thought this article by Russell Roberts is a clear rundown of the argument concerning low-income borrowers in the mortgage crisis. I hadn’t quite understood how you could blame the entire crisis on loans made to low-income borrowers, but this article explains how the political motivation to expand home ownership had Congress directing Freddie and Frannie to take on more loans made to low-income borrowers, which lead to more sub-prime mortgages being implicitly backed by the U.S. Government. Also, Freddie and Frannie “purchased subprime securities for their own portfolios to make money.”
a compelling letter was published today in response, written by James Stock, from Harvard:
“The problem mortgages were packaged and sold as mortgage-backed securities and collateralized debt obligations. That moment of resale is when the risks of those bundled mortgages (whether CRA-induced or not) should have been properly priced. If mortgaged-backed securities market participants had done their homework, MBS prices would have properly reflected the nondiversifiable risk of declining national housing values. If risk managers and regulators had been on their toes, those risks would have been managed appropriately. Markets fail when information is incomplete or manipulated, but everyone in the market knew about the CRA — or should have.”
have been trying to figure out the role of the credit rating agencies, and this criticism seems well-put. If one had been properly aware of the risks involved with mortgage backed securities, and all the accompanying credit default swaps and the basic nature of the Wall Street Firms involved, perhaps the crisis would have been visible earlier on. More people on deck can help in spotting the above-water part of the iceberg.