AMERICAN PREDATORY LENDING AND THE
GLOBAL FINANCIAL CRISIS
ORAL HISTORY PROJECT
Interview with
Peter Gwaltney
Bass Connections
Duke University
2020
PREFACE
The following Oral History is the result of a recorded
interview with Peter Gwaltney conducted by Michael Cai on March 18, 2020. This
interview is part of the Bass Connections American Predatory Lending and the
Global Financial Crisis Project.
Readers
are asked to bear in mind that they are reading a transcript of spoken word,
rather than written prose. The transcript has been reviewed and approved by the
interviewee.
Transcriber: Maria Paz Rios Session:
1
Interviewee: Peter Gwaltney Location: By
phone
Interviewer: Michael Cai Date:
March 18, 2020
Michael Cai: I'm Michael Cai, an
undergraduate student at Duke University and a member of the Bass Connections
team for American Predatory Lending and the Global Financial Crisis. Today is
Wednesday, March 18, 2020. I'm joined by Peter Gwaltney over the phone. Peter
is the former president and CEO of the Louisiana Bankers Association and Senior
Housing Crime Prevention Foundation, and the current president and CEO of the
North Carolina Bankers Association. Peter, thank you for joining me today.
Peter
Gwaltney: Thank you. Happy
to join you.
Michael Cai: So I'd like to start by
establishing a bit about your background. You attended Louisiana State
University for undergrad, is that correct?
Peter
Gwaltney: Yes, I did. I
studied banking and economics there.
Michael Cai: Great. And after
graduating you began working at the Louisiana Bankers Association. I believe
you served as President and CEO from 1999 up until 2006 when you then became
the chairman, president and CEO of the Senior Housing Crime Prevention
Foundation. And finally in 2015 you then became the president and CEO of the
North Carolina Bankers Association. Is that correct?
Peter
Gwaltney: Yes, that is
correct.
Michael Cai: So when in your career
did you first become involved with residential mortgages and the mortgage
market?
Peter
Gwaltney: Well, it actually
dates back to right after graduation from Louisiana State University. I
accepted my first job in banking at Calcasieu Marine National Bank in Lake
Charles, Louisiana where I went through management training. And that was 1988.
During that time, I purchased my first home, so my first foray into mortgage
lending was being a customer, and as an employee of the bank, I was able to
take advantage of the employee discount, where I received an 11% APR [annual
percentage rate], on a 30-year mortgage from the bank. Those were very
different times. And then from that point on, I was involved in compliance loan
administration and then was recruited away to work for the Louisiana Bankers
Association where from that point on, I was involved in public policy and so on
within the banking industry.
Michael Cai: I'd love to do more
about your time with the Louisiana Bankers Association and specifically about
your role in Louisiana's mortgage lending regulations. But first, could you
just describe your official responsibilities with the Louisiana Bankers
Association and how they related to the market for mortgages?
Peter
Gwaltney: Well, I started
out my career there as the director of education in 1990 which effectively
means I was responsible for all of the professional development programs.
Bankers are, just culturally, very engaged in continuing education and training
and development. And so, my responsibility was to provide all of that and plan
all the programming. And so, a large part of what we did was mortgage lending,
construction lending, just the how-to's from an underwriting perspective. And
then also on the compliance side, just all of the various regulations that came
down from Washington on just what banks had to do to comply with all the
federal regulations from CRA [Community Reinvestment Act], you name it, just
the whole suite of regulatory requirements. After ten years there in that role
I was named CEO. And then from that point on, I was directly responsible for
the government relations aspects, and public policy, and working with our
members to try to shape public policy in the Louisiana legislature and with our
congressional delegation in Washington D.C., which is very similar to what I do
now here in North Carolina.
Michael Cai: …We're really interested
in your experience with public policy in
Louisiana, and we we're wondering what were some of the key changes in the
Louisiana mortgage market during your time at the Louisiana Bankers
Association?
