mortgage

Panel exposes players in financial crisis

Ratings agencies. The job of ratings agencies in global markets is to assess the risk of investments and stamp them with a rating that reflects their risk. Historically, mortgage-backed securities were assumed to be an extremely safe investment. Only a small percentage of homeowners ever defaulted and when they did, their home usually fetched enough value in foreclosure sales to cover the shortfall.

This assumption, along with the hefty fees bundlers of mortgage-backed securities were paying for ratings agencies' services, motivated ratings agencies to slap their highest ratings on many of these securities, despite the fact that they were made up of many mortgages of uncertain quality, the report says.

The AAA rating, the same rating bestowed on U.S. Treasuries, in turn led many investors to assume these securities were safe, broadening the market for them and setting the stage for the mortgage meltdown.

American consumers. Investment banks and insurers weren't the only ones who bought into the mortgage boom and ended up too heavily leveraged to survive its bust. Millions of American consumers took full advantage of lax lending standards to bet trillions on the housing market.

These bets came in the form of "investment properties," cash-out refinances and home equity loans that would leave many Americans unable to meet their financial obligations or paying a mortgage that was thousands of dollars underwater.

Minor players

When you're talking about a crisis of this magnitude, the major players aren't everyone. Every Goldfinger needs his Oddjob, and there are still some bit players in FCIC's account of the near-death of the economy that need to be recognized.

Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac, two government-sponsored enterprises, buy mortgages, insure them and sell them on the secondary market. Some economists, particularly some on the FCIC, suspected the GSEs were forced to offer mortgage loans to risky borrowers to help them meet affordable housing goals mandated by the Department of Housing and Urban Development.

The final FCIC report finds that Fannie and Freddie don't deserve as much blame as the players involved. Thanks to the fallout from a 1990s accounting scandal, they did not become as heavily invested in subprime mortgages as many private mortgage insurers did. Affordable housing goals may have boosted their involvement on the margins, but it did not have a major effect on the U.S. economy.

Even so, Fannie and Freddie had other weaknesses that made them vulnerable to a housing crash. Because their exposure to the housing market was so huge and their leverage so extreme, reaching $75 in debt for every $1 they held, they took massive losses once housing values began to drop and prime borrowers began defaulting on their loans.

Fannie and Freddie's role was hotly disputed by FCIC members during the formulation of the final report. Four GOP members -- Bill Thomas, Douglas Holtz-Eakin, Keith Hennessey and Peter Wallison -- released a "Financial Crisis Primer" in December, ascribing a much more central role to the GSEs than the official report would eventually reflect.

The Community Reinvestment Act. In 1977, Congress passed a law that encouraged banks to lend to homebuyers in certain economically distressed neighborhoods where they took deposits. While the FCIC noted this was an unsound policy, it concluded in its final report that the CRA did not contribute significantly to the crisis.

This turned into another hot-button issue for the committee, as Thomas, Holtz-Eakin, Hennessey and Wallison persisted in blaming the CRA in their report, and Wallison released a dissent that concluded the CRA was a big factor in the financial crisis.

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