Can You Imagine the Outcry?

Wouldn't a better effort be made to look at the role government played in creating this mess and find ways to restrain government intrusion into the marketplace. A simple question to ask is would a bank or a mortgage company have taken the risk of no down payments, bad credit history and unsupported claims of employment history and income if they had to hold the loans they wrote? Would a private secondary market assumed the risk of taking on these obligations with such flimsy terms and conditions? If each of these entities new from the beginning that they would hold this risk without the support or intervention of the government - how many of these institutions would be in the position they now find themselves?

What we tend to overlook is the role of not just the Federal Reserve and its easy money policy but also the impacts of both the CRA and Fannie and Freddie in causing this disaster. We simply cannot ignore the actions of bank regulators who were more than willing to use the club of the CRA to force banks to accept risk that they new were unacceptable. We cannot ignore the lowering of mortgage standards that Fannie and Freddie allowed so that they could accept these poorly constructed loans from originators. And we should not overlook the fraudulent packaging that Fannie and Freddie deliberately concocted to pass this bad paper on to others in the form of "exotic" financial instruments.

I have a general rule that states when one or two company's fail - look at management. When an entire sector fails - look at government.

Can somebody explain why we should care if borrowers take out loans they can't afford? In boom market they get undeserved capital gain windfalls, in down markets they get foreclosed out and the lender (almost never the borrower) eats the loss. Foreclosure isn't a party, but at least you get free housing for 6-12 months, and frequently even longer, while the foreclosure is being processed.

Yes, I know banks shouldn't make bad loans, but this issue is always framed by the media and government as one of banks hurting borrowers for profit, not borrowers scamming banks or simple bank incompetence.

What economiser said.

Also, banks wouldn't have lent to people who couldn't repay in the absence of government interventions. The fact that they did in the first place illustrates the distortion of the credit market resulting from attempted central planning by government.

To add a little bit more nuance: banks would still lend if they could quickly shift the loans off their books in the form of MBS/CDOs, like they did in the past decade. The question then becomes, why would anyone buy opaque securities paying AAA-level interest rates? And for that we can squarely blame the government's ultra-low interest rates for creating new money straining for yield.

I shudder to think what today's 0% interest rates will lead to once this hot money dissipates.

Because then the geniuses in Washington bail out the underwater banks and bail out the underwater home "owners." Stop socializing the risk and we can forget about what market actors do.

Even aside from your criticism, which is so obvious that it is easily overlooked and ignored, what regulations could have curbed the rampant fraud in the mortgage-loan, brokerage industry? Aside from brokers' failures in due diligence and suborning and committing misrepresentations on loan documents, the collusion between brokers and appraisers were remarkably pervasive. These actions were already unlawful and needed no new regulations to dis-incent the brokers from engaging in them. It is not the absence of regulations that is necessarily a problem, but the absence of governmental prosecution, either civilly or criminally, against these scofflaws. Both the companies and their agents and employees must be held to account.

More on point, however, if they want to hold Chairman Bernanke to account, they must educate themselves about what failures in regulation by the Federal Reserve actually impacted the economy: the secondary-mortgage markets. But, Chairman Bernanke was not solely to blame for this unchecked, cowboy market. The SEC is principally to blame for their reckless omissions in securing transparency and risk-control throughout the processes in pooling MBSs.

The SEC cannot check what's in the MBS. It is not their job and they are incompetent to perform such a task. The SEC can only (and barely, at that) check to make sure that you're complying with its rules. Their rules tend to be broad, so I doubt they had strict guidelines about what constitutes transparency in ABS. I also don't think it's a good idea for the SEC to dictate the construction of structured products.

Securing transparency and a reasonable risk assessment was chiefly the job of rating agencies and of the people who purchased the ABS. MBS were not sold to moms and pops but rather to institutions fully staffed with fixed income analysts. If at any time any of these potential investors wanted more transparency, more transparency would have been forthcoming. Virtually nobody did. People wanted to engage in the fantasy that since the property market never declined nationally that it can't. Lenders gave home equity loans on inflated equity that they didn't know was inflated. That's not the fault of the SEC.

Politicians wanted to increase home buying (I won't say "ownership" because when you have no equity, you own nothing) by any means necessary. Through various pieces of legislation, manipulation of the interest rate and the abuse of those hybrid monsters fan and fred, they either encouraged or forced lending to ever poorer credit risks.

Now that the consequences of coercion of lenders in the property market are apparent, it's suddenly the fault of poor regulation rather than government coercion and poor risk management.

Nobody saw this melt-down coming? This was all a result of lax regulation by the Fed? Fred and Fan weren't used to achieve political goals? Hah.

From an article by Steven Holmes published in the NYT in September 1999.

http://www.nytimes.com/1999/09/30/business/fann...

"The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."

and

" In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Why imagine?

From New York Times, 9/11/2003, Headline: "New Agency Proposed to Oversee Freddie Mac and Fannie Mae"

http://www.nytimes.com/2003/09/11/business/new-...

"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."

It occurs to me that the Fed was "handing out [loans] with no regard for the borrowers' ability to pay."

Maybe they should start at home...

Worse. The banks were carrying out the politicians' agenda.