(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.
"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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