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  1. 1. The Housing Bubble Bust: The Second Great Depression Presented to Allan P Nuttall By Angela Romero 1
  2. 2. INTRODUCTIONThe 2007 subprime mortgage crisis led America into what is now called The Great Recession-- arecession of epic proportions that has not been seen since The Great Depression. The subprimemortgage crisis turned into a financial debacle because it demolished several pillars of America’seconomic infrastructure. The Great Recession was the result of loosely-knitted governmentregulations, interwoven with greedy lenders, and voracious financial markets. For a crisis of thismagnitude to have happened, the cast of characters that created it must have had great power,private agendas, and ravening greed. This report is going to examine the driving forces of thehousing bubble busts. This study was designed to analyze the mortgage meltdown. Specially, thisstudy wants to answer the following questions: Who were the key players in the mortgage meltdown? What were their motivations? Why they behaved as they did?Figure 1: Housing Bubble Formation depicts the main forces and key players driving the housingbubble. Figure 1: Housing Bubble Formation Causes of the Housing BubbleInstitutional Lending Decisions Personal Borrowing DecisionsGSE Irresponsible Low Wall MBSRisky Lending Interest Street’s Credit Risky Home Bubble HighPractices Practices Rates MBS Ratings ARM ownership Psychology Household Loans Pressure Debt Source: Primary, 2011 2
  3. 3. THE GOVERNMENTThis section is going to cover the cultural pressures and the governmental influence on thehousing bubble. Before the 1960s, only creditworthy individuals who fit the strict requirementsof lenders would get approved for a mortgage loan. Since the underwriting standards were sostrict, a big sector of the population did not qualify for loans. The Boston Fed made a studyinvestigating lending practices because of the large quantity of loans denied. The results of thestudy suggested that Lenders were ―redlining‖, which is the practice of denying loans tominorities and economically distressed communities, regardless of their ability to pay. In otherwords, it is a deliberate discrimination on lending practices towards minorities and low-incomecitizens. The study caused an uproar among people who demanded to be protected fromdiscriminatory lending practices. Further, the media sensationalized the story out of proportions,fuelling the heated issue even further. Together, communities and the media pressured thegovernment to respond.The Boston Fed study was the spark that ignited a government-driven engine towards the road oflooser underwriting standards. The government realized that housing ownership was a powerfulcampaign that would increase votes and popularity. Swiftly, most politicians from left to right,took the ―affordable housing‖ motto as an emblem for their campaigns. For example, in 1996President Clinton started its ―National Homeownership Strategy‖. According to the Washingtonexaminer, this campaign was the seed of the Great Recession ―the roots of this crisis sproutedduring the Clinton administration’s politically motivated effort in the 1990s, to use Fannie Maeand Freddie Mac to expand home ownership‖ (Washington Examiner 1)Not all the pundits agreed with the redlining accusations made by the Fed. According toLiebowitz, the Boston Fed’s study was flawed and it was a smokescreen released in order toachieve relaxed underwriting standards. ―My colleague, Ted Day, and I only decided toinvestigate the Boston Fed study because we knew that no single study, particularly the firststudy, should ever be considered definitive and that something smelled funny about the wholeendeavor. Nevertheless, we were shocked at the poor quality of the data created by the BostonFed… When we attempted to conduct statistical analysis removing the impact of these obviousdata errors, we found that the evidence of discrimination vanished‖ (Lebowitz 1). Despite theaccuracy of the study, the government enacted several laws to protect consumers againstredlining.The Community Reinvestment Act of 1977The first legislation enacted to protect borrowers against discrimination and to increase rate ofownership among minorities was the Community Reinvestment Act of 1977. ―The CRA is aUnited States federal law designed to encourage commercial banks and savings associations tohelp meet the needs of borrowers in all segments of their communities, including low- andmoderate-income neighborhoods‖ (Bankers Academy 1). In a practical way, this Act requiresbanks to lower their lending standards to accommodate less-than-perfect or subprime borrowers.Further, under CRA legislation, it was made possible to pursue legal actions against banks thatcontinued with discriminatory lending practices. ―The regulators imposed quotas— and lendershad to resort to ―innovative or flexible‖ standards and methods to meet those quotas‖ (Sowell39). 3
