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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About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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