The Cause of the 2008 Financial Crisis By James F. Davis | October 14, 2008

As someone who spent the majority of his life as an international bank analyst and executive, I learned, that to fix a problem, one needs to understand what caused it. It can be difficult to see because sometimes it takes time for the effects of bad decisions to manifest themselves. It also requires that we examine the facts rather than our emotional biases.

The facts are that approximately 6% of all mortgage loans in United States are in default. Historically, defaults were less than one-third of that, i.e., from 0.25% to 2%.

A huge portion of the increased mortgage loan defaults are what are referred to as ‘sub-prime’ loans. Most of the sub-prime loans have been made to borrowers with poor credit ratings, no down payment on the home financed, and/or no verification of income or assets (Alt-A’s). Close to 25% of sub-prime and Alt-A’s loans are in default.

These loans increased dramatically as a 9/30/99 New York Times article explained, “In a move that could help increase homeownership rates among minorities and low income consumers, the Fannie Mae Corp. is easing the credit requirements on loans that it will purchase from banks and other lenders.” ... continue