  4. 4. Closing the Gap: A Guide to Equal Opportunity LendingThe Boston Fed published a manual for lending institutions called ―Closing the Gap: A Guide toEqual Opportunity Lending‖ (Boston Fed 1) that addressed the new lax underwriting standards.This section is going to analyze excerpts from the manual and its consequences on lendingpractices. For example, the new obligation ratio stated that it is acceptable to lend to people whohave an income-to-debt ratio lower than the golden standard of 28/36. “Obligation Ratios: itshould be noted that the secondary market is willing to consider ratios above the standard 28/36‖(Boston Fed 1). What this means is that the secondary mortgage market is willing to purchaseriskier loans in order to boost home ownership. Second, not only is the manual lowering thedebt-to-income ratios, which removes any type of cushioning in case of an emergency, but it islending to people with no payment history ―Credit History: Lack of credit history should not beseen as a negative factor… For lower–income applicants in particular, unforeseen expenses canhave a disproportionate effect on an otherwise positive credit record‖ (Boston Fed 1). Lastly,“Sources of Income: In addition to primary employment income… the following are validincome sources: overtime and part–time work, second jobs (including seasonal work), retirementand Social Security income, alimony, child support, Veterans Administration (VA) benefits,welfare payments, and unemployment benefits‖ (Boston Fed 1). The problem with this statementis that part time jobs, secondary jobs, and child support are not valid sources of income becausethey are not stable.By lowering the underwriting standards, the government prompted lending institutions to makeriskier and unsound investments. ―Although the Community Reinvestment Act had noimmediate impact, over the years its underlying assumptions and provisions provided the basisfor ever more insistent pressure on lenders from a variety of government officials and agencies tolend to those whom politicians and bureaucrats wanted them to lend‖ (Sowell 37). Further, theCRA was a dynamic piece of legislation that was modified throughout different presidencies andused as banner of political propaganda. For example, George Bush, who was notorious forderegulating the mortgage market, in his 2002 Presidency speech said ―it starts with setting agoal. And so by the year 2010, we must increase minority home owners by at least 5.5 million…We certainly dont want there to be a fine print preventing people from owning their home…Wecan change the print, and weve got to‖( The white House President George W Bush 1). The lastphrase ―we can change the print, and we’ve got to‖ (The white House President George W Bush1), portrays the essence of governmental deregulation on underwriting standard as a politicalstrategy. Figure 2: Outstanding Mortgage Debt shows the residential mortgage debt and theproperty values from 1997 to 2009. As we can see from the graph, there is a spike in the 1980sfollowing the CRA law enactment. This spike reflects the profound effect the CRA enactmenthad in lending practices. 4
  5. 5. Figure 2: Outstanding Mortgage Debt Source: Seeking Alpha, 2009Another example of how governmental deregulation fuelled the mortgage crisis was when BillClinton passed the Gramm-Leach-Bliley Act, commonly known in as the Financial ServicesModernization Act, which repealed the Glass-Steagall Act. The Glass-Steagall Act preventedcompanies from consolidating because of possible conflict of interest that could adversely affectconsumers. This new law makes it possible for investment banks, depository banks, andinsurance companies to merge as one corporation. As a result, banks like Citicorp merged withinsurance companies, such as Travelers. Corporate mergers of this magnitude have a deep effecton the economic fabric of America. However, the Great Recession can’t be explained only bygovernmental deregulations in lending practices, there are other characters that came into play. 5
