The 545-page Financial Crisis Inquiry Comission report outlines the causes of the financial crisis. Everyone who testified before the Commission said that the financial crisis was initiated by the mortgage meltdown which began when the housing bubble deflated in 2007.
Accountability and ethics broke down with borrowers lying about being able to pay mortgages and lenders making loans to those they knew could not afford it.
Chris Dodd’s favored mortgage lender (who gave him a good mortgage deal) were mentioned in the report:
“Countrywide executives recognized that many of the loans they were originating could result in ‘catastrophic consequences.’ Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in ‘financial and reputational catastrophe’ for the firm. But they did not stop.”
Irresponsible lending was prevalent, according to the report, and there were warnings, but “the Federal Reserve neglected its mission,” and mortgage lenders passed the risk along.
“From the speculators who flipped houses to the mortgage brokers who scouted the loans, to the lenders who issued the mortgages, to the financial firms that created the mortgage-backed securities, collateralized debt obligations… no one in this pipeline of toxic mortgages had enough skin in the game.”
The role of Fannie Mae and Freddie Mac in causing the crisis was significant in several ways. The GSE Act put them in direct competition for housing loans and the purpose of the act was to reduce underwriting standards to provide affordable home purchases to low and middle-income families.
Fannie and Freddie were part of the securitization process that lowered mortgage credit quality standards.
The Act” authorized HUD to establish and administer what was in effect a mortgage quota system in which a certain percentage of all Fannie and Freddie mortgage purchases had to be loans to low-and-moderate income (LMI) borrowers – defined as persons with income at or below the median income in a particular area or to borrowers living in certain low income communities.”
It drastically increased the number of NTM’s (non-traditional mortgages) in the system. NTMs require low or no downpayments, increased debt ratios, impaired credit, reduced loan amortization, et al.
From the report: “9,000 zip codes with a median family income below the metro area median have projected foreclosure rates equal to or greater than 10 percent. These zips have an average projected foreclosure rate of 15 percent and account for 44 percent of all FHA loans in the low- and moderate-income zips.”
An estimated 44 percent of the FHA’s business consists of loans with either one or two subprime attributes—a FICO score below 660 or a debt ratio greater than or equal to 50 percent (based on loans insured during FY 2012).
As large financial institutions whose failures risked contagion, they were massive and multidimensional cases of the too big to fail problem. Policymakers were unwilling to let them fail.
They were by far the most expensive institutional failures to the taxpayer and are an ongoing cost to taxpayers.
Although there were many contributing factors, the housing bubble of 1997-2007, it would not have been as horrific or lasted as long nor would there have been a financial crisis of 2008 but for the role played by the housing policies of the United States government over the course of two administrations [Bush and Clinton - in fairness Bush warned against the practices of Fannie and Freddie but the congress insisted Fannie and Freddie were solvent].
These policies resulted in about 27 million subprime and Alt-A mortgages in the US financial system with half of the mortgages outstanding. The losses resulting from the delinquency and default of these mortgages are responsible for the financial crisis.
All of the above information comes from the report which you can check for yourself. The Dodd-Frank Act does not deal with Fannie and Freddie.
Worse yet, the practice continues and we are faced with the same situation happening again.
The study recommended that the FHA stop these irresponsible lending practices and return to its traditional mission of helping the truly needy and not guaranteeing across-the-board high-risk loans which allows for cross-subsidization of the loans with excessive risk.
There is no effort on the part of the president or congress to do so.
The government has made Fannie and Freddie the problem of the US taxpayer with ongoing bailouts and both Fannie and Freddie are continuing these failed practices.
As Greenspan said, “We’e decided to become a welfare state.”