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So who's to blame?

John McCain has been blaming the economic mess on lax mortgage lending standards at Fannie Mae and Freddie Mac, and by extension to the Democrats in Congress who supposedly pushed for expanded lending at the two government-chartered institutions. Were Fannie and Freddie responsible for the mortgage mess? No, says a current Zacks Investment Research report.

Let’s review a little bit of history: Fannie dates from 1938, Freddie from 1968, and the CRA was passed in 1977. The worst of the bad mortgages were made from 2003 through the first half of 2007. It sure seems like a very long lead time for Fannie, Freddie or the CRA to be the culprit.

It was the growth of private-label mortgage-backed securities, largely built on mortgages originated by mortgage brokers, not banks, and funded by non-bank financial institutions such as New Century, Ameriquest and Countrywide (late in its life, Countrywide did get a thrift subsidiary) that created the worst paper.

The mortgages that started in these channels were packaged up by Bear Stearns, Lehman Brothers and the rest of the big investment banks and sold bypassing Fannie and Freddie.

New Century, Ameriquest, Countrywide...all high-flying (some would say "fly by night") mortgage lenders who would lend to anyone and everyone, but have since crashed. Bear Stearns, Lehman...the Wall Street geniuses who bought practically every mortgage that the lenders sent their way, not because the underlying mortgages were sound but because the Wall Streeters figured they could always sell off the securities to some other sucker. Those "suckers" finally said no, and Wall Street has been pummelled ever since.

October 17, 2008 in Current Affairs | Permalink

Comments

Those who cut themselves fees
and sold mortgages as "risk free" certificates to suckers all over the world are just a few of the culprits responsible for the current financial crisis. I also blame the politicians, lobbyists, educators and the advertising industry, among many others for creating such a
mess.

Posted by: Warren Adler at Oct 18, 2008 9:53:13 PM