  6. 6. THE EVIL TWINS: FANNIE MAE AND FREDDIE MACThe Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation,colloquially known as Fannie and Freddie Mac, are Government-Sponsored Enterprises or GSEs.A GSE is a hybrid entity of governmental sponsorship with private ownership. Their main goalis to supply the mortgage industry with a constant stream of cash. The government created theseGSEs to start a secondary mortgage market, which would smooth out wrinkles of the cashed-strapped lending industry. Before the secondary mortgage market creation, banks had to wait upto 30 years to recover their investment. As a result, the economy suffered periods of cashdroughts and credit crunches. Further, the cash strapped banks couldn’t lend money, whichmeant they could not make money and some were forced into bankruptcy. As a solution, Fannieand Freddie Mac purchase these mortgages from banks, replenishing the bank’s cash reservesand starting the lending cycle again. The GSEs, then securitize these mortgages and sell them toinvestors in the form of bonds called mortgage-backed securities or MBS.Furthermore, there were several pressures that caused the GSEs to lower the underwritingstandards of the loans they will purchase. First, during the 1990s the Clinton and BushAdministrations loosened credit standards in order to increase affordable housing foreconomically distressed communities, as we saw in the previous section. Also, the Department ofHousing and Urban Development HUD, imposed quotas on the amount of low-incomemortgages the GSEs had to purchase. In turn, the GSEs lowered the underwriting standards inorder to meet those quotas. The lowering of the underwriting standards opened the market forsubprime loans. "Fannie Mae is taking on significantly more risk, which may not pose anydifficulties during flush economic times. But the government-subsidized corporation may runinto trouble in an economic downturn, prompting a government rescue similar to that of thesavings and loan industry in the 1980s‖ (The New York Times 1).Furthermore, Fannie Mae and Freddie Mac were forced to compete with private label MBSissued by Wall Street’s investment banks. This external pressure imposed a further loosening ofthe credit requirements. As a result, Fannie and Freddie overextended themselves taking on toomuch debt without the appropriate cash reserves in case of an economic downturn. ―The CEO ofFannie Mae Franklin Raines…pointed out that Fannie Mae had ―amassed over $30 billion ofprivate equity capital to finance $2 trillion of mortgages today‖. He did not address the critic’scharge that it was precisely this high ratio of business done to the amount of capital available, tocover any problems that might arise, which posed a major risk to Fannie Mae and to thefinancial system‖ ( Sowell 53)Fannie and Freddie eventually capsized under the weight of their own debt. The governmentintervened by giving the GSEs access to low-interest loans from the Fed’s reserves andauthorized the Treasury to purchase the GSEs’ stock. Despite of the government’s efforts toboost the GSEs’ financial health, their stock price plummeted more than 90%. ―On Oct 21, 2010FHFA estimates revealed that the bailout of Freddie Mac and Fannie Mae will likely costtaxpayers $224–360 billion in total, with over $150 billion already provided‖ (Tucson Sentinel1). The financial troubles of these giants weren’t enough to cause the mortgage meltdown, so weare going to analyze other sections of the economy that contributed to the crisis 6
  7. 7. THE FEDERAL RESERVE BANKThe Federal Reserve Bank, Fed, was another protagonist of the mortgage crisis. The Fed is anindependent central bank that controls America’s monetary policies through three tools. Open market operations-- it trades U.S Government securities in the open market. Discount rate— sets the interest rate charged to banks for overnight transactions. Reserve Requirements— sets the amount of money that banks must hold in their reserve.Through these mechanisms the Fed controls the money supply and the overall direction of theeconomy. Furthermore, the discount rate or Federal Funds Rate has a direct effect on the amountof money supply that is in the economy. For example, a contractionary monetary policy setsinterest rates high, which means that money becomes expensive. During this phase, the moneysupply becomes scarce, hindering lending. On the other hand, an expansionary monetary policysets discount rate is low, which means that money becomes inexpensive. This increases themoney supply