Peter
Gwaltney: Well, a lot of
time has passed since then, so I'll do my best to recall. I remember my first
mortgage was, I believe it was a 10% down payment. And it was held in portfolio
at the bank. We didn't have a lot of options for low down payment back in the
'80s … And again, the mortgage market doesn't vary much from state to state.
Fannie Mae [The Federal National Mortgage Association] and Freddie Mac [The
Federal Home Loan Mortgage Corporation] created the programs that our banks
participated in to be able to, most of them, to originate and then sell in the
secondary market and followed those guidelines. And what I observed over time
while I was in Louisiana was just the relaxing of standards in terms of down
payments, and documentation, and then also the advent of home equity lines of
credit where in many cases, people were able to get their down payment, able to
borrow their down payment and finance 100% of the house. And in some cases,
even 105% of the value of the house. That's the most I think I personally saw
was where people were able to borrow up to 105% or more of the value of the
house, which wasn't a problem at the time because the general consensus and
accepted practice was that home values always increased. And so, wait a year or
two and the value of the home will catch up with the amount, the percentage of
the equity, that had been loaned.
Michael Cai: You've mentioned this
relaxing of the down payments and the home equity lines of credit. Did you or
any of your colleagues express concerns to each other about anything related to
this, to the housing and mortgage market?
Peter
Gwaltney: Well, we did
because in many cases, the bank, traditional banks, community banks, were not
engaged in that activity because of the risk that it presented. And I'm not
saying that no banks did. It was just, there were those among us who thought
that's just a little fast and loose. And, we had been through both the real
estate and the oil and gas crisis of the '80s when there was an IRS tax change
on how real estate was treated. And at the same time, oil prices fell very
dramatically overnight. And in the late '80s to about 1990, we had somewhere
around a third of the banks fail. In Louisiana, we had I think 306 banks at the
high-water mark. And we had approximately a third of those fail. So, bankers in
Louisiana were very cautious and remembered when things were a little too fast
and loose in the '70s and early '80s. And so, as the mortgage lending market
started to heat up, my recollection is that some of us looked at one another
and said: "We've seen how this movie ends. We need to be careful."
And so, the challenge is when non-bank lenders, mortgage banks and mortgage
lenders who are non-banks, are originating and selling just to make the fee and
don't have any equity in the house or anything at risk, it creates a boil, you
know, the market starts to boil, and people start to buy more houses than they
can afford. You know how all of that ended. But I won't be so bold as to say we
predicted it or saw it coming. But there was always that left foot on the brake
that said, "We've seen this before. We need to be careful."
No
one anticipated what ultimately happened with the financial crisis. But there
was always concern among, particularly banks in Louisiana, Texas, and Oklahoma,
those who went through the real estate and oil and gas crisis of the late '80s.
Michael Cai: I also was interested in
when you were working at the Louisiana Bankers Association. What were some of
the other agencies, state or federal, that you worked with most closely on
issues related to the residential mortgage market?
Peter
Gwaltney: Well, the FDIC
[Federal Deposit Insurance Corporation], the Federal Reserve, the Office of the
Comptroller of the Currency, and the Federal Home Loan Banks. And in our case,
it was the Federal Home Loan Bank of Dallas and they were not a regulator, but
they were a source of liquidity, a source of funding for mortgage lending. Bankers
often barred from the Federal Home Loan Bank and matched funds. It was an
interest rate arbitrage to do mortgage lending. And then our state banking
commissioner oversaw both commercial banks and all mortgage lenders at the
time. And what people didn't understand I think at that time, is that mortgage
lending was— we operated under federal regulations, but the oversight was at the
state level by state banking commissioners. And in our case, in Louisiana, it
was the Office of Financial Institutions.
Michael Cai: How did you see the
federal and state regulatory agencies overlap? And was there any tension in
this model of following federal regulations but having state oversight?
