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Who's Behind the Financial Meltdown?

Posted By Conn Carroll On May 7, 2009 @ 12:43 pm In Ongoing Priorities | Comments Disabled

The Center for Public Integrity has a new project up called The Subprime 25 [1] that identifies the “top 25 lenders who were responsible for nearly $1 trillion of subprime loans made from 2005 through 2007. Together, the companies account for about 72 percent of high-priced loans reported to the government at the peak of the subprime market. Securities created from subprime loans have been blamed for the economic collapse from which the world’s economies have yet to recover.”

Guess who is at the top of the list? Countrywide Financial. But how did Countrywide manage to get to the top of that list? This 2000 report [2] by the Fannie Mae Foundation provides a clue:

Countrywide tends to follow the most flexible underwriting criteria permitted under GSE and FHA guidelines. Because Fannie Mae and Freddie Mac tend to give their best lenders access to the most flexible underwriting criteria, Countrywide benefits from its status as one of the largest originators of mortgage loans and one of the largest participants in the GSE programs. …

When necessary—in cases where applicants have no established credit history, for example—Countrywide uses nontraditional credit, a practice now accepted by the GSEs.

In other words, Fannie and Freddie favored lenders like Countrywide that had irresponsible lending practices. In fact, Fannie Mae was Countrywide’s biggest customer [3]. Thanks to its loose lending practices and backing of Fannie Mae, Countrywide became the largest mortgage lender in the country. In 2006, it financed 20% of all mortgages in the United States — 45% of which were subprime [4].

Fannie and Freddie’s subprime business was not isolated to Countrywide. Fannie and Freddie both bought subprime securities since 1995, and by 2004 they were purchasing $175 billion worth of such securities a year, or 44% of the entire market [5]. From 2003 through 2006 Fannie and Freddie bought more than a half trillion dollars in subprime securities. [5] That is more than any other purchaser in the entire world.

So while the federal government did not make the Center for Public Integrity’s “Subprime 25″ list directly, rest assured that every financial institution on that list is only there thanks to a big assist from big government.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/05/07/whos-behind-the-financial-meltdown/

URLs in this post:

[1] The Subprime 25: http://www.publicintegrity.org/investigations/economic_meltdown/the_subprime_25/

[2] 2000 report: http://www.fanniemaefoundation.org/programs/pdf/rep_newmortmkts_countrywide.pdf

[3] Fannie Mae was Countrywide’s biggest customer: http://www.forbes.com/markets/2008/09/08/bofa-bailout-winner-markets-equity-cx_md_0908markets32.html

[4] In 2006, it financed 20% of all mortgages in the United States — 45% of which were subprime: http://www.nytimes.com/2007/08/26/business/yourmoney/26country.html?hp=&pagewanted=all

[5] Fannie and Freddie both bought subprime securities since 1995, and by 2004 they were purchasing $175 billion worth of such securities a year, or 44% of the entire market: http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_pf.html

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