Bailout train wreck

Once again our good friend Bill has produced a must-read link. I have neighbor who stopped to chat while I was doing yard work and we got to talking about the bailout. He predictably ended up with some sort of "I blame Bush for this mess" comment. I stopped and explained to him about CRA, Fannie & Freddie, how Bush administration had tried to do *something* back in '03, and how as stupid a Bush might have been, at least this one thing you can't pin on him or his administration--the bailout program itself, sure, but not the mess the bailout is purported to clean up. At the end of the conversation, I told him to hang on a second, I have something for you to read -- I had printed this article out for myself since it was too long to read comfortably online, so I gave him my copy.

You might keep a copy on hand for just such an emergency.

It's a long journal article. Here's the official executive summary (emphasis mine):

Why did the mortgage market melt down so badly?
Why were there so many defaults when the econ-
omy was not particularly weak? Why were the se-
curities based upon these mortgages not considered
anywhere as risky as they actually turned out to be?
This report concludes that, in an attempt to in-
crease home ownership, particularly by minorities
and the less affluent, virtually every branch of the
government undertook an attack on underwriting
standards starting in the early 1990s. Regulators,
academic specialists, GSEs, and housing activists
universally praised the decline in mortgage-under-
writing standards as an “innovation” in mortgage
lending. This weakening of underwriting standards
succeeded in increasing home ownership and also
the price of housing, helping to lead to a housing
price bubble. The price bubble, along with relaxed
lending standards, allowed speculators to purchase
homes without putting their own money at risk.
The recent rise in foreclosures is not related em-
pirically to the distinction between subprime and
prime loans since both sustained the same percent-
age increase of foreclosures and at the same time.
Nor is it consistent with the “nasty subprime lend-
er” hypothesis currently considered to be the cause
of the mortgage meltdown. Instead, the important
factor is the distinction between adjustable-rate and
fixed-rate mortgages. This evidence is consistent
with speculators turning and running when hous-
ing prices stopped rising.

There are some more choice bits in there too, this is from the conclusions section:

The question that is being asked is the correct
question: how did it come about that our financial
system allowed such loans to be made, condoned
such loans, and even celebrated such loans? The
answers that are being given are not yet the correct
ones, however. The main answer that is being given,
that unscrupulous lenders were taking advantage of
poorly informed borrowers, does not fit the evidence
nor does it dig deep enough.
The “mortgage innovations” that are largely the
federal government’s responsibility are almost com-
pletely ignored. These “innovations,” heralded as
such by regulators, politicians, GSEs, and academ-
ics, are the true culprits responsible for the mortgage
meltdown. Without these innovations we would not
have seen prime mortgages made with zero down
payments, which is what happens when individuals
use a second mortgage to cover the down payment
of their first. Nor would we have seen “liar loans”
where the applicant was allowed to make up an in-
come number, unless the applicant was putting up
an enormous down payment, which was the perfect-
ly reasonable historical usage of no-doc loans (which
require minimal financial documentation).
The political housing establishment, by which I
mean the federal government and all the agencies
involved with regulating housing and mortgages,
is proud of its mortgage innovations because they
increased home ownership. The housing establish-
ment refuses, however, to take the blame for the flip
side of its focus on increasing home ownership—
first, the bubble in home prices caused by lowering
underwriting standards and then the bursting of the
bubble with the almost catastrophic consequences
to the economy as a whole and the financial diffi-
culties being faced by some of the very homeown-
ers the housing establishment claims to be trying to
benefit.