Peter
Gwaltney: I don't recall
tension. We just accepted the model that the federal government through the
federal regulatory agencies promulgated the regulations that we were
responsible for following. Fannie Mae and Freddie Mac created the mortgage
products that banks could offer and originate and sell back to them. And then
our state regulator, the Office of Financial Institutions, would license
mortgage lenders, require training, supervise that, and then do examinations of
all the mortgage lenders that were not banks. Bank mortgage lenders were exempt
from certain examinations and certain training requirements because they were
already supervised. So that would have been double supervision. So, I don't
recall a tension, and really the disjointed regulation and supervision, it
really didn't become clear until we had the Crisis, and members of Congress
were asking the Federal Reserve, "Where were you when all this was
happening?" And I remember Chairman Bernanke at the time telling a joint
committee of the House and Senate, "You did not give me authority to
supervise this." And I don't think they really understood that.
Michael Cai: So, these mortgage
lenders and originators just had separate oversight from the same state boards
that you mentioned that the Bankers Association was mostly overseen by?
Peter
Gwaltney: Well, the banks
were all supervised by the Office of Financial Institutions. They had different
levels of oversight depending on whether they were a bank or a non-bank.
Michael Cai: And so, out of all these
different agencies you mentioned, I'm curious [about] which of these
stakeholders did you engage with the most, and how about outside of the banking
industry?
Peter
Gwaltney: Yeah. I don't
think I understand your question. Maybe ask it a different way.
Michael Cai: I was wondering just,
with all the groups and agencies that you had to interact with in your position
as president, which groups did you engage with the most? And also just outside
of, I guess working with the banks, what were some of the agencies that you
would also engage with frequently?
Peter
Gwaltney: Oh, okay. The
agency we dealt with the most was our Louisiana Office of Financial
Institutions. We had a close relationship. We collaborated on things, shared
feedback with them from what the banks were telling us. They would share with
us what they were seeing in the banks in their examinations, but similar
relationships with the FDIC, the OCC [Office of the Comptroller of the Currency],
the Federal Reserve, and at the time, the Office of Thrift Supervision back
when it was a separate agency before it was rolled into the Office of the
Comptroller of the Currency. But most of our interaction was with the Louisiana
Office of Financial Institutions.
Michael Cai: And what do you recall
from these interactions in the housing boom years?
Peter
Gwaltney: I don't remember a
lot of conversations about it. Because our members, the banks in Louisiana were
doing commercial lending, agriculture lending; mortgage lending was not, for
any particular bank, the bulk of their activity. It was just another line of
business, except for some of the mutual savings and loans where that was their
primary business. But I don't remember too many conversations just focused on
the run-up, you know, as things started to heat up as we approached 2007.
Now it's important for me to point
out in 2005, in August of 2005, we had Hurricane Katrina, which was a major
disruption to every aspect of banking, but particularly mortgage lending
because the city of New Orleans completely depopulated for an extended period
of time… I mean months, not days. And then whole neighborhoods didn't come back
for six months to a year. And so, that was a whole other set of issues. Thirty
days after Hurricane Katrina came, and that was, I believe, August 30th,
if I'm remembering correctly. So in September, around September 30th,
Hurricane Rita hit New Orleans, and then scraped along the rest of the coast
all the way to Texas and wiped out a lot of real estate toward the Texas line.
And so that created a whole similar experience of just complete disruption in
banking, but also needless to say, the housing market.
And so, North Louisiana was spared
much of that. A lot of North Louisiana was agriculture, rural, and smaller
cities where there weren't booming real estate markets for housing. They were
pretty slow and steady wins the race kind of a thing. And so, '05 and '06 were
very different in Louisiana than they were anywhere else in the country, so
it's kind of hard to look back at our experience and say, "Okay, yeah. Why
weren't we talking about the run-up? Why weren't we talking about some of the
things that led to the Crisis?" Because we were having a very different
experience.
Michael Cai: You mentioned Hurricane
Katrina and Hurricane Rita, and I'm very curious to hear what you did in your
role in response to those hurricanes, to help homeowners.
