Wallison hidden in plain sight; what really caused the worlds worst financial crisis and why it could happen again (2015)

Hidden in Plain Sight Hidden in Plain Sight What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again Peter J Wallison Encounter Books New York • London © 2015 by Peter J Wallison All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Encounter Books, 900 Broadway, Suite 601, New York, New York 10003 First American edition published in 2015 by Encounter Books, an activity of Encounter for Culture and Education, Inc., a nonprofit, tax-exempt corporation Encounter Books website address: www.encounterbooks.com Manufactured in the United States and printed on acid-free paper The paper used in this publication meets the minimum requirements of ansi/niso z39.48‒1992 (r 1997) (Permanence of Paper) FIRST american edition library of congress cataloging-in-publication data Wallison, Peter J Hidden in plain sight : what really caused the world’s worst financial crisis and why it could happen again / by Peter J Wallison pages cm Includes bibliographical references and index ISBN 978-1-59403-770-2 (hard cover : alk paper) — ISBN 978-1-59403-771-9 (ebook) Housing—Finance—Government policy—United States Mortgage loans—Government policy—United States Subprime mortgage loans—Government policy—United States Financial crises—Government policy—United States United States—Economic policy—2001–2009 I Title HD7293.Z9W35 2015 332.7'20973090511—dc23 2014005179 produced by wilsted & taylor publishing services Copy editing: Nancy Evans Design: Yvonne Tsang Composition: Nancy Koerner Charts: Evan Winslow Smith For my amazing grandchildren, with love Skylar Allegra Alex Henry and Elodie Contents Preface  xi Acknowledgments  xvii Part I The Basics Introduction  What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again The Difference between Prime and Nontraditional Mortgages  27 The Importance of Sound Underwriting Standards The Financial Crisis Inquiry Commission Report and Other Explanations for the Crisis  41 Why Conventional Explanations for the Crisis Are Inadequate 4 A Short History of Housing Finance in the U.S.  100 How and Why Housing Finance Was Substantially Changed in 1992 Part II Government Housing Policies Take Effect HUD’s Central Role  125 How HUD Used the Affordable-Housing Goals to Reduce Underwriting Standards 6 The Decline in Underwriting Standards  160 How the Affordable-Housing Goals Forced an Increase in Nontraditional Mortgages Force Fed  182 Why the Affordable-Housing Goals, and Not Market Share or Profit, Were the Sole Reason the GSEs Acquired Nontraditional Mortgages Going Viral  219 Why and How Reduced Underwriting Standards Spread to the Wider Market Part III The Financial Crisis and Its Accelerants The Great Housing Price Bubble  237 How Loosened Underwriting Standards Stimulated Its Growth 10 Flying Blind into a Storm  248 How the GSEs’ Failure to Disclose Their Acquisition of Nontraditional Mortgages Magnified the Crisis 11 31 Million Nontraditional Mortgages Precipitate a Crisis  265 Why Even Government-Backed Mortgage Securities Were Contributors 12 Fair-Value Accounting Scales Up the Crisis  278 How Mark-to-Market Accounting Made Financial Firms Look Weak or Unstable Part IV From Bad to Worse 13 From Bad to Worse  307 How Government Blunders Turned a Mortgage Meltdown Into an Investor Panic and Financial Crisis 14 The False Narrative and the Future  342 Why the Failure to Understand the Causes of the Crisis May Lead to Another Notes  363 Index  393 398 ⋅ inde x income borrowers, 8–9, 163, 168–169, 174; on subprime and Alt-A loans, 182–183; and underwriting standards, 