Saturday, November 12, 2011
Besides the myth of “regulatory uncertainty” constraining businesses from “job creation,” the Republicans in their recent debate peddled another falsehood: the government compelled the mortgage industry to make subprime loans. In fact, the industry readily offered them. The subprime crisis actually reinforces the need for government regulation, which the Republicans consistently oppose. A report by the International Monetary Fund states, "...the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle." Following the debate, Binyamin Appelbaum provided the following fact check:
There is a basic problem with the argument, made by several candidates, that the government forced mortgage lenders to make bad loans: most subprime loans were made by companies that were not subject to any kind of federal regulation.
Furthermore, there was no need for force. Financial companies jumped into the market. The major investment banks lined up to purchase subprime lenders, the major retail banks created subprime-lending divisions and a generation of upstart subprime lenders like Ameriquest and Countrywide were briefly celebrated as rising stars of American business.
No executive of a major mortgage company said at the time that the government was forcing him to make subprime loans. The executives said they did it because they thought they’d make money. And even now, after the crash, with all the temptation to point figures, it is awfully hard to find a mortgage executive who echoes the argument of the Republican candidates.
Studies of the financial crisis do assign a significant measure of responsibility to the government, but mostly for its failure to regulate these lenders.
Fannie Mae and Freddie Mac, the government-backed mortgage finance companies, did provide financing for large numbers of subprime loans, mostly by purchasing mortgage securities for their investment portfolios. But the historical record shows that they came late, diving into subprime lending because private companies were stealing their business and profits. As such, most experts have concluded that Fannie and Freddie helped expand the bubble but did not create it.