Lowering Lending Standards II

Further information on the lending standards side points to why and when did Wall Street investment banks get into the purchase of mortgages and creating their own mortgage backed securities. 

I have heard several reasons why Lehman Brothers, JP Morgan, etc. got into the mortgage buying business. First, it was easy money without perceived risk. Second, loans were purchased without the regulations that burdened banks such as Wells Fargo and Citibank, as they were heavily regulated by the OCC, Federal Reserve, SEC, FDIC and and a host of other regulators. Finally, there was huge competition with Fannie Mae and Freddie Mac because the Government Sponsored Entities were able to borrow money directly from the Treasury at a much cheaper rate, making interest spreads much more desirable to Freddie and Fannie than investment banks.

In the end, there were two groups that set lending standards to create conforming loan products, Freddie and Fannie were one group, and investment banks were the other. Blame lies with each of these groups.

Another issue is lenders such as Countrywide Financial that were not regulated. I will look into this further.