119–120, 125, 140–141, 164– 165, 221 Department of the Treasury, 75, 107, 322, 328, 329, 337; and economic forecasting, 254–255; insurance fund of, 317–318, 319, 320; and toxic asset purchases, 338–339 deregulation, xii, xiv, 61, 100; and Basel capital rules, 67–69; Glass-Steagall Act and, 62–64; investment banks and, 64–65; SEC and, 65–67 derivatives trading, 80; unregulated, 77–78 Desktop Underwriter, 207 discount window: access to, 64–65; banks and, 22–23 discrimination, racial, 115–116 Dodd-Frank Act See DoddFrank Wall Street Reform and Consumer Protection Act Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), xii–xiii, xiv, 3–4, 26, 45, 47, 329, 333, 339, 340, 344, 345, 356, 359, 367n26, 390–391n28; and Group of Thirty, 347–348; and interconnections, 75–78, 313– 316, 320–322; and qualified residential mortgages, 37–38, 357, 358 Donovan, Shaun, 135, 183; on underwriting standards, 191–192 Dow Jones Industrial Average, 303, 339 down payments, 7, 30, 31, 37, 232 (fig.), 241, 360; and affordablehousing goals, 9, 15, 229–230; and FHA loans, 144, 146, 355; low, 239–240; and National Homeownership Strategy, 141–142; and subprime mortgages, 32, 34, 174 DTI See debt-to-income ratios DU Boost (DU Bump), 207 EA See Expanded Approval loans Eavis, Peter, 332 economic forecasting, 250–251, 254 economic growth, 3–4, 249–250 Ely, Bert, 73, 368n37 Emergency Economic Stabilization Act, 302 equity, 240, 284, 333–334 European Union (EU), investment banks and, 65, 315 Expanded Approval (EA) loans, 189, 207 Fair Isaac Corporation, 30 See also FICO scores Fair Lending Best Practices (FLBP), 138 fair-value accounting, 19, 282, 287–288, 295, 303–304, 388n7; inde x procyclicality and, 283–285; securities ratings and, 298–299 Fannie Mae See Federal National Mortgage Association Fannie Random Study, 30, 31, 110–111, 174, 180 FAS 115, 282–283, 285, 286, 301 FAS 157, 289–290, 293–294 FASB See Financial Accounting Standards Board FCIC See Financial Crisis Inquiry Commission FCRA See Federal Credit Reform Act FDIC See Federal Deposit Insurance Corporation FDICIA See Federal Deposit Insurance Corporation Improvement Act Federal Credit Reform Act (FCRA), 142, 374n27 Federal Deposit Insurance Corporation (FDIC), 37, 73, 316, 335, 357 Federal Deposit Insurance Corporation Improvement Act (FDICIA), 69, 73 Federal Home Loan Bank Board (Bank Board), 104 Federal Home Loan Banks, 180, 238 Federal Home Loan Mortgage Corporation (Freddie Mac), xii, 5–6, 8, 9, 25, 31, 42, 106, 108, 137, 139, 161, 238, 267, 349, 380n43; and ­affordablehousing goals, 40, 53, 102– ⋅ 399 103, 128–131, 165–166, 169–170, 173–181, 183–189, 192, 215–218, 257–258, 350; and CRA, 151, 204–205; credit supplement publications of, 216; cross-subsidized loans and, 210–211; exposures of, 34–35; and failure to disclose NTMs, 12, 20, 29, 37, 47–48, 49, 84–85, 96, 215, 256–257, 262, 343; and FHA, 142–147; and housing bubble, 15, 61; and HUD, 167–168; insolvency, 51–52, 133, 232, 325–326; loan qualification through, 222–233; mortgage performance in, 200–201; NTM holdings of, 20, 28, 29, 49, 84–85, 225–226, 343; and PMBS, 163, 190 (table), 197–198, 199, 203; politics and, 171–173; and regulation, 69–71; reporting by, 47–48, 248–249, 262–263; reports to SEC, 211, 214–215; SEC non-prosecution agreement, 12, 49, 262; securitization and, 17, 86, 89, 112; subprime loans and, 11 (table), 12, 164; underwriting standards, 114, 118–119, 120, 164–165, 351, 352–353 Federal Housing Administration (FHA), 5, 28, 88, 127, 137, 157, 161, 355, 374n27; foreclosure rates in, 351, 352 (fig.); and GSEs, 106, 142–147, 178, 180; 400 ⋅ inde x underwriting standards for, 101–102 Federal Housing