Scandal - Subprime Mortgages and Ratings Agencies

The subprime mortgage crisis, which has resulted in global losses of more than $7.7 trillion, is the outcome of unscrupulous lending by the mortgage industry, banks who bought those loans without doing the requisite research, deceptive credit ratings and the government's increasingly relaxed regulation of the banking industry.

Subprime loans are usually adjustable rate mortgages offered to high-risk borrowers, i.e. those with lower income or lesser credit history than "prime borrowers." Predatory mortgage brokers often offered these types of loans to people who had little understanding of what the contract entailed, or they encouraged borrowers to lie about their income in order to secure a loan.

Then the mortgage banks, instead of waiting years to see returns, bundled these loans together and sold them to banks across the country. When housing prices began to fall in late 2006 and mortgage rates were rising, the default rate on subprime mortgages skyrocketed. The financial industry, which now owned much of these loans, was left scrambling to cover the debts.

In March, the crisis claimed the investment bank Bear Stearns and the Federal Reserve provided financial backing to secure a merger with JPMorgan Chase. In June, federal prosecutors arrested two former Bear Stearns hedge fund managers for lying to investors.

Countrywide - the nation's largest mortgage lender - was also felled after mounting losses from subprime investments forced a sale to Bank of America. In June, The Wall Street Journal and Portfolio reported that Countrywide CEO Angelo Mozilo gave preferential mortgages to several people, including U.S. Senators, and three states filed lawsuits against the company for deceptive businesses practices.

Much blame has also been placed on the three leading credit-rating agencies, Moody's, Standard & Poor's and Fitch Ratings. They gave high ratings to many bundled subprime loans when in fact they were poised for disaster. And many critics claim that a conflict of interest was involved, as rating agencies are paid by the very firms that organize and sell the debt to investors.

Mother Jones has compiled an excellent timeline of the mortgage crisis.

Home Loan Troubles Break Records Again
- AP, September 5

The Housing Bubble, Still Burst
- Washington Post, September 3

Regulators Shut Georgia Bank
- Wall Street Journal ($), September 2

Should Biden Share Blame for Foreclosure Crisis?
- ABC News, August 28

FDIC List of ‘Problem Banks’ Grows to 117
- USA Today, August 27

FDIC May Borrow From Treasury
- Wall Street Journal ($), August 27

Regulators Step Up Bank Actions
- Wall Street Journal ($), August 26

Calif. Won’t Investigate Sen. Schumer on IndyMac
- Reuters, August 25

FBI Saw Threat of Mortgage Crisis
- Los Angeles Times, August 25

Fed Chairman Urges Broader Oversight of Financial Firms
- New York Times, August 22

Vanguard: SEC’s Rating Proposals Would Reduce Investor Protection
- Wall Street Journal ($), August 22