and fosters lending. Figure 3: Federal Fund Rate Graph shows the interest ratesfrom 1952 to 2012. Figure 3: Federal Funds Rate Graph Source: Serc Carletonu, 2011 Furthermore, the technology bubble in the mid 1990s and the mortgage bubble in the mid 2000sare perfect examples of expansionary monetary policies. The low interest rates during the mid-1990s and mid-2000s depicted in figure 3 stimulated the economy to the point of creating abubble. For example, when the Federal Funds Rate is low, outstanding mortgage debt is high. Asillustrated by comparing Figure 2: Outstanding Mortgage Debt to Figure 3: Federal Funds RateGraph. For example, there is only 1.75 trillion Dollars on outstanding mortgage debt when thediscount rate is 18%. On the contrary, during the 1990s there is significant growth in mortgagedebt, up to 4 trillion Dollars, when the discount rate was 4%. Finally, there is an unprecedentedboom in the mid-2000s of 15 trillion Dollars in mortgage debt when the discount rate was about1%, a rate never seen since the 1950s. 7
  8. 8. During an economic downturn, the Fed lowers the discount rate in an effort to jumpstart theeconomy, by providing cheap capital for investments. The tech bust created a recession in theAmerican economy, the Fed sought to alleviate it by stimulating the construction and the housingindustry. ―Fed officials conspicuously pinned their hopes for an economic recovery at leastpartly on the housing sector… With technology companies decimated by the collapse of theirstock prices … housing, it appeared, it was the only game in town‖ (Andrews 72). The Fedpursued an expansionary policy that revived the American economy for half a decade.The Fed’s biggest blunder was to raise the Federal Funds Rate from 1% to almost 5 % betweenmid-2004 and mid-2006, in intent to slow down inflation. This hike in interest rates increasedforeclosures because most of the loans being made were adjustable rate mortgages. ARMs arepegged to an economic index that fluctuates with the Federal Funds Rate. Raising the discountrate made the ARMs payments unaffordable, forcing a major sector of homeowners intoforeclosure.Lastly, Alan Greenspan, then President of the Fed, didn’t act to prevent the meltdown fromhappening. ―The Federal Reserve could have stopped this problem dead in its tracks…if the Fedhad done its job, we would not have had the abusive lending and we would have a foreclosurecrisis‖ (Andrews 78). The Fed oversees state chartered banks and under that jurisdiction, itcould have stopped irregular lending practices. Also, there were several pundits that warned theFed from an imminent housing bubble and its dreading consequences. However, the Fed keptlow interest rates, which fueled the housing bubble. Furthermore, Greenspan reported that derivatives such as, Mortgage-backed securities and creditdefault swaps were safe for the economy and should not be regulated. As a result, under theCommodity Futures Modernization Act of 2000, the government deregulated such derivativesmaking it impossible for oversight agencies to control those financial instruments. Despite theFed’s actual intentions, its policies blew the housing bubble beyond proportions exacerbating theeconomic downturn 8
  9. 9. GREEDY LENDERSAs we saw in the past section, the government enacted laws that deregulated underwritingstandards. Soon, the mortgage industry had a myriad of risky complex loans offered to thepublic, also known as ―creative financing strategies‖. In particular, the industry targetedborrowers with bad credit scores or uncertain income streams, the subprime market. Subprimemortgages are attractive to lenders and investors because they generate higher profits. Lendersdid not limit their creativity to subprime loans. For example, loan officers offered No Income NoAssets loans, called NINA, to unqualified individuals. These ―liar loans‖ were originallydesigned for independent contractors whose income greatly differs from their IRS tax returns.Independent contractors can write-off many business expenses to lower their income, but inreality they have earned a substantial amount of money. However, lenders got creative andstarted to offer these loans to people who weren’t independent contractors and whose realincome was stated in their tax returns. ―Loans that require little or no documentation of incomesoared to $276 billion, or 46 percent, of all subprime mortgages last year from $30 billion in2001, according to estimates from New York- based analysts at Credit Suisse