Dare I say lack of government regulation created by Phil Gramm and James Leach.

 

Yeah... FandF were latecomers to the party, pushed by not only congress but big institutional investors to push returns.

Even if you want to fit FnF into some 'Government always screws it up' meme, you have to look at the numbers (and many other things). But FnF were burned for about 200Bn. The other top 24 (of the top 25 entities involved) were private, not-depositor outfits (Goldman, Lehman, Countrywide, Ameriquest etc.) that weren't subject to that regulation at all - and certainly weren't required to loan to anyone. They did, though because signatures on the line were worth many times the value of the loan. After leveraging, insuring with CDS etc. those guys made FnF look like pikers by pushing their exposure to roughly 3X the global economy.

 

Yeah... FandF were latecomers to the party, pushed by not only congress but big institutional investors to push returns.

Even if you want to fit FnF into some 'Government always screws it up' meme, you have to look at the numbers (and many other things). But FnF were burned for about 200Bn. The other top 24 (of the top 25 entities involved) were private, not-depositor outfits (Goldman, Lehman, Countrywide, Ameriquest etc.) that weren't subject to that regulation at all - and certainly weren't required to loan to anyone. They did, though because signatures on the line were worth many times the value of the loan. After leveraging, insuring with CDS etc. those guys made FnF look like pikers by pushing their exposure to roughly 3X the global economy.

Ahh yes, greed - it's a wonderful thing.
I had one of those loans. I retired early. before social security, so of course I had no income, but we wanted to move. I couldn't get a what was a conventional loan because my income (zero) wouldn't cover the requirements. But I wrote them a nice note that said I would pay them with money from investments and away we went with a 3.5% 5 year fixed adjustable. Well that was back in 2002/3 and I was making more in the market that that. Luckily I converted when I went on social security and avoided the crash.
But people will do some strange things. My neighbor got caught up at the peak so he gave his house back to the bank and paid cash for one just like it at a lower price. Guess it didn't hurt quite so bad after that.

 

Yeah... FandF were latecomers to the party, pushed by not only congress but big institutional investors to push returns.

Even if you want to fit FnF into some 'Government always screws it up' meme, you have to look at the numbers (and many other things).

That's been just the problem with that meme. It's always pointed out that loan requirements were lowered to encourage home ownership by the lower economic strata, but never are we privy to the real numbers of those households receiving the loans. In fact, when you look at the numbers, only about 17% of new borrowers during the 2004 - 2007 time frame were considered poor or low-income, as compared to 55% from the middle class. The middle class also accounted for 60% of foreclosures during that time. But neither the government not the banks had any reason to increase loans to the middle class, who already could qualify for standard or conventional loans. So, something else was driving the middle class to take out new loans and refinance, and driving them into more risky loan types. That something else was securitization of the lending market. With securitization, banks and investment institutions didn't need to worry about the quality of the loan or the risk. This, as much as anything else, blew up the market.

 

Another neighbor was well into mortgage backed securities. Thought he had died and gone to heaven.
But almost overnight he was wiped out - had to sell the Corvette and give the condo (now underwater) back to the bank.
Sued his broker, but I don't think anything came of it.

 

That something else was securitization of the lending market. With securitization, banks and investment institutions didn't need to worry about the quality of the loan or the risk. This, as much as anything else, blew up the market.

I think so too. Even if you make a bad loan on a building on some land, you still have the building and the land. Its not the case when you have contract loan originators who are paid on commission to sign up buyers and each of those mean jobs and housing starts that make the economic numbers look good so congress and the administration can crow about it. They sold everything they could sign to the brokers who securized the paper. That was the raw fuel for flipping and leveraging, which the banksters did with gusto. Rate it AAA and sell it. Then insure it. Then (as Goldman and others did, bet against it). Then get us to make them whole.

Nice work if you can get it.

I agree with Brownout's comments on the troubles of the middle class. Whole 'nother can of worms..

Dare I say lack of government regulation created by Phil Gramm and James Leach.

Don't forget Bliley.. and the previous efforts by Citibank/Travlers and others to de-regulate.

.. and for the record, I don't know what Facebook is about either..

 

It doesn't matter how many articles you quote or link, Freddy and Fanny does not give loans to homeowners, nor to they back loans to homeowners. They are a secondary market which purchases debt on the open market. You may or may not think that's a good idea, but it is what it is. They don't make any loans.

I know they buy loans and they facilitated the others to make the subprime loans. If you don't think they were part of the problem, that's fine. You have the right to that opinion, no matter how many people implicated the three entities .... the GSEs, the government, and the lending institutions. Someone was pushing them to make those subprime loans. If they weren't "backed" by the GSEs, I doubt the lenders would have made them. No one would risk their capital on such an adventure. They would risk the one entity that has the deepest of deep pockets, the American taxpayer. Of course, the taxpayer, relied on the government and the bureaucratic regulators to keep an eye on the situation, but it was tough for the regulators to facilitate and regulate. Facilitating was easier as they weren't spending their own money. After all, it was the "government's money."

 

I know they buy loans and they facilitated the others to make the subprime loans. If you don't think they were part of the problem, that's fine. You have the right to that opinion, no matter how many people implicated the three entities .... the GSEs, the government, and the lending institutions."

Of course they were part of the problem. But subprime loans were made with and without the endorsement of the GSE's. In fact, most of the subprime loans were made by banks and sold to private equity firms.

 

Of course they were part of the problem. But subprime loans were made with and without the endorsement of the GSE's. In fact, most of the subprime loans were made by banks and sold to private equity firms.

And towards the end firms like Goldman were selling their own loans short and actually made money doing it.