Sep 22, 2008

Mortgage Meltdown Notes

This is a collection of links and references documenting the current mortgage crisis.

Background & General Coverage

Good general coverage is by the Competitive Enterprise Institutes
A very good explanation about how the whole subprime process--with enough detail to actually explain it. 'Betting on Financial Armageddon' This also gives us another entry in the 'Blame Line' below.
Criticism of the Paulson Fannie & Freddie bailout at A "Failed Business Model"

The Fix 

Wall Street Journal-Here was a good plan to fix the long term Frannie and Freddie nightmare 'End the Mortgage Duopoly'
A simple and elegant fix which addresses the real culprit, the mark-to-market accounting rules: 'Here’s A Plan to Avoid a New RTC'

The Blame Line

Campaign Contributions by Fannie & Freddie as reported by 'open secrets' 'Update: Fannie Mae and Freddie Mac Invest in Lawmakers'
Congress members invested in Fannie & Freddie 'Fannie Mae, Freddie Mac Takeover Costs Congressmen Who Were Invested'

Goldman Sachs chairman and chief executive Lloyd Blankfein said one of the problems was that many financial institutions and investors "outsourced" their risk management."Rather than undertake their own analysis, they relied on the rating agencies to do the essential work of risk analysis for them. This was true at the inception and over the period of the investment, during which time they did not heed other indicators of financial deterioration," he told the panel. 1/13/2010 Congressional Testimony. Top US bankers admit missteps in financial crisis

"Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down."
SEC regulation has actually created a Cartel in the Credit Rating agencies, which has established significant barriers to entry--just another way government regulation is responsible for this crisis. Part of Basel II according to Randy (Basel II)

The three cartel agencies; Fitch, S&P and Moody's that have done the CDO ratings "Amid the chaos of the escalating subprime mortgage crisis, the three major credit-rating agencies - Fitch, Moody's and Standard & Poor's - have been voices of calm. They've downgraded only a sliver of the debt backed by such mortgages, and they say they expect the mess to stay safely confined to the subprime sector."
"Investors criticized S&P, Fitch Ratings and Moody's Investors Service, saying their ratings on bonds backed by U.S. mortgages to people with limited credit didn't reflect the lax lending standards that caused their backward-looking default rates to be inapplicable to risk level of the loans being made."
One thing that contributed to the credit crisis was the sucking up of massive amounts of liquidity by international central banks to borrow huge amounts for stimulus plans. (sjb)
Nobel laureate Joseph Stiglitz, economics professor at Columbia University in New York observed: “I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”

HUD, Fannie & Freddie and the CRA:
Investors Business Daily traces some of the links between HUD, Fannie & Freddie and the Community Redevelopment Act in 'The Real Culprits In This Meltdown'
Great article by the liberal rag--The Village Voice--regarding the Federal Government's policy involvement in the current liquidity crisis. 'Andrew Cuomo and Fannie and Freddie' Aug 2008
A chronological list of HUD secretaries is here.
GAAP Accounting Rules

Wall Street Journal on the impact of new (last November) government mandated accounting rules. 'Maybe the Banks Are Just Counting Wrong'

Just my own opinion:
(2/15/2010) Remember how mortgages used to be when you were growing up? You got your loan from a local bank or Savings & Loan (this was one of the reasons S&L's were created--banks too restrictive on loans to regular people) and they usually kept it in house and serviced it. That also means that the bank representative who sold you the mortgage has his/her reputation on the line. Likewise, the bank would suffer the consequences if you defaulted.
All that ended with Fannie. Later Freddie--which had been around since the 30's--updated its business plan to get in on the action. Now mortgage brokers and mortgage banks would make the loan, but then sell it to Fannie or Freddie (F&F). The originator would never see that loan--or be liable for the risks, if any--again. All of this was a part of a wonderful government plan to expand homeownership. Talk about unintended consequences!