes the retraction is not a problem. Most of the failures are due to poor-performing mortgage loans, allowed under Glass-Steagall, or losses by agencies not involved in commercial banking and thus never covered by law.
Peter J. Wallison points out that no major investment bank is hit by the crisis, "Bear, Lehman, Merrill, Goldman, or Morgan Stanley - affiliated with commercial banks" but stand-alone investment banks are allowed by Glass -Steagall. Mortgage banks, Wachovia, Washington Mutual, and IndyMac, are also independent banks that existed prior to the lifting of Glass.
Capital requirements and risk classification
Capital requirements refer to the amount of financial cushions that banks must keep if their investment suffers losses. Depository banks will take deposits and purchase assets with them, assuming not all deposits will be recalled by the depositor. The more risky an asset a bank chooses, the higher the capital requirement to offset the risk. Storage banks are subject to extensive regulatory and oversight before the crisis. Deposits are also guaranteed by the FDIC to some extent.
However, storage banks have transferred large amounts of assets and liabilities off the balance sheet, through a complex legal entity called a vehicle with a special purpose. This allows banks to remove this amount from the calculation of capital requirements, allowing them to take on more risks, but generate higher profits during the pre-crisis boom period. When these off-balance sheet vehicles were having trouble starting in 2007, many storage banks were required to cover their losses. Martin Wolf wrote in June 2009: "... a big part of what the bank did at the beginning of this decade - off-balance-sheet vehicles, derivatives and 'banking shadow systems' itself - was to find a way round regulation."
Unlike storage banks, investment banks raise capital to fund underwriting, market-making and trading for their own accounts or their clients; they are not subject to the same supervision or capital requirements. Large investment banks at the crisis center in September 2008, such as Lehman Brothers and Merrill Lynch, are not subject to the same capital requirements as depository banks (see section on the shadow banking system below for more information). The debt to equity ratio (the measure of risk taken) increased significantly from 2003 to 2007 for the five largest investment banks, which had $ 4.1 trillion in debt by the end of 2007.
FDIC Chair Sheila Bair warned during 2007 against a more flexible risk management standard of the Basel II agreement and lowered bank capital requirements in general: "There is a compelling reason to believe that banks left to their own devices will keep the capital less - no more - than it would be wise.The fact is, banks do benefit from an implicit and explicit government safety net Investing in banks is considered a safe bet Without proper capital regulation, banks can operate on the market with little or no capital and deposit insurance finally holding the bag, bore many risks and costs of failure History shows the problem is very real... as we see with US banking and the S & P crisis in the late 1980s and 1990s.the final bill for inadequate capital regulations could very heavy.In short, the regulator can not abandon the full capital decision k epada bank. We will not do our work or serve the public interest if we do. "
Boom and collapse of the shadow banking system
The non-depository banking system is growing beyond the size of the regulated depository banking system. However, investment banks, insurance companies, hedge funds, and money market funds in non-depository systems are not subject to the same rules as storage systems, such as depositors' insurance and bank capital restrictions. Many of these institutions are suffering the equivalent of banks managed by the collapse of Lehman Brothers and AIG during September 2008 that triggered the financial crisis and subsequent recession.
The FCIC report explains how this evolving system remains ineffectively governed: "In the early part of the 20th century, we established a series of protections - the Federal Reserve as the last lender, federal deposit insurance, sufficient regulation - to provide a bulwark against the panic that regularly hit the American banking system in the 19th century. However, over the last 30 years, we have allowed the growth of shadowy banking systems and loaded with short-term debt - which rival the size of the traditional banking system. The main components of the market - for example, the multitrillion dollar repo loan market , off-balance-sheet entities and the use of over-the-counter derivatives - are hidden from view, without the protection we have built to prevent financial ruin We have a 21st century financial system with a 19th century security framework.
Significance of parallel banking systems
In a speech in June 2008, US Treasury Secretary Timothy Geithner, then President and CEO of the NY Federal Reserve Bank, placed a significant blunder for freezing credit markets on "run" to entities in the "parallel" banking system, also called the shadow banking system. These entities become important for credit markets that support the financial system, but are not subject to the same regulatory controls. Furthermore, these entities are vulnerable because they borrow short-term in the liquid market to buy long-term, illiquid and risky assets.
