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The Subprime Mortgage Crisis

The United States subprime mortgage crisis was a nationwide financial crisis, occurring between 2007 and 2010, that contributed to the U.S. recession of December 2007 – June 2009.

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[1][2] It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities. Declines in residential investment preceded the recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.[3]

The housing bubble that preceded the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies. While elements of the crisis first became more visible during 2007, several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.[4]

There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others.[5] Two proximate causes were the rise in subprime lending and the increase in housing speculation. The percentage of lower-quality subprime mortgagesoriginated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S.[6][7] A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages.[4] Housing speculation also increased, with the share of mortgage originations to investors (i.e. those owning homes other than primary residences) rising significantly from around 20% in 2000 to around 35% in 2006–2007. Investors, even those with prime credit ratings, were much more likely to default than non-investors when prices fell.[8][9][10] These changes were part of a broader trend of lowered lending standards and higher-risk mortgage products,[4][11] which contributed to U.S. households becoming increasingly indebted. The ratio of household debt to disposable personal income rose from 77% in 1990 to 127% by the end of 2007.[12]

When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending.[6] Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. and Europe.

The crisis had severe, long-lasting consequences for the U.S. and European economies. The U.S. entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 6% of the workforce. The number of jobs did not return to the December 2007 pre-crisis peak until May 2014.[13] U.S. household net worth declined by nearly $13 trillion (20%) from its Q2 2007 pre-crisis peak, recovering by Q4 2012.[14] U.S. housing prices fell nearly 30% on average and the U.S. stock market fell approximately 50% by early 2009, with stocks regaining their December 2007 level during September 2012.[15] One estimate of lost output and income from the crisis comes to “at least 40% of 2007 gross domestic product“.[16] Europe also continued to struggle with its own economic crisis, with elevated unemployment and severe banking impairments estimated at €940 billion between 2008 and 2012.[17] As of January 2018, U.S. bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $626B was invested, loaned, or granted due to various bailout measures, while $390B had been returned to the Treasury. The Treasury had earned another $323B in interest on bailout loans, resulting in an $87B profit.[18]


President George W. Bush discusses Education, Entrepreneurship & Home Ownership at the Indiana Black Expo in 2005

Subprime mortgage lending jumped dramatically during the 2004–2006 period preceding the crisis

Factors contributing to housing bubble

Domino effect as housing prices declined

The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006.[19][20] An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume risky mortgages in the anticipation that they would be able to quickly refinance at easier terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., borrowers were unable to refinance. Defaults and foreclosureactivity increased dramatically as easy initial terms expired, home prices fell, and adjustable-rate mortgage (ARM) interest rates reset higher.

As housing prices fell, global investor demand for mortgage-related securities evaporated. This became apparent by July 2007, when investment bank Bear Stearns announced that two of its hedge funds had imploded. These funds had invested in securities that derived their value from mortgages. When the value of these securities dropped, investors demanded that these hedge funds provide additional collateral. This created a cascade of selling in these securities, which lowered their value further. Economist Mark Zandi wrote that this 2007 event was “arguably the proximate catalyst” for the financial market disruption that followed.[4]

Several other factors set the stage for the rise and fall of housing prices, and related securities widely held by financial firms. In the years leading up to the crisis, the U.S. received large amounts of foreign money from fast-growing economies in Asia and oil-producing/exporting countries. This inflow of funds combined with low U.S. interest rates from 2002 to 2004 contributed to easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.[21][22]

As part of the housing and credit booms, the number of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in MBS reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses were estimated in the trillions of U.S. dollars globally.[23]

While the housing and credit bubbles were growing, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. These entities were not subject to the same regulations as depository banking. Further, shadow banks were able to mask the extent of their risk taking from investors and regulators through the use of complex, off-balance sheet derivatives and securitizations.[24] Economist Gary Gorton has referred to the 2007–2008 aspects of the crisis as a “run” on the shadow banking system.[25]

The complexity of these off-balance sheet arrangements and the securities held, as well as the interconnection between larger financial institutions, made it virtually impossible to re-organize them via bankruptcy, which contributed to the need for government bailouts.[24] Some experts believe these shadow institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations.[26] These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.[27]

The losses experienced by financial institutions on their mortgage-related securities impacted their ability to lend, slowing economic activity. Interbank lending dried-up initially and then loans to non-financial firms were affected. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions, assuming significant additional financial commitments.

The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. Effects on global stock markets due to the crisis were dramatic. Between 1 January and 11 October 2008, owners of stocks in U.S. corporations suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries averaged about 40%.[28]

Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine.[29] Leaders of the larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis.[30] A variety of solutions have been proposed by government officials, central bankers, economists, and business executives.[31][32][33] In the U.S., the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010 to address some of the causes of the crisis.


Housing price appreciation in selected countries, 2002–2008

U.S. households and financial businesses significantly increased borrowing (leverage) in the years leading up to the crisis


The crisis can be attributed to several factors, which emerged over a number of years. Causes proposed include the inability of homeowners to make their mortgage payments (due primarily to adjustable-rate mortgages resetting, borrowers overextending, predatory lending, and speculation), overbuilding during the boom period, risky mortgage products, increased power of mortgage originators, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, monetary and housing policies that encouraged risk-taking and more debt, international trade imbalances, and inappropriate government regulation.[6][34][35][36][37] Excessive consumer housing debt was in turn caused by the mortgage-backed security, credit default swap, and collateralized debt obligation sub-sectors of the finance industry, which were offering irrationally low interest rates and irrationally high levels of approval to subprime mortgageconsumers due in part to faulty financial models.[38][39] Debt consumers were acting in their rational self-interest, because they were unable to audit the finance industry’s opaque faulty risk pricing methodology.[40]

Among the important catalysts of the subprime crisis were the influx of money from the private sector, the banks entering into the mortgage bond market, government policies aimed at expanding homeownership, speculation by many home buyers, and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, 2–28 loan, that mortgage lenders sold directly or indirectly via mortgage brokers.[41] On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes.[42]

In its “Declaration of the Summit on Financial Markets and the World Economy,” dated 15 November 2008, leaders of the Group of 20 cited the following causes:

Federal Reserve Chair Ben Bernanke testified in September 2010 regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in 2007 and a run on the shadow banking system that began in mid-2007, which adversely affected the functioning of money markets. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as a tool for taking excessive risks. Examples of vulnerabilities in the public sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed “Too big to fail” institutions, monetary policy, and trade deficits.[44]

During May 2010, Warren Buffett and Paul Volcker separately described questionable assumptions or judgments underlying the U.S. financial and economic system that contributed to the crisis. These assumptions included: 1) Housing prices would not fall dramatically;[45] 2) Free and open financial markets supported by sophisticated financial engineering would most effectively support market efficiency and stability, directing funds to the most profitable and productive uses; 3) Concepts embedded in mathematics and physics could be directly adapted to markets, in the form of various financial models used to evaluate credit risk; 4) Economic imbalances, such as large trade deficits and low savings rates indicative of over-consumption, were sustainable; and 5) Stronger regulation of the shadow banking system and derivatives markets was not needed.[46] Economists surveyed by the University of Chicago during 2017 rated the factors that caused the crisis in order of importance: 1) Flawed financial sector regulation and supervision; 2) Underestimating risks in financial engineering (e.g., CDOs); 3) Mortgage fraud and bad incentives; 4) Short-term funding decisions and corresponding runs in those markets (e.g., repo); and 5) Credit rating agency failures.[47]

The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that “the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.”[48]


U.S. residential and non-residential investment fell relative to GDP during the crisis

There are several “narratives” attempting to place the causes of the crisis into context, with  overlapping elements. Five such narratives include:

  1. There was the equivalent of a bank run on the shadow banking system, which includes investment banks and other non-depository financial entities. This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards.[25][49]
  2. The economy was being driven by a housing bubble. When it burst, private residential investment (i.e., housing construction) fell by nearly 4% GDP and consumption enabled by bubble-generated housing wealth also slowed. This created a gap in annual demand (GDP) of nearly $1 trillion. Government was unwilling to make up for this private sector shortfall.[50][51]
  3. Record levels of household debt accumulated in the decades preceding the crisis resulted in a balance sheet recession (similar to debt deflation) once housing prices began falling in 2006. Consumers began paying down debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced.[3][49]
  4. Housing speculation using high levels of mortgage debt drove many investors with prime-quality mortgages (i.e., those investors in the middle of the credit score distribution) to default and enter foreclosure on investment properties when housing prices fell; the blame on “subprime” homeowners (i.e., those at the bottom of the credit score distribution) was overstated.[8][10]
  5. Government policies that encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness.[52]

Underlying narratives #1-3 is a hypothesis that growing income inequality and wage stagnation encouraged families to increase their household debt to maintain their desired living standard, fueling the bubble. Further, this greater share of income flowing to the top increased the political power of business interests, who used that power to deregulate or limit regulation of the shadow banking system.[53][54][55]


Household debt relative to disposable income and GDP.

Existing homes sales, inventory, and months supply, by quarter.

Vicious cycles in the housing and financial markets.


According to Robert J. Shiller and other economists, housing price increases beyond the general inflation rate are not sustainable in the long term. From the end of World War II to the beginning of the housing bubble in 1997, housing prices in the US remained relatively stable.[56] The bubble was characterized by higher rates of household debt and lower savings rates, slightly higher rates of home ownership, and of course higher housing prices. It was fueled by low interest rates and large inflows of foreign funds that created easy credit conditions.[57]

Between 1997 and 2006 (the peak of the housing bubble), the price of the typical American house increased by 124%.[58] From 1980 to 2001, the ratio of median home prices to median household income (a measure of ability to buy a house) fluctuated from 2.9 to 3.1. In 2004 it rose to 4.0, and by 2006 it hit 4.6.[59] The housing bubble was more pronounced in coastal areas where the ability to build new housing was restricted by geography or land use restrictions.[60] This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by the price appreciation. US household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990.[12][61]

While housing prices were increasing, consumers were saving less[62] and both borrowing and spending more. Household debt grew from $705 billion at year end 1974, 60% of disposable personal income, to $7.4 trillion at yearend 2000, and finally to $14.5 trillion in midyear 2008, 134% of disposable personal income.[63]During 2008, the typical US household owned 13 credit cards, with 40% of households carrying a balance, up from 6% in 1970.[64]

Free cash used by consumers from home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion over the period.[65][66][67] U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion.[68] From 2001 to 2007, U.S. mortgage debt almost doubled, and the amount of mortgage debt per household rose more than 63%, from $91,500 to $149,500, with essentially stagnant wages.[69] Economist Tyler Cowen explained that the economy was highly dependent on this home equity extraction: “In the 1993-1997 period, home owners extracted an amount of equity from their homes equivalent to 2.3% to 3.8% GDP. By 2005, this figure had increased to 11.5% GDP.”[70]

This credit and house price explosion led to a building boom and eventually to a surplus of unsold homes, which caused U.S. housing prices to peak and begin declining in mid-2006.[71] Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages. These mortgages enticed borrowers with a below market interest rate for some predetermined period, followed by market interest rates for the remainder of the mortgage’s term.

The US home ownership rate increased from 64% in 1994 (about where it had been since 1980) to an all-time high of 69.2% in 2004.[72] Subprime lending was a major contributor to this increase in home ownership rates and in the overall demand for housing, which drove prices higher.

Borrowers who would not be able to make the higher payments once the initial grace period ended, were planning to refinance their mortgages after a year or two of appreciation. As a result of the depreciating housing prices, borrowers ability to refinance became more difficult. Borrowers who found themselves unable to escape higher monthly payments by refinancing began to default.

As more borrowers stopped making their mortgage payments, foreclosures and the supply of homes for sale increased. This placed downward pressure on housing prices, which further lowered homeowners’ equity. The decline in mortgage payments also reduced the value of mortgage-backed securities, which eroded the net worth and financial health of banks. This vicious cycle was at the heart of the crisis.[73]

By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak.[74][75] This major and unexpected decline in house prices means that many borrowers have zero or negative equity in their homes, meaning their homes were worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers – 10.8% of all homeowners – had negative equity in their homes, a number that is believed to have risen to 12 million by November 2008. By September 2010, 23% of all U.S. homes were worth less than the mortgage loan.[76]

Borrowers in this situation have an incentive to default on their mortgages as a mortgage is typically nonrecourse debt secured against the property.[77] Economist Stan Leibowitz argued in the Wall Street Journal that although only 12% of homes had negative equity, they comprised 47% of foreclosures during the second half of 2008. He concluded that the extent of equity in the home was the key factor in foreclosure, rather than the type of loan, credit worthiness of the borrower, or ability to pay.[78]

Increasing foreclosure rates increases the inventory of houses offered for sale. The number of new homes sold in 2007 was 26.4% less than in the preceding year. By January 2008, the inventory of unsold new homes was 9.8 times the December 2007 sales volume, the highest value of this ratio since 1981.[79] Furthermore, nearly four million existing homes were for sale,[80] of which roughly 2.2 million were vacant.[81]

This overhang of unsold homes lowered house prices. As prices declined, more homeowners were at risk of default or foreclosure. House prices are expected to continue declining until this inventory of unsold homes (an instance of excess supply) declines to normal levels.[82] A report in January 2011 stated that U.S. home values dropped by 26 percent from their peak in June 2006 to November 2010, more than the 25.9% drop between 1928 to 1933 when the Great Depression occurred.[83]

From September 2008 to September 2012, there were approximately 4 million completed foreclosures in the U.S. As of September 2012, approximately 1.4 million homes, or 3.3% of all homes with a mortgage, were in some stage of foreclosure compared to 1.5 million, or 3.5%, in September 2011. During September 2012, 57,000 homes completed foreclosure; this is down from 83,000 the prior September but well above the 2000–2006 average of 21,000 completed foreclosures per month.[84]

Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis.[85] During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes purchased were not intended as primary residences. David Lereah, National Association of Realtors‘s chief economist at the time, stated that the 2006 decline in investment buying was expected: “Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market.”[86]

Housing prices nearly doubled between 2000 and 2006, a vastly different trend from the historical appreciation at roughly the rate of inflation. While homes had not traditionally been treated as investments subject to speculation, this behavior changed during the housing boom. Media widely reported condominiums being purchased while under construction, then being “flipped” (sold) for a profit without the seller ever having lived in them.[87]Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties.[88]

One 2017 NBER study argued that real estate investors (i.e., those owning 2+ homes) were more to blame for the crisis than subprime borrowers: “The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors” and that “credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high-risk [subprime] borrowers was virtually constant for all debt categories during this period.” The authors argued that this investor-driven narrative was more accurate than blaming the crisis on lower-income, subprime borrowers.[8] A 2011 Fed study had a similar finding: “In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default.” The Fed study reported that mortgage originations to investors rose from 25% in 2000 to 45% in 2006, for Arizona, California, Florida, and Nevada overall, where housing price increases during the bubble (and declines in the bust) were most pronounced. In these states, investor delinquency rose from around 15% in 2000 to over 35% in 2007 and 2008.[9]

Nicole Gelinas of the Manhattan Institute described the negative consequences of not adjusting tax and mortgage policies to the shifting treatment of a home from conservative inflation hedge to speculative investment.[89]Economist Robert Shiller argued that speculative bubbles are fueled by “contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address the psychology that fuels them, they’re going to keep forming.”[90] Keynesian economist Hyman Minsky described how speculative borrowing contributed to rising debt and an eventual collapse of asset values.[91]

Warren Buffett testified to the Financial Crisis Inquiry Commission: “There was the greatest bubble I’ve ever seen in my life…The entire American public eventually was caught up in a belief that housing prices could not fall dramatically.”[45]


A mortgage brokerage in the US advertising subprime mortgages in July 2008.

