I've been reading up on the causes for the current credit meltdown and the conclusion is inescapable : There was no one factor; no single root cause for the current mess. And yet if all you do is listen to Limbaugh or the even more factually delinquent Hannity and Levin, you might easily think that the CRA and Andrew Cuomo caused the current mess. Likewise, if all you do is listen to Chris Dodd, Barney Frank, Marc Morial and the other Dems holding hearings, you'd think it was all the fault of predatory lenders and Wall Street robber barons. As usual the truth is somewhere in the middle and there are plenty of hands that got dirty and caused the current situation.
It is neither fair nor accurate to heap blame on the CRA. The CRA governed B A N KS and most sub-prime loans were NOT made by banks. The biggest writers of sub-prime mortgages and refinances were mortgage companies like Countrywide, Mid-Century, Argent and Aegis. Likewise most sub-prime and Alt. A loans did not go to low or even middle income blacks and latinos. Most sub-prime loans went to UPPER INCOME Whites except for 2004 when most went to Middle Income Whites.
While they had their own list of sins and omissions, the fact is that Fannie and Freddie did NOT originate sub-prime lending. From 2004-2007 the number of sub-prime mortgages bought by Fannie Mae and Freddie Mac was far exceeded by the number of such loans bought by Wall St. Investment banks like Lehman Brothers.
In one year Lehman Brothers made $ 1.7 BILLION in fees for buying and repackaging sub-prime mortgages. Where Fannie and Freddie DID go seriously wrong was when they abandoned their originally strict lending guidelines. Worst of all was when they dropped what had been a longstanding requirement that REQUIRED pre-borrowing counseling. This proved to be fatal when there were predatory lenders like Countrywide and Argent and unscrupulous brokers masquerading as "financial advisors". In fact the National Association of Mortgage Brokers had their pants pulled down when it was revealed that they encouraged their members to: "FIRST get the borrower to accept you as their FINANCIAL ADVISOR". There is no doubt that many borrowers were steered away from fixed rate mortgages and into sub-prime and Alt A. borrowing. According to the Wall Street Journal, 60 to 65% of sub-prime borrowers qualified for less costly prime mortgages.
To the expansion of sub-prime borrowing we can add in corrupt appraisers; corrupt mortgage brokers collecting fees from the lenders when they were SUPPOSED to be working for the BORROWERS getting them the best deal and it's not surprising that from 2004 to 2006, 21% of all mortgages written during those 3 years were sub-prime. In the preceding eight years from 1996 to 2004 sub-prime mortgages accounted for only 9%. Those EIGHT years were AFTER Cuomo changed the CRA Regs and Reno threatened prosecutions.
There were many cases where black and latino borrowers were steered into sub-prime loans when they qualified for prime fixed rate mortgages. In many cases the ones doing the steering were other blacks and latinos.
As of today, sub-prime ARMs constitute only 6.8% of all mortgages currently outstanding but 43% of the foreclosures. In contrast, sub-prime fixed rate mortgages constitute 6.3% of outstanding loans but only 12% of the foreclosures. So even when borrowers were not qualified for
fixed rate prime mortgages they were steered into the ARMs instead of sub-prime fixed rate mortgages.
For the most part it is probably unfair to blame the borrowers themselves despite recognizing a rudimentary duty to understand what it is you are signing. However there WERE a good number of sophisticated borrowers who were engaged in pure speculation. Anticipating that housing prices would keep going up, Up, UP, many gladly signed up for ARMs with low teaser rates hoping to flip and sell at a healthy profit well before the higher rates came close to kicking in. When prices flattened many were caught with homes they couldn't sell. Nobody should feel the least bit sorry for them or any other speculators.
On top of a lot of shaky borrowing, we can add in the bundling and securitizing, the inadequate regulation and over-leveraging plus a lack of both Congressional and Executive oversight.
When Clinton was President he put together a 20 person Working Group to advise him on what to do about derivatives; what Buffet called "Weapons of Financial Mass Destruction". Alan Greenspan and Arthur Levitt ( then head of the SEC ) and all but one member said there should NOT be regulation. Not even a Clearinghouse to keep track of the derivative market to get some transparency and have a handle on who was obligated to whom. We have clearinghouses for stocks, bonds, options and a lot of other stuff but even today there is nothing of the sort for derivatives.
That's what happened in a nutshell. So let's ALL stop with describing just one part of the elephant and/or pointing a finger in just one or two directions.





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