Group.Homebuyers with those loans defaulted at a 12.6 percent rate in February, compared with 1.5percent of fully documented prime mortgages‖ (Bloomberg 1)Adjustable Rate MortgagesFurthermore, lenders offered Adjustable Rate Mortgages to subprime borrowers because of theircomplex structure and seemingly low interest rates. Research has shown that many subprimeborrowers did not understand these types of loans, which caused them to default at a higher rate.An ARM loan has many components that interact with one another. For example, an ARM loanoffers a low introductory rate of 1%. Also, the loan is tied to an underlying economic index,which fluctuates with the economy. In addition, the lender charges a profit, called margin.Lastly, ARM loans take an adjustment period to become fully indexed. The fully index rate, FIR,is equal to the rate of economic index plus the lender’s margin. As this wasn’t confusing enough,this loan gives different paying options. A borrower can choose to pay interest only, a minimumpayment, or payment in full each month. When borrowers pay interest only, negativeamortization happens. Neg-am means that if a borrower pays the minimum payment, theremainder of what the payment should have been will be added to the original principal owed.This process results in compounding interest, which means that the borrower will pay more thanwhat was owed originally. ―The flexible payment or "option" ARM, which grew rapidly inpopularity during the housing bubble of 2003-2006, had an initial rate period of one month. Itwas a favorite instrument of hucksters because they could advertise rates as low as 1%. TheFIR… was seldom volunteered‖ (The Mortgage Professor’s Website 1)The majority of borrowers that used ARM loans to finance their homes were subprime; however,prime borrowers used them as well. For example, Figure 4: Average Credit Score of Borrowersshows that people with low credit scores used ARMs loans more than people with good creditscores. 9
  10. 10. Figure 4: Average Credits Score of Borrowers S o Source: LoanPerformance ABS Securities, 2011Also, Figure 5: Loan Defaults Forecast shows that out of 55 billion Dollars in loans that wereexpected to default, 44 billon dollars were from subprime mortgages. Asides from the fact thatnon-sophisticated and low-income borrowers got lured in to a loan that they count afford by ateaser rate, during 2005 the Fed raised the discount rate. As a result, the interest rate charged onARMs loans surged, causing a tsunami of defaults and foreclosures. ―Option ARMs wereexquisitely designed to exploit the worst excess of the housing bubble. Hey were perfect for fast-buck speculators, perfect for deceiving unsophisticated borrowers, and perfect for luring peoplewith income into dream houses they could not possibly afford‖ ( Andrews 49). Lastly, thegovernment could have stepped in and stopped these types of loans, but instead it said that ARMloans were fine as long and they were immediately sold to an investor. 10
  11. 11. Figure 5: Loan Defaults ForecastSource: Bank of America Estimates Based on LoanPerformance data, 2011 11
  12. 12. WALL STREET GAMBLING: IN A SHADOW BANKING UNIVERSEThe primary mortgage market is composed of an institutional bank, which lends money to theconsumer. After getting money from depositors, banks lend that money at a higher interest rateto make a profit. Banks encountered liquidity problems after making too many loans becausethey had to wait 30 years to be repaid or wait for more deposits from people. The governmentcreated the secondary mortgage market to smooth out the economic bumps that cashed-strappedbanks caused.The secondary mortgage participants— Federal National Mortgage Association or Fannie Mae,Federal Home Loan Mortgage Corporation or Freddie Mac , and the Government NationalMortgage Association or Ginnie Mae—then sell those mortgages as securitized debt instrumentscalled mortgage-backed securities. The mortgage-backed securities, MBS, are financialinstruments created and issued first in 1968 by Ginnie Mae. Ginnie Mae’s MBS are based onFHA and VA mortgages and have explicit support from the U.S government. On the other hand,Fannie Mae and Freddie Mac sell MBS of private mortgages, which aren’t backed by the U.Sgovernment.The MBS are debt instruments with an underlying pool of loans that were sliced, and repackagedto be sold as bonds. The investors who purchase the bonds receive mortgage payments from theoriginal borrower. These investors were absorbing most of the risk because