The Global Financial Crisis according to Edward Pinto

Global Financial Crisis Survey

Edward Pinto is a Resident Fellow at the American Enterprise Institute. Two of his papers, Government Housing Policies in the Lead-up to the Financial Crisis (or here), and Triggers of the Financial Crisis were referenced in the FCIC final report.

1. Which FCIC View best represents the causes of the Financial Crisis?

Dissenting Views By Wallison

2. Which narrative presented by Douglas Elliott and Martin Baily of the Brookings Institute in Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble best represents the causes of the Financial Crisis?

It was the fault of the government.

3. The Global Financial Crisis is ongoing and I project the Global Financial Crisis will end in the year

2013 or beyond.

4. What were the primary causes of the Global Financial Crisis?

The major cause of the financial crisis in the U.S. was the collapse of housing and mortgage markets resulting from an accumulation of an unprecedented number of weak and risky Non-Traditional Mortgages (NTMs). These NTMs began to default en mass beginning in 2006, triggering the collapse of the worldwide market for mortgage backed securities (MBS) and in turn triggering the instability and insolvency of financial institutions that we call the financial crisis. Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of over-leveraged loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUDís policy of continually and disproportionately increasing the GSEsí goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.

5. What still should change as a result of the crisis?

The US housing finance market of the future should be governed by four basic principles:
  • Principle I: The housing finance market can and should principally function without any direct government financial support.
  • Principle II: Ensuring mortgage quality and fostering the accumulation of adequate capital behind housing risk can create a robust housing investment market without a government guarantee.
  • Principle III: All programs for assisting low-income families to become homeowners should be on-budget and should limit risks to both homeowners and taxpayers.
  • Principle IV: Fannie Mae and Freddie Mac should be eliminated as government-sponsored enterprises (GSEs) over time.

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

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