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Taken from MSNBC: http://www.msnbc.msn.com/id/27183355/
A good succint summary of the interconnected threads to wrap your head around the key players and events, good for both an economic novice, and good reference for a vet.
"The Fed
The collapse of the Internet bubble, followed by the terrorist attacks of 9/11, threw the economy into recession and inflicted damage to the financial system. In response, the Federal Reserve, led by longtime Chairman Alan Greenspan, slashed interest rates and flooded the system with money. The economy slowly recovered, but the Fed kept rates low, providing the mortgage lending industry with a ready source of cheap capital. In 2004, near the peak of the housing bubble, Greenspan encouraged Americans to take out adjustable-rate mortgages."
Home buyers
As the housing boom turned to a bubble, buyers succumbed to the mania. Many were novice investors trying to "flip" real estate for a profit. Others, watching the American Dream recede as prices skyrocketed, justified home purchases that were well beyond their means. For some of those buyers, homeownership was simply not a realistic goal, despite the cheerleading from Congress, the White House and the housing industry.
The real estate lobby
A powerful force on Capitol Hill, led by the National Association of Realtors and National Association of Home Builders, this group championed policies to push homeownership rates to unsustainable levels. Congress and the White House went along; to vote otherwise was to oppose the American Dream. Real estate agents, armed with research from their trade group, fed the myth that home prices would continue to rise and that even if they took a breather, they would never fall by much.
Mortgage brokers
Mortgage brokers earned big commissions even if a loan eventually went bad, because their employers almost always sold the loans quickly. So some brokers stretched the rules to the limits - and beyond - to generate new loan volume. Some committed outright fraud. Others steered borrowers with good credit to higher-fee subprime loans. Borrowers were sold on the idea of overborrowing based on low-cost "teaser rates" - with the false promise that they could always refinance before the rate reset to unaffordable terms. Many mortgage brokers adhered to the letter of the law by disclosing ruinous terms in reams of closing documents, but then made contradictory verbal assurances.
Congress
Members of Congress have always been cheerleaders for homeownership, which after all is the cornerstone of the American Dream. Yet some critics have argued for limits on the virtually sacrosanct deduction for mortgage interest, which provides an incentive to buy more expensive homes. Some analysts have pointed to the Gramm-Leach-Bliley Act of 1999, which knocked down the last remnants of a Depression-era separation between commercial banks and brokerages. But others say the current crisis would have been worse without that law, which has allowed commercial banks to help rescue failing brokerages. In a bipartisan failure, Congress failed to tighten regulation over mortgage giants Fannie Mae and Freddie Mac, which ultimately failed at enormous cost to taxpayers.
Investment bankers
The idea of selling mortgages to investors originated in the 1930 with the creation of the Federal National Mortgage Association, or Fannie Mae. But those loans were made under strict guidelines; investors who bought them were reasonably well protected from loss. As the lending bubble picked up steam, aggressive Wall Street investment bankers used financial alchemy to turn risky loans to borrowers with weak credit histories into Triple-A-rated, safe investments. This fool's gold took two major forms: mortgage-backed securities and credit default swaps. The collapse of these investments is a major cause of the financial crisis.
Fannie/Freddie
As unregulated lenders generated huge volume, Fannie and Freddie wanted in. Fannie and Freddie, both of which had large lobbying operations, went to their friends in Congress and got the green light to jump into the pool of risky loans too. In doing so, the companies put profits for shareholders ahead of their original congressional mandate to serve the interests of home buyers. An accounting scandal in 2004 led to the ouster of Fannie Mae chief executive Franklin Raines and increased calls for reform, but Congress would spend five years debating how to rein in the two companies before the government takeover in 2008.
Appraisers
These professionals are supposed to prevent lenders from lending too much money when buyers bid more than a house is worth. Because they were hired by mortgage brokers, some appraisers abetted the price bubble by valuing houses based the loan amount -- sometimes without even seeing the house. Some mortgage brokers would send out multiple requests for a single appraisal, giving the job to the first appraiser who could "hit the number." Some honest appraisers were forced to seek other work.