This means that disruptions in the credit market will make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities: "In early 2007, commercial asset-backed paper channels, in structured investment vehicles, in securities with auction rates, tender option bonds and variable rate demand records, had a combined asset size of approximately $ 2.2 trillion, a triple-funded asset in the form of triple payments grew to $ 2.5 trillion, Assets held in hedge funds grew to around $ 1.8 trillion, the combined balance of five major investment banks at that time amounted to $ 4 trillion. comparison, the total assets of the top five banks holding the company in the United States at that time more than $ 6 trillion, and the total assets of the entire banking system of about $ 10 trillion. "He stated that" the combined effect of these factors is the financial system which are vulnerable to asset prices and self-reinforcing credit cycles. "
Runs on the shadow banking system
Economist Paul Krugman describes the escape of the shadow banking system as "the essence of what is happening" to cause the crisis. "As shadow banking systems evolve to rival or even surpass the important conventional banking, politicians and government officials should realize that they re-create the kind of financial vulnerability that makes the Great Depression possible - and they should respond by extending the rules and financial safety net to cover institutions These influential figures should announce a simple rule: anything that does what the bank does, anything that should be saved in a crisis like a bank must be governed like a bank. "He refers to this lack of control as" malign neglect. " Some researchers claim that competition between GSE and shadow banking systems causes a setback in underwriting standards.
For example, an investment bank, Bear Stearns, was asked to fill most of its funding in the night market, leaving the company vulnerable to credit market disruptions. When concerns arise about its financial strength, its ability to secure funds in this short-term market has been compromised, leading to the equivalent of running a bank. For four days, available cash fell from $ 18 billion to $ 3 billion as investors withdrew funds from the company. It collapsed and was sold at fire selling price to JPMorgan Bank Chase 16 March 2008.
American homeowners, consumers, and companies owe about $ 25 trillion during 2008. American banks hold about $ 8 trillion of that total directly as traditional mortgage loans. Bondholders and other traditional lenders provide another $ 7 trillion. The remaining $ 10 trillion comes from the securitization market, which means the parallel banking system. The securitization market began to close in the spring of 2007 and nearly died in the fall of 2008. More than a third of the private credit market became unavailable as a source of funds. In February 2009, Ben Bernanke stated that the securitization market remained closed effectively, with the exception of fulfilling mortgages, which could be sold to Fannie Mae and Freddie Mac.
The Economist reported in March 2010: "Bear Stearns and Lehman Brothers are crippled non-bankers amongst the panicked overnight" repo "borrowers, many of whom are money market funds unsure about the quality of securities collateral which they hold.The mass redemption of these funds after Lehman's failure to freeze short-term financing for large corporations. "
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac (also called FNMA and FHLMC) are government-sponsored companies (GSE) that buy mortgages, buy and sell mortgage backed securities (MBS), and guarantee most mortgages in the US.
Financial Crisis Investigation Commission
The Financial Crisis Investigation Commission (FCIC) reported in 2011 that Fannie Mae & Freddie Mac "contributed to the crisis, but not the main cause." FCIC reports that:
- "all but two of the dozens of current and former Fannie Mae employees and regulators interviewed on the subject told the FCIC that achieving goals is not a key driver of GSE 'purchases of a risky mortgage"; it's
- Until 2005, the goal of home ownership for GSE - 50% of mortgage purchases must consist of low- or middle-income families - is not very challenging to be satisfied by "normal business travel", although in 2005 the goal has been improved and reached 55% 2007;
- most of the Alt-A loans - which are included in the risky mortgage that GSE criticized for buying - "high income-oriented", were bought to boost profits, not with an eye toward low and middle meetings. -has a homeownership goal; it's
- most of the GSE's efforts to increase homeownership are marketing efforts and housing promotions, and outreach programs - which have nothing to do with the reduction or relaxation of borrowing standards; it's
- laws that require lending to increase homeownership allow Fannie and Freddie "to fail to meet 'indecent' housing goals or that will affect the safety and health of the company," and that the GSE backs itself from the gap when they feel the need; and that's
- In the end, the loan checks found only a small amount (eg 4% of all loans purchased by Freddie between 2005 and 2008) were purchased "especially as they contribute to the goal [home ownership]".