Enterprises Financial Safety and Soundness Act (GSE Act), 101, 116, 127, 142, 166, 214; objectives of, 117–119 Federal Housing Finance Agency (FHFA), 37, 71, 128, 177, 355– 356, 357, 379n39; on crosssubsidizing loans, 210–211; and LTV ratios, 175–176 federal insurance structure, savings and loan associations in, 103–106 Federal National Mortgage Association (Fannie Mae; FNMA), xii, 5–6, 8, 15, 25, 31, 42, 61, 109, 125, 137, 139, 168, 191 (table), 238, 343, 349, 363n5, 364n9, 372n1, 376n5, 380n43; and affordable-housing goals, 40, 53, 56, 102–103, 128–131, 133, 165–166, 174–181, 183–189, 205–209, 257–258, 350; Alignment Meetings of, 209–210; conservatorship, 214, 325, 355–356; CRA and, 151, 167, 204–205; Credit Policy Committee of, 161–162; credit profile, 54–55 (table), 212–213 (table), 255–256; credit supplement publications of, 211, 213–214, 259; crosssubsidized loans and, 210– 211; exposures of, 34–35; and failure to disclose NTMs, 12, 20, 29, 47–48, 49, 84–85, 96, 256–257, 262, 343; and FHA, 142–147; government backing of, 107–108; guarantee fees, 177, 185, 196, 207, 208, 209, 210–211, 382n39, 383n48; higher-income buyers and, 9–10; insolvency, 51–52, 133, 178, 232, 325–326; Johnson administration and, 106–107; loan dataset, 34–37; mortgage performance in, 200–201; NTM holdings of, 20, 28, 49, 169–170, 193–194, 199–200, 215, 225–226; Opening Doors program and, 114–115; and PMBS, 162–163, 197–199, 203; political power of, 126–127; political pressure on, 171–172; privatization and, 112, 113–114; regulation of, 69–71; relevance of, 173, 192, 209; reporting by, 47–48, 248–249, 258–260, 262–263; reports to SEC by, 214–215; and SEC non-prosecution agreement, 12, 49, 262; securitization and, 17, 86, 89, 192; standard tightening by, 110–111; subprime loans and, 11 (table), 12, 164, 194–195, 196, 386n21; 10-K reports and, 177, 248; underwriting standards, 118–119, 120, 164– 165, 351, 352 inde x Federal Reserve Act, 73, 390– 391n28 Federal Reserve Bank of Boston, 115 Federal Reserve Bank of Cleveland, on subprime loans, 246–247 Federal Reserve Board, 115; and CRA lending, 152, 153–154 Federal Reserve System, xiv, 4, 37, 47, 72, 75, 275, 327, 338, 346, 357; and bank deposits, 311–312; bank holding companies and, 315–316; on bank liquidity, 20, 22–23; and commercial paper market, 318, 319; and CRA loans, 148, 150–151, 155; on determining risk, 83–85; on discount window, 64–65; economic forecasting by, 250–251; on economic slowdown, 249–250; interest rates and, 59, 60, 239, 279; and Lehman Brothers failure, 329–335; liquidity and, 73, 279, 287–288, 321–323; moral hazard created by, 21–22; and Reg Q, 104–105; as regulator, 44–45; on subprime loans, 252–254 FHA See Federal Housing Administration FHFA See Federal Housing Finance Agency FICO scores, 30, 31–32, 33 (table), 95, 110, 141 (table), 144, 353, 354 (fig.), 360; ⋅ 401 and mortgage rating, 34, 35, 36–37, 38, 39, 50–51, 173, 194, 216, 258, 259 financial accounting, 280; standards for, 281–288 Financial Accounting Standard See FAS 115; FAS 157 Financial Accounting Standards Board (FASB), 280, 289, 302, 303, 339; rules, 300–301; on securities assets, 282–283 financial crisis, 3, 24, 244, 343; causes of, xii, xiii, 57, 132–133; CDOs and, 89–93; CDS and, 74–83; common shock and, 315–326, 346–347; credit rating and, 93–96; false narrative about, xiv, 26, 304, 342, 350, 354, 356, 360; government role in, 348–349; HUD and, 134–137; and Lehman Brothers bankruptcy, 335–336; liquidity and, 337– 338; low interest rates and, 57–61; perfect storm theories for, 97–99; predatory lending and, 96–97; risk-taking and, 61–71, 83–85; securitization and, 86–89; “shadow banks” and, 