Triggers of the Financial Crisis

This memorandum is provided in response to the request--made during a discussion with the FCIC staff--that I describe my view of the "triggers" for the financial crisis. I believe that the financial crisis had a single major cause: the accumulation of an unprecedented number of weak mortgages in the U.S. financial system. When these mortgages began to default, they caused the collapse of the worldwide market for mortgage backed securities (MBS), which in turn caused the instability and insolvency of financial institutions that we call the financial crisis. In this context, the "triggers" were those policies and actions that led to the accumulation of so many weak mortgages in our financial system. In this memorandum, I will identify the triggers and show how they eventually caused the collapse of the MBS and asset-backed market. I will also demonstrate how federal policies were directly responsible for mandating a vast increase in homeowner leverage (low or no downpayments), setting extremely high leverage levels for Fannie and Freddie, and requiring flexible underwriting standards throughout virtually entire mortgage finance industry.

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Edward Pinto is a resident scholar at AEI.

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Edward J.
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Tuesday, September 16, 2014 | 5:00 p.m. – 6:00 p.m.
The Constitution as political theory

Please join us for the third-annual Walter Berns Constitution Day Lecture as James Ceasar, Harry F. Byrd Professor of Politics at the University of Virginia, explores some of the Constitution’s most significant contributions to political theory, focusing on themes that have been largely unexamined in current scholarship.

Wednesday, September 17, 2014 | 8:10 a.m. – Thursday, September 18, 2014 | 1:30 p.m.
Third international conference on housing risk: New risk measures and their applications

We invite you to join us for this year’s international conference on housing risk — cosponsored by the Collateral Risk Network and AEI International Center on Housing Risk — which will focus on new mortgage and collateral risk measures and their applications.

Thursday, September 18, 2014 | 2:15 p.m. – 3:00 p.m.
Speaker of the House John Boehner on resetting America’s economic foundation

Please join us as Speaker John Boehner (R-OH) delivers his five-point policy vision to reset America’s economy.

Friday, September 19, 2014 | 9:15 a.m. – 11:00 a.m.
Reforming Medicare: What does the public think?

Please join us as a panel of distinguished experts explore the implications of the report and the consumer role in shaping the future of Medicare.

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