The Financial Crisis Inquiry Commission final report is not expected until January. The Republican FCIC members’ report on the reasons behind the housing bubble was published December 15, the date the full report was supposed to be out. It is rumored that the full report from the 10 member commission will reflect party lines.
The four GOP members place the blame for the housing bubble squarely on the federal government starting in with the policies established in the 1990s for easy credit and low rates.
Starting in the 1990s as home prices increased the government and financial institutions responded by making credit easier to get. Alternative mortgage products proliferated. It became easier to get jumbo loans to accommodate higher prices in hot markets. Only a few financial advisors expected more than a minor correction in the down cycle of the housing market; instead the bubble burst with over 30% loss in values overall.
The alternative instruments were not priced appropriately for the risks that were actually involved in loaning to those who were less credit-worthy or to those who needed higher loan amounts. Traditionally, costs are associated with the risks perceived for the investment; but these risks were decoupled from the investment instrument in the case of sub-prime and Alt-A loans.
The government encouraged promulgation of these non-traditional loans in order to increase the numbers of people who were able to partake in the American dream of home ownership. Both Clinton and Bush administrations participated allowing the GSEs to subsidize mortgages for affordable housing and lower qualified borrowers. What had been considered safe investments became toxic as home values fell and more borrowers defaulted.
While the Republicans blame the government, in part, for getting the country into the mortgage crisis, they also compliment government actions to keep the crisis from spreading out of control. The bailouts of “too big to fail” companies were necessary, according to this report, to keep the economy from falling into depression.
Now the primary effort must be on reducing the deficit to keep a second crisis from happening.