"It's their fault."
"We tried to prevent these awful events from occurring but ... "
"Had I been in office ... "
Well, since I believe hindsight is 20-20 and both sides can agree with that. Let's connect the events, or dots, going backwards.
2008 ...
In America, it is now 7 years after quite a few institutions took advantage of the historically low prime rate and relaxed lending practices. These institutions were offering sub-prime rates and interest-only loans in the form of 5 and 7 year ARM mortgages "to individuals whose credit is generally not good enough to qualify for conventional loans"(1).
February 2006 ...
Greenspan is out. Bernanke is in. Greenspan and the fed since 2004 had been raising the prime rate at every change to head off a credit crisis. The rate increases, as it turns out we'll see later, is a continuation of rate hikes that happened back in the days of irrational exuberance. This time, exuberance was happening in real estate.
So, Bernanke comes in and follows Greenspan's lead for a short time raising the prime rate until it's up another 0.75% to 6.25% in June 2006(2). There it stayed for almost 14 months until it was obvious that the credit crisis was unavoidable. It's been cut back drastically to 1.75% since. The current prime rate is now at it's lowest point since December 2001. We all know what happened that got us there... or do we?
July 2003 - June 2004 ...
Let's make a brief stop here before proceeding further into the past. After all, this is when the rates were historically low. The prime rate hadn't been this low since midway through President Kennedy's term in July of 1961.(3)
In fact, from December 2001 until November 2004 the rate bounced around between 2.00% to 1.00%, never over 2.00% and spent more time fighting to stay above 1.00%. Real estate was on fire though. Sub-prime and loose lending practices continued through up to the end of this period. Home sales reached record levels.
Rates... lending... home sales... there seems to be a few reoccurring themes.
Someone in the Bush administration saw it coming. (4)
December 11, 2001 ...
Three months to the day after that awful day when the name Osama bin Ladin became a household name forever engraved in the minds of every American the federal prime rate reached 1.25%. This was the third cut in those three months. It was in response to this attack... or was it? The rate was at just 2.50% prior to the attacks. If the 9/11 attacks didn't cause the drop, what could have?
Late 2000 ...
It wasn't long before someone saw a storm brewing. Edward M. Gramlich, a Federal Reserve governor who died in September 2007, warned "that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford."(5)
May 2000...
It was on it's way down long before September 11th. In May of 2000 the rate was at 9.50%. Greenspan and the Federal Reserve Board had been trying to burst the Dot Com Bubble and stop the irrational exuberance on Wall St. When the bubble did finally burst the rate starting getting slashed as much as 0.50% at a time. Why?
In a span of less than 14 months Greenspan had it down to 6.50%. Down 3.00% in 14 months compared to a drop of 2.50% over almost 2.5 years after 9/11. Why?
Perhaps, instead of bursting the dot com bubble he instead had a hand in crippling the economy. Fortunately, there were new lending rules at Freddie Mac and Fannie Mae instituted a year earlier by the Clinton administration(1).
And so, we've come full circle.
- 1999, Clinton administration pressures the Freddie's to throw out best practices when it comes to lending.
- 2000, Greenspan bursts the dot com bubble and at the same time the American economy.
- Late 2000, there was already evidence that bad loans were being made. These 7-year ARM's would become the leading edge of the storm.
- 2001, 1.5% of new loans were interest only(6)
- 2001, September 11th attacks which forces the economy and prime rate down further.
- 2002, 6% of new loans were interest only(6)
- 2003, Bush administration and the Republican minority in Congress calls for additional oversight but is killed by the Democrat majority.
- 2003, 13% of new loans were interest only(6)
- 2004, 31% of new loans were interest only(6)
- 2006, An estimated $1 trillion in adjustable rate mortgages will reset in 2007(7). Those who do not refinance could see their payments increase by 25%.
- By the end of the third quarter of 2006, the total U.S. mortgage debt outstanding was $10.7 trillion(8).
My conclusion? The leading edge of the storm (foreclosures from 7yr ARM's in 2000 & 2001 and 5yr ARM's from 2003) is behind us and now we're in the thick of it. Potentially, we may have 4 years of the worst economy since the Great Depression. Just don't point at people on the right of the aisle. Look at recent history and you'll find those responsible. Some of whom are can be counted amoung Obama's 'trusted' advisors.
Quotes and citations:
1. Fannie Mae Eases Credit To Aid Mortgage Lending New York Times, Steven A. Holmes, September 30, 1999
2. Historical Changes of the Target Federal Funds and Discount Rates, Federal reserve Bank of New York
3. Effective Federal Funds Rate
4. New Agency Proposed to Oversee Freddie Mac and Fannie Mae, New York Times, Stephen Labaton, September 11, 2003
5. Fed Shrugged as Subprime Crisis Spread New York Times, Edmund L. Andres, December 18, 2007
6. A Growing Tide of Risky Mortgages Business Week, Peter Coy, May 18, 2005
7. A House of Cards: Refinancing the American Dream, Demos, November 2006
8. Federal Reserve data
