Q&A: Who really caused the sub-prime crises Democrats?

Question by america first: Who really caused the sub-prime crises Democrats?
The Subprime Debacle
by Dr. Kuni Michael Beasley
30 Years in Gestation

The Democrats are doing a lot to try to pin the subprime debacle on the Republicans and the Bush administration. However, there is a long tail to this problem that just happened to pop at this time.

Now, for the rest of the story. Definitions first.

Fannie Mae is the Federal National Mortgage Association (FNMA), founded in 1938 as a publically traded government sponsored enterprise (GSE) that is stockholder owned that makes loans and issue loan guarantees.
Its cousin is Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC), founded in 1970 as another GSE created to expand the secondary market for mortgages. Freddie Mac buys individual mortgages on the secondary market, pooled them into packages, and sold them to investors on the open market.

The secondary market packaged mortgages as collateral and issues securities called collateralized mortgage obligations (CMO) and collateralized debt obligations (CDO), to reduce the risk of individual loans. CMOs are a separate entity that is the actual legal owner of the mortgages it has in a “pool.” CMOs sell bonds to investors based on the value of the mortgages. Investors receive payments based on the increased value of the loans in the pool. The collateral for the bonds are the actual mortgages.

CDOs are a separate entity like CMOs, but are more focused on fixed income assets such as, but not limited to mortgages (and can include commercial mortgages and corporate loans). The focus is cash flow and slices (tranches) of these cash flows are sold to investors.

The subprime mortgage crisis surfaced first in 2007, but it had been incubating for years, indeed, decades. Though roots can be traced back to the New Deal legislation in the 1930’s, the current crisis actually draws its source from the Community Reinvestment Act (CRA) [1977] during the Carter administration that forced banks to lend money to less credit worthy clients. Lending institutions were evaluated to determine if it met the “credit needs of the community” and this was factored into regulatory decisions of the federal government such as applications for facilities, mergers, and acquisitions.

Interest in the CRA resurfaced in the Clinton administration when regulations in the CRA (which could be manipulated without any participation of congress) essentially forced institutions to offer loans to higher risk individuals and businesses. The term “Ninja” loans emerged describing high risk loans made to people with No Income, No Job, and no Assets, but completed a particular bank’s portfolio sufficient to keep federal regulators off their backs.

As access to easy money for high risk borrowers increased, certain institutions began to take advantage of these new opportunities to score fed points and make easy money. Name dropping here: Countrywide began to process, package, and offer investment instruments (CMOs) based on these loans. Revisions to the CRA by the Clinton administration allowed mortgage companies to offer loans without the relative reserve of deposits normally required of banks and other financial institutions.
In addition, this allowed for securitization of sub prime mortgages based on the pooling and packaging of cash-flow producing assets into securities that could be sold to investors – with the asset value not tagged to actual value of the property, but to the value of the cash flow produced by the asset held (sounds weird). The first public securitization of CRA loans was started in 1997 by (familiar name) Bear Stearns!

Now, let’s understand sub-prime loans for a moment. A sub-prime loan is a mortgage offered at a deep discount on interest the first year or two so the borrower could qualify for a larger loan and more expensive house, betting that their economic profile would get better and they could afford large payments later. Adjustable Rate Mortgages (ARMs) are a form of this where the entry rate is low and rises based on certain criteria such as the rates for government securities.

Simply put, lenders (not necessarily banks, but more often mortgage
companies) offered low cost, low entry rate mortgages to people who would not normally qualify for that amount of debt.

These loans were “warehoused” by financial institutions, where a financial institution like Merrill Lynch would set up a separate, but wholly owned mortgage company (First Franklin) to attract loans.
Merrill Lynch would retain control of the loans as a “trustee” or “servicer,” and derive benefits from fees for “managing” the loans and increase assets by keeping escrow deposits. In turn, these loans would be sold to Fannie Mae or Freddie Mac (who were assumed to guarantee the loans), who, in turn, repackaged them for the secondary market.

In 2003 the Bush administration tried to head-off what they saw as a potential crisis by moving the supervision of Fannie Mae and Freddie Mac under a new agency

Best answer:

Answer by Hater Police
Both parties are to blame AND financial companies AND consumers.

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Did the GrammLeache bill in 1999 really ‘deregulate’ banks? Is that why Ron Paul voted against it? Loves regs?

Question by DAR: Did the GrammLeache bill in 1999 really ‘deregulate’ banks? Is that why Ron Paul voted against it? Loves regs?