The Commission found GSE loans had a delinquent rate of 6.2% in 2008 versus 28.3% for non-GSE loans or private label. Takes approximately 25 million outstanding mortgages at the end of each year from 2006 to 2009 and subdivides into 500 subgroups according to characteristics such as credit scores, down payments and mortgage size, mortgage/guaranteer buyers, etc., the Commission finds the average of the delinquency rate are much lower among loans purchased or guaranteed by government-sponsored organizations like FHA, Fannie Mae and Freddie Mac, than non-prime loans sold to "private label" securitization. (see "Loan Performance in Mortgage Segments-Segment Markets")
The Commission finds that GSE mortgage securities
basically retained their value throughout the crisis and did not contribute to the significant financial company losses that became the center of the financial crisis. The GSE participates in the expansion of subprime and other risky mortgages, but they follow rather than lead Wall Street and other lenders.
into subprime loans. Writing in January 2011, three of the four members of the Republic at the FCIC Commission despite disagreeing from the majority of other conclusions, found that the US housing policy, at most, was just one of the causes of the crisis. The three wrote:
"The spread of credit is declining not only for housing but also for other asset classes such as commercial real estate.This tells us to see the credit bubble as the main cause of the US housing bubble.It also tells us that the problem with the US housing policy or the market is not with itself explains the bubble of US housing. "
Wallison's Dissent
In disagreement with majority and minority opinion from FCIC, Commissioner Peter J. Wallison of the American Enterprise Institute (AEI) blamed US housing policy, including Fannie & amp; Freddie, especially for the crisis, writes: "When the bubble began to deflate in mid-2007, low quality and high-risk loans incurred by government policies failed in unprecedented numbers.The effects of these defaults were exacerbated by the fact that some if every investor - including housing market analysts - understood at the time that Fannie Mae and Freddie Mac had acquired substantial amounts of subprime and other high-risk loans to meet HUD's affordable housing targets. "His disagreements largely depend on research by fellow AEI member Edward Pinto, former Chief Credit Officer Fannie Mae. Pinto estimates that at the beginning of 2008 there were 27 million higher risks, "non-traditional" mortgages (defined as subprime and Alt-A) in circulation of $ 4.6 trillion. Of these, Fannie & amp; Freddie holds or secures 12 million mortgages worth $ 1.8 trillion. The government entity holds or guarantees 19.2 million or $ 2.7 trillion of the total mortgage. In January 2008, the outstanding total value of US mortgage debt was $ 10.7 trillion.
Wallsion publishes its disapproval and responds to criticism in a number of articles and parts that have been circulated, and New York Times columnist Joe Nocera accused him of "almost alone" creating "the myth that Fannie Mae and Freddie Mac caused the financial crisis".
Another debate about Fannie and Freddie's role in creating the financial crisis
Criticism of Fannie Mae and Freddie Mac
Critics argue that Fannie Mae and Freddie Mac influence loan standards in many ways that often have little to do with the purchase of their direct loans:
Aggressive promotions with easy automated underwriting standards
In 1995, Fannie and Freddie introduced an automated guarantee system, designed to accelerate the underwriting process. These systems, which immediately set guarantees standards for most industries (whether they were purchased by GSEs) greatly relaxed the underwriting approval process. An independent study of 1,000 loans found that the same loan was 65 percent more likely to be approved by automated processes than with traditional processes. The GSE is aggressive in promoting newly liberalized systems, and even asks lenders to use them. In a paper written in January 2004, OFHEO explained the process: "After Fannie Mae and Freddie Mac started using automatic scoring and underwriting in their internal business operations, it was not long before each Company needed a single lender families who use them to use such tools.The company does so by incorporating the use of such technology in the appropriate guidelines for their vendors/servicers. "
Aggressive promotion of easy collateral valuation system
In the mid-1990s, Fannie and Freddie also promoted Automated Valuation Systems (AVMs). Shortly thereafter, the two GSEs decided that, in most cases, a physical inspection was not necessary. In contrast, AVM, which relies mostly on comparable sales data, will suffice. Some analysts believe that the use of AVM, especially for properties in depressed environments, leads to overvaluation of favorable mortgage lending.
Promotions of thousands of small mortgage brokers
In 2001, several major banks told the Wall Street Journal that Fannie and Freddie promoted small credit brokers with little capital over regulated community banks, providing these brokers with an automated guarantee system. The Wall Street Journal reported that underwriting software "is available to thousands of mortgage brokers" and makes "brokers and other small players a threat to big banks." The theory is that "brokers armed with automated software" can sell loans directly to F & amp; F, thus "cutting banks from the business of making loans." At the height of the housing boom, there are about 75,000 small mortgage brokers across the United States, and it is believed that many of them are responsible for the lopsided practices and predators that led to the subprime mortgage crisis.
Creation of low quality loan products offered by private lenders
Many loan products are sold by mortgage lenders, and are criticized for their weak standards, designed by Fannie or Freddie. For example, an "Affordable Gold 100" loan, designed by Freddie, requires no down payment and no closing costs from the borrower. Closing costs can come from "various sources, including grants from eligible institutions, gifts from relatives or unsecured loans."
