Submitted by JoeyMortgage (not verified) on September 29, 2008 - 10:10pm.
The question is: if you set up a system where entities are given incentives to make subprime mortgage loans (or are punished for failure to do so), then those entities will have a tendency to seek out and make subprime mortgage loans. When you set up a system where entities are able to deliver subprime mortgages with no risk whatsoever to them, because a government-backed entity buys up these loans, allowing the issuer to quickly make money and get rid of the underlying debt, this creates incentives for entities to identify situations where they can issue such subprime mortgages, so that they can be in turn purchased by the government-backed entity. If the government backed entity gets into the business of issuing securities based upon these subprime loans, advertising them as being very good risks when in fact they really weren't, you end up with what we have now - a recipe for disaster. This article smells because its written by someone from the Office of Thrift Supervision, an agency that clearly failed to do anything to avert the disaster - it also smells because the facts that it cites don't seem to add up to anything that undermines the basic logic of events and incentives that led us to this disaster. I'm working on understanding "what went wrong," - but the efforts of people to claim that "it's not the CRA" and/or "it's not due to a government social program designed to help poor people obtain mortgages in order to buy houses" don't ring true to me. Sounds like these people know more about "CYA" than "CRA."
Something fishy here
The question is: if you set up a system where entities are given incentives to make subprime mortgage loans (or are punished for failure to do so), then those entities will have a tendency to seek out and make subprime mortgage loans. When you set up a system where entities are able to deliver subprime mortgages with no risk whatsoever to them, because a government-backed entity buys up these loans, allowing the issuer to quickly make money and get rid of the underlying debt, this creates incentives for entities to identify situations where they can issue such subprime mortgages, so that they can be in turn purchased by the government-backed entity. If the government backed entity gets into the business of issuing securities based upon these subprime loans, advertising them as being very good risks when in fact they really weren't, you end up with what we have now - a recipe for disaster. This article smells because its written by someone from the Office of Thrift Supervision, an agency that clearly failed to do anything to avert the disaster - it also smells because the facts that it cites don't seem to add up to anything that undermines the basic logic of events and incentives that led us to this disaster. I'm working on understanding "what went wrong," - but the efforts of people to claim that "it's not the CRA" and/or "it's not due to a government social program designed to help poor people obtain mortgages in order to buy houses" don't ring true to me. Sounds like these people know more about "CYA" than "CRA."