Peter
Gwaltney: Well, after the
hurricanes hit, Katrina first, the city was, as I said, completely depopulated
and just destroyed and the houses were flooded and it was just chaos and
infrastructure — roads, telephones, electricity, everything — the salt water
intrusion had just ruined everything and rusted everything. And so, we knew
people couldn't move back anytime soon. And so we spent our first month on the
ground there just reopening very basic banking services. There were twenty-seven
banks flooded up to their rooftops and completely out of business for an
extended period of time. And so we reentered the city weeks after Hurricane
Katrina hit with the guidance from the governor, armed escorts from state
police, and we used three or four bank branches where multiple banks would set
up in individual teller stations so that people could come and visit their
bank, cash a check, and find out what their balance is.
And that was a Herculean effort
just doing that much. We advertised over radio, we put flyers on telephone
poles so people would know how to find their bank. And that's where the FDIC
came up with the idea of putting a Find-my-Bank section in their website. That
all came from Hurricane Katrina. We were on the phone with the regulatory agencies
daily after the hurricane, when we could get a phone line – having phone service was a real problem. So
there were days where we had to skip the call because we couldn't get on the
phone, because it just wasn't working. Now this was before smart phones and
widespread internet use.
So, one bank had employees in thirteen
states and didn't know it. They found it out like a year later. Luckily, they
assembled all this and figured it out. So just getting employees to come back
and to serve their customers was a challenge. And so, the housing piece of it
was determining – a lot of the records were destroyed, which created a lot of
problems. And so, millions and millions of dollars were spent by the federal
government and the state to identify the owners of the properties, contact
them, find out if they were coming back, whether they were going to rebuild,
and if they were going to rebuild, in many cases they had to raise their house
to a higher level because the floodplains had all been reset.
And so that was an enormous
undertaking. Most of the banks, this is a kind of a misunderstanding a lot of
people have, most of the banks required flood insurance even when the flood
maps said it wasn't required. The bankers in New Orleans knew where they lived.
They live in a bowl and work in a bowl, so they required flood insurance. So a
lot of the homes were covered to some degree by flood insurance, and then in
some other cases by their standard property and casualty insurance. The problem
with that is, if it was a flood event and property and casualty insurance
doesn't cover that. It doesn’t cover flooding. It only covers fire and wind
damage and things like that, so fighting with the insurance companies was a
large part of what we did. If you don't cover all of those things, that I just
mentioned, people can't rebuild and they can't move back in. And if you can't
do that with one house, you can't do that with that house and then the
neighbor, and then you can't build a neighborhood back. It took a very long
time and a lot of effort. And I probably didn't see my family for six months. I
was so busy in New Orleans, and in Washington D.C, and in our office in Baton
Rouge working with everyone. I left at the end of '06 and the work wasn't
complete, the banks were profitable again, but the rebuilding had really just
started.
Michael Cai: Well that was certainly
a very terrible disaster and a challenge unique to Louisiana which is very
interesting when you think about the financial crisis and how Louisiana's
situation was different. And I guess just to kind of to cap it off talking
about your time at the Louisiana Bankers Association, when you did choose to
step back at the end of '06, what were your thoughts then on the mortgage
market and its future?
Peter
Gwaltney: Well, when I sold
my house — so I'll be very personal about this because that was my experience —
the house that I sold, I owned it for seven years. It had nearly doubled in
value over that time according to my realtor. And we put it up for sale, and
the person who bought it — I was told — that it was a subprime loan. I
honestly, until that day, had never heard that term. So this is 2006, the end
of 2006, I had not heard the term subprime mortgage. I guess I'd been so busy
with Hurricane Katrina and all the recovery and all the other things we were
doing. We weren't talking about those things. But I was told as a subprime
market, they were a marginal borrower and they were borrowing — it might've
been 100% of the value of the house — I don't remember, but my first thought
was wow, this is crazy. I'll be glad when the documents are signed and I'm done
with this house. And it closed and everything was fine, but so I got a sense
that that was happening. I wasn't the only one, that was happening around the
state and around the country. We moved to Tennessee and that same kind of
lending was taking place where we moved in Tennessee, in Memphis; actually Collierville,
right outside of Memphis. It was a hot housing market; home prices were going
up. We had put in an offer and hoped that someone else didn't make an offer the
same day. Houses were moving quickly, and credit was easy, and they offered me
more than I needed and a lower down payment than I thought was appropriate, but
I took it. So, I got a sense that things were a little fast and loose at that
point, which has a result. When money is easy, people don't pay as much
attention to the cost, to the price of the asset – that applies to homes, that
applies to cars. You know, we only used to make 48-month car loans. Now I'm
seeing 60 months, 72 months, 96 months, and that enables the car makers to
raise the price. They could charge more because people can finance it and can
afford it on a monthly basis. That also applies to college. That's why tuition
is going up so fast, because money is easy through the student loan program.