Close relationship with loan aggregator
Across the country, a company reportedly financed 20 percent of all US mortgages in 2006, has a close business relationship with Fannie Mae. This relationship is described in the Chain of Blame by Muolo and Padilla: "For the next 15 years [starting in 1991] Countrywide and Fannie Mae - Mozilo and Johnson and then Mozilo and Franklin Raines, Johnson's successor - will be attached to the hip." "Depending on the year, up to 30 percent of Fannie's loans come from Countrywide, and Fannie is so grateful that it's valued across the country in terms of affectionate purchases - better than those offered to real (solid and reputable) banks."
Reporting fake subprime purchases
The estimated purchase of subprime loans by Fannie and Freddie ranges from zero to trillions of dollars. For example, in 2008 Economist Paul Krugman mistakenly claimed that Fannie and Freddie "did not make subprime loans, because they could not, the definition of subprime loans was a non-compliant loan, enforced by law, that Fannie and Freddie only bought mortgages issued to borrowers who make advance payments substantially and carefully document their earnings. "
Economist Russell Roberts quoted a Washington Post article in June 2008 stating that "[f] rom 2004 to 2006, two [GSEs] bought $ 434 billion in securities backed by subprime loans, creating a market for more such loans." Furthermore, the 2004 HUD report recognizes that while securities trading backed by subprime mortgages is something that GSE rejects openly, they are still participating in the market. Both Fannie and Freddie reported some of their subprime purchases in their annual reports for 2004, 2005, 2006, and 2007. However, the purchase of the GSE subprime is entirely unknown until after the 2007/08 financial crisis. In December 2011, the Securities and Exchange Commission assigned 6 former executives Fannie and Freddie to Securities Fraud, and the SEC alleged that their company held, in fact, more than $ 2 trillion in subprime loans in June 2008 (a month before Krugman made a statement breaking free).
Estimated subprime loan and securities purchase Fannie and Freddie
Critics claim that the number of subprime loans reported by two GSEs is very unclear. In the initial estimate of the purchase of the GSE sub-mission, Peter J. Wallison of the American Enterprise Institute and Calomiris estimated that two GSEs held approximately $ 1 trillion in subprime in August 2008. Further estimates by Edward Pinto, former Fannie Mae Executive, were around $ 1.8 trillion, spread among 12 million mortgages. That would, by the amount, almost half of all subprime loans circulating in the United States. The highest forecasts were generated by Wallison and Edward Pinto, based on the amounts reported by the Securities and Exchange Commission in relation to securities fraud cases against former executives Fannie and Freddie. Using SEC information, Wallison and Pinto estimate that two GSEs held more than $ 2 trillion in under-standard borrowings in 2008.
These differences can be attributed to the source and approximate method. The lowest estimate (Krugman) is based only on what is legally allowed, regardless of what is actually done. The other low estimates are based only on the amounts reported by Fannie and Freddie in other financial and reporting reports. As Alan Greenspan notes, the subprime report by the GSE is not well understood, and this fact was not widely known until 2009: "The huge purchases by GSE [Fannie and Freddie] in 2003-2004 were not revealed until Fannie Mae in September 2009 reclassified most of its mortgage securities portfolio as subprime. "
Estimates of Wallison, Calomiris, and Pinto are based on analyzing the specific characteristics of the loan. For example, Wallison and Calomiris use 5 factors which, they believe, indicate subprime loans. These factors are the amortization of negative loans, interest payments only, payments below 10 percent, low documentation, and low FICO (credit) scores.
Cheerleading for subprime
When Fannie or Freddie bought subprime loans, they took the opportunity because, as Paul Krugman notes, "subprime loans are non-compliant loans, enforced by law, that Fannie and Freddie only purchase mortgages issued to borrowers who make payments face substantially and carefully document their earnings. "As noted, the SEC has alleged that Fannie and Freddie disregarded the law in connection with the purchase of subprime loans. However, some loans are clearly less qualified so Fannie and Freddie will not buy. Nevertheless, both GSEs promote subprime loans that they can not buy. For example: "In 1997, Matt Miller, Director of Single-Family Affordable Lending at Freddie Mac, spoke to private lenders at the Affordable Housing Symposium He said that Freddie could usually find a way to buy and secure their affordable housing loan" through the use of Loan Prospector research and creative credit enhancement.... 'Then, Mr. Miller added:' But what can you do if after all this analysis, the product you hold does not meet conventional secondary market standards? ' Matt Miller has a solution: Freddie will work with "some companies" in an effort to find buyers for this [subprime] loan. ".
