This crisis started at the grass roots level. In '93, there was a big drop in interest rates, prompted by Allen Greenspan lowering the prime rate. This caused a huge refinance boom, but this boom was mostly conforming Freddy and Fanny paper that the banks wanted, due to the fees they could get away with, like charging for points, etc.
When the investors saw this, it took about 2 years for the cycle to repeat itself. Only this time, the mortgage brokers were getting cheap money that theoreticily would bring much bigger profits if the underwriting guidlines were relaxed, thus creating the sub-prime market.
(As a neccesary foot note, remember back to the Carter administation when inflation drove the interest rates into the 18% range. As the rates came down, the demand for refinancing was created. BIG FOOTNOTE, the credit card rates NEVER came back down.)
By '96, the conforming refinance boom had dried up, but the greedy brokers had loan officers that were hungry for easy money. With the help of crooked appraisers creating bogus home equity, help by crooked title companies that got their hidden closing costs built into the loans, the sub-prime stampead was on it's way.
I have to pause here to interject where this market was coming from. Big corporate storefront loan sharks, like American General, HFC, Ford, Benificial, etc. had exploited the ignorance of basic arithmatic of the working class that they could use their home equity to borrow $$$ for whatever they wanted. Buy the American Dream, they said, with out mentioning that you were turning you house into a revolving line of credit at 18%. If the public didn't buy into this, they just ran up revolving credit card debt, and started paying the minimum monthly payments, at 10-18%. But if you missed a payment, the rates could jump up as high as 23%.
This is where the the picture starts getting fuzzy. There was no oversight on what you needed to become a loan officer. Guys who were selling used cars last week were now selling mortgages. All you needed were postage stamps and a telephone, and the knowlege of how to go to a county court house and make note of who had mortgages with the finance companies. Contact these borrowers, show them how to convert their bad Finance company loans into a "REAL" mortgage, saving them somtimes hundreds of $$$ a month on their payments. Or, pay off all of those credit cards using your new found equity to convert bad debt into good debt. BTW, these mortgages were being bought by the the big lenders, using a string of shell companys posing as funders for these loans, (think Coutrywide and New Century). The reality was that American General, HFC, Ford, GMAC and others were the real owners of this subprime paper.
Stealing from Peter to pay Paul? Not really, since they now owned a 30 year note on a piece of collateral that could be sold again on a secondary market. This was also true for new home purchases as well, like the "No money down" deals.
Greed, avarace, a sencence of entitlement, and con-artists convincing people of what a great deal they were getting.
Whether it was credit card debt, finance company bloodsuckers, hedge funds or derivatives, or credit "swaps", everybody was after the easy money.
Folks, the cows have come home. Now we all have to shoulder the load, or it will be 1929 all over again. A de-flationary depression that will take years to recover from.
History repeats itself, again and again.
JMHO