In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers,[6][92] including undocumented immigrants.[93] Lending standards deteriorated particularly between 2004 and 2007, as the government-sponsored enterprise (GSE) mortgage market share (i.e. the share of Fannie Mae and Freddie Mac, which specialized in conventional, conforming, non-subprime mortgages) declined and private securitizers share grew, rising to more than half of mortgage securitizations.[6]

Historically less than 2% of homebuyers lost their homes to foreclosure. But by 2009 over 40% of subprime adjustable rate mortgages were past due. (source: Financial Crisis Inquiry Report, p.217, figure 11.2)

Subprime mortgages grew from 5% of total originations ($35 billion) in 1994,[94][94][95] to 20% ($600 billion) in 2006.[95][96][97] Another indicator of a “classic” boom-bust credit cycle, was a closing in the difference between subprime and prime mortgage interest rates (the “subprime markup”) between 2001 and 2007.[98]

In addition to considering higher-risk borrowers, lenders had offered progressively riskier loan options and borrowing incentives. In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever.[99] By comparison, China has down payment requirements that exceed 20%, with higher amounts for non-primary residences.[100]


Growth in mortgage loan fraud based upon US Department of the Treasury Suspicious Activity Report Analysis

To produce more mortgages and more securities, mortgage qualification guidelines became progressively looser. First, “stated income, verified assets” (SIVA) loans replaced proof of income with a “statement” of it. Then, “no income, verified assets” (NIVA) loans eliminated proof of employment requirements. Borrowers needed only to show proof of money in their bank accounts. “No Income, No Assets” (NINA) or Ninja loans eliminated the need to prove, or even to state any owned assets. All that was required for a mortgage was a credit score.[101]

Types of mortgages became more risky as well. The interest-only adjustable-rate mortgage (ARM), allowed the homeowner to pay only the interest (not principal) of the mortgage during an initial “teaser” period. Even looser was the “payment option” loan, in which the homeowner has the option to make monthly payment that do not even cover the interest for the first two or three year initial period of the loan. Nearly one in 10 mortgage borrowers in 2005 and 2006 took out these “option ARM” loans,[69] and an estimated one-third of ARMs originated between 2004 and 2006 had “teaser” rates below 4%. After the initial period, monthly payments might double[95] or even triple.[102]

The proportion of subprime ARM loans made to people with credit scores high enough to qualify for conventional mortgages with better terms increased from 41% in 2000 to 61% by 2006. In addition, mortgage brokers in some cases received incentives from lenders to offer subprime ARM’s even to those with credit ratings that merited a conforming (i.e., non-subprime) loan.[103]

Mortgage underwriting standards declined precipitously during the boom period. The use of automated loan approvals allowed loans to be made without appropriate review and documentation.[104] In 2007, 40% of all subprime loans resulted from automated underwriting.[105][106] The chairman of the Mortgage Bankers Association claimed that mortgage brokers, while profiting from the home loan boom, did not do enough to examine whether borrowers could repay.[107] Mortgage fraud by lenders and borrowers increased enormously.[108]

The Financial Crisis Inquiry Commission reported in January 2011 that many mortgage lenders took eager borrowers’ qualifications on faith, often with a “willful disregard” for a borrower’s ability to pay. Nearly 25% of all mortgages made in the first half of 2005 were “interest-only” loans. During the same year, 68% of “option ARM” loans originated by Countrywide Financial and Washington Mutual had low- or no-documentation requirements.[69]

At least one study has suggested that the decline in standards was driven by a shift of mortgage securitization from a tightly controlled duopoly to a competitive market in which mortgage originators held the most sway.[6] The worst mortgage vintage years coincided with the periods during which Government Sponsored Enterprises (specifically Fannie Mae and Freddie Mac) were at their weakest, and mortgage originators and private label securitizers were at their strongest.[6]

Why was there a market for these low quality private label securitizations? In a Peabody Award winning program, NPR correspondents argued that a “Giant Pool of Money” (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) and collateralized debt obligation(CDO), which were assigned safe ratings by the credit rating agencies.

In effect, Wall Street connected this pool of money to the mortgage market in the U.S., with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted. However, continued strong demand for MBS and CDO began to drive down lending standards, as long as mortgages could still be sold along the supply chain. Eventually, this speculative bubble proved unsustainable. NPR described it this way:[109]

Number of U.S. residential properties subject to foreclosure actions by quarter (2007–2012).



Subprime borrowers typically have weakened credit histories and reduced repayment capacity.  Subprime loans have a higher risk of default than loans to prime borrowers.[110] If a borrower is delinquent in making timely mortgage payments to the loan servicer (a bank or other financial firm), the lender may take possession of the property, in a process called foreclosure.

The value of American subprime mortgages was estimated at $1.3 trillion as of March 2007,[111] with over 7.5 million first-lien subprime mortgages outstanding.[112]Between 2004 and 2006 the share of subprime mortgages relative to total originations ranged from 18%–21%, versus less than 10% in 2001–2003 and during 2007.[113][114] The majority of subprime loans were issued in California.[115] The boom in mortgage lending, including subprime lending, was also driven by a fast expansion of non-bank independent mortgage originators which despite their smaller share (around 25 percent in 2002) in the market have contributed to around 50 percent of the increase in mortgage credit between 2003 and 2005.[116] In the third quarter of 2007, subprime ARMs making up only 6.9% of US mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter.[117]

By October 2007, approximately 16% of subprime adjustable-rate mortgages (ARM) were either 90-days delinquent or the lender had begun foreclosureproceedings, roughly triple the rate of 2005.[118] By January 2008, the delinquency rate had risen to 21%[119] and by May 2008 it was 25%.[120]

According to RealtyTrac, the value of all outstanding residential mortgages, owed by U.S. households to purchase residences housing at most four families, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008.[121] During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006.[122] This increased to 2.3 million in 2008, an 81% increase vs. 2007,[123] and again to 2.8 million in 2009, a 21% increase vs. 2008.[124]

By August 2008, 9.2% of all U.S. mortgages outstanding were either delinquent or in foreclosure.[125] By September 2009, this had risen to 14.4%.[126] Between August 2007 and October 2008, 936,439 US residences completed foreclosure.[127] Foreclosures are concentrated in particular states both in terms of the number and rate of foreclosure filings.[128] Ten states accounted for 74% of the foreclosure filings during 2008; the top two (California and Florida) represented 41%. Nine states were above the national foreclosure rate average of 1.84% of households.[129]



“The FBI defines mortgage fraud as ‘the intentional misstatement, misrepresentation, or omission by an applicant or other interest parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan.'”[130] In 2004, the Federal Bureau of Investigation warned of an “epidemic” in mortgage fraud, an important credit risk of nonprime mortgage lending, which, they said, could lead to “a problem that could have as much impact as the S&L crisis”.[131][132][133][134] Despite this, the Bush administration prevented states from investigating and prosecuting predatory lenders by invoking a banking law from 1863 “to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative.”[135]

The Financial Crisis Inquiry Commission reported in January 2011 that: “… mortgage fraud… flourished in an environment of collapsing lending standards and lax regulation. The number of suspicious activity reports – reports of possible financial crimes filed by depository banks and their affiliates – related to mortgage fraud grew 20-fold between 1996 and 2005 and then more than doubled again between 2005 and 2009. One study places the losses resulting from fraud on mortgage loans made between 2005 and 2007 at $112 billion.

Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process.”Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities.”[69]

Comparison of the growth of traditional banking and shadow banking[136]



The Financial Crisis Inquiry Commission reported in January 2011:

In a June 2008 speech, President of the NY Federal Reserve Bank Timothy Geithner, who later became Secretary of the Treasury, placed significant blame for the freezing of credit markets on a “run” on the entities in the “parallel” banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls as depository banks. Further, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices.[26]

Repo and other forms of shadow banking accounted for an estimated 60% of the “overall US banking system,” according to Paul Krugman,.[137] Geithner described its “entities”:

He stated that the “combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles.”[26] Nobel laureate economist Paul Krugman described the run on the shadow banking system as the “core of what happened” to cause the crisis.

He referred to this lack of controls as “malign neglect.”[138][139]

The securitization markets supported by the shadow banking system started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds.[140] According to the Brookings Institution, the traditional banking system does not have the capital to close this gap as of June 2009: “It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume.” The authors also indicate that some forms of securitization are “likely to vanish forever, having been an artifact of excessively loose credit conditions.”[141]

Economist Gary Gorton wrote in May 2009:

Fed Chair Ben Bernanke stated in an interview with the FCIC during 2009 that 12 of the 13 largest U.S. financial institutions were at risk of failure during 2008. The FCIC report did not identify which of the 13 firms was not considered by Bernanke to be in danger of failure.[142]

Economist Mark Zandi testified to the Financial Crisis Inquiry Commission in January 2010:

The Economist reported in March 2010: “Bear Stearns and Lehman Brothers were non-banks that were crippled by a silent run among panicky overnight “repo” lenders, many of them money market funds uncertain about the quality of securitized collateral they were holding. Mass redemptions from these funds after Lehman’s failure froze short-term funding for big firms.”[144]

Borrowing under a securitization structure.

IMF diagram of CDO and RMBS.


Securitization – the bundling of bank loans to create tradeable bonds – started in the mortgage industry in the 1970s, when Government Sponsored Enterprises (GSEs) began to pool relatively safe, conventional, “conforming” or “prime” mortgages, create “mortgage-backed securities” (MBS) from the pool, sell them to investors, guaranteeing these securities/bonds against default on the underlying mortgages.[6][145] This “originate-to-distribute” model had advantages over the old “originate-to-hold” model,[146] where a bank originated a loan to the borrower/homeowner and retained the credit (default) risk. Securitization removed the loans from a bank’s books, enabling the bank to remain in compliance with capital requirement laws. More loans could be made with proceeds of the MBS sale. The liquidity of a national and even international mortgage market allowed capital to flow where mortgages were in demand and funding short. However, securitization created a moral hazard – the bank/institution making the loan no longer had to worry if the mortgage was paid off[147] – giving them incentive to process mortgage transactions but not to ensure their credit quality.[148][149] Bankers were no longer around to work out borrower problems and minimize defaults during the course of the mortgage.[150]

With the high down payments and credit scores of the conforming mortgages used by GSE, this danger was minimal.[151] Investment banks however, wanted to enter the market and avoid competing with the GSEs.[147] They did so by developing mortgage-backed securities in the riskier non-conforming subprime and Alt-Amarket. Unlike the GSEs[152] the issuers generally did not guarantee the securities against default of the underlying mortgages.[6]

What these “private label” or “non-agency” originators did do was to use “structured finance” to create securities. Structuring involved “slicing” the pooled mortgages into “tranches”, each having a different priority in the stream of monthly or quarterly principal and interest stream.[153][154] Tranches were compared to “buckets” catching the “water” of principal and interest. More senior buckets didn’t share water with those below until they were filled to the brim and overflowing.[155] This gave the top buckets/tranches considerable creditworthiness (in theory) that would earn the highest “triple A” credit ratings, making them salable to money market and pension funds that would not otherwise deal with subprime mortgage securities.

