The subprime mortgage crisis impact timeline lists dates relevant to the creation of a United States housing bubble, the 2005 housing bubble burst and the subprime mortgage crisis which developed during 2007 and 2008. It includes United States enactment of government laws and regulations, as well as public and private actions which affected the housing industry and related banking and investment activity. It also notes details of important incidents in the United States, such as bankruptcies and takeovers, and information and statistics about relevant trends. For more information on reverberations of this crisis throughout the global financial system see 2008 financial crisis.
1938–1979 1938: The Federal National Mortgage Association, or Fannie Mae, is established as part of Franklin D. Roosevelt's New Deal, to purchase mortgages guaranteed by the Veterans Administration and the Federal Housing Administration. This took the loans off the books of mortgage lenders, freeing up capital so that they could make more loans.McClean, Nocera, p 6 late 1960s: Fannie Mae is permitted to purchase 'conventional' mortgages (not just VA/FHA).McClean, Nocera, p23 late 1960s: Angelo Mozilo & Loeb found Countrywide Financial, and pioneer the nationwide non-bank mortgage lending business; in the beginning, Mozilo is extremely concerned with credit quality.McClean, Nocera, p22 1968: Fannie Mae spins off Ginnie Mae as a separate entity. Ginnie will continue to have an explicit, written government guarantee for all its mortgage loans.McClean, Nocera, p7 Fannie Mae, however, is converted into a stand-alone corporation, a government-sponsored enterprise (GSE). 1970: Federal Home Loan Mortgage Corporation (Freddie Mac) is created by an act of Congress as a government-sponsored enterprise to buy mortgages from the Thrift/savings and loan industry; it is owned by the industry itself (until 1989) The GSEs (Fannie and Freddie) have an 'implicit guarantee' from the government; that if they get into trouble, the government will bail them out. There is no written law or contract stating the government will do this; it is simply assumed by the industry, government officials, and investors. This implicit, unstated guarantee is what allows the debt of Fannie and Freddie to be moved off of the balance sheet of the government. This makes the national debt falsely appear to be lower than it really is, and artificially makes the budget look more balanced. This arrangement will not be tested until 2008 (see below)McClean, Nocera, Chapter 1See also On The Brink by Henry Paulson 1970: Ginnie Mae creates the first mortgage-backed security, based on FHA and VA mortgages. It guarantees them.McClean, Nocera, p 7 1971: Freddie issues its first Mortgage Participation Certificate security. This is the first mortgage-backed security made of ordinary mortgages.History of Freddie Mac. 1970s: Private companies begin mortgage asset securitization with the creation of private mortgage pools in the 1970s. 1974: Equal Credit Opportunity Act imposes heavy sanctions for financial institutions found guilty of discrimination on the basis of race, color, religion, national origin, sex, marital status, or ageRegulation B, Equal Credit Opportunity 12 CFR 202.14(b) as stated in Closing the Gap: A Guide to Equal Opportunity Lending , Federal Reserve System of Boston. 1977: Community Reinvestment Act is enacted to address historical discrimination in lending, such as 'redlining'. The Act encourages commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.Text of Housing and Community Development Act of 1977—title Viii (Community Reinvestment) . 1977: Salomon Brothers attempts creation of a "private label" mortgage backed security (one that doesn't involve GSE mortgages). It fails in the marketplace.McClean, Nocera, p 12 Late 1970s: Lewis Ranieri (Salomon) and Larry Fink (First Boston) invent securitization; mortgages are pooled and the pool is sliced into tranches, which are then sold to investors.McClean, Nocera, p 5Liar's Poker, Michael Lewis
1980–1989 1980: The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 grants all thrifts, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts. The law also exempts federally chartered savings banks, installment plan sellers and chartered loan companies from state usury (unlimited high interest rates) limits.The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs, and the Personal Bankruptcy Rate , Federal Deposit Insurance Corporation "Bank Trends" Newsletter, March, 1998. The law also allowed home equity loans to be treated just like mortgages.McClean, Nocera, p 29 1981: Each of the 12 Federal Reserve banks establishes a Community Affairs Office to offer public and private guidance in accordance with the Community Reinvestment Act. 1981: Salomon Brothers transitions from a private partnership to a public corporation, the first of the Wall St. investment banks to do so. This shifts the risk of financial loss from the partners to shareholders, arguably increasing the appetite for risk. 1981: David Maxwell becomes CEO of Fannie; he greatly increases the use of mortgage securities, forming an uneasy alliance with Ranieri and Fink 1982: Reagan's Commission on Housing recommends the GSEs be separated from the government 1982: Alternative Mortgage Transaction Parity Act of 1982 (AMTPA) preempts state laws allows lenders to originate mortgages with features such as adjustable-rate mortgages, balloon payments, and negative amortization and "allows lenders to make loans with terms that may obscure the total cost of a loan". 