Charles Morrischecks in with us to call the charge that poverty activists fueled the mortgage crisis “absurd.” Our story Tuesday outlined that argument, in which conservatives blame the Community Reinvestment Act for the flood of subprime lending that led to the housing meltdown. Morris, however, says it’s clear that competition drove bad lending. Consider a 2005 Standard & Poor’s report that reviewed a sample of collateralized debt obligation deals, or CDOs. The CDOs are investment-grade securities backed by a pool of bonds, loans and other assets.
The CDOs used mortgage-backed securities as collateral, and judging by the sample, “there appears to be a high preference for subprime over prime” securities, S&P reported. Subprime represented 62 percent to 75 percent of the residential mortgage-backed securities in 31 of 39 transactions, the report said.
And why did investors choose subprime over prime?
Simple. High yields, S&P explained.
Which is just what we said – profits, not poverty activists, were at the root of subprime’s growth.
Even in 2005, S&P seemed to raise a few warning flags about all this, although clearly no one paid much attention. From the report:
“„In addition to the risk of housing price declines and higher interest rates that could affect the performance of the RMBS (Residential Mortgage-backed Security) market, structured finance CDO managers are concerned with the payment shock associated with some of the affordability products. This concern is especially acute because these products are being offered to subprime borrowers with lower FICO scores and higher LTVs.
But the subprime mortgage-backed securities market rolled on. By 2006, subprime and Alt-A loans comprised 41 percent of all new mortgages issued. We all know the story from there.
The lesson from this, when it comes to claims that low-income borrowers are to blame for the ailing financial system: follow the money, not the rhetoric.