The PWG includes the heads of Treasury, the Federal Reserve, the Securities and Exchange Commission (“SEC”), and the Commodity Futures Trading Commission (“CFTC”) and is chaired by the Secretary of the Treasury.
On March 13, 2008, the PWG issued a report on the causes of the Big Shitpile and included recommendations for improving the system. Among the causes is the laxity of lending standards:
A. Reforming the Mortgage Origination Process
Issues1. State-licensed mortgage brokers, who take loan applications and shop them to depository institutions or other lenders, had similarly weak incentives. Weak government oversight of these entities also contributed to the rise in unsound underwriting practices.
2. Originators had weak incentives to maintain strong underwriting standards, particularly at a time when securitizers, credit rating agencies, and mortgage investors did not conduct due diligence sufficient to align originator incentives with the underlying risks. Against this backdrop, limited government oversight of mortgage companies not affiliated with regulated depositories, which made about half of higher-priced mortgages in 2006, contributed to a rise in unsound underwriting practices in the subprime sector, including, in some cases, fraudulent and abusive practices.
3. Consumer protection rules and disclosure requirements did not sufficiently protect consumers against improper lending.
Note that the problem isn't Fannie, Freddie or the Community Reinvestment Act, it's the UNREGULATED mortgage companies.
On Friday, October 11 2008, the PWG issued a progress report and it included this summary of the causes of the Big Shitpile:
The PWG found that the principal underlying causes of the turmoil in financial markets were:
• a breakdown in underwriting standards for subprime mortgages;
• a significant erosion of market discipline by those involved in the securitization process, including originators, underwriters, credit rating agencies, and global investors, related in part to failures to provide or obtain adequate risk disclosures;
• flaws in credit rating agencies’ assessments of subprime residential mortgagebacked securities (RMBS) and other complex structured credit products, especially collateralized debt obligations (CDOs) that held RMBS and other assetbacked securities (CDOs of ABS);
• risk management weaknesses at some large U.S. and European financial institutions; and
• regulatory policies, including capital and disclosure1 requirements, that failed to mitigate risk management weaknesses.
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2 comments:
In the most recent report released Friday, there is reference to Fannie and Freddie on page 4:
Despite the significant progress made in the last year to reform this process, the portfolios
of two major mortgage industry entities, Fannie Mae and Freddie Mac, underperformed
expectations partially due to their holdings of mortgage assets created during the period of weak
underwriting.
IOW, they had bought up subprime mortgages and issued securities, that they weren't able to back up because so many of the loans ended up in default.
I noticed that in the March report there is reference to Credit Rating Agencies (CRA) being involved in the whole mess. I wonder if somehow that acronym was conflated with Community Reinvestment Act (Also CRA)
ANON,
I'm not sure if Fannie & Freddie issue securities on their own but that's something I'll have to look into.
The Community Reinvestment Act had very little to do with the crisis. The ratings agencies had a LOT to do with it because they gave AAA ratings to junk.
As I pointed out in a previous post, together Fannie & Freddie owned less than $115 billion in subprime securities and that amount pales in comparison to the $3.2 TRILLION created by Wall Street.
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