1983: The first collateralized mortgage obligation (CMO) is created by Larry Fink's team at First Boston. It is made from Freddie Mac mortgages.McClean, Nocera, p 13 1984: The Secondary Market Enhancement Act (SMMEA), partly formed by Ranieri's closeness with Reagan's staff, attempts to level the playing field on the mortgage securities market so that private mortgage-securities companies (like Salomon Brothers) will be able to compete with the GSEs. The act also is the foundation of the credit ratings agencies importance in the market; the law limits pension funds & others so that they are only allowed to buy mortgage bonds that are rated highly by a NRSROMcClean, Nocera, 13-14 1986: Tax Reform Act of 1986 (TRA) ended prohibited taxpayers from deducting interest on consumer loans, such as credit cards and auto loans, while allowing them to deduct interest paid on mortgage loans, providing an incentive for homeowners to take out home equity loans to pay off consumer debt. Household debt would grow from $705 billion at year end 1974, 60% of disposable personal income, to $7.4 trillion at year end 2000, and finally to $14.5 trillion in midyear 2008, 134% of disposable personal income.Z.1 Historical Tables (1974) and current Z.1 release (2008) , Table B.100, lines 31,48. 1986: The Real Estate Mortgage Investment Conduit (REMIC) law is passed, as part of an uneasy alliance between Ranieri (of Salomon) and Maxwell (of Fannie). It prevents double-taxation of mortgage securities; the 'secondary market' for mortgages booms.McClean, Nocera, 16 1987: The mezzanine CDO was invented at Drexel Burnham Lambert 1987: Maxwell of Fannie, fights bitterly with Wall Street and Congress about allowing GSEs to do REMICs. Lobbying and threats fly back and forth.McClean, Nocera, 17 1985–1989: The effects of Tax Reform Act of 1986, the elimination of Regulation Q which had capped interest rates banks were allowed to pay, imprudent lending during the late 1970s inflationary period, as well as other causes, led to asset-liability mismatch for many Savings and Loans.research.stlouisfed.org This de facto insolvency led to the Savings and Loan Crisis and the failure and/or closure of half of all federally insured savings and loans. The number declined from 3,234 to 1,645. Late 1980s: Several groups lose big money on tranched mortgage securities, including Merrill Lynch. The market shrinks.McClean, Nocera, p 18 1988: Guardian Savings and Loan issues the first 'subprime'-backed mortgage security. Long Beach Mortgage begins to move towards the subprime securitization market. Its employees will later go on to lead many other subprime companies.McClean, Nocera, p 31 1989–1995: Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) established the Resolution Trust Corporation (RTC), which closed hundreds of insolvent savings and loans holding $519 billion in assets. The law also moved regulatory authority to the Office of Thrift Supervision (OTS). The U.S. government ultimately appropriated $105 billion to resolve the S&L crisis. After banks repaid loans through various procedures, there was a net loss to taxpayers of $40 billion by the end of 1999.Timothy Curry and Lynn Shibut, The Cost of the Savings and Loan Crisis: Truth and Consequences Federal Deposit Insurance Corporation, December 2000. The RTC decides to sell the massive amount of bad real estate debt it holds to investors. In order to do this, it decides to use the tools of securitization and structured finance, such as overcollateralization, bond insurance, and subordination. This results in transforming the bad debt into various new products that had high enough ratings to attract investors.
1990–1995 1990s: The first subprime bubble. Founding of subprime lenders New Century, Option One, FirstPlus Financial, and the buyout of The Money Store. Famco and several other subprime lenders go bankrupt. Angelo Mozilo of Countrywide Financial privately calls subprime lenders 'crooks', but is forced to compete or lose market share.McClean, Nocera, p36, 87 1990s: J.P. Morgan invents value at risk and credit default swaps; later misused tragically by other companies.McClean, Nocera, Chapter 4Fool's Gold, Gillian Tett 1990: Fannie gets Paul Volcker to argue it doesn't need the same regulatory capital as banks.McClean, Nocera, p41 1992: Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing, increasing their pooling and selling of such loans as securities; Office of Federal Housing Enterprise Oversight (OFHEO) created to oversee themBen S. Bernanke, Chair of Federal Reserve System, The Community Reinvestment Act: Its Evolution and New Challenges, speech at the Community Affairs Research Conference, Washington, D.C., Federal Reserve System website, March 30, 2007. 1992: Jim Johnson is new CEO at Fannie. Ramps up the 'cut them off at the knees' strategy against political enemies. Tactics include a massive lobbying effort, neutering the OFHEO, creating a "partnership office" network to court the politically powerful with pork, giving high level employment to the well connected, giving out campaign contributions, creating a charity foundation, and threatening critics like FM Watch with retaliation. One of McClean & Nocera's sources compared Fannie's activities to Tammany Hall.McClean, Nocera p40-45 1993: The Federal Reserve Bank of Boston published "Closing the Gap: A Guide to Equal Opportunity Lending", which recommended a series of measures to better serve low-income and minority households, including loosening income thresholds for receiving a mortgage, influencing government policy and housing activist demands on banks thereafter.Michael Flynn, Anatomy of a Breakdown; Concerted government policy helped trigger the financial meltdown—and will almost certainly extend it, Reason magazine, January 2009.Closing the Gap: A Guide to Equal Opportunity Lending , Federal Reserve System of Boston, 1993.