71–74 Financial Crisis Inquiry Commission (FCIC), 25, 41, 59, 78, 80, 83, 87, 94, 133, 135, 155, 161, 197, 214, 251, 262, 343, 348; on affordablehousing goals, 198–199; on Bear Stearns near-failure, 402 ⋅ inde x 273–274, 310; dissents in, 56–57, 97–98; on HUD role, 182, 183, 189; on Lehman Brothers failure, 330–332, 334–335; partisan structure of, 43–46, 48–49; on predatory lending, 96–97; process and conclusions of, 46–47, 50–51, 52–53; on subprime reporting, 260–261; on underwriting standards, 191–192 Financial Services Roundtable, 285 Financial Stability Oversight Council (FSOC), 315, 345 First American Loan­ Performance, Inc (CoreLogic), 11–12, 249, 253 Fishbein, Alan J., 117 Fitch Ratings, and CDS market, 82–83 FLBP See Fair Lending Best Practices FNMA See Federal National Mortgage Association foreclosure rates, 34, 245; and FHA loans, 102, 145 (fig.), 351, 352 (fig.) Frank, Barney, 25, 42, 49, 157, 347, 366n8; and GSE regulation, 70, 71, 172 Freddie dataset, 29, 34–35, 36 (table), 37–38, 51, 216, 221, 223–224, 225, 227, 228, 230– 231, 233 (fig.), 267, 353 Freddie Mac See Federal Home Loan Mortgage Corporation Fremont, 195 Friedman, Milton, xi, xiv FSOC See Financial Stability Oversight Council Fuld, Richard, on Lehman Brothers failure, 324, 334–335 funds from abroad, and housing bubble, 57–58, 59 GAO See Government Accountability Office Geithner, Timothy, 23, 75, 314, 320; and Bear Stearns rescue, 313, 323; on Lehman Brothers failure, 326–327, 332–333; on stress tests, 339 Ginnie Mae, 86 Glass-Steagall Act, 62–64 GMAC-RFC Holding Company, 195 Goldman Sachs, 63, 65, 71, 308, 325; and Federal Reserve, 315–316 Gonzales, Henry, 117 Gorelick, Jamie, 167 Gorton, Gary: on ABX.HE index, 293–294; on accounting, 303–304 Government Accountability Office (GAO), and investment banks, 65–67 government-sponsored enterprises (GSEs), 88, 95, 110, 111, 254, 378n26; in conservatorship, 12, 126, 134, 214, 325, 355–356; and credit losses, 255–256; and inde x HUD, 134–137; information provided by, 47–48, 84–85; mortgage performance of, 203–204; nontraditional mortgages and, 173–181; nontraditional mortgages, failure to disclose acquisition of, 10–13, 48, 96, 248–264; performance goals for, 133–134; and PMBS, 195–197; political power of, 126–127; political pressures on, 171–173; regulation of, 69–71; status as, 107–108; and subprime loans, 10–11, 52; and underwriting standards, 7–8, 37, 112–113, 114, 119–120, 191–192, 221–222; and Wall Street, following, 59, 162–163, 183; and Wall Street, market competition with, 191–203 See also Federal Home Loan Mortgage Corporation; Federal National Mortgage Association Gramm-Leach-Bliley Act, 44, 62, 63, 65, 151 Grant, James, 238 Great Depression, xiv, 3, 101 Greenspan, Alan, 60, 68, 239, 254, 337; on bank assets, 281– 282; on economic forecasting, 250–251 Group of Thirty: and DoddFrank legislation, 347–348; on interconnectedness, 344–345, 346–347 ⋅ 403 GSE Act See Federal Housing Enterprises Financial Safety and Soundness Act GSEs See government-­sponsored enterprises guarantee fees See under Federal National Mortgage Association Hennessey, Keith, 97–98 Hensarling, Jeb, 372n40 Herz, Robert, 302 historical cost accounting, 299–300 HMDA See Home Mortgage Disclosure Act Holtz-Eakin, Douglas, 98 Home Mortgage Disclosure Act (HMDA), 115, 136, 148, 157 homeownership rates, 7, 30, 102, 357; federal goals for, 131–132, 139–140, 181 Homeowners Protection Act (HOPA), 148 HOPA See Homeowners Protection Act House Banking Committee, 117 House Financial Services Committee, 71, 170, 339, 372n40; on securities valuation, 302–303 House of Representatives, and GSEs, 70, 172 housing, 355; affordability