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A discussion of the solutions to the subprime crisis

Click here for more stories in this investigation The top subprime lenders whose loans are largely blamed for triggering the global economic meltdown were owned or bankrolled by banks now collecting billions of dollars in bailout money — including several that have paid huge fines to settle predatory lending charges.

These big institutions were not only unwitting victims of an unforeseen financial collapse, as they have sometimes portrayed themselves, but enablers that bankrolled the type of lending that has threatened the financial system. The banks made huge profits while their executives collected handsome bonuses until the bottom fell out of the real estate market. Twenty of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy.

Most were not banks and were not permitted to collect deposits. Eleven of the lenders on the list have made payments to settle claims of widespread lending abuses. Four of those have received bank bailout funds, including American International Group Inc.

Subprime borrowers are generally people with poor credit who may have a recent bankruptcy or foreclosure on their record, according to the Federal Reserve.

Some smaller lenders and some that do business in rural areas are not required to report. The government estimates the data account for about 80 percent of all home mortgages. In 2004, the Federal Reserve began requiring lenders to indicate when borrowers were being charged three percentage points or more above the rate of interest earned on U.

Treasury bonds of a similar maturity. The 2004 data were excluded due to poor compliance and other factors.

  • Abusive Lending The subprime lending business has had its share of public relations problems;
  • Panelists at a congressional hearing testify in favor of restructuring loans as a solution to the subprime crisis;
  • With investment banks buying more and more loans themselves each year, Freddie and Fannie began buying a huge volume of mortgage-backed securities from Wall Street as a means to foster affordable housing goals;
  • Four of those have received bank bailout funds, including American International Group Inc.

The market for these loans, driven by Wall Street investors, grew through the early 2000s, peaked in 2005, and crashed in 2007. The top 25 subprime lenders represent nearly 5 million loans. There are multiple definitions of what constitutes a subprime loan. Nine of the top 10 lenders were based in California — seven were located in either Los Angeles or Orange counties. At least eight of the top 10 were backed at least in part by banks that have received bank bailout money. Countrywide was bought by Bank of America last year, saving it from probable bankruptcy.

Second was Ameriquest Mortgage Co. Third was now-bankrupt New Century Financial Corp. Non-Bank Lenders Dominate Independent mortgage companies like Ameriquest and New Century were among the most prolific subprime lenders.

Since they were not banks, they could not accept deposits, which limited their access to funds. But most of the big investment banks also purchased subprime loans made by other lenders and sold them as securities. Several other lenders among the Top 25 were subsidiaries of Wall Street banks or hedge funds. The lending totals in the survey include subsidiaries owned by the parent companies.

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Two of the top subprime lenders were seized by the government. American International Group AIGbetter known for insurance and complex trades in financial derivatives, made the list at No. Bailout Recipients On Oct.

The administration later changed direction and opted instead to buy shares of stock from the banks. Also on the list: A call and e-mail to Bank of America were not returned. Such loans are not considered subprime, she said, and added that the bank closed GreenPoint shortly after it was acquired.

Since the confusion and panic of 2008 has receded, angry taxpayers have been looking for someone to blame for the mess. But the subprime lenders could never have done so much damage were it not for their underwriters — those giant investment banks in the U. Wall Street Cash Pours In During the boom years, investment banks provided a staggering amount of cash to subprime lenders so they could make loans.

Also among the top underwriters: Eighty-one percent of the loans were adjustable rate mortgages. Cole said he would have no comment. Some investment banks owned subprime lenders. Merrill Lynch bought First Franklin Corp. Bear Stearns bought Encore Credit Corp. Lehman Brothers, now bankrupt, ranked No. The bank was a pioneer of sorts in investing in subprime lending. Even banks that managed to dodge much of the carnage created by the subprime meltdown — like Goldman Sachs — were invested in the subprime mortgage business.

  • The administration later changed direction and opted instead to buy shares of stock from the banks;
  • Countrywide was bought by Bank of America last year, saving it from probable bankruptcy.

Long Beach was a subsidiary of Washington Mutual, which collapsed in 2008 thanks largely to losses in the subprime mortgage market. It was the biggest bank failure in U. Included in the prospectus for those Goldman Sachs securities was a boiler-plate warning to investors considering buying subprime mortgages. Goldman has been more conciliatory than some banks as far as accepting responsibility for the economic collapse.

Fannie and Freddie were created by the government to promote home ownership by buying mortgages from lenders and selling them to investors, thus freeing up cash for banks to make more loans.

The roots of the financial crisis: Who is to blame?

With investment banks buying more and more loans themselves each year, Freddie and Fannie began buying a huge volume of mortgage-backed securities from Wall Street as a means to foster affordable housing goals.

On September 7, 2008, the government took control of the two entities. Abusive Lending The subprime lending business has had its share of public relations problems. Subprime lenders say they serve an important function — offering credit to people who have been snubbed by traditional mortgage lenders. Indeed, subprime lenders have paid billions to settle charges of abusive lending practices.

Two of the largest settlements ever reached for lending problems were with AIG and Citigroup, two financial institutions that have received billions in federal aid. Citigroup has a history of subprime lending, dating back to its purchase of Associates First Capital Corp.

A discussion of the solutions to the subprime crisis

Citigroup at the time was building a global banking empire thanks to its success in convincing the government to deregulate the financial services industry the year before. Associates had been criticized by some as a predatory lender, and in 2002, Citigroup paid a price for it. A Citigroup spokesman said the bank does not sell or securitize its loans. Citigroup has caught heat from other big banks for supporting a bill, backed by consumer advocates, that would give judges more leeway in reworking mortgage loans of people in bankruptcy.

The bill died in the Senate on April 30. AIG settled claims of abusive lending practices in 2007. Ameriquest was the subject of at least four settlements involving predatory lending since 1996, including charges of excessive fees and misleading poor and minority borrowers. Keeping it, however, is a different matter. One of the key measures of whether borrowers can afford a home or not is to compare their income to their loan amount.

So borrowers were taking out loans that amounted to 165 percent of their salary. The ratio remained relatively steady through the rest of the 1990s, but by 2000, it began to shoot upward. That amounts to a loan-to-income ratio of 2.

That meant the typical loan amounted to 246 percent of annual income. Borrowers, in other words, were spending a much higher percentage of their income on housing during the subprime lending boom.

  • And digging out will be no easy task;
  • Ultimately, that fed a wave of foreclosures, leading to trouble for borrowers, lenders, and eventually taxpayers — lots of it;
  • United nations new york and geneva, december 2010 the financial and economic crisis of 2008-2009 and developing countries edited by sebastian dullien;
  • Many of the lenders coaxed them along by lowering lending standards, failing to require documentation of income on loans, and providing adjustable rate loans with low two-year teaser rates that reset to much higher levels;
  • The ratio remained relatively steady through the rest of the 1990s, but by 2000, it began to shoot upward.

Many of the lenders coaxed them along by lowering lending standards, failing to require documentation of income on loans, and providing adjustable rate loans with low two-year teaser rates that reset to much higher levels. Ultimately, that fed a wave of foreclosures, leading to trouble for borrowers, lenders, and eventually taxpayers — lots of it.

And digging out will be no easy task.