How Wall Street Killed the Housing Market
Most foreclosures during the sub prime mortgage crisis were due to Wall Street. It was not due to honest, hardworking, responsible borrowers. For most of banking history, loans were not given out to people who did not have enough income or with poor credit history. This reduces the risk of foreclosure. A common sense rule that has worked for years. In the early 2000's no one saw a global financial crisis coming. Investors were just looking for a place to invest their money with low risk to get a return. Low risk investments were best found in the housing market.
Government sponsored entities (GSE) were put in place to enhance the flow of credit to the housing sector.
Although the GSE did purchase sub prime mortgages, they did not buy near as many as Wall Street did. First an investor would agree to buy a mortgage loan from a broker. Then the broker sells it to a bank, who then trades it to an investment business on Wall Street. These Wall Street mortgage businesses were getting thousands of mortgage checks every month that were supposed to last the life of the mortgages. Then the Wall Street business interchanges shares of that income to investors who were willing to buy.
After a while the GSE authorized and developed investments known as Alt-A loans which were not affordable housing loans but very risky loans. Sub prime mortgage-backed securities were created by Wall Street firms. Mortgage eligibility criteria changed. First the SIVA loans came out, or stated income, verified assets. People didn't have to confirm their income any more. They just needed to state it and show that they had money in the the bank. Next, the no income, verified assets or NIVA loans came out. No longer was the lender interested in what you do for a living. People just needed to show some money in their bank accounts. The qualifications kept getting looser and then they came out with the NINA loan, or no income no assets. People didn't have to prove or state any financial ability to pay just a have credit score. This all created a housing bubble, over time people's income did not increase with their mortgages. More and more people began defaulting on their loans and flooding the market with foreclosure and lowering the value of homes.
The problem was always with the risky mortgages created by Wall Street. The government sponsored entities losses were caused by risky mortgages that frequently went to borrowers with higher incomes that were not properly screened and therefore risky. Wrongful loan descriptions have the most to blame when it comes to the housing foreclosure crisis. The government sponsored entities financial losses stem generally from the Alt-A loans, which are not related to affordable housing. The government sponsored entities investments in sub prime mortgage securities was fewer than Wall Street’s. That is how Wall Street killed the housing market