Too much Fed credit encouraged too much building, so prices ballooned past their economic values on the effluvium of degenerating derivatives. Now, we have foreclosures, upside-down homeowners, devalued and disappeared mortgage-makers, failed and failing banks, and a cesspool of phony investment values camouflaged by a carpet of Federal fun dollars now owed by the taxpayers. How come?
Because Congress pimped out the home mortgage industry and the Fed financed the business. First, Congress; we'll leave Fed credit faucet Greenspan's enabling for another time. Go back to 1977 and see passage of the Community Reinvestment Act (CRA) by compassionate legislators using other people's money to help poor folks who couldn't afford to buy homes.
Go way back in 1950, and people thought lenders were entitled to repayment and shouldn't lend to folks who couldn't repay. Mortgage lenders demanded good credit for loans in slums where credit was risky and property wasn't worth foreclosing; they outlined those areas on their maps, calling it redlining an area.
Progressives called it punishing the poor. They felt poor people with bad credit were as much entitled to home ownership as anybody. Earlier public housing was often trashed by residents; the hope was they wouldn't trash what they own.
Congressmen Barney Frank, Senator Chris Dodd, and others leaned on Fannie Mae, Freddie Mac, and Ginnie Mae to finance riskier mortgages, and on the regulators to push the banks into making the riskier mortgage loans. The bureaucrats at Housing and Urban Development (HUD) wrote implementing regulations. The famous Association of Community Organizations for Reform Now (ACORN) put a lot of effort (smiled upon by politicians) into bullying local banks into abandoning credit quality in favor of quantity with low or no down payments, cursory or no credit research, and other policies to move loan volume up among the poor. The government's bank regulators added their encouragement. Why not? The risky loans were sold off to Fannie and Freddie; they didn't stay with the original lender and the banks collected a lot of income. At this point, the consistent with safe and sound operation language you saw above got lost.
Then, Wall Street thought to package large batches of mortgage loans into bundles and sell off salami-slices of the bundles to investors. Buying a slice was to become the owner of fractional portions of all the mortgage loans in the bundle. Individuals, banks, and various investment groups at the peak of the foolishness treated these and such other variations as credit default swaps like starving hyenas treat raw steak. Everybody was making money!
Inuit seal hunters sharpen a short piece of springy cartilage on each end, compress it into a curl and embed it into a piece of fish before throwing the fish to seals. Swallowed, the pointed spring unfolds as the fish is digested, it straightens, punctures the seal's gut and eventually another dead seal floats to the surface to be collected. The bundled mish-mash of unknowable mortgage loan risks in those derivative packages acted similarly when people finally questioned. Warren Buffett had called derivatives: financial weapons of mass destruction.
Nothing new, of course. The lemming-like behavior of humanity chasing wealth goes back a long way. You might Google John Law's Mississippi Bubble in France, the Dutch tulip mania, or even better, the U.S. 1980's S&L collapse, which neatly prefigured the present housing bust. Government always ends wearing a plaid jacket with white suede shoes and proving Barnum was right.
After reality returned (sort of) around 2007 and started collapsing the inflated real estate values, Congress first set up its usual suckers (the taxpayers) to bail its big bank friends out of trouble using the $700 B (to start) TARP law plus other bailouts; it then passed a new set of regulatory bank laws so that it couldn't happen again. Congress was careful not to notice that it had repealed similar post-Great Depression regulations shortly before, clearing the way for the present collapse. The whole thing was caused by greedy bankers...according to the Congressfolk. Like guns cause murders....
Most of this has been published for those who follow such things. Less attention has been paid to the fact that, since the CRA is still the law of the land, Barney Frank and friends are still powerful in Congress, Fannie, Freddie, and Ginnie are still buying mortgage loans under the chivvying of Congresspeople, HUD's regulations are unchanged, and the SEIU has replaced ACORN as appointed bank bully, the same set of conditions that set the sand foundation under housing credit before, are still operating. Those paying attention have noticed the taxpayer billions ($153 B so far, per the Federal Housing Finance Agency's Inspector General's 3/31/2011 report, still being lost by Fannie and Freddie under their now government managers. Private industry would be in bankruptcy with management replaced; the top guys at Fannie and Freddie were paid $17.1 M between them for 2009/2010 and they're still going while Fannie and Freddie are still losing. Government is the Energizer Bunny of deficits.
So Congress, fronted by Barney Frank and Chris Dodd with the lenders as their madams, pimped out the mortgage industry on cheap Fed credit and raided the taxpayers for bailout money when the scheme collapsed. The usual suspects are still doing the same business at the same old stand and still losing money for the taxpayers who pay the bills for government mismanagement. The taxpayers will be paying off this one for a very long time; maybe forever if Congress leaves Fannie, Freddie, Ginnie, the CRA, and related HUD regulations as they are.
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