To use up the MBS tranches lower in payback priority that could not be rated triple-A and that a conservative fixed income market would not buy, investment banks developed another security – known as the collateralized debt obligation (CDO). Although the CDO market was smaller, it was crucial because unless buyers were found for the non-triple-A or “mezzanine” tranches, it would not be profitable to make a mortgage-backed security in the first place.[156][157] These CDOs pooled the leftover BBB, A-, etc. rated tranches, and produced new tranches – 70%[158] to 80%[159] of which were rated triple A by rating agencies. The 20–30% remaining mezzanine tranches were sometimes bought up by other CDOs, to make so-called “CDO-Squared” securities which also produced tranches rated mostly triple A.[160]

This process was later disparaged as “ratings laundering”[161] or a way of transforming “dross into gold”[162] by some business journalists, but was justified at the time by the belief that home prices would always rise.[163][164] The model used by underwriters, rating agencies and investors to estimate the probability of mortgage default was based on the history of credit default swaps, which unfortunately went back “less than a decade, a period when house prices soared”.[165]

In addition the model – which postulated that the correlation of default risks among loans in securitization pools could be measure in a simple, stable, tractable number, suitable for risk management or valuation[165] – also purported to show that the mortgages in CDO pools were well diversified or “uncorrelated”. Defaults on mortgages in Orlando, for example, were thought to have no effect on – i.e. were uncorrelated with – the real estate market across the country in Laguna Beach. When prices corrected (i.e. the bubble collapsed), the resulting defaults were not only larger in number than predicted but far more correlated.[165]

Still another innovative security criticized after the bubble burst was the synthetic CDO. Cheaper and easier to create than original “cash” CDOs, synthetics did not provide funding for housing, rather synthetic CDO-buying investors were in effect providing insurance (in the form of “credit default swaps“) against mortgage default. The mortgages they insured were those in “cash” CDOs the synthetics “referenced”. So instead of providing investors with interest and principal payments from MBS tranches, payments were the equivalent of insurance premiums from the insurance “buyers”.[166] If the referenced CDOs defaulted, investors lost their investment, which was paid out to the insurance buyers.[167]

Unlike true insurance, credit default swaps were not regulated to insure that providers had the reserves to pay settlements, or that buyers owned the property (MBSs) they were insuring, i.e. were not simply making a bet a security would default.[168] Because synthetics “referenced” another (cash) CDO, more than one – in fact numerous – synthetics could be made to reference the same original, multiplying the effect if a referenced security defaulted.[169][170] As with MBS and other CDOs, triple A ratings for “large chunks”[171] of synthetics were crucial to the securities’ success, because of the buyer/investors’ ignorance of the mortgage security market and trust in the credit rating agencies ratings.[172]

Securitization began to take off in the mid-1990s. The total amount of mortgage-backed securities issued almost tripled between 1996 and 2007, to $7.3 trillion. The securitized share of subprime mortgages (i.e., those passed to third-party investors via MBS) increased from 54% in 2001, to 75% in 2006.[98] In the mid-2000s as the housing market was peaking, GSE securitization market share declined dramatically, while higher-risk subprime and Alt-A mortgage private label securitization grew sharply.[6] As mortgage defaults began to rise, it was among mortgages securitized by the private banks. GSE mortgages – securitized or not – continued to perform better than the rest of the market.[6][173] Picking up the slack for the dwindling cash CDO market[174] synthetics were the dominant form of CDO’s by 2006,[175] valued “notionally[176] at an estimated $5 trillion.[175]

By the autumn of 2008, when the securitization market “seized up” and investors would “no longer lend at any price”, securitized lending made up about $10 trillion of the roughly $25 trillion American credit market, (i.e. what “American homeowners, consumers, and corporations owed”).[140][141] In February 2009, Ben Bernanke stated that securitization markets remained effectively shut, with the exception of conforming mortgages, which could be sold to Fannie Mae and Freddie Mac.[177]

According to economist A. Michael Spence: “when formerly uncorrelated risks shift and become highly correlated … diversification models fail.” “An important challenge going forward is to better understand these dynamics as the analytical underpinning of an early warning system with respect to financial instability.”[178]

Criticizing the argument that complex structured investment securitization was instrumental in the mortgage crisis, Paul Krugman points out that the Wall Street firms issuing the securities “kept the riskiest assets on their own books”, and that neither of the equally disastrous bubbles in European housing or US commercial property used complex structured securities. Krugman does agree that it is “arguable is that financial innovation … spread the bust to financial institutions around the world” and its inherent fragmentation of loans has made post-bubble “cleanup” through debt renegotiation extremely difficult.[137]

Leverage ratios of investment banks increased significantly between 2003 and 2007.

The Financial Crisis Inquiry Commission reported in January 2011 that: “From 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product. The very nature of many Wall Street firms changed – from relatively staid private partnerships to publicly traded corporations taking greater and more diverse kinds of risks. By 2005, the 10 largest U.S. commercial banks held 55% of the industry’s assets, more than double the level held in 1990. On the eve of the crisis in 2006, financial sector profits constituted 27% of all corporate profits in the United States, up from 15% in 1980.”[69]

Many financial institutions, investment banks in particular, issued large amounts of debt during 2004–07, and invested the proceeds in mortgage-backed securities(MBS), essentially betting that house prices would continue to rise, and that households would continue to make their mortgage payments. Borrowing at a lower interest rate and investing the proceeds at a higher interest rate is a form of financial leverage. This is analogous to an individual taking out a second mortgage on his residence to invest in the stock market. This strategy proved profitable during the housing boom, but resulted in large losses when house prices began to decline and mortgages began to default. Beginning in 2007, financial institutions and individual investors holding MBS also suffered significant losses from mortgage payment defaults and the resulting decline in the value of MBS.[179]

A 2004 U.S. Securities and Exchange Commission (SEC) decision related to the net capital rule allowed US investment banks to issue substantially more debt, which was then used to purchase MBS. Over 2004–07, the top five US investment banks each significantly increased their financial leverage (see diagram), which increased their vulnerability to the declining value of MBSs. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of US nominal GDP for 2007. Further, the percentage of subprime mortgages originated to total originations increased from below 10% in 2001–03 to between 18–20% from 2004 to 2006, due in-part to financing from investment banks.[113][114]

During 2008, three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch). These failures augmented the instability in the global financial system. The remaining two investment banks, Morgan Stanley and Goldman Sachs, opted to become commercial banks, thereby subjecting themselves to more stringent regulation.[180][181]

In the years leading up to the crisis, the top four U.S. depository banks moved an estimated $5.2 trillion in assets and liabilities off-balance sheet into special purpose vehicles or other entities in the shadow banking system. This enabled them to essentially bypass existing regulations regarding minimum capital ratios, thereby increasing leverage and profits during the boom but increasing losses during the crisis. New accounting guidance will require them to put some of these assets back onto their books during 2009, which will significantly reduce their capital ratios. One news agency estimated this amount to be between $500 billion and $1 trillion. This effect was considered as part of the stress tests performed by the government during 2009.[182]

Martin Wolf wrote in June 2009: “…an enormous part of what banks did in the early part of this decade – the off-balance-sheet vehicles, the derivatives and the ‘shadow banking system’ itself – was to find a way round regulation.”[183]

The New York State Comptroller’s Office has said that in 2006, Wall Street executives took home bonuses totaling $23.9 billion. “Wall Street traders were thinking of the bonus at the end of the year, not the long-term health of their firm. The whole system – from mortgage brokers to Wall Street risk managers – seemed tilted toward taking short-term risks while ignoring long-term obligations. The most damning evidence is that most of the people at the top of the banks didn’t really understand how those [investments] worked.”[59][184]

The incentive compensation of traders was focused on fees generated from assembling financial products, rather than the performance of those products and profits generated over time. Their bonuses were heavily skewed towards cash rather than stock and not subject to “claw-back” (recovery of the bonus from the employee by the firm) in the event the MBS or CDO created did not perform. In addition, the increased risk (in the form of financial leverage) taken by the major investment banks was not adequately factored into the compensation of senior executives.[185]


Credit default swaps (CDS) are financial instruments used as a hedge and protection for debtholders, in particular MBS investors, from the risk of default, or by speculators to profit from default. As the net worth of banks and other financial institutions deteriorated because of losses related to subprime mortgages, the likelihood increased that those providing the protection would have to pay their counterparties. This created uncertainty across the system, as investors wondered which companies would be required to pay to cover mortgage defaults.

Like all swaps and other financial derivatives, CDS may either be used to hedge risks (specifically, to insure creditors against default) or to profit from speculation. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion[citation needed]. CDS are lightly regulated, largely because of the Commodity Futures Modernization Act of 2000. As of 2008, there was no central clearing house to honor CDS in the event a party to a CDS proved unable to perform his obligations under the CDS contract. Required disclosure of CDS-related obligations has been criticized as inadequate. Insurance companies such as American International Group (AIG), MBIA, and Ambac faced ratings downgrades because widespread mortgage defaults increased their potential exposure to CDS losses. These firms had to obtain additional funds (capital) to offset this exposure. AIG’s having CDSs insuring $440 billion of MBS resulted in its seeking and obtaining a Federal government bailout.[186] The monoline insurance companies went out of business in 2008–2009.

When investment bank Lehman Brothers went bankrupt in September 2008, there was much uncertainty as to which financial firms would be required to honor the CDS contracts on its $600 billion of bonds outstanding.[187][188]Merrill Lynch‘s large losses in 2008 were attributed in part to the drop in value of its unhedged portfolio of collateralized debt obligations (CDOs) after AIG ceased offering CDS on Merrill’s CDOs. The loss of confidence of trading partners in Merrill Lynch’s solvency and its ability to refinance its short-term debt led to its acquisition by the Bank of America.[189][190]

Economist Joseph Stiglitz summarized how credit default swaps contributed to the systemic meltdown: “With this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else-or even of one’s own position. Not surprisingly, the credit markets froze.”[191]

Author Michael Lewis wrote that CDS enabled speculators to stack bets on the same mortgage bonds and CDO’s. This is analogous to allowing many persons to buy insurance on the same house. Speculators that bought CDS insurance were betting that significant defaults would occur, while the sellers (such as AIG) bet they would not. A theoretically infinite amount could be wagered on the same housing-related securities, provided buyers and sellers of the CDS could be found.[192]

Derivatives such as CDS were unregulated or barely regulated. Several sources have noted the failure of the US government to supervise or even require transparency of the financial instruments known as derivatives.[193][194][195] A 2008 investigative article in the Washington Post found that leading government officials at the time (Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SECChairman Arthur Levitt) vehemently opposed any regulation of derivatives. In 1998 Brooksley E. Born, head of the Commodity Futures Trading Commission, put forth a policy paper asking for feedback from regulators, lobbyists, legislators on the question of whether derivatives should be reported, sold through a central facility, or whether capital requirements should be required of their buyers. Greenspan, Rubin, and Levitt pressured her to withdraw the paper and Greenspan persuaded Congress to pass a resolution preventing CFTC from regulating derivatives for another six months – when Born’s term of office would expire.[194] Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crisis of 2008.[195]

In addition, Chicago Public Radio, Huffington Post, and ProPublica reported in April 2010 that market participants, including a hedge fund called Magnetar Capital, encouraged the creation of CDO’s containing low quality mortgages, so they could bet against them using CDS. NPR reported that Magnetar encouraged investors to purchase CDO’s while simultaneously betting against them, without disclosing the latter bet.[170][196][197] Instruments called synthetic CDO, which are portfolios of credit default swaps, were also involved in allegations by the SEC against Goldman-Sachs in April 2010.[198]

The Financial Crisis Inquiry Commission reported in January 2011 that CDS contributed significantly to the crisis. Companies were able to sell protection to investors against the default of mortgage-backed securities, helping to launch and expand the market for new, complex instruments such as CDO’s. This further fueled the housing bubble. They also amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities and helped spread these bets throughout the financial system. Companies selling protection, such as AIG, were not required to set aside sufficient capital to cover their obligations when significant defaults occurred. Because many CDS were not traded on exchanges, the obligations of key financial institutions became hard to measure, creating uncertainty in the financial system.[69]

MBS credit rating downgrades, by quarter


Credit rating agencies – firms which rate debt instruments/securities according to the debtor’s ability to pay lenders back – have come under scrutiny during and after the financial crisis for having given investment-grade ratings to MBSs and CDOs based on risky subprime mortgage loans that later defaulted. Dozens of lawsuits have been filed by investors against the “Big Three” rating agencies – Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings.[199] The Financial Crisis Inquiry Commission (FCIC)[200] concluded the “failures” of the Big Three rating agencies were “essential cogs in the wheel of financial destruction” and “key enablers of the financial meltdown”.[201] Economist Joseph Stiglitz called them “one of the key culprits” of the financial crisis.[202] Others called their ratings “catastrophically misleading”, (the U.S. Securities and Exchange Commissioner[203]), their performance “horrendous” (The Economist magazine[204]). There are indications that some involved in rating subprime-related securities knew at the time that the rating process was faulty.[205][206]

The position of the three agencies “between the issuers and the investors of securities”[207] “transformed” them into “key” players in the housing bubble and financial crisis according to the Financial Crisis Inquiry Report. Most investors in the fixed income market had no experience with the mortgage business – let alone dealing with the complexity of pools of mortgages and tranche priority of MBS and CDO securities[207] – and were simply looking for an independent party who could rate securities.[208] The putatively independent parties meanwhile were paid “handsome fees” by investment banks “to obtain the desired ratings”, according to one expert.[208]

In addition, a large section of the debt securities market – many money markets and pension funds – were restricted in their bylaws to holding only the safest securities – i.e securities the rating agencies designated “triple-A”. Hence non-prime securities could not be sold without ratings by (usually two of) the three agencies.[209]

From 2000 to 2007, one of the largest agencies – Moody’s – rated nearly 45,000 mortgage-related securities[210] – more than half of those it rated – as triple-A.[211] By December 2008, there were over $11 trillion structured finance securities outstanding in the U.S. bond market debt.[210] But as the boom matured, mortgage underwriting standards deteriorated. By 2007 an estimated $3.2 trillion in loans were made to homebuyers and owners with bad credit and undocumented incomes, bundled into MBSs and CDOs, and given top ratings[212] to appeal to global investors.