That followed bailing out hedge funds, if you recall. Ron Paul, rather than seeing it as deregulating saw it as a set up for further bailouts and taxpayer liability for failing entities. He thought the deregulation parts could be written in a one page bill and the rest was new REGULATION which would end up creating bubbles and shifting liability for business ventures to taxpayers.

Sound familiar?

And if he was so prescient then, why is the government now only turning for solutions to those who drove us off a cliff, to begin with?

From 1999:

“today we are considering a bill aimed at modernizing the financial services industry through deregulation. It is a worthy goal which I support. However, this bill falls short of that goal. The negative aspects of this bill outweigh the benefits….

The growth in money and credit has outpaced both savings and economic growth. These inflationary pressures have been concentrated in asset prices, not consumer price inflation–keeping monetary policy too easy. This increase in asset prices has fueled domestic borrowing and spending.
Government policy and the increase in securitization are largely responsible for this bubble. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $ 1.5 trillion in 1998, two-thirds of which were refinances which put an extra $ 15,000 in the pockets of consumers on average–and reduce risk for individual institutions while increasing risk for the system as a whole.
The rapidity and severity of changes in economic conditions can affect prospects for individual institutions more greatly than that of the overall economy. The Long Term Capital Management hedge fund is a prime example. New companies start and others fail every day. What is troubling with the hedge fund bailout was the governmental response and the increase in moral hazard.
This increased indication of the government’s eagerness to bail out highly-leveraged, risky and largely unregulated financial institutions bodes ill for the post S. 900 future as far as limiting taxpayer liability is concerned. LTCM isn’t even registered in the United States but the Cayman Islands!
…My main reasons for voting against this bill are the expansion of the taxpayer liability and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill.
Should they be listening to Ron Paul – who is telling them to let the market handle this mess rather than extending the pain with bailouts?

Best answer:

Answer by Greg
It merely dissolved the “firewall” between investment banks and consumer banks. After the Great Depression, the FDR Administration in effect said to the investment banks, “If you want to gamble, fine, but you aren’t going to do it with peoples’ life savings”, so they prohibited consumer banks from investing in stocks and other such instruments.

What it did not do is deregulate OTC commodities (default swaps are a huge problem right now). That was done in the 1999 Commodities Modernization Act (again introduced by Phil Gramm), and what it did not do is place capital reserve requirements on investment banks (and the root of the problem was just how highly leveraged these firms were).

As for the setup for future bailouts, that’s baked in to the mergers that are underway. We saw from the Lehman bankruptcy (Lehman was leveraged at about 50-1) that the fallout was severe, so the Fed and the Treasury were forced to act to keep the investment banks from folding, but amid all of this there is further consolidation through mergers and acquisitions of both consumer and investment banks, so if they were too big to fail before, well the ones that are left are bigger.

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Q&A: Do conservatives really think this recession was caused by regulation?

Question by Wtfsthe Deal: Do conservatives really think this recession was caused by regulation?
Deregulation allowed the merger of banks that created banks that would be systemic risks if they failed
Deregulation allowed massive increases in financial liabilities of banks, through relaxed leverage limits, and led to insolvency after capital reserves decreased by just a few percent
Deregulation allowed the bribery of the ratings agencies
Deregulation allowed the fraudulent trading of derivatives
Deregulation allowed the securitization of mortgages, which encourages predatory lending
Deregulation allowed several insurance policies to be taken out on the same derivative, which brought AIG to its knees.

How on earth could anyone think that regulation caused this crisis?
Being forced? Are you really talking about the community reinvestment act? What a joke.

The securitzation of mortgages relieves local and investment banks from the responsibility if loans they make dont get paid. It placed all the responsibility on the investor and on AIG, and eventually became a system than encouraged the signing of sub prime loans, just to increase the volume of collateralized debt obligations being packaged and sold. It encourages predatory lending. Relaxed limits on leveraged allows banks to loan out as much as 30 times as much as they actually owned, as opposed to the normal 7 times before the conservatives had their way. If banks werent allowed to loan out that much money, as they hadnt been for years, a small decrease in their capital wouldnt have equated to a huge drop in their reserves to liabilities ratio, and they would have remained solvent and never even needed a bailout.
“What both sides fail to understand is that none of this would have happened if Congress didn’t change the laws set in place during the Great Depression.”

Republicans repealed those laws!!! Republicans repealed glass steagle, made derivatives illegal to regulate, and relaxed leverage limits!!! democrats understand it perfectly well.

Best answer:

Answer by shea c
its all Obama fault

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