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The Meltdown Cause in One K of Text Or Less:

Bruce McQuain [1] does an admirable job of explaining my estimation on the sub-prime meltdown quoting a 1999 article in the New Work Times:

The lede [2]:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

Yeah, I know, I’ve beaten this drum for quite a few posts now, but it is important to understand. What, if you were a bank or lender, would this say to you?

It says, “Hey, I can take risks I normally wouldn’t take because Fannie is going to take the real risk off my hands by buying up dubious loans”. So what do banks and lenders do then with an expanded market? They exploit it.

So why was Fannie Mae making this move of loosening credit requirements?

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

Exactly. And well done, Bruce. This is exactly the argument I’ve been making for weeks, now.