As these mortgages began to default, the three agencies were compelled to go back and redo their ratings. Between autumn of 2007 and the middle of 2008, agencies downgraded nearly $2 trillion in MBS tranches.[213] By the end of 2008, 80% of the CDOs by value[214] rated “triple-A” were downgraded to junk.[215][216] Bank writedowns and losses on these investments totaled $523 billion.[212][217][218]

Critics such as the Financial Crisis Inquiry Commission argue the mistaken credit ratings stemmed from “flawed computer models, the pressure from financial firms that paid for the ratings, the relentless drive for market share, the lack of resources to do the job despite record profits, and the absence of meaningful public oversight”.[69]

Structured investment was very profitable to the agencies and by 2007 accounted for just under half of Moody’s total ratings revenue and all of the revenue growth.[219] But profits were not guaranteed, and issuers played the agencies off one another, ‘shopping’ around to find the best ratings, sometimes openly threatening to cut off business after insufficiently generous ratings.[220] Thus there was a conflict of interest between accommodating clients – for whom higher ratings meant higher earnings – and accurately rating the debt for the benefit of the debt buyer/investors – who provided zero revenue to the agencies.[221]

Despite the profitability of the three big credit agencies – Moody’s operating margins were consistently over 50%, higher than famously successful Exxon Mobil or Microsoft[222] – salaries and bonuses for non-management were significantly lower than at Wall Street banks, and its employees complained of overwork.

This incentivized agency rating analysts to seek employment at those Wall Street banks who were issuing mortgage securities, and who were particularly interested in the analysts’ knowledge of what criteria their former employers used to rate securities.[223][224] Inside knowledge of interest to security issuers eager to find loopholes included the fact that rating agencies looked at the average credit score of a pool of borrowers, but not how dispersed it was; that agencies ignored borrower’s household income or length of credit history (explaining the large numbers of low income immigrants given mortgages—people “who had never failed to repay a debt, because they had never been given a loan”); that agencies were indifferent to credit worthiness issues of adjustable-rate mortgages with low teaser rates, “silent second” mortgages, or no-documentation mortgages.[225]

As of 2010, virtually all of the investigations of rating agencies, criminal as well as civil, are in their early stages.[226] In New York, state prosecutors are examining whether eight banks[227] duped the credit ratings agencies into inflating the grades of subprime-linked investments.[228] In the dozens of suits filed against them by investors involving claims of inaccurate ratings[199] the rating agencies have defended themselves using the First Amendmentdefense—that a credit rating is an opinion protected as free speech.[229] In 2013, McClatchy Newspapers found that “little competition has emerged” since the Credit Rating Agency Reform Act of 2006 was passed “in rating the kinds of complex home-mortgage securities whose implosion led to the 2007 financial crisis”. The Big Three’s market share of outstanding credit rating has barely shrunk, moving from 98% to 97%.[230]

U.S. Subprime lending expanded dramatically 2004–2006.


Government over-regulation, failed regulation and deregulation have all been claimed as causes of the crisis. Increasing home ownership has been the goal of several presidents including Roosevelt, Reagan, Clinton and George W. Bush.[231]

Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.

Alan Greenspan[232]

Several steps were taken to reduce the regulation applied to banking institutions in the years leading up to the crisis. Further, major investment banks which collapsed during the crisis were not subject to the regulations applied to depository banks. In testimony before Congress both the Securities and Exchange Commission (SEC) and Alan Greenspan claimed failure in allowing the self-regulation of investment banks.[233][234]

In 1982, Congress passed the Alternative Mortgage Transactions Parity Act (AMTPA), which allowed non-federally chartered housing creditors to write adjustable-rate mortgages. This bi-partisan legislation was, according to the Urban Institute, intended to “increase the volume of loan products that reduced the up-front costs to borrowers in order to make homeownership more affordable.”[235] Among the new mortgage loan types created and gaining in popularity in the early 1980s were adjustable-rate, option adjustable-rate, balloon-payment and interest-only mortgages. Subsequent widespread abuses of predatory lending occurred with the use of adjustable-rate mortgages.[41][236] Approximately 90% of subprime mortgages issued in 2006 were adjustable-rate mortgages.[4]

The Glass-Steagall Act was enacted after the Great Depression. It separated commercial banks and investment banks, in part to avoid potential conflicts of interest between the lending activities of the former and rating activities of the latter. In 1999 Glass-Steagall was repealed by the Gramm-Leach-Bliley Act. Economist Joseph Stiglitz criticized the repeal of Glass Steagall because, in his opinion, it enabled the risk-taking culture of investment banking to dominate the more conservative commercial banking culture, leading to increased levels of risk-taking and leverage during the boom period.[237] President Bill Clinton, who signed the legislation, dismissed its connection to the subprime mortgage crisis, stating (in 2008): “I don’t see that signing that bill had anything to do with the current crisis.”[238]

The Commodity Futures Modernization Act of 2000 was bi-partisan legislation that formally exempted derivatives from regulation, supervision, trading on established exchanges, and capital reserve requirements for major participants. It “provided a legal safe harbor for treatment already in effect.”[239] Concerns that counterparties to derivative deals would be unable to pay their obligations caused pervasive uncertainty during the crisis. Particularly relevant to the crisis are credit default swaps (CDS), a derivative in which Party A pays Party B what is essentially an insurance premium, in exchange for payment should Party C default on its obligations. Warren Buffett famously referred to derivatives as “financial weapons of mass destruction” in early 2003.[240][241]

Former Fed Chair Alan Greenspan, who many economists blamed for the financial crisis, testified in October 2008 that he had trusted free markets to self-correct and had not anticipated the risk of reduced lending standards.”Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”[232]

Some analysts believe the subprime mortgage crisis was due, in part, to a 2004 decision of the SEC that affected 5 large investment banks. The critics believe that changes in the capital reserve calculation rules enabled investment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities supporting subprime mortgages. These banks dramatically increased their risk taking from 2003 to 2007. By the end of 2007, the largest five U.S. investment banks had over $4 trillion in debt with high ratios of debt to equity, meaning only a small decline in the value of their assets would render them insolvent.[242][243]However, in an April 9, 2009 speech, Erik Sirri, then Director of the SEC’s Division of Trading and Markets, argued that the regulatory weaknesses in leverage restrictions originated in the late 1970s: “The Commission did not undo any leverage restrictions in 2004,” nor did it intend to make a substantial reduction.[244]

Several administrations, both Democratic and Republican, advocated affordable housing policies in the years leading up to the crisis. The Housing and Community Development Act of 1992 established, for the first time, an affordable housing loan purchase mandate for Fannie Mae and Freddie Mac, a mandate to be regulated by the Department of Housing and Urban Development (HUD). Initially, the 1992 legislation required that 30 percent or more of Fannie’s and Freddie’s loan purchases be related to affordable housing. However, HUD was given the power to set future requirements. During the later part of the Clinton Administration, HUD Secretary Andrew Cuomoannounced “new regulations to provide $2.4 trillion in mortgages for affordable housing for 28.1 million families, which increased the required percentage of mortgage loans for low- and moderate-income families that finance companies Fannie Mae and Freddie Mac must buy annually from the then current 42 percent of their total purchases to a new high of 50 percent.[245] Eventually (under the Bush Administration) a 56 percent minimum was established.[246] Additionally, in 2003, “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”.[247]

“The National Homeownership Strategy: Partners in the American Dream”, was compiled in 1995 by Henry Cisneros, President Clinton’s HUD Secretary. This 100-page document represented the viewpoints of HUD, Fannie Mae, Freddie Mac, leaders of the housing industry, various banks, numerous activist organizations such as ACORN and La Raza, and representatives from several state and local governments.”[248] In 2001, the independent research company, Graham Fisher & Company, stated: “While the underlying initiatives of the [strategy] were broad in content, the main theme … was the relaxation of credit standards.”[249]

“Members of the Right tried to blame the seeming market failures on government; in their mind the government effort to push people with low incomes into home ownership was the source of the problem. Widespread as this belief has become in conservative circles, virtually all serious attempts to evaluate the evidence have concluded that there is little merit in this view.”

Joseph Stiglitz[250]

The Financial Crisis Inquiry Commission (majority report), Federal Reserve economists, and several academic researchers have stated that government affordable housing policies were not the major cause of the financial crisis.[6][116] They also state that Community Reinvestment Act loans outperformed other “subprime” mortgages, and GSE mortgages performed better than private label securitizations.


The Community Reinvestment Act (CRA) was originally enacted under President Jimmy Carter in 1977 in an effort to encourage banks to halt the practice of lending discrimination. In 1995 the Clinton Administration issued regulations that added numerical guidelines, urged lending flexibility, and instructed bank examiners to evaluate a bank’s responsiveness to community activists (such as ACORN) when deciding whether to approve bank merger or expansion requests.[251] Critics claim that the 1995 changes to CRA signaled to banks that relaxed lending standards were appropriate and could minimize potential risk of governmental sanctions.

Conservatives and libertarians have debated the possible effects of the CRA, with detractors claiming that the Act encouraged lending to uncreditworthy borrowers,[252][253][254][255] and defenders claiming a thirty-year history of lending without increased risk.[256][257][258][259] Detractors also claim that amendments to the CRA in the mid-1990s, raised the amount of mortgages issued to otherwise unqualified low-income borrowers, and allowed the securitization of CRA-regulated mortgages, even though a fair number of them were subprime.[260][261]

In its “Conclusions” submitted January 2011, the Financial Crisis Inquiry Commission reported that

Critics claim that the use of the high-interest-rate proxy distorts results because government programs generally promote low-interest rate loans—even when the loans are to borrowers who are clearly subprime.[262] However, several economists maintain that Community Reinvestment Act loans outperformed other “subprime” mortgages, and GSE mortgages performed better than private label securitizations.[6][116]

However, economists at the National Bureau of Economic Research concluded that banks undergoing CRA-related regulatory exams took additional mortgage lending risk. The authors of a study entitled “Did the Community Reinvestment Act Lead to Risky Lending?” compared “the lending behavior of banks undergoing CRA exams within a given census tract in a given month (the treatment group) to the behavior of banks operating in the same census tract-month that did not face these exams (the control group). This comparison clearly indicates that adherence to the CRA led to riskier lending by banks.” They concluded: “The evidence shows that around CRA examinations, when incentives to conform to CRA standards are particularly high, banks not only increase lending rates but also appear to originate loans that are markedly riskier.” Loan delinquency averaged 15% higher in the treatment group than the control group one year after mortgage origination.[263]

As part of the 1995 National Homeownership Strategy, HUD advocated greater involvement of state and local organizations in the promotion of affordable housing.[264] In addition, it promoted the use of low or no-down payment loans and second, unsecured loans to the borrower to pay their down payments (if any) and closing costs.[265] This idea manifested itself in “silent second” loans that became extremely popular in several states such as California, and in scores of cities such as San Francisco.[266] Using federal funds and their own funds, these states and cities offered borrowers loans that would defray the cost of the down payment. The loans were called “silent” because the primary lender was not supposed to know about them. A Neighborhood Reinvestment Corporation (affiliated with HUD) publicity sheet explicitly described the desired secrecy: “[The NRC affiliates] hold the second mortgages. Instead of going to the family, the monthly voucher is paid to [the NRC affiliates]. In this way the voucher is “invisible” to the traditional lender and the family (emphasis added)[267]

Franklin Raines earned $90 million in salary and bonuses while he was head of Fannie Mae.[268]


Fannie Mae and Freddie Mac are government sponsored enterprises (GSE) that purchase mortgages, buy and sell mortgage-backed securities (MBS), and guarantee nearly half of the mortgages in the U.S. A variety of political and competitive pressures resulted in the GSEs ramping up their purchase and guarantee of risky mortgages in 2005 and 2006, just as the housing market was peaking.[269][270] Fannie and Freddie were both under political pressure to expand purchases of higher-risk affordable housing mortgage types, and under significant competitive pressure from large investment banks and mortgage lenders.[271]

Nine of the ten members of the Financial Crisis Inquiry Commission reported in 2011 that Fannie and Freddie “contributed to the crisis, but were not a primary cause”,[272] or that since “credit spreads declined not just for housing, but also for other asset classes like commercial real estate … problems with U.S. housing policy or markets [could] not by themselves explain the U.S. housing bubble.”[273] According to the Commission, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis. The GSEs participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders into subprime lending.[69]

Several studies by the Government Accountability Office (GAO), Harvard Joint Center for Housing Studies, the Federal Housing Finance Agency, and several academic institutions summarized by economist Mike Konczal of the Roosevelt Institute, indicate Fannie and Freddie were not to blame for the crisis.[274] A 2011 statistical comparisons of regions of the US which were subject to GSE regulations with regions that were not, done by the Federal Reserve, found that GSEs played no significant role in the subprime crisis.[275] In 2008, David Goldstein and Kevin G. Hall reported that more than 84 percent of the subprime mortgages came from private lending institutions in 2006, and the share of subprime loans insured by Fannie Mae and Freddie Mac decreased as the bubble got bigger (from a high of insuring 48 percent to insuring 24 percent of all subprime loans in 2006).[276] In 2008, another source found estimates by some analysts that Fannie’s share of the subprime mortgage-backed securities market dropped from a peak of 44% in 2003 to 22% in 2005, before rising to 33% in 2007.[271]

Whether GSEs played a small role in the crisis because they were legally barred from engaging in subprime lending is disputed.[277] Economist Russell Roberts[278] cites a June 2008 Washington Post article which stated that “[f]rom 2004 to 2006, the two [GSEs] purchased $434 billion in securities backed by subprime loans, creating a market for more such lending.”[279] Furthermore, a 2004 HUD report admitted that while trading securities that were backed by subprime mortgages was something that the GSEs officially disavowed, they nevertheless participated in the market.[280]

Insofar as Fannie and Freddie did purchase substandard loans, some analysts question whether government mandates for affordable housing were the motivation. In December 2011 the Securities and Exchange Commissioncharged the former Fannie Mae and Freddie Mac executives, accusing them of misleading investors about risks of subprime-mortgage loans and about the amount of subprime mortgage loans they held in portfolio.[281]According to one analyst, “The SEC’s facts paint a picture in which it wasn’t high-minded government mandates that did the GSEs wrong, but rather the monomaniacal focus of top management on marketshare. With marketshare came bonuses and with bonuses came risk-taking, understood or not.”[282] However, there is evidence suggesting that governmental housing policies were a motivational factor. Daniel H. Mudd, the former CEO of Fannie Mae, stated: “We were afraid that lenders would be selling products we weren’t buying and Congress would feel like we weren’t fulfilling our mission.” Another senior Fannie Mae executive stated: “Everybody understood that we were now buying loans that we would have previously rejected, and that the models were telling us that we were charging way too little, but our mandate was to stay relevant and to serve low-income borrowers. So that’s what we did.”[283]

