Where this story completely falls short for me is Hudson’s neglect in identifying the causation of the abuse he documents. If you don’t have the Community Reinvestment Act (CRA) that sets quotas for subprime loans, banks never learn about this market. If you don’t have Fannie Mae and Freddie Mac [together referred to as government-supported enterprises, or GSES] clearing the books of groups like Citibank by providing an unending supply of liquidity for all those second mortgages, how could they have written them? You only write a bad mortgage because you know there is a schmuck to sell it to. The schmuck was the US taxpayer holding the bag for Fannie and Freddie. Where is that in this great piece of investigative journalism? If Citibank has to keep those mortgages, they go under. No reason to even mention the fact that the exclusion of real-estate profits from capital gains in 1997 fueled a speculative bubble when talking about the meltdown. I appreciate the knowledge about the corruption, but it doesn’t take place without Fannie and Freddie and the Community Reinvestment Act.
Los Angeles, CA
Dean Starkman responds: I appreciate Thomas’s acknowledgement of the corruption issue. However, Hudson’s exploration of corruption in the US mortgage-lending system was spot on. Post-crash investigations, including the Financial Crisis Inquiry Commission (FCIC) and the Levin-Coburn commission, have concluded—and data show—that private-sector loans, fueled by the Wall Street aftermarket, were indeed the central cause of the mortgage crisis (and thus the financial crisis), while the factors Thomas cites were not.
As many commentators have noted, there are a number of things to be mad at the GSES about—their use of political clout to ward off oversight, their mid-2000s accounting scandals, their purchases of Wall Street-created subprime securities, their huge losses caused by the sheer size of their portfolio, etc.—but data show they never bought subprime mortgages per se. They did buy Alt-A (poorly documented) loans, but did so late, most aggressively in 2006, and only after losing market share to the private sector, which had vastly expanded and dominated the subprime/Alt-A market. And even after they lowered standards, the loans the GSES bought or backed significantly outperformed those in the private sector: Even for a subset of borrowers with similar credit scores—below 660—FCIC data show that GSE mortgages were far less likely to be seriously delinquent than were non-GSE securitized mortgages: 6.2 percent versus 28.3 percent, as of the end of 2008. Online readers can find more in the FCIC report and in condensed form in columns by Bethany McLean and Joe Nocera.
As for the CRA, the argument for the centrality of a 1977 law in a mortgage boom three decades later is even more far-fetched, but suffice it to say that the FCIC found that only 6 percent of all “high-cost” (subprime) loans had any connection to the law, which didn’t even cover some of the worst actors—non-banks like Ameriquest, Countrywide, and the rest.