During what I believe was my second year in law-school, a student reluctantly asked one of my favorite instructors to repeat an explanation to a particular issue — noting that he or she did not want to beat a dead horse. My instructor, being the very patient and good-natured guy that he was, responded: ”I would call in a missile strike on a dead horse”.
In some ways, that is exactly what I feel like with this blog post: it’s nothing new, but when the causes of the mortgage crisis are articulated so clearly and simply… I’d feel remiss in failing to bring it to your attention. So without further adieu, here is Peter Wallison in the Wall Street Journal:
When the crisis first arose, the left’s explanation was that it was caused by corporate greed, primarily on Wall Street, and by deregulation of the financial system during the Bush administration. The implicit charge was that the financial system was flawed and required broader regulation to keep it out of trouble. As it became clear that there was no financial deregulation during the Bush administration and that the financial crisis was caused by the meltdown of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages—the narrative changed. The new villains were the unregulated mortgage brokers who allegedly earned enormous fees through a new form of “predatory” lending—by putting unsuspecting home buyers into subprime mortgages when they could have afforded prime mortgages…
There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations…
[I]t was government policy [as opposed to greedy mortgage lenders] for these poor quality loans to be made.
Feel free to read the whole thing here.
I’ve been hearing more and more about how de-regulation is the root problem of the mortgage mess. Democrats have been making it the focal-point of their latest policy push to exercise greater government oversight on yet another sector of our economy. The latest instance of this mantra came from a blog my constitutional law instructor writes for titled “essentially contested America”.