Submitted by Businomics Blog
Did lack of regulation create the subprime mortgage crisis? I’m asked this all the time. The short answer: Of course not. Nowhere close. Not a chance. Here’s the long answer.
What regulations have we had? The mortgage originator—your local bank or mortgage broker—was under regulations not to discriminate and to inform you of your interest rate. Those papers you signed without reading? Many of them were “Truth in Lending” disclosures designed to protect you from getting into something you didn’t understand. However, if you didn’t read them, maybe they didn’t protect you.
But you were not the one lending money to a borrower incapable or unwilling to pay the money back. That was your banker. He was not regulated because he didn’t have any risk. He immediately turned around and sold your loan, along with a thousand other loans, to a Wall Street investment bank, which formed the many mortgages into a mortgage backed security or a “collateralized debt obligation.”
There were no regulations protecting Wall Street investment bankers from lending deadbeats money. The idea is that they are smart enough, sophisticated enough, to take care of themselves. (That turned out to be a bad idea, but it was the idea behind the lack of regulation.)
How did these rich, sophisticated investors make such a huge mistake? First they experimented. They tried small variations from the old traditional loans. Variations like adjustable rate mortgages. Low-down-payment mortgages. No documentation mortgages. (How else would strippers who make their living from tips be able to borrow money?)
These experiments worked well. Surprisingly well. Why? Because it was a rising real estate market. Borrowers who were unable to make their payments simply sold their homes at a profit. No big deal, and no default or foreclosure on the mortgage.
The crucial mistake that Wall Street made was extrapolating from the good times to the bad times. They assumed that these subprime mortgages would be good all the time because they had been good in the rising house market. Oops.
Would more regulation have helped? Maybe we could have protected Wall Street investment bankers from themselves. Maybe with good regulations they would not have to give up their summer homes in the Hamptons. Maybe.
In reality, regulatory policy has worked in the opposite direction. The government wanted more risky loans made, not less. For example, the Community Reinvestment Act pressured banks to make loans in poor neighborhoods. Banks (and I was a banker under the CRA) figured that making some bad loans was just another tax., a cost of doing business as a regulated company. In 1995, the Clinton administration revised the CRA to increase pressure on banks to make more loans to risky borrowers. In 1997, the first pool of subprime mortgages was securitized (by Bear Stearns!)
The law regulating Fannie Mae and Freddie Mac was rewritten to reduce their capital requirements, meaning they would become riskier. Some critics were concerned about the risk, but here’s what the distinguished Congressman Barney Frank had to say at the time:
”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
New York Times, September 11, 2003
At the height of the real estate boom, the United States set record home ownership rates. Politicians, including President Bush, bragged about their success at getting Americans into their own homes. As recently as August 2007, the President bragged that he was helping Americans get homes with lower down payments and higher loan limits. He also signed a lay making it easier for homeowners to walk away from their mortgage obligations.
Would more regulation have reduced the number of bad loans made? Most likely, more regulation would have increased the problem.
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2 users commented in " Sub-prime Mortgage Crisis: Caused by Lack of Regulations? "
Follow-up comment rss or Leave a TrackbackHi Everyone,
The reason I am writing this is to remind all those that may have forgotten, or never even heard of, how our current economic crisis mirrors the Stock Market crash that created the Great Depression. I understand that many people know about how terrible the Great Depression was and how it effected our economy. What most people don’t know is how it was manufactured and how closely our current economic crisis resembles the Great Depression.
In the roaring 20s Wall St. banks decided it would be a good idea to allow regular people play the stock market by buying stocks with only 10% actual currency while the bank retained the remaining 90% ownership, yet allowing the trader to maintain 100% of the control. The catch was that the bank could call in these loans at anytime and the loan had to be paid within 24 hours. The loan was called a margin loan and when it was called in, that was called a Margin Call.
So, the sleeze behind the Banking system, names like Warsburg, J.P. Morgan, Rockefeller, Roosevelt and most notoriously, Rothschild, made the decision to deliberately crash the market by doing a widespread Margin Call. Calling in all these loans simultaneously resulted in many thousands of traders being forced to sell their stocks in order to immediately pay back their Margin Loans. This in turn led directly to the collapse of the Stock Market. There is a lot more to this story and many other BIG names to mention, but you can go Google that yourself. Just look it up and you’ll find the truth.
Now let’s come to present day with the Predatory Lending scandal that has ultimately led our economy to this point. Back in 2003 and 2004 several huge lenders owned by the same family names as mentioned above decided it would be a good idea to lend a great many billions of dollars to millions of Americans that simply could not afford the large loans they were receiving from these people. In turn, this created an inflated market value of Real Estate because so many people were competing to “flip” homes with their overrated loan approvals. This process created a housing market bubble that would last across a 3 year period. By late 2005 this bubble began to deflate, real estate values dropped like a rock and the crisis had begun.