of, 157–158; decline in values of, 17–18, 24; federal policies on, xv, 4–5, 25, 26, 42–43, 57, 61, 404 ⋅ inde x 100, 243, 266, 267–268, 340– 341, 342 See also affordablehousing goals housing price bubble, 244, 343, 346, 349; causes of, 13–18; in foreign countries, 244–247; and government housing policies, 267–268; high leverage and, 240–241; length of, 242–243; and low interest rates, 58–61; monetary policy and, 57–58; and mortgage defaults, 276–277; procyclicality and, 283–285; and quality of mortgages, 35–36, 127–128 housing prices, 12, 247; fall in, 17–18, 241–242; and mortgage defaults, 270–271 Howard, Timothy, 114, 162 Huang, Yilin, 89 HUD See Department of Housing and Urban Development IMF See Inside Mortgage Finance IndyMac, failure of, 66, 72, 346 inflation, 1970s, 108–109 Inside Mortgage Finance (IMF), 12 insolvency: FHA, 103; GSEs, 51–52, 133, 178, 180, 232, 325–326 “Interagency Guidance on Nontraditional Mortgage Product Risks,” 186 interconnectedness, among financial institutions, 75–78, 313–316, 320–322, 336, 344– 345, 346–347 interest rates, 279, 351; low, 57– 61, 239; S&Ls and, 105–106 investment, 239; NTM-backed securities, 16–17; in PMBS, 248, 271–273 investment banks, 278, 308, 309 (fig.), 312, 315; financial weaknesses in, 279–280; and SEC regulations, 65–67; as “shadow banks,” 71–74; and subsidiaries, 63–64 Ireland, 245 Jaffee, Dwight, 244 James, Anthony, 237–238 Johnson, James A., 113–114, 115, 126, 171; and FHA, 161–162 Johnson, Lyndon, 106–107 Johnson, Tim, 360 Johnson-Crapo bill, 360–361 JPMorgan Chase, 155, 349; and Bear Stearns, 20, 21, 22, 274, 310, 324, 327 Kindleberger, Charles, 14 Kroszner, Randall, 150, 151 Krugman, Paul, 257, 365–366n2 Kudlow, Larry, 25 Labaton, Stephen, 65 LaMalfa, Thomas, 31 Lea, Michael, 245–246 Lehman Brothers, 21, 22, 65, 71, 72, 195, 270, 308; assets inde x of, 334, 340; bankruptcy of, 24, 58, 63, 279, 314, 316, 322–323, 324, 335–336; and CDS market, 76–77, 320–321, 336–337; and commercial paper market, 317–319; on credit loss predictions, 255, 256; failure of, 325, 326–332, 339, 345, 346 leverage, and housing prices, 239–242 Lewis, Michael, 251 LIBOR-OIS spread, 278–279 liquidity, 24, 106, 108, 269, 278, 317; and asset values, 287–288; banks and, 20, 22–23; Bear Stearns near-failure and, 273–274, 310; Federal Reserve and, 73, 279, 321–322; and financial crisis, 337–338; and Lehman Brothers failure, 334–335 LMI See low- and moderateincome borrowers Lo, Andrew, 66 LoanPerformance See First American LoanPerformance, Inc loans See mortgages; specific types loan-to-value (LTV) ratios, 9, 31, 32, 35, 51, 101, 102, 104, 110, 141 (table), 161, 216, 231 (fig.), 360; and default rates, 353, 354 (fig.); and Fannie Mae loans, 162, 174, 196; and FHA loans, 143, 144, 145 (fig.), 147; and GSE ⋅ 405 loans, 175–176; and mortgage quality, 228–229, 270; and prime mortgages, 38, 39, 222; and subprime mortgages, 37, 183; in traditional mortgages, 29–30 low- and moderate-income (LMI) borrowers, 174, 209, 239; affordable-housing goals and, 116–117, 130, 131, 135–137, 139–140, 199; FHA loans and, 161–162; HUD goals for, 168–169, 222; PMBS and, 162–163; raising numbers of, 8–9 Lowenstein, Roger, 75–76 LTV See loan-to-value ratios market behavior, economic forecasting and, 250–251 Markit Group Ltd., 293 mark-to-market accounting, 24, 90, 233, 255, 274, 275, 276, 277, 278–287, 290, 295, 302– 303, 307–309, 340, 342, 346 Marzol, Adolfo, 184 Maxwell, David, 113 MBA See Mortgage Bankers Association MBS See mortgage-backed securities McCain, John, xi–xii McDonald, Oonagh, 126–127 McLean, Bethany, 197, 200, 203, 214 MCM See My Community Mortgage 406 ⋅ inde x Merrill Lynch, 63, 