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III. THE U.S. GOVERNMENT’S ROLE

IN FOSTERING THE GROWTH OF
THE NTM MARKET

Th e preceding section of this dissenting statement described the damage
that was done to the fi nancial system by the unprecedented number of defaults and
delinquencies that occurred among the 27 million NTMs that were present there
in 2008. Given the damage they caused, the most important question about the
fi nancial crisis is why so many low quality mortgages were created. Another way
to state this question is to ask why mortgage standards declined so substantially
before and during the 1997-2007 bubble, allowing so many NTMs to be created.
Th is massive and unprecedented change in underwriting standards had to have a
cause—some factor that was present during the 1990s and thereaft er that was not
present in any earlier period. Part III addresses this fundamental question.
Th e conventional explanation for the fi nancial crisis is the one given by Fed
Chairman Bernanke in the same speech at Morehouse College quoted at the outset
of Part II:
Saving infl ows from abroad can be benefi cial if the country that receives those infl ows
invests them well. Unfortunately, that was not always the case in the United States
and some other countries. Financial institutions reacted to the surplus of available
funds by competing aggressively for borrowers, and, in the years leading up to the crisis,
credit to both households and businesses became relatively cheap and easy to obtain. One
important consequence was a housing boom in the United States, a boom that was
fueled in large part by a rapid expansion of mortgage lending. Unfortunately, much of
this lending was poorly done, involving, for example, little or no down payment by the
borrower or insuffi cient consideration by the lender of the borrower’s ability to make the
monthly payments. Lenders may have become careless because they, like many people
at the time, expected that house prices would continue to rise--thereby allowing
borrowers to build up equity in their homes--and that credit would remain easily
available, so that borrowers would be able to refi nance if necessary. Regulators did not
do enough to prevent poor lending, in part because many of the worst loans were made
by fi rms subject to little or no federal regulation. [Emphasis supplied] 59
In other words, the liquidity in the world fi nancial market caused U.S. banks
to compete for borrowers by lowering their underwriting standards for mortgages
and other loans. Lenders became careless. Regulators failed. Unregulated originators
made bad loans. One has to ask: is it plausible that banks would compete for
borrowers by lowering their mortgage standards? Mortgage originators—whether
S&Ls, commercial banks, mortgage banks or unregulated brokers—have been
competing for 100 years. Th at competition involved off ering the lowest rates and
the most benefi ts to potential borrowers. It did not, however, generally result in

59 Speech at Morehead College April 14, 2009.
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