GSE has a pioneering role in expanding the use of subprime lending: In 1999, Franklin Raines first put Fannie Mae into the subprime, following up on previous Fannie Mae efforts in the 1990s, which reduced the mortgage payment terms. At present, subprimes represent a small fraction of the overall mortgage market. In 2003, after subprime use has been greatly expanded, and many private lenders began issuing subprime loans in a competitive response to Fannie and Freddie, the GSE still controls nearly 50% of all subprime loans. From 2003 onward, private lenders increased their subprime lending portion, and then spent much of the most risky loans. However, efforts to defend Fannie Mae and Freddie Mac for their role in the crisis, citing their declining market share in subprimes after 2003, ignore the fact that this GSE has largely created this market, and even collaborated with some of the worst private borrowed offenders, such as Countrywide. In 2005, one of four loans purchased by Fannie Mae came from Countrywide. Fannie Mae and Freddie Mac basically opened the subprime highway, down which was followed by many others.
Defender of Fannie Mae and Freddie Mac
Economist Paul Krugman and Prosecutor David Min argue that Fannie Mae, Freddie Mac, and the Community Reinvestment Act (CRA) may not be the main cause of bubbles/bust in residential real estate because there is an equally large bubble in commercial real estate in America - the market for hotels, shopping centers and office parks are almost unaffected by affordable housing policies. Their assumption, implicitly, is that the financial crisis is caused by the explosion of "bubble" real estate.
Facing Krugman's analysis, Peter Wallison argues that the crisis was caused by a burst of real estate bubbles that were largely supported by low lending or no payments, which is a unique case for the US. > Housing debt . Also, after examining commercial credit failures during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): "We found limited evidence that substantial damage in CMBS [mortgage backed commercial collateral]] underwriting loans occurred prior to the crisis. " Other analysts support the assumption that the crisis in commercial real estate and related loans occurred after crisis in residential real estate. Business journalist Kimberly Amadeo reports: "The first signs of a decline in residential real estate occurred in 2006. Three years later, commercial real estate began to feel its effects.D Denice A. Gierach, a real estate lawyer and CPA, wrote:
... most commercial real estate loans are good loans that are being destroyed by a very bad economy. In other words, borrowers do not cause bad loans, it's economics.
In their book about the crisis, McLean and Nocera reporters argue that GSE (Fannie and Freddie) follow from leading the private sector into subprime loans.
"In 2003, Fannie Mae's market share estimates for bonds supported by single-family housing were 45%, only one year later, down to 23.5%.As a 2005 internal presentation in Fannie Mae noted, with several alarms,` Volume private label surpassed Fannie Mae's volume for the first time.`... There is no question as to why this happens: subprime mortgage originators are starting to dominate the market They do not need Fannie and Freddie to guarantee their loans... As Fannie's market share falls, investors the company is getting restless...
Citigroup has been hired to see what Citi calls `strategic alternative to maximize long-term... shareholder value` [in Fannie Mae]. Among its main recommendations to increase... market capitalization:... began to guarantee `unsuitable housing mortgage '"
"Non-conforming" loans means not in accordance with the main loan standards.
In a 2008 article on Fannie Mae, the New York Times described the company as a response to pressure rather than establishing a step in lending. In 2004, "competitors seized their profitable parts of the business Congress demanded that they help direct more loans to low-income borrowers The lenders threatened to sell directly to Wall Street unless Fannie buys the lion's share of their most loans risky "
Federal Reserve data found more than 84% of subprime mortgages in 2006 coming from private-label institutions rather than Fannie and Freddie, and part of the insured subprime loans by Fannie Mae and Freddie Mac declined as the bubble grew (from an insurable 48% to insure 24% of all subprime loans in 2006). According to economists Jeff Madrick and Frank Partnoy, unlike Wall Street, the GSE "never purchased riskier citizenship bonds (CDOs) that were also rated triple-A and were a major source of financial crises." A 2011 study by the Fed uses a comparison of geographic area statistics that is and is not subject to GSE regulations, finding "little evidence" that GSE plays an important role in the subprime crisis.
Another argument against Wallison's thesis is that the numbers for subprime mortgages provided for him by Pinto are increasing and "can not stand". Krugman quotes the work of economist Mike Konczal: "As Konczal says, all of this depends on the three-card monte form: you're talking about" subprime and other high-risk "loans, lumping subprime with other loans that do not, apparently, anywhere almost as dangerous with the actual subprime, then use this basically fake aggregate to make it look like Fannie/Freddie really is at the heart of the matter. "In Pinto's analysis," non-traditional mortgages "include an Alt-A mortgage, which is not used by low- and middle-income borrowers and has nothing to do with meeting the purpose of affordable housing.