65, 71 Min, David, 200 minorities, 9, 115–116, 184 Minsky, Hyman, 14–15 Minsky model, 243 MMFs See money market funds Monetary Control Act, 105 monetary policy, and housing bubble, 57–58, 60 money market funds (MMFs), 105, 319; and Treasury insurance fund, 317–318, 320 Montgomery, Brian, 187, 210 Moody’s Investors Service, 90, 91 (table), 93, 256; and MBS rating downgrades, 279, 294, 295, 296 (table), 298 moral hazard, in rescuing Bear Stearns, 21–22, 323–325 Morgan Stanley, 63, 65, 71, 92, 308, 325; and Federal Reserve, 315–316 Morgenson, Gretchen, 114 mortgage-backed securities (MBS), 18, 59–60, 62, 87–88, 272, 286, 287, 291; and AAA tranches, 293–294; and ratings downgrades, 294–295; subprime, 203, 284; valuing, 301–302 Mortgage Bankers Association (MBA), 31; and Best Practices Initiative, 137–139 mortgage market: performance of, 256–258; private and government, 224–225 mortgages, 16, 24, 101, 102, 116, 148, 219, 222, 238, 240, 353, 370n6, 383n48; banks and, 18–19; CRA and, 148, 150–156; cross-subsidizing, 210–211, 382n39; degraded standards of, 226–227; delinquency and default rates of, 58, 110, 200–201, 220–221, 232, 265–268, 270–271, 386–387n2; deterioration of, 226–231; discount, 22–23; easing terms for, 9–10; GSEs and, 5–6; housing bubble and, 13–18, 127–128; profitability of, 203–204; qualified residential, 37–38; quality of, 50–51, 355–356; racial discrimination in, 115–116; reporting on, 11–12; risky, 59–60; second, 7, 175, 176, 220, 229, 378n39; second liens, 176, 296; silent seconds, 175, 176; securitization of, 192–193, 271–272; special categories of, 187, 189; traditional, 29–31, 35; underwriting standards of, 7–8, 27–28 See also Alt-A loans; nontraditional mortgages; prime mortgages; subprime mortgages/loans Mozilo, Angelo, 164 Mudd, Daniel, 53, 125–126, 187, 210; on HUD goals, 167–168, 183–184 My Community Mortgage (MCM), 189, 207 inde x Natale, Christina, 160 National Community Reinvestment Coalition (NCRC), and CRA, 152–156 National Economic Research Associates (NERA), on delinquency and default rates, 220–221 National Homeownership Strategy, 137, 140–141, 157, 174, 181, 230, 239 National Low Income Housing Coalition, 117 Nationally Recognized Statistical Rating Organizations (NRSROs), 94 NCRC See National Community Reinvestment Coalition NERA See National Economic Research Associates New Century, 195 New York Federal Reserve Bank, 23; and Lehman Brothers failure, 308, 331–332 Nocera, Joe, 197, 200, 203, 214, 349, 380n1 nontraditional mortgages (NTMs), 37, 39–40, 41, 67, 88, 96, 126, 156, 157, 219, 343, 349, 350; acquisition of, 10, 193–194; and affordablehousing goals, 9, 183–190, 207–209; default rates of, 233 (fig.), 265–266; delinquency rates of, 200–201, 202 (table), 266–267; and Fannie and Freddie insolvency, 51–52; ⋅ 407 and financial crisis, 24, 99; GSE-acquired, 162, 173–181, 197–198, 203, 211, 214, 215– 216; and housing bubble, 14– 15, 61, 128, 244, 247, 276–277; HUD policies and, 168–170; as not profitable, 203–204; PMBS-backed, 163, 196–197, 308, 315, 346; private sector and, 224–225; reporting on, 11–13, 48, 49, 84–85, 248–249, 251–253, 263–264; securities backed by, 16–17; securitization of, 194, 199–200; in 2008, 28–29 See also Alt-A loans; subprime mortgages/loans NRSROs See Nationally Recognized Statistical Rating Organizations NTMs See nontraditional mortgages Obama, Barack, xii, 46, 61, 70; and Dodd-Frank legislation, 347–348, 359; on interconnectedness, 344–345 OCI See Other Comprehensive Income Office of Federal Housing Enterprise Oversight (OFHEO), 8, 70, 186, 196, 258 Office of the Comptroller of the Currency, 357; and CRA, 153–154 OFHEO See Office of Federal