they would bereceiving the payments from the original borrower and in case of default they would lose on theirinvestment. On the contrary, institutional banks, which originated the loans, are secured becausethey will get their money back from the secondary mortgage market.The mortgage business was booming and the private sector wanted to get their share. As a result,investment banks such as the Lehman Brothers and Solomon invented on its own kind of MBS,―private label MBS‖. The invention of the private MBS was a milestone for Wall Street. Exoticfinancial instruments called derivatives arose from the creative and greedy minds of this part oftown. The trading and speculating of these derivatives caused an unprecedented bubble in thefinancial sector, which busted when the underlying loans on those derivatives defaulted.―Investors purchased more than $60 billion of private-label (non-GSE) subprime mortgage-backed securities, six times more than 1991s volume of $10 billion‖ (U.S. Department ofHousing and Urban Development 1). Figure 6: Mortgage-Backed Securities by Entity shows the market share distribution of theMBS. From 1995 to 2000s, Fannie Mae and Freddie Mac were the main players, purchasingabout 60% of all mortgages. After 2003, the private label MBS took over the market with amaximum market share of 60%. From 2003 to 2007, private label MBS dominated the marketbecause they were not regulated by the government. Furthermore, the 2007-2010 stock marketcrash is represented in this graph by a sharp decline in MBS market share from the Wall Street’sfirms. 12
  13. 13. Figure 6: Mortgage-Backed Securities by entity Source: Congressional Budget Office Based from the Securities Industry, 2011Securitization PatternsTo understand how the private label MBS work, we are going to analyze the process of loansecuritization. Investment bankers securitize a pool of mortgages by dividing them into tranches,French for slices. Each tranche level represents different levels of risks. A bond rating of AAAmeans zero risk, while a rating of BBB means higher risk. In theory, the expected return goes up,as you go down the tranches. Financial analyst had to work with credit rating agencies to ensurethat these MBS had good ratings, otherwise investors wouldn’t purchase them. To sell thebottom riskiest tranches, bankers invented— High Grade Collateralized Debt Obligations,mezzanine CDOs, and CDOs 2 to mask their risk. Figure 7: Securitization Pattern of Mortgage-Backed Securities depicts the securitization pattern of subprime mortgages mentioned above. 13
  14. 14. Figure 7: Securitization Pattern of Mortgage-Backed Securities S S Source: Bionic Turtle, 2011Wall Street didn’t stop its creativity there, bankers created credit default swaps, synthetic CDOs,Bistros and many other complex derivatives that in the words of many pundits, not even a P.H.Din finance and mathematics would understand. In fact, Credit Defaults Swaps, CDS, which areinsurance derivatives in case of default, caused the collapse of insurance giant AGI.Furthermore, the big five investment banks-- Goldman Sachs, Bear Stearns, Merrill Lynch,Morgan Stanley, and Lehman Brothers – persuaded the Securities Exchange Commission to laxits long standing regulation on the amount of debt they could take on. This legislation fuelled thefinancial boom because it suspended the net capital rule. The net capital rule legislation limits abank’s ability to take on debt and establishes a minimum reserve requirement of capital to coverits assets during bad economic times. The loosening of the net capital rule freed up money,which was invested in risky MBS and related derivatives. Furthermore, ―In loosening thecapital rules, which are supposed to provide a buffer in turbulent times, the agency [S.E.C] alsodecided to rely on the firms’ own computer models for determining the riskiness of investments,essentially outsourcing the job of monitoring risk to the banks themselves‖ (New York Times 1).There were warnings from wise people in the business to stop MBS trading in Wall Street. Forexample, Lewis Ranieri, the co-inventor of the MBS, warned the public about danger of thesenew mutant breed of MBS ―Wall Street had gone gaga securitizing subprime mortgages withoutpaying much attention to quality‖ (Muolo 216). Also, Bill Ackman, founder of Pershing SquareCapital, predicted that when the investors realized they had been deceived, there would be aneconomic debacle. ―[Bill] Ackman accused Wall Street of fueling the binge by turning risky…The danger was that the whole process would abruptly reverse‖ ( Andrews 122) 14
