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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
decades. With new financial products like the home equity line of credit, households
could borrow against their homes to compensate for investment losses or unemploy-
ment. Deflation, against which the Fed had struck preemptively, did not materialize.
At a congressional hearing in November , Greenspan acknowledged—at least
implicitly—that after the dot-com bubble burst, the Fed cut interest rates in part to
promote housing. Greenspan argued that the Fed’s low-interest-rate policy had stim-
ulated the economy by encouraging home sales and housing starts with “mortgage
interest rates that are at lows not seen in decades.” As Greenspan explained, “Mort-
gage markets have also been a powerful stabilizing force over the past two years of
economic distress by facilitating the extraction of some of the equity that home -
owners had built up.” In February , he reiterated his point, referring to “a large
extraction of cash from home equity.”
SUBPRIME LOANS: “BUYERS WILL PAY A HIGH PREMIUM”
The subprime market roared back from its shakeout in the late s. The value of
subprime loans originated almost doubled from through , to billion.
In , of these were securitized; in , . Low interest rates spurred this
boom, which would have long-term repercussions, but so did increasingly wide-
spread computerized credit scores, the growing statistical history on subprime bor-
rowers, and the scale of the firms entering the market.
Subprime was dominated by a narrowing field of ever-larger firms; the marginal
players from the past decade had merged or vanished. By , the top subprime
lenders made of all subprime loans, up from in .
There were now three main kinds of companies in the subprime origination and
securitization business: commercial banks and thrifts, Wall Street investment banks,
and independent mortgage lenders. Some of the biggest banks and thrifts—Citi-
group, National City Bank, HSBC, and Washington Mutual—spent billions on boost-
ing subprime lending by creating new units, acquiring firms, or offering financing to
other mortgage originators. Almost always, these operations were sequestered in
nonbank subsidiaries, leaving them in a regulatory no-man’s-land.
When it came to subprime lending, now it was Wall Street investment banks that
worried about competition posed by the largest commercial banks and thrifts. For-
mer Lehman president Bart McDade told the FCIC that the banks had gained their
own securitization skills and didn’t need the investment banks to structure and dis-
tribute. So the investment banks moved into mortgage origination to guarantee a
supply of loans they could securitize and sell to the growing legions of investors. For
example, Lehman Brothers, the fourth-largest investment bank, purchased six differ-
ent domestic lenders between and , including BNC and Aurora. Bear
Stearns, the fifth-largest, ramped up its subprime lending arm and eventually ac-
quired three subprime originators in the United States, including Encore. In ,
Merrill Lynch acquired First Franklin, and Morgan Stanley bought Saxon Capital; in
, Goldman Sachs upped its stake in Senderra Funding, a small subprime lender.
Meanwhile, several independent mortgage companies took steps to boost growth.
