Mortgage-backed
securities loaded with "toxic" subprime loans fueled the housing
bubble and crash. Many blame Wall Street bankers for the MBS debacle. But
actual data show that government policy was the main culprit.
Packages
of mortgages sold to investors were a safe investment for decades. It wasn't
the creation of mortgage securities that triggered the subprime boom. Rather,
government policy unleashed subprime into the MBS market.
"The
Department of Housing and Urban Development was pushing the National
Homeownership Strategy since 1995 that basically said, 'Do away with down
payments,'" said Ed Pinto, a resident fellow at the conservative American
Enterprise Institute. "Doing away with down payments drove an increase in
leverage throughout the market and the result was that everyone got on the
bandwagon, including the market for MBSs. As a result, credit loosened
tremendously."
Affordable
Mandate HUD not only encouraged no down payments but also adopted affordable
housing mandates for the government-sponsored enterprises that issue mortgage
securities, Fannie Mae and Freddie Mac. Beginning in 1996, the GSEs had to make
40% of new loans they financed to borrowers with incomes below the national
median.
With
lower underwriting standards and a mandate to fulfill, Fannie and Freddie's MBS
issuance began to take off. It surged more than 116%, from $342 billion in 1997
to $741 billion in 1998.It was a recipe for disaster as Fannie and Freddie had
an implicit guarantee (since made explicit) that the government would cover any
losses that they suffered.
With
that backing, investors were all too willing to gobble up the GSEs' MBS
offerings, even if they included subprime loans. But this also pushed up
housing prices, making it harder for new borrowers to afford a home."That
became known as the 'affordability gap,'" said Pinto. "Housing prices
are going up 15% a year and we have to loosen underwriting standards even more
so that borrowers can afford the higher prices."
Just
Lower Your Standards By 2000, Fannie and Freddie were financing loans with zero
down payments. The private market soon followed. By 2006, 30% of all homebuyers
made no down payment.
Also
in 2000 HUD required Fannie and Freddie to increase to 50% of new loans they
financed to borrowers with incomes below the national median. It also
encouraged increasing the allowable debt ratio of borrowers and lowering credit
score standards. This made far more potential borrowers eligible to buy a home.
But
these were riskier borrowers, and these changes also added more fuel to home
prices. After those changes, Fannie and Freddie's business skyrocketed. Their
MBS issues jumped from about $469 billion in 2000 to $1.1 trillion in 2001. The
increase continued, rising to $1.5 trillion in 2002 and $2.2 trillion in 2003.
As
GSEs' issuance of mortgage securities began to fall in 2004, the private MBS
market took up some of the slack. Private issuance rose from $684 billion in
2003 to $980 billion in 2004 to a high of $1.3 trillion in 2005.
Yet
private mortgage securities never matched that of the GSEs. From 1995-2009, the
private market issued about $6.8 trillion in MBSs vs. $14 trillion for Fannie
and Freddie.
Since
the crisis, the private MBS market has been very slow to recover. Fannie,
Freddie and a much-expanded Federal Housing Administration dominate home loan
finance even more than during the boom.
Source: Investor's Business Daily By David
Hogberg, Posted 02/11/2013 06:38 PM ET
IBD: http://news.investors.com/021113-643996-whos-the-villain-in-subprime-bust-data-point-to-govt.aspx#ixzz2L4NDPvLp
Comments:
The HUD order to lower borrowing standards was the cause of the 2008 Meltdown. Those regulations plus he Community Redevelopment Act should have never been allowed to be implemented. These rules are still on the books and need to be revoked and repealed.
Norb Leahy, Dunwoody GA Tea Pary Leader
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