In his lone dissent to the majority and minority opinions of the FCIC, Peter J. Wallison of the American Enterprise Institute (AEI) blamed U.S. housing policy, including the actions of Fannie and Freddie, primarily for the crisis, writing: “When the bubble began to deflate in mid-2007, the low quality and high risk loans engendered by government policies failed in unprecedented numbers. The effect of these defaults was exacerbated by the fact that few if any investors – including housing market analysts – understood at the time that Fannie Mae and Freddie Mac had been acquiring large numbers of subprime and other high risk loans in order to meet HUD’s affordable housing goals.” His dissent relied heavily on the research of fellow AEI member Edward Pinto, the former Chief Credit Officer of Fannie Mae. Pinto estimated that by early 2008 there were 27 million higher-risk, “non-traditional” mortgages (defined as subprime and Alt-A) outstanding valued at $4.6 trillion. Of these, Fannie & Freddie held or guaranteed 12 million mortgages valued at $1.8 trillion. Government entities held or guaranteed 19.2 million or $2.7 trillion of such mortgages total.[284]

One counter-argument to Wallison and Pinto’s analysis is that the credit bubble was global and also affected the U.S. commercial real estate market, a scope beyond U.S. government housing policy pressures. The three Republican authors of the dissenting report to the FCIC majority opinion wrote in January 2011: “Credit spreads declined not just for housing, but also for other asset classes like commercial real estate. This tells us to look to the credit bubble as an essential cause of the U.S. housing bubble. It also tells us that problems with U.S. housing policy or markets do not by themselves explain the U.S. housing bubble.”[285] Economist Paul Krugman wrote in January 2010 that Fannie Mae, Freddie Mac, CRA, or predatory lending were not primary causes of the bubble/bust in residential real estate because there was a bubble of similar magnitude in commercial real estate in America.[286]

Countering the analysis of Krugman and members of the FCIC, Peter Wallison argues that the crisis was caused by the bursting of a real estate bubble that was supported largely by low or no-down-payment loans, which was uniquely the case for U.S. residential housing loans. He states: “It is not true that every bubble – even a large bubble – has the potential to cause a financial crisis when it deflates.” As an example, Wallison notes that other developed countries had “large bubbles during the 1997–2007 period” but “the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than the losses suffered in the United States when the 1997–2007 [bubble] deflated.”[287][287]

Other analysis calls into question the validity of comparing the residential loan crisis to the commercial loan crisis. After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): “We find limited evidence that substantial deterioration in CMBS [commercial mortgage-backed securities] loan underwriting occurred prior to the crisis.”[288] Other analysts support the contention that the crisis in commercial real estate and related lending took place after the crisis in residential real estate. Business journalist Kimberly Amadeo wrote “The first signs of decline in residential real estate occurred in 2006. Three years later, commercial real estate started feeling the effects.”[289] Denice A. Gierach, a real estate attorney and CPA, wrote:

A second counter-argument to Wallison’s dissent is that the definition of “non-traditional mortgages” used in Pinto’s analysis overstated the number of risky mortgages in the system by including Alt-A, which was not necessarily high-risk. Krugman explained in July 2011 that the data provided by Pinto significantly overstated the number of subprime loans, citing the work of economist Mike Konczal: “As Konczal says, all of this stuff relies on a form of three-card monte: you talk about ‘subprime and other high-risk’ loans, lumping subprime with other loans that are not, it turns out, anywhere near as risky as actual subprime; then use this essentially fake aggregate to make it seem as if Fannie/Freddie were actually at the core of the problem.”[291]

Federal funds rate and various mortgage rates


Central banks manage monetary policy and may target the rate of inflation. They have some authority over commercial banks and possibly other financial institutions. They are less concerned with avoiding asset price bubbles, such as the housing bubble and dot-com bubble. Central banks have generally chosen to react after such bubbles burst so as to minimize collateral damage to the economy, rather than trying to prevent or stop the bubble itself. This is because identifying an asset bubble and determining the proper monetary policy to deflate it are matters of debate among economists.[292][293]

Some market observers have been concerned that Federal Reserve actions could give rise to moral hazard.[42] A Government Accountability Office critic said that the Federal Reserve Bank of New York‘s rescue of Long-Term Capital Management in 1998 would encourage large financial institutions to believe that the Federal Reserve would intervene on their behalf if risky loans went sour because they were “too big to fail.”[294]

A contributing factor to the rise in house prices was the Federal Reserve’s lowering of interest rates early in the decade. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%.[295] This was done to soften the effects of the collapse of the dot-com bubble and of the September 2001 terrorist attacks, and to combat the perceived risk of deflation.[292]

The Fed believed that interest rates could be lowered safely primarily because the rate of inflation was low; it disregarded other important factors. According to Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas, the Fed’s interest rate policy during the early 2000s (decade) was misguided, because measured inflation in those years was below true inflation, which led to a monetary policy that contributed to the housing bubble.[296]

Ben Bernanke and Alan Greenspan — both former chairmen of the Federal Reserve — disagree, arguing decisions on purchasing a home depends on long-term interest rates on mortgages not the short-term rates controlled by the Fed. According to Greenspan, “between 1971 and 2002, the fed funds rate and the mortgage rate moved in lock-step,” but when the Fed started to raise rates in 2004,[297][298][299] mortgage rates diverged, continuing to fall (or at least rise) for another year (see “Fed Funds Rate & Mortgage Rates” graph). Construction of new homes didn’t peak until January 2006.[300] Bernanke speculates that a world wide “saving glut” pushed capital or savings into the United States, keeping long-term interest rates low and independent of Central Bank action.[301]

Agreeing with Fisher that the low interest rate policy of the Greenspan Fed both allowed and motivated investors to seek out risk investments offering higher returns, is finance economist Raghuram Rajan who argues that the underlying causes of the American economy’s tendency to go “from bubble to bubble” fueled by unsustainable monetary stimulation, are the “weak safety nets” for the unemployed, which made “the US political system … acutely sensitive to job growth”;[302] and attempts to compensate for the stagnant income of the middle and lower classes with easy credit to boost their consumption.[303]

Economist Thomas Sowell wrote that the Fed’s decision to steadily raise interest rates was a key factor that ended the housing bubble. The Fed raised rates from the unusually low level of one percent in 2004 to a more typical 5.25% in 2006. By driving mortgage rates higher, the Fed “made monthly mortgage payments more expensive and therefore reduced the demand for housing.” He referred to the Fed action as the “nudge” that collapsed the “house of cards” created by lax lending standards, affordable housing policies, and the preceding period of low interest rates.[52]


Former Federal Deposit Insurance Corporation Chair William Isaac placed much of the blame for the subprime mortgage crisis on the Securities and Exchange Commission and its fair-value accounting rules, especially the requirement for banks to mark their assets to market, particularly mortgage-backed securities.[304] Whether or not this is true has been the subject of ongoing debate.[305][306]

The debate arises because this accounting rule requires companies to adjust the value of marketable securities (such as the mortgage-backed securities (MBS) at the center of the crisis) to their market value. The intent of the standard is to help investors understand the value of these assets at a point in time, rather than just their historical purchase price. Because the market for these assets is distressed, it is difficult to sell many MBS at other than prices which may (or may not) be reflective of market stresses, which may be below the value that the mortgage cash flow related to the MBS would merit. As initially interpreted by companies and their auditors, the typically lower sale value was used as the market value rather than the cash flow value. Many large financial institutions recognized significant losses during 2007 and 2008 as a result of marking-down MBS asset prices to market value.


U.S. current account or trade deficit through 2012

In 2005, Ben Bernanke addressed the implications of the United States’s high and rising current account deficit, resulting from U.S. investment exceeding its savings, or imports exceeding exports.[307] Between 1996 and 2004, the U.S. current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. The U.S. attracted a great deal of foreign investment, mainly from the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the U.S.) running a current account deficit also have a capital account (investment) surplus of the same amount. Foreign investors had these funds to lend, either because they had very high personal savings rates (as high as 40% in China), or because of high oil prices.

Bernanke referred to this as a “saving glut[301] that may have pushed capital into the United States, a view differing from that of some other economists, who view such capital as having been pulled into the U.S. by its high consumption levels. In other words, a nation cannot consume more than its income unless it sells assets to foreigners, or foreigners are willing to lend to it. Alternatively, if a nation wishes to increase domestic investment in plant and equipment, it will also increase its level of imports to maintain balance if it has a floating exchange rate.

Regardless of the push or pull view, a “flood” of funds (capital or liquidity) reached the U.S. financial market. Foreign governments supplied funds by purchasing U.S. Treasury bonds and thus avoided much of the direct impact of the crisis. American households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities. American housing and financial assets dramatically declined in value after the housing bubble burst.[308][309]

Economist Joseph Stiglitz wrote in October 2011 that the recession and high unemployment of the 2009–2011 period was years in the making and driven by: unsustainable consumption; high manufacturing productivity outpacing demand thereby increasing unemployment; income inequality that shifted income from those who tended to spend it (i.e., the middle class) to those who do not (i.e., the wealthy); and emerging market’s buildup of reserves (to the tune of $7.6 trillion by 2011) which was not spent. These factors all led to a “massive” shortfall in aggregate demand, which was “papered over” by demand related to the housing bubble until it burst.[310]

Securitization markets were impaired during the crisis.


Financial market stresses became apparent during 2007 that resulted in sizable losses across the financial system, the bankruptcy of over 100 mortgage lenders and the emergency sale of investment bank Bear Stearns in March 2008 to depository bank JP Morgan Chase. Some writers began calling the events in the financial markets during this period the “Subprime Mortgage Crisis” or the “Mortgage crisis”.[179][311]

As U.S. housing prices began to fall from their 2006 peak, global investors became less willing to invest in mortgage-backed securities (MBS). The crisis began to affect the financial sector in February 2007, when HSBC, one of the world’s largest banks, wrote down its holdings of subprime-related mortgage securities by $10.5 billion, the first major subprime related loss to be reported.[312] By April 2007, over 50 mortgage companies had declared bankruptcy, many of which had specialized in subprime mortgages, the largest of which was New Century Financial.[313] At least 100 mortgage companies either shut down, suspended operations or were sold during 2007.[314] These mortgage companies made money on the origination and sale of mortgages, rather than interest from holding the mortgage. They had relied on continuing access to this global pool of investor capital to continue their operations; when investor capital dried-up, they were forced into bankruptcy.

Other parts of the shadow banking system also encountered difficulty. Legal entities known as structured investment vehicles (SIV) and hedge funds had borrowed from investors and bought MBS. When mortgage defaults rose along with the fall in housing prices, the value of the MBS declined. Investors demanded that these entities put up additional collateral or be forced to pay back the investors immediately, a form of margin call. This resulted in further sales of MBS, which lowered MBS prices further. This dynamic of margin call and price reductions contributed to the collapse of two Bear Stearns hedge funds in July 2007, an event which economist Mark Zandi referred to as “arguably the proximate catalyst” of the crisis in financial markets.[4] On August 9, 2007 French bank BNP Paribas announced that it was halting redemptions on three investment funds due to subprime problems, another “beginning point” of the crisis to some observers.[315][316]

Investment banks such as Bear Stearns had legal obligations to provide financial support to these entities, which created a cash drain. Bear Stearns reported the first quarterly loss in its history during November 2007 and obtained additional financing from a Chinese sovereign wealth fund. Investment banks Merrill Lynch and Morgan Stanley had also obtained additional capital from sovereign wealth funds in Asia and the Middle East during late 2007.[311]

The major investment banks had also increased their own borrowing and investing as the bubble expanded, taking on additional risk in the search for profit. For example, as of November 30, 2006, Bear Stearns reported $383.6 billion in liabilities and $11.8 billion in equity, a leverage ratio of approximately 33.[317] This high leverage ratio meant that only a 3% reduction in the value of its assets would render it insolvent. Unable to withstand the combination of high leverage, reduced access to capital, loss in the value of its MBS securities portfolio, and claims from its hedge funds, Bear Stearns collapsed during March 2008. Historian Robin Blackburn wrote: “The Wall Street investment banks and brokerages hemorrhaged $175 billion of capital in the period July 2007 to March 2008, and Bear Stearns, the fifth largest, was ‘rescued’ in March, at a fire-sale price, by JP Morgan Chase with the help of $29 billion of guarantees from the Federal Reserve.”[179]

The TED spread (the difference between the interest rates on interbank loans and on the safer short-term U.S. government debt) – an indicator of credit risk – increased dramatically during September 2008.

Financial market conditions continued to worsen during 2008. By August 2008, financial firms around the globe had written down their holdings of subprime related securities by US$501 billion.[318] The IMF estimated that financial institutions around the globe would eventually have to write off $1.5 trillion of their holdings of subprime MBSs. About $750 billion in such losses had been recognized as of November 2008. These losses wiped out much of the capital of the world banking system. Banks headquartered in nations that have signed the Basel Accords must have so many cents of capital for every dollar of credit extended to consumers and businesses. Thus the massive reduction in bank capital just described has reduced the credit available to businesses and households.[319]

The crisis hit a critical point in September 2008 with the failure, buyout or bailout of the largest entities in the U.S. shadow banking system. Investment bank Lehman Brothers failed, while Merrill Lynch was purchased by Bank of America. Investment banks Goldman Sachs and Morgan Stanley obtained depository bank holding charters, which gave them access to emergency lines of credit from the Federal Reserve.[320] Government-sponsored enterprises Fannie Mae and Freddie Mac were taken over by the federal government. Insurance giant AIG, which had sold insurance-like protection for mortgage-backed securities, did not have the capital to honor its commitments; U.S. taxpayers covered its obligations instead in a bailout that exceeded $100 billion.[321]

Further, there was the equivalent of a bank run on other parts of the shadow system, which severely disrupted the ability of non-financial institutions to obtain the funds to run their daily operations. During a one-week period in September 2008, $170 billion were withdrawn from US money funds, causing the Federal Reserve to announce that it would guarantee these funds up to a point.[322] The money market had been a key source of credit for banks (CDs) and nonfinancial firms (commercial paper). The TED spread (see graph above), a measure of the risk of interbank lending, quadrupled shortly after the Lehman failure. This credit freeze brought the global financial system to the brink of collapse.