And so that applies to housing. If credit is too easy, values of houses can go
up and people are just looking at the monthly payment. And so what happened
does not surprise me at all. It didn't surprise me.
Michael Cai: …. After that had
happened, just based on your personal story, did you talk to any bankers about
subprime lending? …Were you … doing more research into subprime lending at that
point? Or were you more … focused on your next role at the Senior Housing Crime
Prevention Foundation?
Peter
Gwaltney: Good question. I
was less focused on public policy and I was more focused on growing a nonprofit
foundation. And certainly until Lehman Brothers failed, and I realized we were
in a crisis and "for sale" signs started going up on houses and I
realized those are people who can't afford the payments. That's somebody who
just lost their job. And that I might have bought at the top of the bubble, which
is what I did.
Michael Cai: Shifting to the Senior
Housing Crime Prevention Foundation and growing this nonprofit, could you tell
me what some of your official responsibilities were and how they related to the
residential mortgage market?
Peter
Gwaltney: Well, they didn't
apply at all to the residential mortgage lending market. The Senior Housing
Crime Prevention Foundation is a nonprofit foundation that owns the Senior
Crimestoppers program, which is a crime prevention program that's in nursing
homes in roughly forty-five states that protects seniors from theft, abuse,
neglect, all the different things that happen in senior care facilities.
Studies show that when you densely populate a facility like a senior care
facility with seniors, they are vulnerable to bad actors and so we provided
various services and training for the staff and awareness for the families and
just a lot of different things. And we got all of our funding from the banking
industry. Banks made contributions to our work to fund what we did. And my job
there was to take us from kind of a small, fledgling organization that wasn't
very old at the time, to scale it nationwide and grow it up, scale it
nationally. And so, it was seven days a week, flying all over the country,
staying very, very busy. And so as all of this happened around me, I watched
the news just like the rest of the world and tried to understand how it
affected me again. I really wasn't so focused on public policy like I was in my
previous life.
Michael Cai: Thanks for the
clarification. And so, you were holding that position during the years of the
financial crisis in 2007, 2008. Did that have any effect on your role with the
foundation and what the foundation was doing?
Peter
Gwaltney: Well, yes, because
we had gotten a fast start in '05 and '06 at the foundation with banks funding
our work. And then it seems like when I got there in January of '07, it just
seemed to suddenly slow down and we couldn't figure it out. It was just harder
than it had been. And we jokingly said, “What did I do to break this?” You
know, as soon as I showed up. But in the rear view mirror, what we realize now
is we were headlong into a deep recession and a financial crisis that didn't
know it. And I remember the day Lehman failed and I remember that I talked to
our team, I said: "Folks, this is what's been happening. We're in
something deep now. Let's just try to survive it." And so we did, things
flattened out for us. We managed as best we could.
And then probably around 2009,
2010, things slowly improved, and we were able to get our funding levels back
up. But because we were working with banks across the country, they're not
going to tell you when you walk in, "We can't help you, we don't want to
participate because we're trying to save the bank. We're under a MOU [memorandum
of understanding] with the federal regulatory agencies", or anything like
that. In many cases, it's confidential. They can't tell you even if they wanted
to. In a lot of cases, they just wouldn't tell us.
