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464 Dissenting Statement

stimulated the growth of that market through their purchases of PMBS, but also
because the huge infl ow of government or government-directed funds into the
housing market turned what would have been a normal housing bubble into a bubble
of unprecedented size and duration. Th is encouraged and enabled unprecedented
growth in the PMBS market in two ways.
First, the gradual increase of the AH goals, the competition between the GSEs
and the FHA, the eff ect of HUD’s Best Practices Initiative, and bank lending under
the CRA, assured a continuing fl ow of funds into weaker and weaker mortgages.
Th is had the eff ect of extending the life of the housing bubble as well as increasing
its size. Th e growth of the bubble in turn disguised the weakness of the subprime
mortgages it contained; as housing prices rose, subprime borrowers who might
otherwise have defaulted were able to refi nance their mortgages, using the equity
that had developed in their homes solely through rising home prices. Without the
continuous infusion of government or government-directed funds, delinquencies
and defaults would have begun showing up within a year or two, bringing the
subprime PMBS market to a halt. Instead, the bubble lasted ten years, permitting
that market to grow until it reached almost $2 trillion.
Second, as housing prices rose in the bubble, it was necessary for borrowers to
seek riskier mortgages so they could aff ord the monthly payments on more expensive
homes. Th is gave rise to new and riskier forms of mortgage debt, such as option
ARMs (resulting in negative amortization) and interest-only mortgages. Mortgages
of this kind could be suitable for some borrowers, but not for those who were only
eligible for subprime loans. Nevertheless, subprime loans were necessary for PMBS,
because they generally bore higher interest rates and thus could support the yields
that investors were expecting. As subprime loans were originated, Fannie and
Freddie were willing consumers of those that might meet the AH goals; moreover,
because of their lower cost of funds, they were able to buy the “best of the worst,”
the highest quality among the NTMs on off er. Th ese factors—the need for higher
yielding loans and the ability of Fannie and Freddie to pay up for the loans they
wanted—drove private sector issuers further out on the risk curve as they sought
to meet the demands of investors who were seeking exposure to subprime PMBS.
From the investors’ perspective, as long as the bubble kept growing, PMBS were
off ering the high yields associated with risk but were not showing commensurate
numbers of delinquencies and defaults.

5. What was Known About NTMs

Prior to the Crisis?
Virtually everyone who testifi ed before the Commission agreed that the
fi nancial crisis was initiated by the mortgage meltdown that began when the housing
bubble began to defl ate in 2007. None of these witnesses, however, including
the academics consulted by the Commission, the representatives of the rating
agencies, the offi cers of fi nancial institutions that were ultimately endangered by the
mortgage downdraft , regulators and supervisors of fi nancial institutions and even
33
the renowned investor Warren Buff ett, seems to have understood the dimensions

33 See Buff ett, testimony before the FCIC, June 2, 2010.