In a dramatic meeting on September 18, 2008, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout of the banking system. Bernanke reportedly told them: “If we don’t do this, we may not have an economy on Monday.”[323] The Emergency Economic Stabilization Act, also called the Troubled Asset Relief Program (TARP), was signed into law on October 3, 2008.[324]

In a nine-day period from Oct. 1–9, the S&P 500 fell a staggering 251 points, losing 21.6% of its value.[325] The week of Oct. 6–10 saw the largest percentage drop in the history of the Dow Jones Industrial Average – even worse than any single week in the Great Depression.[326]

The response of the US Federal Reserve, the European Central Bank, and other central banks was dramatic. During the last quarter of 2008, these central banks purchased US$2.5 trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the US also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks.[319] On Dec. 16, 2008, the Federal Reserve cut the Federal funds rate to 0–0.25%, where it remained until December 2015; this period of zero interest-rate policy was unprecedented in U.S. history.[327]


The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses were expected to top $2.8 trillion from 2007 to 2010. U.S. banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S. banks were about 60 percent through their losses, but British and eurozone banks only 40 percent.[328]

Impacts from the crisis on key wealth measures

U.S. Real GDP – Contributions to percent change by component 2007–2009


Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008.[329] Total retirement assets, Americans’ second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total $8.3 trillion.[329]

  • Real gross domestic product (GDP) began contracting in the third quarter of 2008 and did not return to growth until Q1 2010.[330] CBO estimated in February 2013 that real U.S. GDP remained 5.5% below its potential level, or about $850 billion. CBO projected that GDP would not return to its potential level until 2017.[331]
  • The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, then steadily declined to 7.6% by March 2013.[332] The number of unemployed rose from approximately 7 million in 2008 pre-crisis to 15 million by 2009, then declined to 12 million by early 2013.[333]
  • Residential private investment (mainly housing) fell from its 2006 pre-crisis peak of $800 billion, to $400 billion by mid-2009 and has remained depressed at that level. Non-residential investment (mainly business purchases of capital equipment) peaked at $1,700 billion in 2008 pre-crisis and fell to $1,300 billion in 2010, but by early 2013 had nearly recovered to this peak.[334]
  • Housing prices fell approximately 30% on average from their mid-2006 peak to mid-2009 and remained at approximately that level as of March 2013.[335]
  • Stock market prices, as measured by the S&P 500 index, fell 57% from their October 2007 peak of 1,565 to a trough of 676 in March 2009. Stock prices began a steady climb thereafter and returned to record levels by April 2013.[336]
  • The net worth of U.S. households and non-profit organizations fell from a peak of approximately $67 trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15 trillion or 22%. It began to recover thereafter and was $66 trillion by Q3 2012.[337]
  • U.S. total national debt rose from 66% GDP in 2008 pre-crisis to over 103% by the end of 2012.[338] Martin Wolf and Paul Krugman argued that the rise in private savings and decline in investment fueled a large private sector surplus, which drove sizable budget deficits.[339][340]

Members of US minority groups received a disproportionate number of subprime mortgages, and so have experienced a disproportionate level of the resulting foreclosures.[341][342][343] A study commissioned by the ACLU on the long-term consequences of these discriminatory lending practices found that the housing crisis will likely widen the black-white wealth gap for the next generation.[344] Recent research shows that complex mortgages were chosen by prime borrowers with high income levels seeking to purchase expensive houses relative to their incomes. Borrowers with complex mortgages experienced substantially higher default rates than borrowers with traditional mortgages with similar characteristics.[345] The crisis had a devastating effect on the U.S. auto industry. New vehicle sales, which peaked at 17 million in 2005, recovered to only 12 million by 2010.[346]


Public debt to GDP ratio for selected European countries – 2008 to 2012. Source Data: Eurostat

Relationship between fiscal tightening (austerity) in Eurozone countries with their GDP growth rate, 2008–2012[347]


The crisis in Europe generally progressed from banking system crises to sovereign debt crises, as many countries elected to bail out their banking systems using taxpayer money. Greece was different in that it concealed large public debts in addition to issues within its banking system. Several countries received bailout packages from the “troika” (European Commission, European Central Bank, International Monetary Fund), which also implemented a series of emergency measures.

Many European countries embarked on austerity programs, reducing their budget deficits relative to GDP from 2010 to 2011. For example, according to the CIA World Factbook Greece improved its budget deficit from 10.4% GDP in 2010 to 9.6% in 2011. Iceland, Italy, Ireland, Portugal, France, and Spain also improved their budget deficits from 2010 to 2011 relative to GDP.[348][349]

However, with the exception of Germany, each of these countries had public-debt-to-GDP ratios that increased (i.e., worsened) from 2010 to 2011, as indicated in the chart shown here. Greece’s public-debt-to-GDP ratio increased from 143% in 2010 to 165% in 2011.[348] This indicates that despite improving budget deficits, GDP growth was not sufficient to support a decline (improvement) in the debt-to-GDP ratio for these countries during this period. Eurostat reported that the debt to GDP ratio for the 17 Euro area countries together was 70.1% in 2008, 79.9% in 2009, 85.3% in 2010, and 87.2% in 2011.[349][350]

Unemployment is another variable that might be considered in evaluating austerity measures. According to the CIA World Factbook, from 2010 to 2011, the unemployment rates in Spain, Greece, Ireland, Portugal, and the UK increased. France and Italy had no significant changes, while in Germany and Iceland the unemployment rate declined.[348] Eurostat reported that Eurozone unemployment reached record levels in September 2012 at 11.6%, up from 10.3% the prior year. Unemployment varied significantly by country.[351]

Economist Martin Wolf analyzed the relationship between cumulative GDP growth from 2008 to 2012 and total reduction in budget deficits due to austerity policies (see chart) in several European countries during April 2012. He concluded that: “In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions.” Changes in budget balances (deficits or surpluses) explained approximately 53% of the change in GDP, according to the equation derived from the IMF data used in his analysis.[352]

Economist Paul Krugman analyzed the relationship between GDP and reduction in budget deficits for several European countries in April 2012 and concluded that austerity was slowing growth, similar to Martin Wolf. He also wrote: “this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster.”[353]

This chart compares U.S. potential GDP under two CBO forecasts (one from 2007 and one from 2016) versus the actual real GDP. It is based on a similar diagram from economist Larry Summers from 2014.[354]


The crisis had a significant and long-lasting impact on U.S. employment. During the Great Recession, 8.5 million jobs were lost from the peak employment in early 2008 of approximately 138 million to the trough in February 2010 of 129 million, roughly 6% of the workforce. From February 2010 to September 2012, approximately 4.3 million jobs were added, offsetting roughly half the losses.[355][356]

In Spring 2011 there were about a million homes in foreclosure in the United States, several million more in the pipeline, and 872,000 previously foreclosed homes in the hands of banks. Sales were slow; economists estimated that it would take three years to clear the backlogged inventory. According to Mark Zandi of Moody’s Analytics, home prices were falling and could be expected to fall further during 2011. However, the rate of new borrowers falling behind in mortgage payments had begun to decrease.[357]

The New York Times reported in January 2015 that: “About 17% of all homeowners are still ‘upside down’ on their mortgages … That’s down from 21% in the third quarter of 2013, and the 2012 peak of 31%.” Foreclosures as of October 2014 were down 26% from the prior year, at 41,000 completed foreclosures. That was 65% below the peak in September 2010 (roughly 117,000), but still above the pre-crisis (2000-2006) average of 21,000 per month.[358]

Research indicates recovery from financial crises can be protracted, with lengthy periods of high unemployment and substandard economic growth.[359] Economist Carmen Reinhart stated in August 2011: “Debt de-leveraging [reduction] takes about seven years … And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before.”[360]

U.S. savings and investment; savings less investment is the private sector financial surplus

During the crisis and ensuing recession, U.S. consumers increased their savings as they paid down debt (“deleveraged”) but corporations simultaneously were reducing their investment. In a healthy economy, private sector savings placed into the banking system is borrowed and invested by companies. This investment is one of the major components of GDP. A private sector financial deficit from 2004 to 2008 transitioned to a large surplus of savings over investment that exceeded $1 trillion by early 2009 and remained above $800 billion as of September 2012. Part of this investment reduction related to the housing market, a major component of investment in the GDP computation. This surplus explains how even significant government deficit spending would not increase interest rates and how Federal Reserve action to increase the money supply does not result in inflation, because the economy is awash with savings with no place to go.[340]

Economist Richard Koo described similar effects for several of the developed world economies in December 2011: “Today private sectors in the U.S., the U.K., Spain, and Ireland (but not Greece) are undergoing massive deleveraging in spite of record low interest rates. This means these countries are all in serious balance sheet recessions. The private sectors in Japan and Germany are not borrowing, either. With borrowers disappearing and banks reluctant to lend, it is no wonder that, after nearly three years of record low interest rates and massive liquidity injections, industrial economies are still doing so poorly. Flow of funds data for the U.S. show a massive shift away from borrowing to savings by the private sector since the housing bubble burst in 2007. The shift for the private sector as a whole represents over 9 percent of U.S. GDP at a time of zero interest rates. Moreover, this increase in private sector savings exceeds the increase in government borrowings (5.8 percent of GDP), which suggests that the government is not doing enough to offset private sector deleveraging.”[361]

Sectoral financial balances in US economy 1990–2017. By definition, the three balances must net to zero. Since 2009, the US foreign surplus (trade deficit) and private sector surplus have driven a government budget deficit.

Economist Wynne Godley explained in 2004-2005 how U.S. sector imbalances posed a significant risk to the U.S. and global economy. The combination of a high and growing foreign sector surplus and high government sector deficit meant that the private sector was moving towards a net borrowing position (from surplus to deficit) as a housing bubble developed, which he warned was an unsustainable combination.[362][363]

Economist Martin Wolf explained in July 2012 that government fiscal balance is one of three major financial sectoral balances in the U.S. economy, the others being the foreign financial sector and the private financial sector. The sum of the surpluses or deficits across these three sectors must be zero by definition. In the U.S., a foreign financial surplus (or capital surplus) exists because capital is imported (net) to fund the trade deficit. Further, there is a private sector financial surplus due to household savings exceeding business investment. By definition, there must therefore exist a government budget deficit so all three net to zero. The government sector includes federal, state and local. For example, the government budget deficit in 2011 was approximately 10% GDP (8.6% GDP of which was federal), offsetting a capital surplus of 4% GDP and a private sector surplus of 6% GDP.[339]

Wolf argued that the sudden shift in the private sector from deficit to surplus forced the government balance into deficit, writing: “The financial balance of the private sector shifted towards surplus by the almost unbelievable cumulative total of 11.2 per cent of gross domestic product between the third quarter of 2007 and the second quarter of 2009, which was when the financial deficit of US government (federal and state) reached its peak…No fiscal policy changes explain the collapse into massive fiscal deficit between 2007 and 2009, because there was none of any importance. The collapse is explained by the massive shift of the private sector from financial deficit into surplus or, in other words, from boom to bust.”[339]

Various actions have been taken since the crisis became apparent in August 2007. In September 2008, major instability in world financial markets increased awareness and attention to the crisis. Various agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis.

To date, various government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. For a summary of U.S. government financial commitments and investments related to the crisis, see CNN – Bailout Scorecard.

Federal Reserve holdings of treasury (blue) and mortgage-backed securities (red)


The central bank of the US, the Federal Reserve, in partnership with central banks around the world, took several steps to address the crisis.[364] Federal Reserve Chairman Ben Bernanke stated in early 2008: “Broadly, the Federal Reserve’s response followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy.”[119]

The Federal Reserve Bank:

  • Lowered the target for the Federal funds rate from 5.25% to 2%, and the discount rate from 5.75% to 2.25%. This took place in six steps occurring between 18 September 2007 and 30 April 2008;[365][366] In December 2008, the Fed further lowered the federal funds rate target to a range of 0–0.25% (25 basis points).[367]
  • Undertook, along with other central banks, open market operations to ensure member banks remain liquid. These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rates (called the discount rate in the US) they charge member banks for short-term loans;[368]
  • Created a variety of lending facilities to enable the Fed to lend directly to banks and non-bank institutions, against specific types of collateral of varying credit quality. These include the Term Auction Facility (TAF) and Term Asset-Backed Securities Loan Facility (TALF).[369]
  • In November 2008, the Fed announced a $600 billion program to purchase the MBS of the GSE, to help lower mortgage rates.[370]
  • In March 2009, the Federal Open Market Committee decided to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of government-sponsored enterprise mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities during 2009.[371]

According to Ben Bernanke, expansion of the Fed balance sheet means the Fed is electronically creating money, necessary “because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”[372]

The New York Times reported in February 2013 that the Fed continued to support the economy with various monetary stimulus measures: “The Fed, which has amassed almost $3 trillion in Treasury and mortgage-backed securities to promote more borrowing and lending, is expanding those holdings by $85 billion a month until it sees clear improvement in the labor market. It plans to hold short-term interest rates near zero even longer, at least until the unemployment rate falls below 6.5 percent.”[373]


On 13 February 2008, President George W. Bush signed into law a $168 billion economic stimulus package, mainly taking the form of income tax rebate checks mailed directly to taxpayers.[374] Checks were mailed starting the week of 28 April 2008. However, this rebate coincided with an unexpected jump in gasoline and food prices. This coincidence led some to wonder whether the stimulus package would have the intended effect, or whether consumers would simply spend their rebates to cover higher food and fuel prices.

