I'm sick of being right all the time... no, seriously.

The WSJ has an article today about the origins of the housing bubble. The main point: so-called "predatory" lenders needed to sell their mortgages to someone. They did not hold them like normal banks, but instead securitized bundles of them and sold them to larger institutions.

"Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations."

This requires a little mental gymnastics to understand correctly, because it is not intuitive. Normally, we think of demand coming from the consumer, but for firms that only lend it is the other way around. Their operating cash comes from businesses UP the chain, not loan interest. Therefore, they are really selling in reverse, to the banks, and their "product" is the value added by pulling a group of mortgage borrowers into a securitizable group.

The point: if wonky demand for bad mortgages was not created by the federal government, these companies would not have been able to sell their product. They would have either had to stick to traditional, safe mortgages, or else they would not have existed in the first place. Companies like Countrywide were probably originated because banks wanted to subcontract a layer or two of risk from the bad mortgages the federal government was forcing them to take. A kind of, "we know when the Countrywides fail that we have a sales cycle or two to purge our own toxic assets and lobby our congresspeople for a bailout." It worked for most of the big banks, and who can blame them for doing it? They were damned if they did, damned if they didn't.