Housing Enterprise Oversight Opening Doors program, 114 408 ⋅ inde x Open Market Committee, forecasting by, 250, 252–253, 254 Option One, 195 Other Comprehensive Income (OCI), 286, 299 other than temporary impairment (OTTI), 286 Panic of 1907, Parsons, Patti, 184 Paulson, Henry (“Hank”), 20, 71, 248, 254–255, 335, 340, 345; on Bear Stearns rescue, 21–22, 75, 313, 323; on CDS, 320, 321; and Lehman Brothers failure, 326–329, 332–333; on toxic asset purchases, 338–339 Peirce, Hester, 79 Pelosi, Nancy, 44, 172 perfect storm theories, 97–99 Pierce, Samuel, 112 Pinto, Edward, 45, 52, 257, 261, 262, 380n1; on CRA commitments, 155–156; and FCIC investigation, 49, 50–51; on NTMs, 28–29 PLS See private label securities PMBS See private mortgagebacked securities predatory lending, 96–97 Primary Dealer Credit Facility, 321, 333, 335 prime mortgages, 25, 31–32, 38–39, 222, 257, 358; delinquencies and defaults in, 220–221, 233 (fig.), 266–267; in Freddie dataset, 223–224, 233 (fig.); NTMs reported as, 249, 253 Prince, Charles O., 284, 285 private label securities (PLS), 16 private mortgage-backed securities (PMBS), 16, 62, 68, 71, 84, 86, 88, 162–163, 172, 247, 248, 254, 279, 291, 295, 316, 347, 379n39; and banks, 18–19, 24, 73; and Bear Stearns, 273–274, 308; and CDOs, 89–90; GSE holding of, 170, 173, 174, 177–178, 179 (table), 183, 184–185, 187, 190 (table), 195–199, 201, 203; investor sentiment and, 271–273; and market decline, 17–18, 275–276; market for, 193, 287; and mortgage performance, 200, 201, 216; NTM-backed, 194, 224–225, 268–269, 315, 346; rating of, 19–20, 93; as toxic assets, 338–339 privatization, 172; Fannie Mae, 107, 113–114; Reagan administration and, 111–112 procyclicality: and Bear ­Stearns, 308, 310; in fair-value accounting, 283–285 profit, in subprime and Alt-A loans, 182–183 QM See qualified mortgage QRM See qualified residential mortgage inde x qualified mortgage (QM), 358– 359, 360, 361 qualified residential mortgage (QRM), 37–38, 357, 358, 359, 361 racial discrimination, in mortgage lending, 115–116 Raines, Franklin, 170 rating agencies See Nationally Recognized Statistical Rating Organizations Reagan administration, privatization and, 111–112 real estate mortgage investment conduits (REMICs), 112 recessions, xiii, 355; 1957, 102; 1981–1983, 108–109 See also financial crisis Reg Q See Regulation Q Regulation Q (Reg Q), 104–105 regulations, xii–xiii; of GSEs, 69– 71; and firm diversification, 68–69; of “shadow banks,” 71– 74 See also Dodd-Frank Wall Street Reform and Consumer Protection Act REMICs See real estate mortgage investment conduits Republicans: on FCIC, 43–46, 56–57; on GSEs, 70, 171–172 Reserve Primary Fund, 21, 340; and breaking the buck, 316–317; and decline of commercial paper market, 318–320; and Lehman Brothers bankruptcy, 317–318 ⋅ 409 RHS See Rural Housing Service Richards, Carl, 219–220 Richardson, Matthew, 13 Riegle-Neal Interstate Banking and Branching Efficiency Act, 67–69, 152 risks, 16, 88; CDOs and, 80–82; CDS as, 75–77, 82–83; management of, 83–85 risk-taking, 61–62; by GSEs, 10–13 Ritholtz, Barry, 42 Rosner, Joshua, 114 Rural Housing Service (RHS), 5, 180 S&Ls See savings and loan associations savings and loan associations (S&Ls), 5, 69, 72, 108; collapse of, 105–106, 109; and CRA regulations, 121–122, 149, 204–205; federally insured, 103–105 Schwartz, Anna, xiv SEC See Securities and Exchange Commission securities, xiv, 63, 86, 107, 281, 308, 337; assets in, 282–283; control of, 73–74; mortgagebacked (MBS), 18, 59–60, 62, 87–88; NTM-backed, 16–17; ratings downgrades on, 294–295, 298–299; value of, 288–290, 301–302 See also asset-backed securities; mortgage-backed