On 17 February 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009, an $787 billion stimulus package with a broad spectrum of spending and tax cuts.[375] Over $75 billion of the package was specifically allocated to programs which help struggling homeowners. This program is referred to as the Homeowner Affordability and Stability Plan.[376]

The U.S. government continued to run large deficits post-crisis, with the national debt rising from $10.0 trillion as of September 2008 to $16.1 trillion by September 2012. The debt increases were $1.89 trillion in fiscal year 2009, $1.65 trillion in 2010, $1.23 trillion in 2011, and $1.26 trillion in 2012.[377]

Common equity to total assets ratios for major US banks


Losses on mortgage-backed securities and other assets purchased with borrowed money have dramatically reduced the capital base of financial institutions, rendering many either insolvent or less capable of lending. Governments have provided funds to banks. Some banks have taken significant steps to acquire additional capital from private sources.

The U.S. government passed the Emergency Economic Stabilization Act of 2008 (EESA or TARP) during October 2008. This law included $700 billion in funding for the “Troubled Assets Relief Program” (TARP). Following a model initiated by the United Kingdom bank rescue package,[378][379] $205 billion was used in the Capital Purchase Program to lend funds to banks in exchange for dividend-paying preferred stock.[380][381]

Another method of recapitalizing banks is for government and private investors to provide cash in exchange for mortgage-related assets (i.e., “toxic” or “legacy” assets), improving the quality of bank capital while reducing uncertainty regarding the financial position of banks. U.S. Treasury Secretary Timothy Geithnerannounced a plan during March 2009 to purchase “legacy” or “toxic” assets from banks. The Public-Private Partnership Investment Program involves government loans and guarantees to encourage private investors to provide funds to purchase toxic assets from banks.[382]

As of April 2012, the government had recovered $300 billion of the $414 billion that was ultimately distributed to them via TARP. Some elements of TARP such as foreclosure prevention aid will not be paid back. Estimated taxpayer losses were $60 billion.[383]

For a summary of U.S. government financial commitments and investments related to the crisis, see CNN – Bailout Scorecard.

For a summary of TARP funds provided to U.S. banks as of December 2008, see Reuters-TARP Funds.

People queuing outside a Northern Rockbank branch in Birmingham, United Kingdom on September 15, 2007, to withdraw their savings because of the subprime crisis.


Several major financial institutions either failed, were bailed out by governments, or merged (voluntarily or otherwise) during the crisis. While the specific circumstances varied, in general the decline in the value of mortgage-backed securities held by these companies resulted in either their insolvency, the equivalent of bank runs as investors pulled funds from them, or inability to secure new funding in the credit markets. These firms had typically borrowed and invested large sums of money relative to their cash or equity capital, meaning they were highly leveraged and vulnerable to unanticipated credit market disruptions.[179]

The five largest U.S. investment banks, with combined liabilities or debts of $4 trillion, either went bankrupt (Lehman Brothers), were taken over by other companies (Bear Stearnsand Merrill Lynch), or were bailed out by the U.S. government (Goldman Sachs and Morgan Stanley) during 2008.[384] Government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac either directly owed or guaranteed nearly $5 trillion in mortgage obligations, with a similarly weak capital base, when they were placed into receivership in September 2008.[385] For scale, this $9 trillion in obligations concentrated in seven highly leveraged institutions can be compared to the $14 trillion size of the U.S. economy (GDP)[386] or to the total national debt of $10 trillion in September 2008.[377]

Major depository banks around the world had also used financial innovations such as structured investment vehicles to circumvent capital ratio regulations.[387] Notable global failures included Northern Rock, which was nationalized at an estimated cost of £87 billion ($150 billion).[388] In the U.S., Washington Mutual (WaMu) was seized in September 2008 by the US Office of Thrift Supervision (OTS).[389] This would be followed by the “shotgun wedding” of Wells Fargo and Wachovia after it was speculated that without the merger Wachovia was also going to fail. Dozens of U.S. banks received funds as part of the TARP or $700 billion bailout.[390] The TARP funds gained some controversy after PNC Financial Services received TARP money, only to turn around hours later and purchase the struggling National City Corp., which itself had become a victim of the subprime crisis.

As a result of the financial crisis in 2008, twenty-five U.S. banks became insolvent and were taken over by the FDIC.[391] As of August 14, 2009, an additional 77 banks became insolvent.[392] This seven-month tally surpasses the 50 banks that were seized in all of 1993, but is still much smaller than the number of failed banking institutions in 1992, 1991, and 1990.[393] The United States has lost over 6 million jobs since the recession began in December 2007.[394]

The FDIC deposit insurance fund, supported by fees on insured banks, fell to $13 billion in the first quarter of 2009.[395] That is the lowest total since September 1993.[395]

According to some, the bailouts could be traced directly to Alan Greenspan’s efforts to reflate the stock market and the economy after the tech stock bust, and specifically to a February 23, 2004 speech Mr. Greenspan made to the Mortgage Bankers Association where he suggested that the time had come to push average American borrowers into more exotic loans with variable rates, or deferred interest.[396] This argument suggests that Mr. Greenspan sought to enlist banks to expand lending and debt to stimulate asset prices and that the Federal Reserve and US Treasury Department would back any losses that might result. As early as March 2007 some commentators predicted that a bailout of the banks would exceed $1 trillion, at a time when Ben Bernanke, Alan Greenspan and Henry Paulson all claimed that mortgage problems were “contained” to the subprime market and no bailout of the financial sector would be necessary.[396]

U.S. Changes in Household Debt as a percentage of GDP for 1989-2016. Homeowners paying down debt for 2009-2012 was a headwind to the recovery. Economist Carmen Reinhart explained that this behavior tends to slow recoveries from financial crises relative to typical recessions.[397]

U.S. federal government spending was held relatively level around $3.5 trillion from 2009-2014, which created a headwind to recovery, reducing real GDP growth by approximately 0.5% per quarter (annualized) on average between Q3 2010 and Q2 2014.[398]


Both lenders and borrowers may benefit from avoiding foreclosure, which is a costly and lengthy process. Some lenders have offered troubled borrowers more favorable mortgage terms (e.g. refinancing, loan modification or loss mitigation). Borrowers have also been encouraged to contact their lenders to discuss alternatives.[399]

The Economist described the issue this way in February 2009: “No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmes have been ineffectual, and private efforts not much better.” Up to 9 million homes may enter foreclosure over the 2009–2011 period, versus one million in a typical year.[400] At roughly U.S. $50,000 per foreclosure according to a 2006 study by the Chicago Federal Reserve Bank, 9 million foreclosures represents $450 billion in losses.[401]

A variety of voluntary private and government-administered or supported programs were implemented during 2007–2009 to assist homeowners with case-by-case mortgage assistance, to mitigate the foreclosure crisis engulfing the U.S. One example is the Hope Now Alliance, an ongoing collaborative effort between the US Government and private industry to help certain subprime borrowers.[402] In February 2008, the Alliance reported that during the second half of 2007, it had helped 545,000 subprime borrowers with shaky credit, or 7.7% of 7.1 million subprime loans outstanding as of September 2007. A spokesperson for the Alliance acknowledged that much more must be done.[403]

During late 2008, major banks and both Fannie Mae and Freddie Mac established moratoriums (delays) on foreclosures, to give homeowners time to work towards refinancing.[404][405][406]

Critics have argued that the case-by-case loan modification method is ineffective, with too few homeowners assisted relative to the number of foreclosures and with nearly 40% of those assisted homeowners again becoming delinquent within 8 months.[407][408][409] In December 2008, the U.S. FDIC reported that more than half of mortgages modified during the first half of 2008 were delinquent again, in many cases because payments were not reduced or mortgage debt was not forgiven. This is further evidence that case-by-case loan modification is not effective as a policy tool.[410]

In February 2009, economists Nouriel Roubini and Mark Zandi recommended an “across the board” (systemic) reduction of mortgage principal balances by as much as 20–30%. Lowering the mortgage balance would help lower monthly payments and also address an estimated 20 million homeowners that may have a financial incentive to enter voluntary foreclosure because they are “underwater” (i.e. the mortgage balance is larger than the home value).[411][412]

A study by the Federal Reserve Bank of Boston indicated that banks were reluctant to modify loans. Only 3% of seriously delinquent homeowners had their mortgage payments reduced during 2008. In addition, investors who hold MBS and have a say in mortgage modifications have not been a significant impediment; the study found no difference in the rate of assistance whether the loans were controlled by the bank or by investors. Commenting on the study, economists Dean Baker and Paul Willen both advocated providing funds directly to homeowners instead of banks.[413]

The Los Angeles Times reported the results of a study that found homeowners with high credit scores at the time of entering the mortgage are 50% more likely to “strategically default” – abruptly and intentionally pull the plug and abandon the mortgage – compared with lower-scoring borrowers. Such strategic defaults were heavily concentrated in markets with the highest price declines. An estimated 588,000 strategic defaults occurred nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in the fourth quarter of 2008.[414]

On 18 February 2009, U.S. President Barack Obama announced a $73 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for Fannie Mae and Freddie Mac to purchase and more easily refinance mortgages. The plan is funded mostly from the EESA’s $700 billion financial bailout fund. It uses cost sharing and incentives to encourage lenders to reduce homeowner’s monthly payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent. The plan also involves forgiving a portion of the borrower’s mortgage balance. Companies that service mortgages will get incentives to modify loans and to help the homeowner stay current.[415][416][417]



President Barack Obama and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others.[420][421][422] The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010 to address some of the causes of the crisis.

U.S. Treasury Secretary Timothy Geithner testified before Congress on October 29, 2009. His testimony included five elements he stated as critical to effective reform:

  1. Expand the Federal Deposit Insurance Corporation bank resolution mechanism to include non-bank financial institutions;
  2. Ensure that a firm is allowed to fail in an orderly way and not be “rescued”;
  3. Ensure taxpayers are not on the hook for any losses, by applying losses to the firm’s investors and creating a monetary pool funded by the largest financial institutions;
  4. Apply appropriate checks and balances to the FDIC and Federal Reserve in this resolution process;
  5. Require stronger capital and liquidity positions for financial firms and related regulatory authority.[423]

The Dodd-Frank Act addressed these elements, but stopped short of breaking up the largest banks, which grew larger due to mergers of investment banks at the core of the crisis with depository banks (e.g., JP Morgan Chaseacquired Bear Stearns and Bank of America acquired Merrill Lynch in 2008). Assets of five largest banks as a share of total commercial banking assets rose then stabilized in the wake of the crisis.[424] During 2013, Senators John McCain (Republican) and Elizabeth Warren (Democratic) proposed a bill to separate investment and depository banking, to insulate depository banks from higher risk activities. These were separated prior to the 1999 repeal of the Glass-Steagall Act.[425]


Significant law enforcement action and litigation resulted from the crisis. The U.S. Federal Bureau of Investigation probed the possibility of fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers, and insurer American International Group, among others.[426] New York Attorney General Andrew Cuomo sued Long Island based Amerimod, one of the nation’s largest loan modification corporations for fraud, and issued numerous subpoenas to other similar companies.[427] The FBI assigned more agents to mortgage-related crimes and its caseload dramatically increased.[428][429] The FBI began a probe of Countrywide Financial in March 2008 for possible fraudulent lending practices and securities fraud.[430]

Several hundred civil lawsuits were filed in federal courts beginning in 2007 related to the subprime crisis. The number of filings in state courts was not quantified but was also believed to be significant.[431] In August 2014, Bank of America agreed to a near-$17 billion deal to settle claims against it relating to the sale of toxic mortgage-linked securities including subprime home loans, in what was believed to be the largest settlement in U.S. corporate history. The deal with the U.S. Justice Department topped a deal the regulator made the previous year with JPMorgan Chase over similar issues.[432] Morgan Stanley paid $2.6 billion to settle claims in February 2015, without reaching closure on homeowner relief and state claim


U.S. banks have paid considerable fines from legal settlements due to mortgage-related activities. The Economist estimated that from 2008 through October 2013, U.S. banks had agreed to $95 billion in mortgage-related penalties. Settlement amounts included Bank of America ($47.2B), JP Morgan Chase ($22.3B), Wells Fargo ($9.8B), Citigroup ($6.2B) and Goldman-Sachs ($0.9B).[433] Bloomberg reported that from the end of 2010 to October 2013, the six largest Wall St. banks had agreed to pay $67 billion.[434] CNBC reported in April 2015 that banking fines and penalties totaled $150 billion between 2007 and 2014, versus $700 billion in profits over that time.[435]

Many of these fines were obtained via the efforts of President Obama’s Financial Fraud Enforcement Task Force (FFETF), which was created in November 2009 to investigate and prosecute financial crimes. The FFETF involves over 20 federal agencies, 94 U.S. Attorney’s offices, and state and local partners. One of its eight working groups, the Residential Mortgage Backed Securities (RMBS) Working Group, was created in 2012 and is involved in investigating and negotiating many of the fines and penalties described above.[436]

Several books written about the crisis were made into movies. Examples include The Big Short by Michael Lewis and Too Big to Fail by Andrew Ross Sorkin. The former tells the story from the perspective of several investors who bet against the housing market, while the latter follows key government and banking officials focusing on the critical events of September 2008, when many large financial institutions faced or experienced collapse.

