In order to generate loans, Fannie said that "lack of credit history should not be seen as a negative factor.'' Credit scores were ignored, joblessness was overlooked. No money down and no savings were required. These borrowers were considered ideal because they paid a higher interest rate and early mortgage repayment was minimized (and if it happened, penalized). The goal? Keep those income streams coming, at all cost.
"In other words, a banker confronted with these new relaxed requirements, could off-load any risky loans to the government-sponsored enterprises responsible for financing home mortgages for millions of Americans.'' They could sell the loans to Fannie or Freddie Mac and the "downside could be handed off to the government.''
In 1994, Morgenson writes, $40 billion in subprime loans were made in the United States; in 1999, $160 billion.
By 2006, subprime titan Countrywide Financial financed about 20 percent of all mortgages in the U.S. (at a value of about 3.5% of the U.S. GDP). At the collapse, it was purchased in 2008 by Bank of America for $4.1 billion.''
Morgenson says whistleblowers who tried to prevent the collapse went ignored: They suggested, in 1996, that to privatize Fannie Mae and Freddie Mac would reduce the risk of a costly taxpayer bailout. In 2008,that bailout happened.
"It is not yet known how much these debacles will cost the American taxpayer, but conservative estimates put the total in the hundreds of billions of dollars,'' she writes.
"Will a debacle like the credit crisis of 2008 ever happen again?'' Morgenson asks.
Yes, because Congress did not fix the problem of too-big-to-fail when it had the chance, and for another unsettling reason.
"It is indeed one of the most frustrating aspects of this story -- the rise of subprime, the dereliction of duty by so many who participated in the mortgage mess,'' that "the cast of characters that created the mess continues to hold high positions or are holding jobs of even greater power.''
What's an investor to do? Maybe what so many of the subprime lenders did. Buy Treasuries.
Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, by Gretchen Morgenson and Joshua Rosner. Times Books. Henry Holt and Company. $16.95.