Federal regulators
Lax regulation of Wall Street and the mortgage industry have been blamed in part for the crisis. In late September Christopher Cox, chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged that failures in a voluntary supervision program for Wall Street's big investment banks had contributed to the meltdown. Yet ironically, an obscure accounting rule called mark-to-market, created in the wake of the 2001 Enron scandal, may have worsened the financial meltdown. Because many mortgage-backed securities cannot be sold, they are being priced as if they are worthless. That is forcing banks and investment firms to write down huge paper losses.
Unregulated lenders
Following a series of regulatory changes, the growth of this industry in the 1990s helped finance that decade's historic rise in homeownership rates. But as the economy recovered from the 2001 recession, and home prices soared in value, lenders had to stretch borrowers further to make deals happen. These lenders thought they bore little risk, because they quickly sold off mortgages to Wall Street investment houses. But when home prices stalled and mortgage volume dried up, bad loans soon swamped these lenders. Many of them are no longer in business.
Bond rating agencies
For decades, investors have relied on three companies -- Moody's, Standard and Poor's and Fitch -- to analyze and evaluate bond risks. A strong rating keeps borrowing costs low. But Wall Street bond issuers pick up the tab for these ratings, which created a conflict of interest for the agencies. Compounding the problem, these firms also offered 'consulting' services - including disclosures of their rating methodologies - to the Wall Street firms trying maximum ratings. That made it easier to design complex securities that got high ratings. Massive ratings 'downgrades' came too late to save investors.
The White House
The rise in the foreclosure rate is at the heart of the current meltdown; until it begins to fall, the housing market - and the securities backed by mortgages on those houses - will have a hard time finding a bottom. The Bush administration has opposed aggressive measures to stem foreclosures. Instead, in the early months of the crisis, it assembled the Hope Now hotline to try to prod lenders to work with troubled borrowers. As msnbc.com reported, readers told of long hold times, inconsistent advice and little help. "
A good succint summary of the interconnected threads to wrap your head around the key players and events, good for both an economic novice, and good reference for a vet.
"The Fed
The collapse of the Internet bubble, followed by the terrorist attacks of 9/11, threw the economy into recession and inflicted damage to the financial system. In response, the Federal Reserve, led by longtime Chairman Alan Greenspan, slashed interest rates and flooded the system with money. The economy slowly recovered, but the Fed kept rates low, providing the mortgage lending industry with a ready source of cheap capital. In 2004, near the peak of the housing bubble, Greenspan encouraged Americans to take out adjustable-rate mortgages."
Home buyers
As the housing boom turned to a bubble, buyers succumbed to the mania. Many were novice investors trying to "flip" real estate for a profit. Others, watching the American Dream recede as prices skyrocketed, justified home purchases that were well beyond their means. For some of those buyers, homeownership was simply not a realistic goal, despite the cheerleading from Congress, the White House and the housing industry.
The real estate lobby
A powerful force on Capitol Hill, led by the National Association of Realtors and National Association of Home Builders, this group championed policies to push homeownership rates to unsustainable levels. Congress and the White House went along; to vote otherwise was to oppose the American Dream. Real estate agents, armed with research from their trade group, fed the myth that home prices would continue to rise and that even if they took a breather, they would never fall by much.
Mortgage brokers
Mortgage brokers earned big commissions even if a loan eventually went bad, because their employers almost always sold the loans quickly. So some brokers stretched the rules to the limits - and beyond - to generate new loan volume. Some committed outright fraud. Others steered borrowers with good credit to higher-fee subprime loans. Borrowers were sold on the idea of overborrowing based on low-cost "teaser rates" - with the false promise that they could always refinance before the rate reset to unaffordable terms. Many mortgage brokers adhered to the letter of the law by disclosing ruinous terms in reams of closing documents, but then made contradictory verbal assurances.
