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Ratings agencies can only rate on what's reported to them. Again, Fannie and Freddie didn't disclose the riskiness of many of their loans to investors.
Almost 30% of the value of their loans were high-risk, nearly 3 times as much as they had led investors to believe.
Ed Pinto/ American Enterprise Institute ( AEI) is the source of this information. This is another one of those Koch funded permanent DC class think tanks that concludes everything as per their own subjective agenda.
FHA and VA loans are, by their very nature, sub prime. Borrowers would not otherwise be able to borrow under the same terms without FHA and VA insuring those loans. During the bubble, the number of mortgages underwritten exploded. It stands to reason that 30% of their loans were considered high risk, under the circumstances. FNMA and FHLMC never made it a secret that their MBS contained such mortgages. We are not talking public consumers, here. Rather, these are highly sophisticated institutional investors.
Back in the early 80's, Wall Street began to create private label Collateralized Mortgage Obligation (CMO) bonds backed by FHLMC and FNMA mortgage pass-through notes. Wall street knew exactly what they were packaging because they mined the underlying data by every criteria imaginable. They could predict, with reasonable certainty, what percentage of loans were going to default, be refinanced and remain outstanding in good condition, regardless of the underlying terms of the mortgage. Seasoned ( oldest) loans were less likely to blow up the newer loans. They also knew which zip codes were most or least likely to blow up and balanced the exposures.
Fast forward to the credit default swaps, quasi insurance securities. Wall Street bought whole sub prime loans from originators. FNMA/FHLMC had nothing to do with these dirty birdies. Wall Street knew exactly what they were buying. They sliced and diced and repackaging them under their own private labels. So long as home values continued to appreciate at annual double digits, all would be well.
The independent credit rating agencies drank the kool aid and assigned them investment grade ratings. So long as home values continued to appreciate at annual double digits, all would be well. If they had more appropriately rated the junk as junk, institutional investors would have had to ignored it and there would not have been funding available for the dirtiest sub prime mortgages.
With a AAA rating, many otherwise conservative institutional investors ignored the fundamentals and went for the ROI. Some institutional investors, like NY Life did their homework rather than rely solely on credit ratings, and took a pass. Others, like FNMA/FHLMC, most of the big banks, large corporations and AIG ignored the fundamentals and instead relied on the AAA credit rating.
If FNMA/FHLMC had chosen to not invest their own capital in Wall Street junk bonds, they likely would have had the capital to weather the storm of the housing market bust.
Instead, they and a lot of other institutional investors bet the farm. Corporations take incredible risks when activist shareholders demand maximum ROI and link senior management compensation to short term results. It's a cultural thing.
No. The common thread was the GSEs imposing affordable housing goals, loosening lending standards for far too many loans, and then misrepresenting the amount in risky loans they had acquired to both ratings agencies and investors.
I already posted the Fannie Mae document that touted Countrywide as the first lender to sign a Fair Lending Best Practices agreement with HUD in 1994.
No, it's the culture of extremely ill-advised social engineering that created monumental moral hazard, mostly involving the GSEs.
Timothy Geithner testifying to the Financial Crisis Inquiry Commission, in 2009: "Moral hazard is everywhere in the financial systems--it’s endemic. Of course, what we had in the crisis makes it bigger going forward. The biggest moral hazard was Fannie and Freddie. The GSEs were entirely moral hazard." http://www.acuma.org/uploads/ACUMA_J...1_Pipeline.pdf
I agree with what you are saying, but isn't that a symptom? Government started this mess with their everyone deserves to own a house. Without government meddling in the free market none of this happens.
Where do you rank predatory lending specificlly as a factor in the financial meltdown?
I'd say predatory lending ranks right up there with unicorns as a factor in the financial meltdown. Because predatory lending is about as real as unicorns are.
There is no such thing as predatory lending. There is such a thing as stupid borrowing. But that doesn't advance the progressive cause. If banks are at fault, that gives the progressives cause to step in and impose their will on the financial industry to protect all these poor innocent people who were preyed upon. You know, the people who signed a contract to pay for a mortgage without sufficient means of paying - but it's the bank's fault for "preying" on them, not their fault for signing a contract with terms they could not fulfill.
I'd say predatory lending ranks right up there with unicorns as a factor in the financial meltdown. Because predatory lending is about as real as unicorns are.
There is no such thing as predatory lending. There is such a thing as stupid borrowing. But that doesn't advance the progressive cause. If banks are at fault, that gives the progressives cause to step in and impose their will on the financial industry to protect all these poor innocent people who were preyed upon. You know, the people who signed a contract to pay for a mortgage without sufficient means of paying - but it's the bank's fault for "preying" on them, not their fault for signing a contract with terms they could not fulfill.