According to Journalist McLean, "the theory that GSE is to blame for the crisis" is "canard", that "has been completely discredited, over and over again." The Commission met with Pinto to analyze the figures and, according to McLean, "the number of Pinto does not survive".
The Government Accountability Office estimates a much smaller amount for extraordinary subprime loans than Pinto. Pinto stated that, when the market collapses, half of all US mortgages - 27 million loans - are subprime. GAO estimates (in 2010) that only 4.59 million loans were outstanding at the end of 2009, and that from 2000 to 2007 only 14.5 million total nonprime loans originated.
The Pinto data, included in the FCIC report from Washington, disagrees, estimates Fannie and Freddie bought $ 1.8 trillion in subprime mortgages, which are spread among 12 million mortgages. However, according to journalist Joe Nocera, Pinto's credit score "increased", by classifying "almost anything non-mortgage remained 30 years as` subprime.` "
It should be noted that the assessments made above (by Konczal, Krugman, McLean, GAO, and Federal Reserve) were made prior to the SEC filling, in December 2011, Fannie Mae and Freddie Mac executives with securities fraud. Significantly, the SEC alleges (and still maintains) that Fannie Mae and Freddie Mac are reported as subprime and substandard less than 10 percent of sub-prime and substantial loans. In other words, a sub-standard loan owned in the GSE portfolio may be 10 times greater than reported. According to Wallison, it will make the SEC's estimates of GSE's current loan higher than Edward Pinto's estimate.
According to David Min, a Wallison critic at the Center for American Progress,
as of the second quarter of 2010, the level of delinquency in all secured loans Fannie and Freddie was 5.9 percent. In contrast, the national average is 9.11 percent. The default levels of Fannie and Freddie Alt-A are also much lower than the national default rate. The only possible explanation for this is that many of the loans are characterized by S.E.C. and Wallison/Pinto as "subprime" are not actually subprime mortgages.
Still another criticism from Wallison is that as far as Fannie and Freddie contribute to the crisis, the search for its own gain rather than the government's mandate for expansion of home ownership is the cause. In December 2011, after the Securities and Exchange Commission assigned 6 former Fannie and Freddie executives to Securities Fraud, Wallison stated, as did the SEC, that all GSE sub-mission purchases were hidden during the crisis. On the SEC's allegations, Wallison estimates that Fannie and Freddie hold, in fact, more than $ 2 trillion in subprime loans in June 2008. However, journalist Joe Nocera argues that "SEC complaints make almost no mention of an affordable housing mandate" and instead accused executives of buying subprime mortgages (in Nocera's words) "too late... to reclaim lost market share, and thus maximize their bonuses." According to Jeff Madrick and Frank Partnoy, what made Fannie and Freddie conservator in September 2008 "has nothing to do with pursuing the original goal of affordable loans." The GSE is much more concerned about maximizing their profits than fulfilling these goals. low to buy mortgage securities with high payouts once their accounting irregularities are behind them... The most disturbing thing about the GSE, they refuse to maintain sufficient capital as a cushion against loss, despite the demands of their own regulators that they are doing it. "
However, the Nocera dispute, at least one executive at Fannie Mae has a completely different perspective, stated in an interview:
Everyone understands that we are now buying loans that we previously rejected, and that the models tell us that we have too little to collect, but our mandate is to remain relevant and serve low-income borrowers. So that's what we did. "Fannie and Freddie both are under political pressure to expand the purchase of affordable, high-risk housing mortgage types, and under significant competition pressure from large investment banks and mortgage lenders.
Wallison has quoted New York Times columnist Gretchen Morgenson and his book Reckless Endangerment as pointing out that Jim Johnson's "Democratic political operation" changed Fannie Mae "into a political machine created and exploited housing policy the government that is at the center of the financial crisis and leading the way for Wall Street. " However, in Morgenson's book review, two Wallison economic critics (Jeff Madrick and Frank Partnoy) point out that Morgenson does not defend Wall Street because Fannie misled it, but states "from all partners in the home ownership drive, no industry contributes more to corruption from lending process than Wall Street. "
Federal Takeover of Fannie Mae and Freddie Mac
In 2008, GSE was owned, either directly or through their sponsored mortgage pool, $ 5.1 trillion in residential mortgages, about half of the unpaid amount. GSE has always been highly leveraged, their net worth on June 30, 2008 to just US $ 114 billion. When concerns arose about GSE's ability to generate nearly $ 5 trillion in collateral and other obligations in September 2008, the US government was forced to put these companies into conservatories, effectively nationalizing them with taxpayer fees. Paul Krugman notes that the implicit guarantee of government support means that "profits are privatized but losses are socialized," meaning that investors and management earn profits during the boom period while taxpayers will take losses during the bailout.