So that was my experience through
the recession and the mortgage crisis. It got a lot more personal when the— and
I was planning on staying there. I loved my work. I care deeply about seniors
and I just really did love the work we were doing, and it was getting easier.
The funding was starting to flow again in 2014. But the North Carolina Bankers
Association approached me about coming here to take this role as CEO. And I
turned them down a couple of times because I really did love my work, and then
we finally got together and they said, “Please come.” And I did. And so we put
our house on the market where we had bought, as I explained to you at the top
of the market back in '07. And because we had a homeowner's restriction in our
neighborhood that you cannot rent your house; if you leave, you have to sell
it. And so at the risk of getting very personal, to sell our house we had to
take a $100,000 loss in equity when we sold it. So when we talk about the
recession and we talk about the housing bubble and the subprime crisis and the
impact it had on real people who weren't even directly involved, as either a
subprime borrower or a subprime lender, just an average person like us, it hit
us very directly and took a number of years to recover from that. So I have
strong memories of the impact of that recession.
Michael Cai: …. One more question
related to your time with the Senior Housing Crime Prevention Foundation: you
mentioned hearing a lot about the recession, mostly just gathering that through
the news, but were there any other sources, in like the months leading up to
the crisis where you felt that interactions were different or you were hearing
any concerns from anyone you were working with?
Peter
Gwaltney: Well, it's hard to
describe. We referred to it as bankers just going quiet, where we would call a
bank and say: "Here's what we do. Here's how you can help us. Would you
like to have a meeting to discuss it?" They would do one of two things. They
would say this is in the months and year leading up to – I think the
commencement of the crisis as being Lehman's failure. Well, banks would do one
of two things. They would say, "No, we're just not interested. Thank you,"
and get off the phone, or they would say, "Yes, please, let's talk about
it" and we would go see them, whether it was in Buffalo, New York or
Ventura, California. We literally worked coast to coast. And, we would go see
them. We'd have a very good meeting. They loved what we did. They said they
would think about it and then when we'd call them back, they either wouldn't
take the call, or they would have an excuse that they hadn't talked about it
yet, or they needed to have a meeting to discuss it, or they just decided that
it wasn't a good fit for them at the moment.
What we look back on is, a lot of
those banks were under memorandum of understanding, or cease and desist orders,
or some sort of federal regulatory order that they were unable to do some of
the things we needed them to do or asked them to do. They just couldn't tell
us. And so, this kind of thing is abundantly clear in the rear view mirror.
When you're in it, it's hard to figure out and you ask yourself, "Maybe
I'm not telling our story right. Maybe I could do better." And I think
that that's common with a lot of businesses.
Michael Cai: So just a few more
concluding questions. You mentioned as you look back on the Crisis over a
decade later, there wasn't a very real sense of worry that this recession was
going to happen. But do you think that there is an important lesson for bankers
looking back? What some of the warning signals were that something like this
was going to happen?
Peter
Gwaltney: Yes, and they
still talk about them today: just fundamental sound banking practices. A
sufficient down payment, whether it's a car loan, a home loan, or a business loan,
means that the borrower has equity, has something at risk, and so a down
payment, some sort of equity is important. Strong underwriting, understanding
the source of repayment, whether it's a job, or a trust fund. Where does the
money come from? How reliable is that source of income? How long has it been in
place? How strong is this borrower? Where did the down payment come from?
There's just so many questions that sound underwriting requires. And then what
are the risks? If all the underwriting is good and we know what the risks are,
whatever risks that are remaining, how do we mitigate those so that if there's
a curve ball, something doesn't go as planned, how does the bank get its money
back? Short of repossessing the house, because nobody wants to repossess a
house. Banks don't want to own houses.
So it's all about the source of
repayment. There's just no substitute for that. So this is just ABCs, one, two,
threes for bankers, just sound banking practices. And being willing to say no
to a deal. I hear this all the time. Bankers are very disciplined right now.