securities; 410 ⋅ inde x private mortgage-backed securities Securities and Exchange ­Commission (SEC), 12, 37, 47, 156, 280, 281, 315, 357; and Fannie and Freddie, 49, 85, 177, 258–259; function of, 65– 67; GSE reporting to, 211–212, 214–215, 262; on valuation process, 301–302 Securities Exchange Act, 211 securitization, 86–89, 112, 356– 357; of mortgages, 192–193, 271–272; of NTMs, 87–88, 199–200 self-denominated subprime loans See under subprime mortgages/loans Senate, 360, 372n40; and GSE regulation, 70, 113; on housing bubble, 244–246 Senate committee report, 116, 120 Shadow Financial Regulatory Committee, 325 Shiller, Robert, on housing bubbles, 58–59, 60, 242, 243 (fig.) SIFI See systematically important financial institution Sowell, Thomas, 97 Spain, 245 special affordable goals See under affordable-housing goals Standard & Poor’s (S&P) ­ratings, 298; downgrades, 294, 296 (table) Stern School of Business, on financial crisis, 132–133 Stewart, James B., 332 stock market, xiv, 59, 82, 303, 339 subprime loans See subprime mortgages/loans subprime mortgages/loans, 10, 32, 34, 35, 50–51, 91 (table), 119, 161, 166, 168, 174–176, 192, 246–247, 284, 363n5; Countrywide Financial Corporation and, 163–164, 172–173, 268; cross-­subsidized, 210–211, 382n39; FHA and, 146–147; FICO scores and, 36–37; GSE acquisition of, 11–12, 35, 52, 170, 179–181, 187, 194–195, 197, 386n21; GSE acquisition of, for profit, 203–211; profit in, 182–183; reporting on, 248–250, 251, 253–254, 256–257, 258–261; self-denominated, 28, 52, 134, 145, 173–174, 177, 178, 194, 250, 261 Syron, Richard, 115, 170, 223 systematically important financial institution (SIFI), 315, 345– 346 TARP See Troubled Asset Relief Program Taylor, John B., 239 inde x Term Auction Facility, 321 Term Securities Lending Facility, 321 Thomas, Bill, 44, 98–99 Thomas, William R., 109–110 “Three Studies of Subprime and Alt-A Loans in the US Mortgage Market” (Pinto), 28 Trevino, Albert, 176–177 Trillion Dollar Commitment, 114, 139, 161, 162 Troubled Asset Relief Program (TARP), 321, 322, 340, 368n36 2005-HE7 (securities), 299, 301; downgrades, 296–298 UBS, 92 underserved goals See under affordable-housing goals underwriting standards, 27–28, 30, 62, 160–161, 205, 219, 223, 350–351; automated, 13, 16, 207; FHA, 101–102; of GSEs, 7–8, 37, 112–113, 114, 118– 119, 191–192, 351–353; HUD changes in, 119–120, 125, 140–141, 164, 183; lowering of, 221–222, 359–360; for low-income buyers, 9–10; and qualified mortgages, 358–359; ⋅ 411 and qualified residential mortgages, 37–38 United Kingdom, troubled mortgages in, 245, 246 Urban Institute, 164–165 Veterans Administration (VA) loans, 5, 28, 106, 180 Villani, Kevin, 168, 295 Volcker, Paul, 344 Wachovia National Bank: failure of, 66, 72, 346; FDIC takeover of, 316, 335 Wall Street, as cause of crisis, 20, 47, 63, 71–72, 75–76, 77–78, 92–93, 161, 251–252, 343, 348–349 See also various firms Washington Mutual Bank, 170, 171, 195, 316; failure of, 66, 72, 346 Weech, Paul, 184 Wells Fargo, 155, 335 Wessel, David, 310, 327 Williams, Meredith, 89 Yardeni, Edward, 310 Zigas, Barry, 165–166, 204, 206 .. .Hidden in Plain Sight Hidden in Plain Sight What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again Peter J Wallison Encounter Books New... cataloging -in- publication data Wallison, Peter J Hidden in plain sight : what really caused the world’s worst financial crisis and why it could happen again / by Peter J Wallison pages cm Includes bibliographical... xvii Part I The Basics Introduction  What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again The Difference between Prime and Nontraditional Mortgages  27 The Importance