Announcing the conservator on September 7, 2008, GSE regulator Jim Lockhart stated: "To promote stability in the secondary mortgage market and lower funding costs, the GSE will slightly increase their MBS portfolio by the end of 2009. Then, to address systemic risks, in 2010 the portfolio they will begin to be gradually reduced at a rate of 10 percent per year, mostly through natural runoff, eventually stabilizing at a lower size, less risky. "
According to Jeff Madrick and Frank Partnoy, the GSE ended up with a conservatory due to the sharpness of the fall in housing prices, and despite the fact that they "never took almost the risk taken private market." Jason Thomas and Robert Van Order argue that the fall of the GSE "is rapid, primarily because mortgages originated in 2006 and 2007. This... is largely associated with the purchase of a risky-but-not-subprime mortgage and insufficient capital to cover impairment in property values. "In their paper on GSE, they" found no evidence that their accidents are caused by government housing policies or that they have an important role in the development of the market of securities backed by subprime mortgages ".
Community Reinvestment Act
CRA was originally enacted under President Jimmy Carter in 1977. The law was created to encourage banks to discontinue discriminatory practices on loans. There is a debate among economists about the impact of CRA, with critics claiming that it encourages lending to consumers and a defense that can not accept credit claiming a thirty-year debt history without an increased risk.
Conclusion Commission on Financial Crisis Investigation
The Commission of Financial Crisis Investigations (majority report) concluded in January 2011 that: "... CRA is not a significant factor in subprime lending or crisis.Many subprime lenders are not subject to CRA.Research shows only 6% of high -cost credit - proxy for subprime loans - have a relationship with the law Loans made by lenders arranged by CRA in an environment where they are required to lend half the possibility of default as similar loans made in the same neighborhood by independent mortgage initiators are not subject on the law. "
Three Republican authors of the report disagreeing with the majority opinion of FCIC wrote in January 2011: "Both the Community Reinvestment Act and the Glass-Steagall firewall deletion are significant causes. Crisis can be explained without using these factors." The three authors further explained: "The spread of credit declines not only for housing but also for other asset classes such as commercial real estate.This tells us to see the credit bubble as an important cause of the US housing bubble.It also tells us that the problem with the US housing policy or the market does not in itself explain the bubble of US housing. "
Debate about the role of CRA in crisis
The detractors point out that the early years of CRA were relatively harmless; however, amendments to CRA, made in the mid-1990s, increased the number of home loans to unqualified low-income borrowers and, for the first time, allowed the securitization of CRA-regulated loans that contained subprime mortgages. In view of some criticisms, CRA's weakened loan standards and other affordable housing programs, coupled with the Federal Reserve's low interest rate policy after 2001, were the main cause of the 2007/08 financial crisis.
CPA Joseph Fried writes that there is a lack of performance data on CRA loans, based on responses by only 34 of the 500 banks surveyed. However, estimates have been tried. Edward Pinto, former Channel Credit Officer Fannie Mae (1987-89) and Fellow at the American Enterprise Institute, estimates that, as of June 30, 2008, there are $ 1.56 trillion of unpaid CRA loans (or equivalent). Of this amount, about $ 940 billion (about 6.7 million loans), according to Pinto, subprime.
Economist Paul Krugman notes that subprime explosions are "strongly encouraged" by loan initiators who are not subject to the Community Reinvestment Act. One study, by a law firm advising financial services agencies on the compliance of Reinvestment Society, found that agencies covered by CRA were less likely to make subprime loans (only 20-25% of all subprime loans), and when they make lower interest rates. The banks are half likely to resell the loan to another party.
Federal Reserve Governor Randall Kroszner and Federal Reserve Deposit Insurance Corporation chairman Sheila Bair have stated that CRA is not to blame for the crisis. In a 2008 speech delivered to The New America Foundation conference, Bair commented, "Let me ask: where in CRA is written: lending to people who can not afford to pay back?" Where is the loan? which causes current problems driven by a desire for market share and revenue growth... pure and simple. "Bair is literally true: CRA does not tell banks to lend to those who can not pay. However, research shows that many banks feel very depressed. For example, Bostic and Robinson found that lenders seem to see CRA agreements "as a form of insurance against potentially huge and unknown costs..." of breach of lending.