Congress
Members of Congress have always been cheerleaders for homeownership, which after all is the cornerstone of the American Dream. Yet some critics have argued for limits on the virtually sacrosanct deduction for mortgage interest, which provides an incentive to buy more expensive homes. Some analysts have pointed to the Gramm-Leach-Bliley Act of 1999, which knocked down the last remnants of a Depression-era separation between commercial banks and brokerages. But others say the current crisis would have been worse without that law, which has allowed commercial banks to help rescue failing brokerages. In a bipartisan failure, Congress failed to tighten regulation over mortgage giants Fannie Mae and Freddie Mac, which ultimately failed at enormous cost to taxpayers.
Investment bankers
The idea of selling mortgages to investors originated in the 1930 with the creation of the Federal National Mortgage Association, or Fannie Mae. But those loans were made under strict guidelines; investors who bought them were reasonably well protected from loss. As the lending bubble picked up steam, aggressive Wall Street investment bankers used financial alchemy to turn risky loans to borrowers with weak credit histories into Triple-A-rated, safe investments. This fool's gold took two major forms: mortgage-backed securities and credit default swaps. The collapse of these investments is a major cause of the financial crisis.
Fannie/Freddie
As unregulated lenders generated huge volume, Fannie and Freddie wanted in. Fannie and Freddie, both of which had large lobbying operations, went to their friends in Congress and got the green light to jump into the pool of risky loans too. In doing so, the companies put profits for shareholders ahead of their original congressional mandate to serve the interests of home buyers. An accounting scandal in 2004 led to the ouster of Fannie Mae chief executive Franklin Raines and increased calls for reform, but Congress would spend five years debating how to rein in the two companies before the government takeover in 2008.
Appraisers
These professionals are supposed to prevent lenders from lending too much money when buyers bid more than a house is worth. Because they were hired by mortgage brokers, some appraisers abetted the price bubble by valuing houses based the loan amount -- sometimes without even seeing the house. Some mortgage brokers would send out multiple requests for a single appraisal, giving the job to the first appraiser who could "hit the number." Some honest appraisers were forced to seek other work.
Federal regulators
Lax regulation of Wall Street and the mortgage industry have been blamed in part for the crisis. In late September Christopher Cox, chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged that failures in a voluntary supervision program for Wall Street's big investment banks had contributed to the meltdown. Yet ironically, an obscure accounting rule called mark-to-market, created in the wake of the 2001 Enron scandal, may have worsened the financial meltdown. Because many mortgage-backed securities cannot be sold, they are being priced as if they are worthless. That is forcing banks and investment firms to write down huge paper losses.
Unregulated lenders
Following a series of regulatory changes, the growth of this industry in the 1990s helped finance that decade's historic rise in homeownership rates. But as the economy recovered from the 2001 recession, and home prices soared in value, lenders had to stretch borrowers further to make deals happen. These lenders thought they bore little risk, because they quickly sold off mortgages to Wall Street investment houses. But when home prices stalled and mortgage volume dried up, bad loans soon swamped these lenders. Many of them are no longer in business.
Bond rating agencies
For decades, investors have relied on three companies -- Moody's, Standard and Poor's and Fitch -- to analyze and evaluate bond risks. A strong rating keeps borrowing costs low. But Wall Street bond issuers pick up the tab for these ratings, which created a conflict of interest for the agencies. Compounding the problem, these firms also offered 'consulting' services - including disclosures of their rating methodologies - to the Wall Street firms trying maximum ratings. That made it easier to design complex securities that got high ratings. Massive ratings 'downgrades' came too late to save investors.
The White House
The rise in the foreclosure rate is at the heart of the current meltdown; until it begins to fall, the housing market - and the securities backed by mortgages on those houses - will have a hard time finding a bottom. The Bush administration has opposed aggressive measures to stem foreclosures. Instead, in the early months of the crisis, it assembled the Hope Now hotline to try to prod lenders to work with troubled borrowers. As msnbc.com reported, readers told of long hold times, inconsistent advice and little help. "
and also 