1938 -1989
1938
Fannie Mae is established as part of FDR’s New Deal – it serves to securitize mortgages and ensure funds are consistently available to lending institutions.
1968
Fannie Mae is converted to a stand-alone government sponsored enterprise. This move takes its debt off the government books.
1970
Federal Home Loan Mortgage Corporation – Freddie Mac – is created by Congress as a government sponsored enterprise to buy mortgages on the secondary market, lump them together and sell them as mortgage-backed securities to investors on the open market – an action which will be exploited and abused.
1970s
Private companies follow suit and begin mortgage asset securitization with the creation of private mortgage pools.
1974
Equal Credit Opportunity Act imposes heavy sanctions on discrimination in lending practises.
1977
Community Reinvestment Act is enacted to address historical discrimination in lending – very much exploited and abused later on.
1980
The Depositary Institutions Deregulation and Monetary Control Act granted all thrifts, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts. It also exempted federally chartered savings banks, installment plan sellers and chartered loan companies from unlimited interest rate limits.
1981
Each of the 12 Federal Reserve Banks establishes a Community Affairs Ofice to offer private and public guidance in accordance with the Community Reinvestment Act.
1981
Solomon Brothers becomes a public corporation – the first Wall Street bank to do so, shifting the risk of losses from the partners to shareholders.
1982
Alternative Mortgage Transaction Parity Act preempts state laws and allows lenders to originate mortgages with features such as adjustable-rate mortgages (ARMs), balloon payments and negative amortization and allows lenders to obscure the total real cost of loans – further setting the stage for abuse.
1986
Tax Reform Act (TRA) ended tax payers deducting interest of consumer debt such as credit cards and auto loans but allows deducting interest from mortgages. This motivated homeowners to make equity loans to pay off consumer credit. The result was household debt growing from $705 billion in 1974 to $7.4 trillion in 2000 and finally to $14.5 trillion in 2008.
1987
Drexel Burnham Lambert develops the mezzanine Collateralized Debt Obligation (CDO); Credit Suisse develops the first mortgage -backed CDO in 2000.
1985 – 1989
The effects of the TRA of 1986 led to a asset-liability mismatch for many Savings and Loans – this defacto insolvency led to the Savings and Loans crisis and half of all federally-backed savings and loans closed.
1989 – 1995
Financial Institutions Reform, Recovery and Enforcement Act led to closure of hundreds of insolvent savings and loans and the US Government appropriated billions to solve the crisis.
1990 – 2000
1992
The Fedral Housing Enterprises Financial Safety and Soundness Act required Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing – this increased the pooling of mortages and selling them as securities. Again, to be exploited later.
1993
The Federal Reserve Bank of Boston published “Closing the Gap: a Guide to Equal Opportunity Lending.” This included recommendations to loosen some income thresholds for minority and low-income households to better serve these households. Again, to be exploited and abused later.
1994
The Interstate Banking and Branching Efficiency Act was repealed, derugulating the actions of bank holding companies. This set the stage for disasters to come.
1995
New Community Reinvestment Act breaks down home-loan data by neighborhood, income levels and race, enabling community groups to complain about CRA compliance and collect brokers’ fees for marketing loans. This set the stage further for abuses that followed.
1997
Investors bought $60 billion of subprime mortgage securities, six times more than 1991.
1998
Housing bubble grows as inflation adjusted home pricing appreciation exceeds 10% per year. Brooksley Born and the Commodity Futures Trading Commission call for regulation of “Over the Counter Derivatives.” Alan Greenspan et al fight this as it would harm the economy – nothing gets done. Federal Reserve Bank of New York rescues Long-Term Capital Management hedge fund which encouraged risky loans on the assumption that the goverment will bail out as it is “too big to fail.”
1999
Fannie Mae eases credit requirements to encourage banks to extend loans to individuals whose credit is not good enough for conventional loans – setting the stage further for exploitation and disaster.
The Gramm-Leach-Bliley Act repeals the Glass-Stegall Act of 1933. It deregulates banking, insurance services industry, allowing banks to grow very large.
2000
Lenders originated $160 billion of subprime loans, up from $40 billion in 1994. Fannie Mae commits to purchase and securitize $2 billion of CRA eligible loans. In November Fannie Mae announces HUD will soon require it to dedicate 50% of its business to low and moderate income households. Nobody raised a red flag.
In December the Commodity Futures Modernization Act of 2000 defines interest rates, currency prices and stock as “excluded commodities” allowing trade of credit-default swaps by hedge funds with minimal oversight to investment banks and insurance companies. The stage is complete and the escalation of exploitation, abuse and greed will lead to the first domino to fall – Bear Sterns in 2008.
2001
Dot-com bubble collapse.
to be continued.