Federal Reserve Governor Randall Kroszner said that the CRA is not to blame for the subprime chaos, "First, only a fraction of the subprime mortgages associated with CRA, and second, CRA-related loans seem to work in proportion to other types of subprime loans." Together. we believe that the evidence stands in contradiction to the notion that CRA contributes in a substantive way to the current mortgage crisis, "Kroszner says:" Only 6% of all loans at higher prices are extended by CRA. - Closed lenders for low-income or low-income borrowers in their CRA assessment area, local geography that is the primary focus for CRA evaluation purposes. "
According to Edward Pinto's American Enterprise Institute colleague, Bank of America reported in 2008 that its CRA portfolio, which is 7% of mortgages owned housing, is responsible for 29% of its losses. He also alleges that "about 50 percent of CRA loans for single family residence... [have] characteristics that indicate high credit risk," but, according to the standards used by various government agencies to evaluate CRA's performance at the time, calculated as "subprime" because the creditworthiness of the borrower is not considered. However, economist Paul Krugman believes that the Pinto category of other "high-risk" mortgages is wrong including non-high-risk loans, which are just like the corresponding traditional mortgages. In addition, other CRA critics acknowledge that "some CRP subprime loans may have occurred, even in the absence of CRA, for that reason, the direct impact of CRA on subprime lending volumes is uncertain."
James Kourlas pointed out that "industry players... are confident that they can handle new loan standards and make profits, believing they can safely fund a massive expansion of housing loans, that they are wrong is not proof and of themselves that they are willing to sacrifice profits for altruistic ideals.The government that started rolling the ball did not fully explain why the industry picked up the ball and ran with it. "
CRA was revived in the 1990s, during merger fever among banks. The fragmented banking system is a legacy of state-level anti-ramification laws. Without branches and national diversification, banks are experiencing a deterioration of the local economy. After the savings and loan crisis, a decade of merger combines the banking industry. One criterion for government approval for mergers is "good citizenship" which is shown by lending to underserved markets.
During the Clinton administration, CRA was refreshed and used to control the merger. President Clinton said the CRA "was good enough until we started power.Over more than 95 percent of the public investment... made in the 22 years since the law was made in the six and a half years that I have been in the office." CRA became an important tool in Clinton's "third way" as an alternative to both laissez-faire payments and government transfer payments to build housing directly.
However, CRA ratings, and not CRA loans, are a key tool for changing banking practices. Poor rating prevents mergers. Community activist groups are an important part of the merger process. Their support is very important for most mergers and in return the banks support their organizations. In 2000 the bank gave $ 9.5 billion in support to activist groups and in return these groups testified in favor of the merged merger. The creation by the WaMu mega-bank merger in 1999 came with a CRA $ 120 billion ten-year agreement to fund the efforts of housing activists. In return, CRA activists supported the merger of one of the "poorest managed banks and among the largest and earliest banks that failed in the 2007-09 subprime crisis".
Banks that refuse to abandon traditional credit practices remain small. By controlling the merger, CRA ratings create "trusting banks" that not only come from loans labeled CRA-loans but extend easy credit across the board. By controlling the merger process, the government is able to breed the soft-credit banks through an artificial selection process.
Steven D. Gjerstad and Vernon L. Smith, reviewing the research on the role of CRA, found that CRA loans were not significant in a crisis but CRA ratings (bank ratings) played an important role. They conclude, "CRA is not exempt from playing a role in crisis or blamed as the root cause." It justifies easy credit for those who are and indirectly affect all loans to the borrowers who are the target. That, however, is part of the emerging consensus among lenders, governments and communities for easy credit.
The government's "affordable housing" policy
Overview
The Financial Crisis Investigation Commission (FCIC), Federal Reserve economist, business journalist Bethany McLean and Joe Nocera, and some academic researchers argue that the government's affordable housing policy is not the main cause of the financial crisis. They also argue that the Community Reinvestment Act loans outperform other "subprime" mortgages, and GSE mortgages perform better than private label securitizations.
According to the Financial Crisis Investigation Commission, "based on evidence and interviews with dozens of people involved" in the HUD's ("Department of Housing and Urban Development)" affordable housing goals "for the GSE," we decided that these goals only contributed little to Fannie. and participation
Source of the article : Wikipedia
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