Subprime Post-Mortem

Clayton Cramer posts an excellent analysis and timeline of how the whole subprime meltdown happened. He rightly points out that it wasn't any one thing, but a whole series of changes that drove the implosion. But the one theme that runs through the whole mess was Democrats and ACORN driving banks to lend more and more money to people who had fewer and fewer means to pay it back. It all started in 1977 with the passage of the Community Reinvestment Act. In of itself CRA was not a big driver of subprime mortgages to begin with because it had no teeth and therefore was not terribly effective. But changes in the 1990's to the way the law was interpreted, combined with ACORN's use of shakedown techniques to hold up bank mergers, led to more and more banks being forced to offer sub-prime mortgages in order to keep ACORN from shutting down their businesses through regulatory complaints. But even then, things would not have gotten out of control because bankers knew that it was their arse on the hook if these loans failed en masse.

Then came 1994 and the rewrite of the CRA under Clinton. This was the straw that broke the camel's back. Because up to this point Fannie Mae and Freddie Mac would not buy up Subprime mortgages. Why? They were too damned risky. But the 1994 rewrite of the CRA changed all of that. Suddenly Fannie and Freddie were encouraged to buy subprime mortgages. Banks, being no longer on the hook for the losses, and being pounded on by the Government and ACORN to offer more and more subprime mortgages took the path of least resistance. They started selling them right and left.

This triggered a whole new class of real estate speculators, people who could not afford the loans were lying on thier applications and were taking out FHA loans on speculation properties instead of homesteads and then flipping the houses. But that works only as long as the market continues to rise. That can't happen forever.

This of course built a house of cards that was inevitably going to fall, the only question was when. I and others had a feeling something like this was going to happen as far back as 2005. Back in 2005, I sold off all of my holdings in REIT's. I was beginning to think I had made a mistake because the expected fall had not come. But it did finally happen, it just took longer than I thought.