Real Estate Market

Wall Street, not Fannie, Freddie to blame for housing, economic meltdown

by Broderick Perkins

(2/2/2011) - A recent study puts much of the blame for the mortgage meltdown squarely at the feet of Wall Street, rather than the federal government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Research from the Center for Responsible Lending (CRL) "Wall Street, Not Fannie Mae & Freddie Mac, Created & Led the Toxic Mortgage Market," says toxic subprime loans started the foreclosure crisis and the disaster spread to other mortgages approved without properly qualifying borrowers.

"The facts show that Fannie Mae and Freddie Mac were followers, not leaders, in the events leading up to today's foreclosure epidemic," the report says.

"During the 2000s, subprime mortgage lending grew rapidly as Wall Street seized on the opportunity to invest in riskier, higher-interest mortgages. 'Securitization' ... made it possible for loosely-regulated lenders to make loans and then immediately sell them to private firms that created mortgage-backed securities."

CRL's report says:

• GSEs were prohibited from buying subprime mortgages because the loans were outside the prescribed GSE guidelines. Subprime mortgage-backed securities were created in the private sector by Wall Street firms. • GSEs did purchase subprime mortgage-backed securities as investments, but not in a volume that matched Wall Street purchases.

• GSEs eventually guaranteed and created investments with "Alt-A" loans which went to relatively wealthier borrowers with higher credit scores. The loans did have risky features, such as limited documentation. These investments are primarily why the GSEs were placed into conservatorship. GSEs investments were generally less risky than Wall Street's, but the private market and the GSEs share responsibility for supporting the loans.

• Mortgage loans purchased by Fannie Mae and Freddie Mac - including loans to lower-income borrowers - are performing better than those on the private market. As of June 2010, 13.35 percent of GSE loans to borrowers with credit scores under 660 were 90 or more days delinquent or in foreclosure, compared to 28 percent for subprime loans, according to Mortgage Bankers Association statistics.

• Affordable housing loans weren't the problem. GSEs' losses were generated by risky loans, primarily Alt-A loans that generally went to borrowers with higher incomes.

• GSEs' support of the Alt-A market, in a drive for profit and market share, actually weakened their performance on meeting affordable housing goals.

• The vast majority of subprime loans, 94 percent of them, were made by lenders who were not subject to the Community Reinvestment Act (CRA). The CRA covers banks and thrifts, which didn't make many subprime loans.

• Abusive loan terms were far more responsible for the foreclosure crisis than risky borrowers.

"Recent studies have shown that, comparing borrowers of similar risk characteristics, loans with sensible terms had significantly lower foreclosure rates than explosive subprime loans made by non-bank lenders," CRL's report says.

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