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Bear Stearns, the CRA, and Freddie Mac

I keep hearing that the subprime crisis was caused by people willing to buy stuff they couldn’t evaluate. Why would smart people do that? One answer is that they were stupid. In an era of rising home prices, it’s hard to remember that prices can go down. And when prices are going up, the risks of default are low. Is there another answer? What was the role of GSE’s in reducing the riskiness of these assets? What was the role of GSEs in creating systemic risk rather than one bank or investment house making bad decisions? So here’s an interesting press release from October 20, 1997, claiming to be the first securitization of CRA-encouraged loans. What I find interesting is that it was securitized by Bear Stearns and guaranteed by Freddie Mac. I wonder how many more were like that. Here’s some of the text:

CHARLOTTE – First Union
Capital Markets Corp. and Bear, Stearns & Co. Inc. have priced a
$384.6 million offering of securities backed by Community Reinvestment
Act (CRA) loans – marking the industry’s first public securitization of
CRA loans.

affordable mortgages were originated or acquired by First Union
Corporation and subsidiaries. Customers will experience no impact –
they will continue to make payments to and be serviced by First Union
Mortgage Corp. CRA loans are loans targeted to low and moderate income
borrowers and neighborhoods under the Community Reinvestment Act of

securitization of these affordable mortgages allows us to redeploy
capital back into our communities and to expand our ability to provide
credit to low and moderate income individuals," said Jane Henderson,
managing director of First Union’s Community Reinvestment and Fair
Lending Programs. "First Union is committed to promoting home ownership
in traditionally underserved markets through a comprehensive line of
competitive and flexible affordable mortgage products. This transaction
enables us to continue to aggressively serve those markets."

$384.6 million in senior certificates are guaranteed by Freddie Mac and
have an implied "AAA" rating. First Union Capital Markets Corp. is the
investment banking subsidiary of First Union Corporation.

are extremely pleased by how well this transaction was received by
investors as many of the tranches were significantly oversubscribed,"
said Owen Williams, managing director of fixed income sales and trading
at First Union Capital Markets Corp. "This offering is further proof of
investors’ b desire for a diverse range of collateral."