September 24, 2012

Cause of Mortgage Crisis.

There still is confusion over what and who caused the mortgage crisis.

Wall Street firms created mortgage backed securities, backed by first mortgage loans, that were not backed by any agency of the federal government and now referred to as sub-prime loans. They then went to the rating agencies, S&P and Moody's, and paid them a fee to get a AAA rating, the highest investment grade. Wall Street sold them to investors, pension funds, banks, insurance companies all over the world.

Fannie Mae and Freddie Mac also created mortgage backed securities starting in the early 1970's. These securities did have the full faith and credit of the United States. These securities worked fine until the market was flooded with sub prime loans, which in turn drove down the value of homes as borrowers using these sub prime loans defaulted. Home prices were driven down so far that the securities insured by Fannie and Freddie started going under water.

It is true that some time in the mid nineties the net worth requirements of Fannie & Freddie were reduced and this exasperated the problem. It is also true that in the '90's Fannie and Freddie converted to private corporations and they did take on more risk as a result of that move.

By far, the bulk of the problem was the part created by Wall Street and they made a killing. I do fault the government for not going after these culprits.

1 comment:

  1. The condition of mortgage depends on the status of the economy. "I do fault the government for not going after these culprits" I don't think so.

    ReplyDelete