Even More to The Mortgage Mess
Dusty Rhoades probably didn’t go far enough in only excoriating Citibank and Credit Suisse for the mortgage securities fiasco (Oct 23). I’d add Goldman Sachs, rating agencies and many others who should have gone to jail for fraud.
But there is something Rhoades didn’t say, although he touched on it when he noted the collateralized debt obligations were backed “by crap.” And that’s the key: The shady mortgage-backed securities might not have been worthless if the underlying mortgages themselves had met reasonable underwriting standards. Alas, thanks to our friends in Washington, they did not.
Beginning in 1992 the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. Similarly, the Community Reinvestment Act in 1995 required banks and S&Ls to make a certain number of loans to people at or below 80 percent of the median income in the areas they served. Easy money, meet eager customer.
Given this confluence of events, by 2008 there were 27 million loans — half of all mortgages in the U.S. — which were “subprime” or close to it. These loans were made to people with marginal credit, or were loans with no or low down payments, little or no documentation, or were “interest only.”
A widely publicized example of these egregious standards noted that a strawberry picker in California with a $14,000 income had qualified to buy a $750,000 house.
The government got its wish, and a lot of folks who previously couldn’t afford to buy a house wound up owning one. So what if they didn’t meet the payments, because you could always sell your house at a higher price and pay off the lender, right?
But we should all feel good our government tried to do the right thing.
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