primary players that caused the housing bubble are:
The banking institutions that bundled and sold very risky mortgages
2) The Wall Street firms that bought these instruments and hedged for a default hazard by booking speculative derivative
insurance that could never pay off on massive defaults
Mae and Freddie Mac provided government backing, of last resort, on bad mortgages
In order to understand the how this came about, one needs to acknowledge the role of repealing the Glass-Seagall Act. In the account, Repeal of Glass-Steagall Act cause
of housing boom, the conclusion is evident.
"The purpose of the Glass-Steagall Act was to control speculation and prohibit a bank from owning other financial
institutions which would create a conflict of interest, such as investment banks and insurance companies. The Glass-Steagall
Act was enacted in 1933 after excessive risk-taking that contributed to the Great Depression. Jean-Marie Eveillard, of First
Eagle Funds, has said: "Glass-Steagall protected bankers against themselves. Bankers are sheep. They don't mind going
over the cliff if everyone else goes over the cliff."
The reason banks were giving out such risky loans is that they were able to securitize them and sell them as mortgage
backed securities and other collateralized debt obligations to investors. With the ability to both create loans and then underwrite,
securitize and sell mortgage backed instruments under one roof, it is easy for banks to create a ponzi-like scheme."
truth is that high-risk mortgages were "bundled" just like good mortgages and sold as iron-clad securities. Accounting
practices allowed banks to "book" profit from these loans immediately and account for the risks later. The same
practices were used on the infamous "credit default swaps." These are insurance-like contracts that promise to cover
losses on certain securities in case of a default—except they didn’t always work that way in the unregulated credit
This created the short-term results that shareholders
demanded. Could bank executives have booked less profit and held some reserve for the rainy day that was sure to come? Sure,
and they would have been fired. The shareholders would have demanded they be replaced by their colleagues who were willing
to show higher profit. So the money was taken as profit years ago, and there’s nothing left but debt."
Politicians like Barney Frank advanced the utopian notion that even the most financially
destitute deserve to own a home. Having the ability and income to make mortgage payments seems foreign to the social engineers.
The government rescue net would fix any cracks in the money tree. Add the practice of packaging subprime mortgages and you
have the perfect storm. The collapse of the housing market is a direct result of unrealistic expectations, unreasonable low
interest rates and unlimited loans provided to unqualified borrowers.
The beleaguered mortgagor shares in the dislocation, when their dream of home ownership is stripped. Evictions are
postponed for humanitarian reasons as unwinding of the financial markets drag on for years. Even historically low interest
rates cannot prime the pump any longer.
The fair value for
housing must have a reasonable collation to actual replacement costs. Yet a property is only worth a price that a buyer is
willing to pay. The idea that securing financing of underwater properties, when current owners or fresh buyers can
no longer qualify for a new mortgage, smacks of a designed policy to depress real estate values for years to come.
The draconian Dodd-Frank Act just added more layers of punitive regulations that
adversely affect prospective buyers, while avoiding the needed rational regulations that would restore the separation that
Glass-Steagall protected for decades.
•The key flaw in the Dodd-Frank Act
(DFA) is its effort to control the quality of mortgages by imposing regulation and regulatory costs on lenders and securitizers.
•Because it focuses on only a narrow part of the mortgage
market, and exempts the government-backed sectors, the act will do nothing to prevent the deterioration in mortgage underwriting
•A plan developed at AEI would define a "prime
mortgage" by statute, making it possible to eliminate the qualified mortgage, the qualified residential mortgage, and
the 5 percent risk retention.
•The fundamental flaws in
the housing finance provisions of the DFA cannot be repaired by regulation; they should be repealed and replaced by the plan
developed at AEI.
In late March, the bank and securities
regulators charged with filling in the details of the DFA's provisions on mortgage-market reform released a set of proposed
rules outlining how the act's broad terms will likely be implemented. The reaction in the market was something close to shock,
as mortgage bankers, mortgage insurers, securitization specialists, and even the Center for Responsible Lending panned the
rules in testimony before the House Financial Services Committee.
the details of the AIE alternative on their web site that presents their plan.