@cicerone imposter,
Quote:The following statement is taken from this link:
http://www.investopedia.com/articles/07/subprime-blame.asp
Quote:Plenty of Blame to Go Around
Overall, it was a mix of factors and participants that precipitated the current sub-prime mess. Ultimately, though, human behavior and greed drove the demand, supply and the investor appetite for these types of loans. Hindsight is always 20/20, and it is now obvious that there was a lack of wisdom on the part of many. However, there are countless examples of markets lacking wisdom, most recently the dotcom bubble and ensuing "irrational exuberance" on the part of investors.
The article at the web site you point to, although mentioning the governments' act of suppressing interest rates, thru its "Central Banks", of which the U.S. Federal Reserve is one, says:
Quote:In response, central banks around the world tried to stimulate the economy. They created capital liquidity through a reduction in interest rates.
One predictable result of this (since
those rates were, essentially, zero) was that
Quote::...investors sought higher returns through riskier investments. Lenders took on greater risks too, and approved subprime mortgage loans to borrowers with poor credit.
This is not a bad article, so far as it goes, in explaining, somewhat, the actors in, if not the cause of the financial meltdown. The article shows us the value of hindsight towards the actions of home buyers and that of rating agencies, although it doesn't mention our government's actions in legislatively mandating those very agencies. It also briefly mentions (and improperly blames hedge funds) for their actions in responding to market forces as at fault also. Others are also blamed under the generic term of "Greed" the use of which is questionable if one actually would like to determine the actual cause of the meltdown that might present a future remedy.
This article saves its biggest criticism for the lenders (they are the
Biggest Culprit[s] )or "mortgage originators" . But who are these devils and why are they so, well, devilish?
Investopedia informs:
Quote:What Does Mortgage Originator Mean?
An institution or individual that works with a borrower to complete a mortgage transaction. A mortgage originator can be either a mortgage broker or a mortgage banker, and is the original mortgage lender. Mortgage originators are part of the primary mortgage market. Investopedia explains Mortgage Originator
The primary mortgage market is highly fragmented in the United States. While there are several large firms that originate a large percentage of mortgages, there are thousands of smaller firms and individuals, which also account for a large percentage of total mortgage originations.
Tallying up what percentage of originations belong to which mortgage originator depends on how an origination is counted. A large percentage of newly originated mortgages are immediately sold into the secondary mortgage market, where they might be counted by the institution that purchases the mortgage in the secondary market as an origination, thus double-counting the origination.
The author of your article fails to make a critical connection between the 'originators' and how they got the money to continue to make those loans (georgeob mentioned the process: recapitalization). But wait, the originators then sell those mortgages? This is how they recapitalize (and they also collect a fee). Sounds like a good short term return for those "originators! After all, if they are going to sell those mortgages, risky or otherwise, it is a good deal for them since they also rid themselves of any corresponding risk (from their default). But, who would buy these sub-prime things? Well, as it turns out, the U.S. government! And lots of them too!
So says the Washington Post.
Quote:In 2004, as regulators warned that sub-prime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.
Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in sub-prime loans as a public good that would foster affordable housing.
Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of sub-prime lending that is roiling the U.S. economy.
The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by sub-prime loans, creating a market for more such lending. Sub-prime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.
So we have the government, by way of the Central Bank, encouraging the buying of houses (inflation of the housing bubble generally) due to low interest rates, the government created oligopoly of rating agencies (government chosen favorites with no competition to keep them honest), and the demonstrative wisdom of another government agency (HUD here but Barney and Chris contributed also) going all in on their social engineering by making the two FMs buy said securities. Three strikes and the taxpayers are out.
JM
