Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again

433 Pages·2015·2.05 MB·English

by  Peter J. Wallison

Hidden in Plain SigHt

Hidden
in Plain
SigHt
What Really Caused the
World’s Worst Financial Crisis
and Why It Could Happen Again
Peter J. Wallison
encounter Books
New York • London
© 2015 by Peter J. Wallison
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any means,
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the prior written permission of Encounter Books, 900 Broadway,
Suite 601, New York, New York 10003.
First American edition published in 2015 by Encounter Books,
an activity of Encounter for Culture and Education, Inc.,
a nonprofit, tax-exempt corporation.
Encounter Books website address: www.encounterbooks.com
Manufactured in the United States and printed on acid-free paper.
The paper used in this publication meets the minimum requirements
of ansi/niso z39.48‒1992 (r 1997) (Permanence of Paper).
FIRST american edition
library of congress cataloging-in-publication data
Wallison, Peter J.
Hidden in plain sight : what really caused the world’s worst financial
crisis and why it could happen again / by Peter J. Wallison.
pages cm
Includes bibliographical references and index.
ISBN 978-1-59403-770-2 (hard cover : alk. paper) —
ISBN 978-1-59403-771-9 (ebook)
1. Housing—Finance—Government policy—United States.
2. Mortgage loans—Government policy—United States. 3. Subprime
mortgage loans—Government policy—United States. 4. Financial
crises—Government policy—United States. 5. United States—Economic
policy—2001–2009. I. Title.
HD7293.Z9W35 2015
332.7'20973090511—dc23
2014005179
produced by wilsted & taylor publishing services
Copy editing: Nancy Evans
Design: Yvonne Tsang
Composition: Nancy Koerner
Charts: Evan Winslow Smith
For my amazing grandchildren, with love
Skylar
Allegra
Alex
Henry
and
Elodie

ContentS
Preface xi
Acknowledgments xvii
PARt I
The Basics
1 introduction 3
What Really Caused the World’s Worst Financial
Crisis and Why It Could Happen Again
2 t he Difference between Prime
and nontraditional Mortgages 27
The Importance of Sound Underwriting Standards
3 the Financial Crisis inquiry
Commission report and other
explanations for the Crisis 41
Why Conventional Explanations for the Crisis
Are Inadequate
4 a short History of Housing Finance
in the U.s. 100
How and Why Housing Finance Was
Substantially Changed in 1992
PARt II
GovernmenT housinG
Policies Take effecT
5 HUD’s Central role 125
How HUD Used the Affordable-Housing
Goals to Reduce Underwriting Standards
6 t he Decline in Underwriting standards 160
How the Affordable-Housing Goals Forced
an Increase in Nontraditional Mortgages
7 Force Fed 182
Why the Affordable-Housing Goals, and Not
Market Share or Profit, Were the Sole Reason
the GSEs Acquired Nontraditional Mortgages
8 Going Viral 219
Why and How Reduced Underwriting
Standards Spread to the Wider Market
PARt III
The financial crisis
and iTs acceleranTs
9 the Great Housing Price Bubble 237
How Loosened Underwriting Standards
Stimulated Its Growth
10 Flying Blind into a storm 248
How the GSEs’ Failure to Disclose Their
Acquisition of Nontraditional Mortgages
Magnified the Crisis
11 3 1 Million nontraditional Mortgages
Precipitate a Crisis 265
Why Even Government-Backed Mortgage
Securities Were Contributors
12 F air-Value accounting scales Up the Crisis 278
How Mark-to-Market Accounting Made
Financial Firms Look Weak or Unstable
PARt IV
from Bad To Worse
13 From Bad to Worse 307
How Government Blunders Turned a Mortgage
Meltdown Into an Investor Panic and Financial Crisis
14 the False narrative and the Future 342
Why the Failure to Understand the Causes
of the Crisis May Lead to Another
Notes 363
Index 393