Subprime Crisis Impact Timeline - 2001-2004

2001-2004

• 2000–2003: Early 2000s recession spurs government action to rev up economy.
• 2000-2001: US Federal Reserve lowers Federal funds rate 11 times, from 6.5% (May 2000) to 1.75% (December 2001), creating an easy-credit environment that fueled the growth of US subprime mortgages.
• 2001: Ex-Wall Streeter John Posner writes A Home Without Equity is just a Rental with Debt, criticizing the massive growth in home equity loans and refinancing for consumer purchases, amongst other things. Charles Kindleberger of Manias, Panics, and Crashes finds it insightful; it is largely ignored.
• 2002-2006: Fannie Mae and Freddie Mac combined purchases of incorrectly rated AAA subprime mortgage-backed securities rise from $38 billion to $90 billion per year.
  • Lenders began to offer loans to higher-risk borrowers, Subprime mortgages amounted to $600 billion (20%) by 2006.
  • Speculation in residential real estate rose. During 2005, 28% of homes purchased were for investment purposes, with an additional 12% purchased as vacation homes. During 2006, these figures were 22% and 14%, respectively. As many as 85% of condominium properties purchased in Miami were for investment purposes which the owners resold ("flipped") without the seller ever having lived in them.
• 2002–2003: Mortgage denial rate of 14 percent for conventional home purchase loans, half of 1997.
• 2002: Annual home price appreciation of 10% or more in California, Florida, and most Northeastern states.
  • Paul O'Neill (Secretary of the Treasury) is fired by Bush. Among other things, he had wanted to take action on executive compensation and corporate governance.
  • June 17:Bush unveils his "Blueprint for the American Dream". He sets goal of increasing minority home owners by at least 5.5 million by 2010 through billions of dollars in tax credits, subsidies and a Fannie Mae commitment of $440 billion to establish NeighborWorks America with faith based organizations.
• 2003: Federal Reserve Chair Alan Greenspan lowers federal reserve’s key interest rate to 1%, the lowest in 45 years.
  • August: Borio and White of Bank of International Settlements speak at the Jackson Hole Economic Symposium. Their warnings about problems with collateralized debt obligations and rating agencies are rejected or ignored by attendees, including Alan Greenspan.
  • September: Bush administration recommend moving governmental supervision of Fannie Mae and Freddie Mac under a new agency created within the Department of the Treasury. The changes are blocked by Congress.
• 2003-2007: U.S. subprime mortgages increased 292%, from $332 billion to $1.3 trillion, due primarily to the private sector entering the mortgage bond market, once an almost exclusive domain of government sponsored enterprises like Freddie Mac.
  • The Federal Reserve fails to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned loan standards (employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability), emphasizing instead lender's ability to securitize and repackage subprime loans.
• 2004-2007: Many financial institutions issued large amounts of debt and invested in mortgage-backed securities (MBS), believing that house prices would continue to rise and that households would keep up on mortgage payments.
• 2004: U.S. homeownership rate peaks with an all time high of 69.2 percent.
  • Following example of Countrywide Financial, the largest U.S. mortgage lender, many lenders adopt automated loan approvals that critics argued were not subjected to appropriate review and documentation according to good mortgage underwriting standards. In 2007, 40% of all subprime loans resulted from automated underwriting.Mortgage fraud by borrowers increases.
  • HUD ratcheted up Fannie Mae and Freddie Mac affordable-housing goals for next four years, from 50 percent to 56 percent, stating they lagged behind the private market; they purchased $175 billion in 2004—44 percent of the market; from 2004 to 2006, they purchased $434 billion in securities backed by subprime loans
  • October: SEC effectively suspends net capital rule for five firms—Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley. Freed from government imposed limits on the debt they can assume, they levered up 20, 30 and even 40 to 1, buying massive amounts of mortgage-backed securities and other risky investments.