2008 Housing Crisis: Liar Loans

Bankers Created a Housing Crisis by Inventing "Liar Loans"

On August 9, 2007, French bank BNP Paribas stopped withdrawals from its investment funds, citing subprime mortgage losses. This event marked the beginning of the 2008 housing crisis. At a Senate hearing in 2008, Richard Bowen, a former Citigroup executive, revealed that the bank had been issuing large numbers of "liar loans" to unqualified buyers. In Irvine, California, bankers were aggressively marketing these loans to people who couldn't afford houses.

What Everyone Knows

Most people think the 2008 housing crisis was caused by a combination of factors, including deregulation and speculation. The standard story goes that subprime borrowers, who were often low-income or minority households, were the primary culprits, as they took on mortgages they couldn't afford. This narrative suggests that the crisis was an unfortunate accident, rather than the result of a deliberate strategy by bankers. However, a closer examination of the evidence reveals a more complex and disturbing picture.

What History Actually Shows

Historians like Nomi Prins, in her book "All the Presidents' Bankers," argue that bankers played a central role in creating the housing crisis. By 2004, banks like Citigroup and Merrill Lynch were issuing large numbers of "liar loans," which were mortgages that required little or no documentation of the borrower's income. The fact that these loans were often based on stated income, rather than verified income, was a key factor in the crisis. According to a 2007 report by the Federal Reserve, the percentage of subprime mortgages with low or no documentation increased from 25% in 2001 to 50% in 2006. As early as 2005, economists like Joseph Stiglitz were warning about the dangers of subprime lending, but their warnings were ignored by bankers and regulators. By 2006, the housing market was showing signs of strain, with prices beginning to fall in many areas. Bankers like Angelo Mozilo, the CEO of Countrywide Financial, continued to push "liar loans" on unsuspecting buyers, even as the market was collapsing. In 2007, the FBI launched an investigation into mortgage fraud, but it was too little, too late. The damage had already been done, and the stage was set for the crisis that would unfold in 2008.

The Part That Got Buried

Federal regulators, particularly those at the Federal Reserve and the Office of the Comptroller of the Currency, chose to ignore the warning signs of the housing crisis, allowing bankers to continue issuing "liar loans" with impunity. The decision by these regulators to turn a blind eye to the reckless lending practices of banks like Countrywide Financial and Wells Fargo enabled the crisis to deepen. Additionally, the Gramm-Leach-Bliley Act of 1999, signed into law by President Bill Clinton, played a significant role in suppressing this story by repealing parts of the Glass-Steagall Act, which had previously separated commercial and investment banking. This repeal allowed banks to engage in riskier practices, such as subprime lending, without adequate oversight. As a result, the story of "liar loans" and their role in the housing crisis was not fully told, with many of the key players and institutions involved working to downplay their involvement.

The Ripple Effect

The 2008 housing crisis led to a significant increase in foreclosures, with millions of Americans losing their homes. This, in turn, led to a surge in demand for rental housing, causing rents to rise sharply. Many families were forced to cut back on other expenses, such as food and healthcare, in order to pay their rent. The crisis also led to a sharp decline in housing values, leaving many homeowners owing more on their mortgages than their homes were worth. One specific modern thing that traces directly back to this event is the rise of online rental platforms, such as Zillow and Redfin, which have become major players in the housing market.

The Line That Says It All

The 2008 housing crisis resulted in over 9.3 million families losing their homes to foreclosure or distressed sale between 2007 and 2010.

A Note on Sources

This article draws on historical records, documented accounts, and academic research related to the 2008 housing crisis and the subprime mortgage market.