They walk away from deals, they walk away, whether they're home loans or
business loans. They know what's good for their bank. They know what kind of
loans they want to book, what kind of borrowers that they want to have. And
what risks are good for their bank. And if they're not a fit, they say no and
let that borrower go to someone else. They're not chasing the next deal. They
haven't been for quite some time. Our industry is very, very disciplined right
now.
Michael Cai: To what extent do you
see your personal experience as adding something important to our understanding
of what happened in the run-up to '07, '08?
Peter
Gwaltney: How important is
my personal experience, is that the question?
Michael Cai: Your experience as the
president of the Louisiana Bankers Association and on the Senior Housing Crime
Prevention Foundation, and your experience in those roles as adding something
important to our understanding of what happened in the run-up to '07 and '08.
Peter
Gwaltney: Well, I always
like to say there's nothing new under the sun. The business cycle is just that:
it's a cycle, and it revisits us. It comes back and we have to remember our
lessons that we've learned. And it's OK to make mistakes, but we have to learn
from them. And I've been through numerous recessions. I've been through
numerous business cycles, and the great recession, the oil and gas and real
estate depression of the '80s, and in each case, the bankers learned something
and applied it going forward. And there's just no substitute for gray hair and
wisdom in all of this.
It's just very important-- when
someone comes to me and thinks that they have a new idea, they've figured out a
way to do some kind of lending that the others haven't figured out, I'm really
slow to listen because there's just not that much new under the sun. And safe,
sound banking practices, the ABC's and one, two, threes of our industry have
been around for a hundred years or more and – more than a hundred years. And,
it's just hard to get around those. So that's why experience is so important.
And I really love the idea of your project to capture the history and the
experiences and ask ourselves: “What can we learn from this lesson? Let's make
sure we don't make these mistakes again, either individually as banks or as a
nation from a public policy perspective.”
Michael Cai: .... And this is one
last question, over the last decade we've seen a number of different narratives
emerge to explain the financial crisis. How do you understand what caused that
crisis?
Peter
Gwaltney: That's a great
question, I'm glad you asked it. I've seen a number of theories, and my
personal experience, I hate to call it a theory because it's what I believe to
be true: it's just old fashion greed. It's what it all comes down to. And
policy makers in Washington D.C. made it possible through the design of
mortgage products at Fannie Mae, Freddie Mac; members of Congress encouraging
home ownership and encouraging the agencies, the GSEs [Government Sponsored
Enterprises], to create the secondary market for these products. And then Wall
Street securitizing the mortgages and reselling them and people trying to make
a buck on that.
And then people wanting to buy
more house than they could. And when an authority figure, like a mortgage
lender or a banker, says you qualify, unfortunately, some people seed their
personal responsibility and say: "Well if they said I can afford it, I
must!" And they either know it deep in their heart, but they just said,
"They say, I can afford it. I must be able to," or they just didn't
know, and that's even worse. They just didn't know what they could afford. They
were just waiting for someone else to tell them what they could afford. That's
really sad. And so, I think all of these stars aligned of people wanting to
live in the nicest house that they can afford. And then having a structure
where an intermediary can make them that loan with a secondary market that will
buy that loan and then a government saying: "We want this, y'all go and
keep doing it."
And then the selective memory, when I was in
Louisiana — I forgot to mention this — when I was in Louisiana, I was lobbying
for GSE reform. The Congressman Richard Baker, who was on the House Financial
Services Committee, he had drafted a GSE reform bill that was very thick,
probably more than 500 pages, and Congressman Frank, Barney Frank, would not
hear it, wouldn't have a hearing on it. It could have been because Richard Baker
was a conservative Republican and Barney Frank was a Democrat and he didn't
want to hear a Republican bill. Or, it was because he didn't want GSE reform.
Either way, after the crisis, Congressman Frank did his very best to make
himself look as good as he possibly could. That's human nature. That's what we
do. So on one hand I fault him for it, but he's human and that's just natural
to do. So, all of that is my theory of the crisis: it goes down to greed.
[END OF SESSION]