This is moderately partisan but I think makes some strong points.
UPDATE: Found a functioning file.
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To blame the whole mess on the Community Reinvestment Act is just plain ignorant. 50% of sub-prime loans were issued by non-CRA institutions. The sub-primes loans issued under the CRA have been less likely to default due to increased regulation and oversight on CRA institutions. The CRA has existed since 1977. The changes made under the Clinton administration may have encouraged some bad loans, but the root of the “mortgage crisis” was the mortgage-backed security.
When a lender securitizes a mortgage they are selling the future earning potential of that loan, the interest. They are also selling the risk associated with possible default. Normal fixed rate home loans are generally safe investments, and are given triple-A ratings. Lenders realized they could create triple-A mortgage backed securities by bundling sub-prime mortgages with their fixed-rate counterparts. This is where the market failed.
Once it became clear that one could make a sub-prime loan and sell it off as a great investment, the market went wild. Mortgage brokers were encouraged to loan money to people with fewer and fewer qualifications, and since the brokers made money off of each loan, why not?
Lenders then packaged and sold these mortgages and made their money. Now the losers are whoever bought bad mortgage securities, and low income people who should have never been approved for a loan in the first place.
So now whoever owns the loan and whoever owes the money are screwed, because due to the packaging, the dividing, and repackaging of these mortgage securities, it is almost impossible to figure out who holds which loan.
Which is sad, because everybody loses on foreclosures, both lender and borrower, which is why banks try to avoid them as much as they can.
But the person who first made the loan did not have to take the risk, and knew it. So they made bad loans. Lots of them. And that’s the mortgage crisis explained.
Sounds like we need to regulate securization so that if you do package sub primes with triple A loans the package conveys the inherent risk in the bad loans.
Not even half. But yes regulating these securities is a no brainer, though I’m guessing we’re too late and the market will regulate itself on that point.
September 29th, 2008 at 7:16 pm
Video no longer available.
September 30th, 2008 at 1:29 pm
Partisan drivel.
To blame the whole mess on the Community Reinvestment Act is just plain ignorant. 50% of sub-prime loans were issued by non-CRA institutions. The sub-primes loans issued under the CRA have been less likely to default due to increased regulation and oversight on CRA institutions. The CRA has existed since 1977. The changes made under the Clinton administration may have encouraged some bad loans, but the root of the “mortgage crisis” was the mortgage-backed security.
When a lender securitizes a mortgage they are selling the future earning potential of that loan, the interest. They are also selling the risk associated with possible default. Normal fixed rate home loans are generally safe investments, and are given triple-A ratings. Lenders realized they could create triple-A mortgage backed securities by bundling sub-prime mortgages with their fixed-rate counterparts. This is where the market failed.
Once it became clear that one could make a sub-prime loan and sell it off as a great investment, the market went wild. Mortgage brokers were encouraged to loan money to people with fewer and fewer qualifications, and since the brokers made money off of each loan, why not?
Lenders then packaged and sold these mortgages and made their money. Now the losers are whoever bought bad mortgage securities, and low income people who should have never been approved for a loan in the first place.
So now whoever owns the loan and whoever owes the money are screwed, because due to the packaging, the dividing, and repackaging of these mortgage securities, it is almost impossible to figure out who holds which loan.
Which is sad, because everybody loses on foreclosures, both lender and borrower, which is why banks try to avoid them as much as they can.
But the person who first made the loan did not have to take the risk, and knew it. So they made bad loans. Lots of them. And that’s the mortgage crisis explained.
September 30th, 2008 at 2:12 pm
I can blame half of the crisis on the CRA.
Sounds like we need to regulate securization so that if you do package sub primes with triple A loans the package conveys the inherent risk in the bad loans.
September 30th, 2008 at 10:05 pm
Not even half. But yes regulating these securities is a no brainer, though I’m guessing we’re too late and the market will regulate itself on that point.