Already been stated many times that there is no single reason for the financial meltdown but if you don't believe in there is such a thing as predatory lending there is no reason attempt to explain. If you want to learn something then go look at the numerous court cases and see if you still come to that conclusion because the courts strongly disagree.
I'd say predatory lending ranks right up there with unicorns as a factor in the financial meltdown. Because predatory lending is about as real as unicorns are.
There is no such thing as predatory lending. There is such a thing as stupid borrowing. But that doesn't advance the progressive cause. If banks are at fault, that gives the progressives cause to step in and impose their will on the financial industry to protect all these poor innocent people who were preyed upon. You know, the people who signed a contract to pay for a mortgage without sufficient means of paying - but it's the bank's fault for "preying" on them, not their fault for signing a contract with terms they could not fulfill.
Ed Pinto/ American Enterprise Institute ( AEI) is the source of this information. This is another one of those Koch funded permanent DC class think tanks that concludes everything as per their own subjective agenda.
Oh, brother. Typical mindless deflection.
Who funds the SEC, which uncovered the GSEs' massive securities fraud ($1 Trillion worth), and Timothy Geithner who admitted the GSEs were entirely moral hazard? Hmmm?
You all just don't want to admit that yet another attempt at government interference and social engineering ended very badly, and nearly took down our entire financial system.
I agree with what you are saying, but isn't that a symptom? Government started this mess with their everyone deserves to own a house. Without government meddling in the free market none of this happens.
Exactly. The GSEs were the vehicle for yet another government-imposed social engineering scheme, and in order to make that happen, the GSEs fraudulently misled investors on $1 Trillion worth of MBS.
I read the other day that Mitsubishi tried to expand their auto sales in 2003 and offered a 0-0-0 incentive to buyers with poorer credit. Basically, 0 down, 0% interest and 0 payments for 12 months.
Sound predatory?
Well after 12 months, the deadbeats that got to drive the car around for free for a year basically just defaulted (aka walked away). Mitsubishi now had a car over a year old and had to go through reposession etc etc etc.....they lost 1/2 billion on the deal.
Sound familiar?
Predatory lending is really a giant scapegoat to deflect any possible sharing of responsibility by the common man....many of whom are just as greedy and deceitful as any bank.
Sub prime auto loans have been around for decades. People with poor credit are charged a higher interest rate than people with solid credit scores. ( Those same people are also going to pay more for auto insurance because the driver's credit score is one of many factors that are analyzed. From an actuarial basis, there is a connection between credit scores and accident rates.)
Sub prime loans can be securitized, rated by independent credit rating agencies and sold to investors. Three out of four sub prime auto loans end up paying them off. This pay off may be achieved by trading the car in and rolling the balance into a new sub prime loan or, by satisfaction of the terms of the original loan.
The loan originator may keep or sell servicing right to these loans, no different than a mortgage.
There are always investors who are willing to trade a higher ROI for increased risk.
Unlike a mortgage, when someone stops paying their car loan, the car is quickly repossessed and resold. Each state has legislation that determines a minimum gap of time between a missed payment and repossession. Some states allow a car to be repossessed after one missed payment. Most allow for 2 missed payments.
Failure to maintain contractually required auto insurance is also a huge factor in auto repossession.
A car is transportation from point A to B. A car begins to depreciate the moment it is driven off the lot. Yet, a heck of a lot of people 's self esteem seems to be tied to the car they drive. And some of them go on to blame political parties and government for wealth inequality, despite their own lousy choices that seem to perpetually keep them poor. Go figure, eh.
Sub prime auto loans have been around for decades. People with poor credit are charged a higher interest rate than people with solid credit scores. ( Those same people are also going to pay more for auto insurance because the driver's credit score is one of many factors that are analyzed. From an actuarial basis, there is a connection between credit scores and accident rates.)
Sub prime loans can be securitized, rated by independent credit rating agencies and sold to investors. Three out of four sub prime auto loans end up paying them off. This pay off may be achieved by trading the car in and rolling the balance into a new sub prime loan or, by satisfaction of the terms of the original loan.
The loan originator may keep or sell servicing right to these loans, no different than a mortgage.
There are always investors who are willing to trade a higher ROI for increased risk.
The key is that investors need to know the truth about the risk level of the loans they're buying. That's where Fannie and Freddie screwed up. They misrepresented over $1 trillion worth of mortgages as low-risk when they were not. Cue the 2008 financial crisis...
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