At this point I would like to deviate for a moment to another event that occurred around Christmas time in 2005 that most people don’t even know about. While most of Washington was away on winter vacation for the holidays, a most sinister agreement was pushed through Congress, the Senate and signed off on by President Bush himself. This agreement is called the North American Union Agreement (NAU) and basically makes Canada, the United States and Mexico borderless. This agreement ties the three economies together and essentially “Unifies” the three sovereign nations under one umbrella.
Coming back to our current economic crisis, we now see that 3 years after this agreement was passed and 5 years after the housing bubble was manufactured, our government is on the verge of striking the final blow to our economy by diluting the value of our dollar with zero value “bail out” loans. It doesn’t take a macro-economist to see what’s happening here. Think of the American dollar as a glass of whole Milk. Left alone the Milk is tasty and healthy. However, once you start to mix water with it, the Milk loses it’s flavor and begins to have no flavor or nutritional value. If you mix enough water with it, it becomes worthless and is nothing more than Milk colored water. This is exactly what these sinister bastards are doing to our economy.
First, they allow people to think they’re getting a generous deal on a loan, little did they know the motive behind it and how widespread these valueless loans were. Then, the same lenders sell these loans to another bank under their umbrella of companies and change the terms. The new terms increase the payments, which in turn leads to foreclosures, bankruptcies and utter financial chaos for many average people. Eventually this outward disease spreads inward and upsets the top of the economic food chain. Once that happens our government injects zero value currency into an already teetering economy. Once this dilutes our dollar to a certain point, we will suffer economic collapse.
Please, keep in mind that this will happen no matter what the average citizen does now. Also keep in mind that this economic crisis, just like the Great Depression, is 100% manufactured and backed by nothing but lies. Mark my words on this: Once the economy reaches a critical low, the government will propose unifying the United States and Canada’s economies in order to stabilize both. This is the ruse, so you better WATCH FOR IT!!! Mexico will not be unified in the early stages of this process because we need to raise the Mexican economy up a little higher and reduce the United States and Canada’s economy even further. This is how the equilibrium is forged and the way all 3 economies will be balanced in order to finally create the NAU.
Many people might ask, “Why is a North American Union such a bad thing if it get’s our economy right?”
The first problem is how all this was manufactured to happen. From the housing bubble, to the liquidation of the American economy, to the hurried and hidden passing of the NAU, this crap stinks to high heaven! The second problem is how this will affect our Constitution and basically shreds it under a whole new legal structure. Finally, and this is the worst of it, America will no longer exist as it has for more than 200 years. So goodbye to everything our forefathers sacrificed to make this nation, the international banking cartel now owns you, me and everyone else.
What’s even worse is where all this puppeteering is leading us to as a planet. Look far enough into this evil crap and you’ll soon realize that once we have an EU, a NAU and soon to follow Asian Union along with an African Union that most people don’t even know exists, it’s only a matter of time before those four unions are UNIFIED. Then we get a lovely Global Union with one currency, one leader and zero freedom. This is big brother at his finest and all thanks to one family that started this process about 500 years ago, Rothschild.
Now realistically I don’t think the founder of the Rothschild name, which came from Germany and started as a jewelry business, had any idea this is where things would lead. Yet here we are and all thanks the diabolical evil this family has slowly spread like a creeping disease over 5 god damn centuries. DAMN THE ROTHSCHILDS and the lot of underlying puppets they control. We need to rise up as a single voice and SAY NO!!!!!
NO I WILL NOT SERVE YOU! NO, I AM NOT YOUR SLAVE! NO, YOUR MONEY IS WORTHLESS TO ME! NO, YOU CANNOT HAVE MY FREEDOM BECAUSE IT IS THE MOST VALUABLE THING I POSSESS!!!!!! NO, IT IS YOU, THE GREEDY SCUM, THAT HAVE NO POWER OVER ME!!!!!
When the time comes, will you be a head of cattle to be counted or will you rise up and SAY NO WITH ME?!!!
A.O.
The Mortgage Forgiveness Debt Relief Act of 2007 removed the last incentive for borrowers to remain in “their” homes. This law must be rewritten and retitled the Patriotic Mortgage Repayment Act of 2008.
The Patriotic Mortgage Repayment Act of 2008 - If a borrower defaults on a mortgage and the market value of the collateral is insufficient to repay the money borrowed, the Treasury will recover 105% of the residual borrowed but unpaid amount using IRS collection methods and interest schedules. Such a law would prevent the general population from bailing out the speculators that purchased more house than they could reasonably afford. These wannabee flippers took grandma’s money out of the bank, now the bank has collapsed the the FDIC is having to pay off grandmas. The least these deadbeats should do is repay 100% of grandmas’ money to the treasury plus 5% as a handling fee.
It should be trivial for the borrower to meet his obligation. After the foreclosure sale recovers 60% of the original loan, the payments on the remaining 40% loss should be well within the budget of even the biggest speculative wannabe flipper real estate genius that bought at the top of the market using grandma’s money.
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