We keep meaning to get back to the subject of who the major culprits of the housing bubble were. It's a subject that deserves research and consideration because our country needs regulations to keep it from happening again as well as a thorough discussion of how policy decisions contributed to the meltdown. And, not surprisingly, right-wing ideologues continue to intentionally lie about what happened in their typically pathetic attempt to smear anyone who doesn't march in lockstep with their political agenda.
Here's the short version. Unregulated derivative financial products fueled a demand for mortgages, and this demand could only be met by loaning money to people who were poor debt risks. Fed Chairman Alan Greenspan's policy of keeping interest rates low exacerbated this behavior by making the initial act of borrowing inexpensive, thus encouraging loans that would have future costs that couldn't reasonably be expected to be paid. Responding to fundamental economics, this increase in the demand for mortgages was met with an unregulated supply from private lenders, many of them unscrupulous, predatory quick-buck artists, and this supply drove an increased demand for houses, which drove their prices up.
As long as housing prices kept going up, people could periodically borrow against their additional equity whenever their loan terms readjusted their interest rates. This need to periodically refinance also had the added benefit of generating additional business for mortgage companies, supplying fees that don't get generated when people take out traditional 30-year fixed mortgages. This is why there was an explosion of new mortgage companies anxious to get in the game, and why most of them have now disappeared.
Added to all of this, a variety of dishonest practices sprung up to support this activity. Appraisers started saying houses were worth whatever number a mortgage company needed to make a loan instead of a realistic, conservative estimate. Rating agencies, paid by the companies they were rating, started handing out excessively positive ratings of financial products that were actually garbage. Private lenders took advantage of unsophisticated borrowers who simply wanted what almost everyone does - a house of their own.
Ignorant and/or dishonest right-wing gasbags continue to try to convince people, many of whom are still, quite understandably, trying to put all these pieces together, that this is all the Democrats fault. They think that if they repeat their lies often enough, that this is all the fault of Freddie and Fannie and the CRA of 1977 (yes, even Jimmy Carter gets trotted out for this one), that someday it will become true. They continue to deny that it was the combination of greed, dishonesty, and right-wing ideology that turned the American housing market into just another giant casino where the house could fleece the sheep and privileged financial insiders could turn securities markets into nothing more than a very complicated Ponzi scheme.
From time-to-time, we'll present a variety of articles that discuss what really happened, and show how the right continues to lie about the hijacking of the American economy for the benefit of the few. It is no accident that all of this occurred when Republicans controlled all three branches of government. For now, we'll begin with
this article from McClatchy that discusses how it was private sector loans, not those purchased by Fannie Mae and Freddie Mac, that drove the housing bubble and its ultimate, inevitable collapse.
As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.
Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.
Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.
Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.
During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.
Of course, there's a lot more detail that ties these activities to the unregulated derivatives markets that packaged and resold these subprime mortgages as well as sold insurance (we're talking about you, AIG) just in case these mortgages went belly up without any reserves whatsoever to actually pay owners' claims. What's important to understand at this point is what's above, and why the only way to prevent this from happening again is strong, airtight regulation and enforcement that effectively cages the inevitable greed and dishonesty that arises whenever money starts changing hands. Unregulated private enterprise had its chance, and only fools or privileged insiders would give it another.