  15. 15. Credit Rating AgenciesStandard & Poor’s and Moody’s, rated most of these MBS as investments grade bonds fromAAA to BBB. As a comparison, Treasury Bills have a rating of AAA, which basically meanszero risk of default. The credit rating agencies were criticized for giving these new breed ofsecurities such a high rating without proper knowledge of their true risk.As a result of the increase in defaults, the credit rating agencies had to lower the rating of manyMBS. For example, on July 10th 2007, Standards and Poor’s downgraded 612 MBS frominvestment bonds to junk bonds. Also, Moody’s downgraded 399 securities during that sameperiod of time. This event was the first domino to tumble creating a chain reaction leading to themortgage meltdown. The downgrades caused widespread panic in the stock markets. Theincrease in defaults and the unstable economic environment caused by the change in bond ratingsopened the door to the stock market crash of 2007- 2010. Figure 8: Market Crash of 2007-2010,depicts the sad reality of the Great Recession. Figure 8: Market Crash of 2007-2010 Source: Markit: Financial Information Services, 2010As mentioned before, the Fed raised the Federal Funds Rate on 2005 causing the ARM interestto soar, which in turn created a Tsunami of foreclosures. As a result, home prices droppedcausing borrowers to become upside down or owe more than they had in equity, increasingforeclosure rates even more. After borrowers started defaulting at increasing rates, the price ofthe MBS plummeted, causing a stock market crash. After the stock market crash of 2007, the bigfive investment banks failed. Bear Sterns and Merrill were sold at a bargain to other banks. TheLehman Brothers filed for bankruptcy. Goldman Sachs and Morgan Stanley converted intoheavily regulated depository banks. The stock market crash and the tsunami of defaults wascatastrophic economy because two of its strongest pillars were blown one after another. 15
  16. 16. CONCLUSIONThe Great Recession was caused by a systematic fail of all components of society. Conflictingprivate agendas generated a free for all business environment in which the powerful abused theweek and swindled the rest. The government failed to protect the consumer and regulate thebusiness environment. The mortgage industry failed to be ethical in its lending practices, endingwith major bankruptcies and corruption scandals. The financial banking industry created a time-bomb that wiped out five of its biggest investment banks and crashed its precious stock market.When the economy went awry, banking institutions received a big hand from the government,while ex-homeowners were left with nothing. 16
  17. 17. ReferencesAndrews, Edmund. ―Busted: Left Inside the Great Mortgage Meltdown‖. London: Norton & Company, 2009.Bankers Academy (2011). Community Reinvestment Act:. Retrieved July 2011 from, Richard. ―Confessions of a Subprime Lender: An insider’s Tale of Greed, Fraud, and Ignorance‖. New Jersey: Wiley Books, 2008.Dewitt, Anthony. (2011, July 25). Close to half of all Az mortgages are underwater. The Tucson Sentinel. Retrieved July 2011 from Reserve Bank of Boston (1993). Closing the Gap: A Guide to Equal Opportunity Lending. Retrieved July 2011 from ,Steven. (1999, September 30). Fannie Mae Eases Credit To Aid Mortgage Lending. The New York Times. Retrieved July 2011 from eases-credit-to-aid-mortgage-lending.htmlIvry, Bob.( 2007, April 25). Subprime `Liar Loans Fuel Bust With $1 Billion Fraud . Bloomberg. Retrieved July 2011 from, Stan (2009). Anatomy of a Train Wreck: Causes of the Mortgage Meltdown. Retrieved July 2011 from ttp://, Adam. ―The Foreclosure of America‖. New York: Berkeley Books, 2009.Muolo, Paul. ―Chain of Blame: The Truth Behind America’s Housing and Mortgage Crisis‖. New Jersey: Wiley Books, 2008.Sowell, Thomas. ―The Housing Boom and Bust‖. New York: Basic Books, 2009.The New York Times (2008).The Reckoning; Agencys 04 Rule Let Banks Pile Up New Debt, And Risk. Retrieved July 2011 from pagewantThe Mortgage Professor’s Website(2011). The Fully Indexed Rate: Better Know What It Is. Retrieved July 2011 from indexed_rate_what_you_ don%27t_ know_can_hurt_ you.htmThe White House President George W Bush (2002). President Calls for Expanding Opportunities to Home Ownership Retrieved July 2011 from Examiner (2008). Roots of financial crisis in Clinton housing policy. Retrieved July 2011 from policy#ixzz1Tue61P9v 17