File:Put-Backs, Robo-Signers Put New Pressure on US Housing Market VOALearningEnglish.ogv

VOA Special English Economics Report from October 2010 describing how millions of foreclosed homes were seized by banks


Estimates of impact have continued to climb. During April 2008, International Monetary Fund (IMF) estimated that global losses for financial institutions would approach $1 trillion.[437]One year later, the IMF estimated cumulative losses of banks and other financial institutions globally would exceed $4 trillion.[438]

Francis Fukuyama has argued that the crisis represents the end of Reaganism in the financial sector, which was characterized by lighter regulation, pared-back government, and lower taxes. Significant financial sector regulatory changes are expected as a result of the crisis.[439]

Fareed Zakaria believes that the crisis may force Americans and their government to live within their means. Further, some of the best minds may be redeployed from financial engineering to more valuable business activities, or to science and technology.[440]

Roger Altman wrote that “the crash of 2008 has inflicted profound damage on [the U.S.] financial system, its economy, and its standing in the world; the crisis is an important geopolitical setback…the crisis has coincided with historical forces that were already shifting the world’s focus away from the United States. Over the medium term, the United States will have to operate from a smaller global platform – while others, especially China, will have a chance to rise faster.”[319]

GE CEO Jeffrey Immelt has argued that U.S. trade deficits and budget deficits are unsustainable. America must regain its competitiveness through innovative products, training of production workers, and business leadership. He advocates specific national goals related to energy security or independence, specific technologies, expansion of the manufacturing job base, and net exporter status.[441] “The world has been reset. Now we must lead an aggressive American renewal to win in the future.” Of critical importance, he said, is the need to focus on technology and manufacturing. “Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy – and somehow still expect to prosper,” Jeff said. “That idea was flat wrong.”[442]

Economist Paul Krugman wrote in 2009: “The prosperity of a few years ago, such as it was – profits were terrific, wages not so much – depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either.”[443] Niall Ferguson stated that excluding the effect of home equity extraction, the U.S. economy grew at a 1% rate during the Bush years.[444] Microsoft CEO Steve Ballmer has argued that this is an economic reset at a lower level, rather than a recession, meaning that no quick recovery to pre-recession levels can be expected.[445]

The U.S. Federal government’s efforts to support the global financial system have resulted in significant new financial commitments, totaling $7 trillion by November, 2008. These commitments can be characterized as investments, loans, and loan guarantees, rather than direct expenditures. In many cases, the government purchased financial assets such as commercial paper, mortgage-backed securities, or other types of asset-backed paper, to enhance liquidity in frozen markets.[446] As the crisis has progressed, the Fed has expanded the collateral against which it is willing to lend to include higher-risk assets.[447]

The Economist wrote in May 2009: “Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors. Given the political implications of such austerity, the temptation will be to default by stealth, by letting their currencies depreciate. Investors are increasingly alive to this danger…”[448]

The crisis has cast doubt on the legacy of Alan Greenspan, the Chairman of the Federal Reserve System from 1986 to January 2006. Senator Chris Dodd claimed that Greenspan created the “perfect storm“.[449] When asked to comment on the crisis, Greenspan spoke as follows:[292]


Following the recession of the 2008-2010 era, there became a bigger focus from Millennials on mortgages the affect they have on their personal finances. Most who were of working age were unable to find employment that would allow them to save enough for a house. The lack of good employment opportunities has created questions among this generation about how much of their lives that they are willing to invest into a home and if that money isn’t better spent elsewhere. Mortgage Magnitude[450] looks at how many years of life a mortgage will actually cost a consumer given the area’s median income and median home value, showing homes in metropolitan areas ranging from ratios of 1:5 to 1:10. Donna Fancher researched to find if the “American Dream” of owning a home is still a realistic goal, or if it is continually shrinking for the youth of the US, writing:

“The value of owner-occupied housing also exceeds income growth. In many markets, prospective buyers are continuing to rent due to concerns over affordability. However, demand also increases rent disproportionately.”[451]

While housing prices fell dramatically during the recession, prices have been steadily coming back to pre-recession prices; with a rising interest rate, home ownership could continue to be challenging for Millennials. Jason Furman wrote:

“while the unemployment rate for those over 34 peaked at about 8 percent, the unemployment rate among those between the ages of 18 and 34 peaked at 14 percent in 2010 and remains elevated, despite substantial improvement; delinquency rates on student loans have risen several percentage points since the Great Recession and even into the recovery; and the homeownership rate among young adults has dropped from a peak of 43 percent in 2005 to 37 percent in 2013 concurrent with a large increase in the share living with their parents.”[452]

Several major U.S. economic variables had recovered from the 2007-2009 Subprime mortgage crisis and Great Recession by the 2013-2014 time period.

U.S. median family net worth peaked in 2007, declined due to the Great Recession until 2013, and only partially recovered by 2016.[453]


The recession officially ended in the second quarter of 2009,[454] but the nation’s economy continued to be described as in an “economic malaise” during the second quarter of 2011.[455] Some economists described the post-recession years as the weakest recovery since the Great Depressionand World War II.[456][457] The weak economic recovery has led many to call it a “Zombie Economy”, so-called because it is neither dead nor alive. Household incomes, as of August 2012, had fallen more since the end of the recession, than during the 18-month recession, falling an additional 4.8% since the end of the recession, totally to 7.2% since the December 2007 level.[458] Additionally as of September 2012, the long-term unemployment was the highest it had been since World War II,[459] and the unemployment rate peaked several months after the end of the recession (10.1% in October 2009) and was above 8% until September 2012 (7.8%).[460][461] The Federal Reserve kept interest rates at a historically low 0.25% from December 2008 until December 2015, when it began to raise them again.

However, the Great Recession was different in kind from the all the recessions since the Great Depression, as it also involved a banking crisis and the de-leveraging (debt reduction) of highly indebted households. Research indicates recovery from financial crises can be protracted, with lengthy periods of high unemployment and substandard economic growth.[359] Economist Carmen Reinhart stated in August 2011: “Debt de-leveraging [reduction] takes about seven years … And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before.”[462][397]

Then-Fed Chair Ben Bernanke explained during November 2012 several of the economic headwinds that slowed the recovery:

  • The housing sector did not rebound, as was the case in prior recession recoveries, as the sector was severely damaged during the crisis. Millions of foreclosures had created a large surplus of properties and consumers were paying down their debts rather than purchasing homes.
  • Credit for borrowing and spending by individuals (or investing by corporations) was not readily available as banks paid down their debts.
  • Restrained government spending following initial stimulus efforts (i.e., austerity) was not sufficient to offset private sector weaknesses.[398]

For example, U.S. federal spending rose from 19.1% GDP in fiscal year (FY) 2007 to 24.4% GDP in FY2009 (the last year budgeted by President Bush) before falling towards to 20.4% GDP in 2014, closer to the historical average. In dollar terms, federal spending was actually higher in 2009 than in 2014, despite a historical trend of a roughly 5% annual increase. This reduced real GDP growth by approximately 0.5% per quarter on average between Q3 2010 and Q2 2014.[463] Both households and government practicing austerity at the same time was a recipe for a slow recovery.[398]

Several key economic variables (e.g., Job level, real GDP per capita, household net worth, and the federal budget deficit) hit their low point (trough) in 2009 or 2010, after which they began to turn upward, recovering to pre-recession (2007) levels between late 2012 and May 2014 (close to Reinhart’s prediction), which marked the recovery of all jobs lost during the recession.[13][464][14][465] Real median household income fell to a trough of $53,331 in 2012, but recovered to an all-time high of $59,039 by 2016.[466] However, the gains during the recovery were very unevenly distributed. Economist Emmanuel Saez wrote in June 2016 that the top 1% of families captured 52% of the total real income (GDP) growth per family from 2009-2015. The gains were more evenly distributed after the tax increases in 2013 on higher-income earners.[467]

President Obama declared the bailout measures started under the Bush Administration and continued during his Administration as completed and mostly profitable as of December 2014.[468] As of January 2018, bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $626B was invested, loaned, or granted due to various bailout measures, while $390B had been returned to the Treasury. The Treasury had earned another $323B in interest on bailout loans, resulting in an $87B profit.[18]


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Why the judge silenced my court documents

I want to be clear as to why the judge acting in my legal case silenced my court documents.  I want people to learn why the judge lied to me when he told me at the end of the case that he had copyrighted my court file.  The reasons are simple yet may not be very clear.   It is the same reasons that to this day there is still only a minute amount of my legal case documentation available for public record.  It is the same reasons that the court had conveniently “lost” the files from the court reporter that I had hired to transcribe the case.

To make this point we will go back a little bit to when I filed a lawsuit against Wells Fargo Bank for fraud, in early 2011.  In order to accomplish this task, since I didn’t have money for an attorney I had initially hired a paralegal to assist me in developing the paperwork so that I could file a cause of action and move forward in CA Superior Court.  After only a few moving papers filed the defendants filed a motion to move the case to Federal Court.  This is called Remanding the Case.  It was a strategy on their part.  Since I was acting as my own attorney and was thus far proving to be successful at filing paperwork to the court, counsel for the defense decided to send it up the chain to the federal level.  In the federal court system there are a different set of rules of court and rules of procedure to follow that the defense might be able to get me to stumble upon.

It was after they successfully remanded the case to the Federal Court of Northern California that my paralegal informed me that the case was now out of their league.  They were not familiar with the Federal rules and procedures and therefore felt it would be best for them to not assist me.  The paralegal was sorry for never dealing at the federal level and not knowing the information, but didn’t want to make a mistake on their end that would end my case or cause harm to me from their actions.

I can understand this and we parted amicably, but now I needed to learn everything I could about the rules of court and rules of procedure at the federal level.  This strategy on the defenses part was good because it made me not only have to learn the rules of the game, but at the same time, respond to the moving papers that they began filing.  I found myself in the law library and online nearly every waking hour of the day just trying to keep up.  So, I spent the next year and a half arguing about the fact that they never served or never appropriately by law served me documents when they would file a motion or moving paper.  they tried to get it to where I would not respond timely or show to a hearing because I would not have known the date or time.  We never even got to argue or litigate any substantive issues.

You see, over 90 percent of any and all court cases are won and loss due to simple procedural errors done by one of the parties.  These procedural errors are part of the rules of court or the procedures of the court as outlined by each state.  If a law firm doesn’t follow the rules as to how one is supposed to file a document, or how to fill out specific documents, or to show up to court on time, or to file specific documents on time, or to serve opposing parties, and a myriad of other rules that must be followed, the firm can lose the lawsuit by dismissal or demurrer based on not following the rules or law or procedure.   The law firm would then probably not tell their client the real reason that they lost and will probably inform the client of some other convoluted reason as to their loss, but it certainly wouldn’t be because of a procedural issue that the firm failed to do.  So, this means that if you simply learn and do the paperwork correctly, if you learn and do all of the filing correctly and make sure of all of the timing issues and get them done correctly, you will have an over 90% chance of winning.

So, I concentrated on this point alone and played that card as I learned the rules of the game.  So, if there were procedural issues from the opposing counsel that I could argue against (and there always was) I would.  This way I would not have to go down the road of arguing any legal points that they would bring up.  The law office for Wells Fargo Bank- Anglin, Flewelling, Rasmussen, Campbell & Trytten, LLP; and the law firm for the NDEX West, LLC acting as the Trustee- Barrett, Daffin, Frappier, Treder & Weiss, LLP wanted to get me into arguing the legal issues.  This was their arena.  This is what they know.  This is how they win by staying with what they know.

So, I am not a lawyer.  I do not have a subscription to Lexus-Nexus that I could easily shepardize legal precedents, appeals decisions and more at the flick of a keystroke.  My legal research was done in the UC Berkeley Law library, Hastings Law Library, or the San Francisco Law Library pouring over hundreds of volumes of legal tomes and familiarizing myself with legal cases for hours and days on end in order to try to wrap my mind around each case that the opposing counsel would throw out in their documents.  The referenced cases numbered in the hundreds and there was no way I would be able to stay with them and follow and argue appropriately if I stayed in their arena.

So, I would argue that the procedures to the paperwork were done incorrectly by them.  They did not file documents correctly, they did not serve the documents correctly, or they did not serve the documents at all.  This was where I could make a case, however, the court did not want to rule against or dismiss the case for the bank under procedural issues which would land someone with a home that is free and clear or can no longer be foreclosed upon.  The court wanted to stay away from this, so the court would never end the litigation.  It was frustrating to see how the courts would not follow the rules of their own court siding with the banks continually allowing them multiple “bits of the apple”.  However, during this time I was able to learn more and more about law, rules and how to litigate.  I was simply buying time.

I researched, memorized and learned more and more.  I reviewed my case notes from every angle and idea that would arise.  This time spent staying in the legal arena was tiring and frustrating to do and not really get into any substantive legal issues pertaining to my case, but it allowed me to find ways to learn.

So, over time I submitted Amended Claims and whittled away at honing my arguments.  I learned and found ways to file amended causes of action against Wells Fargo Bank for fraud.  This alone was difficult, as fraud is one of the most difficult causes of action to argue.  The nights were sleepless and the days were filled with research.  It was wearing me down.

I began to get much more focused in my argument against Wells Fargo when I was tasked by my study friend to find a Deed of Trust that actually abides by all facets of the existing rule of law.  Because I was unable to find a true Deed of Trust in how it was worded or signed, in order to substantiate my case to the court for what a true Deed of Trust document looks like as it based on the rule of law, I found myself in front of the computer system at the Alamed County Recorder’s Office for days on end, reviewing thousands and thousands of documents.  Eventually I found one that fit the parameters of what I was looking for that took me back to a contract dated 1997.

That was when I sat down an wondered why I had to go all of the way back to 1997 to find a Deed of Trust Agreement that fits the parameters as set out by the rule of law.  What took place that created this timeline of contracts where none of them actually comply with real estate contract law?  How can this be?

None of these contracts complied with contract law because they weren’t signed by the lending party, or if there was a Substituted Trustee the documents used to make this substitution we never signed by the borrower.  However, in 1997, I found a handful of contracts which both parties signed and any changes or substitutions were signed by all parties, and I found Re-Conveyance documents that were also filled out appropriately to the rule of law.

This action is simple and dates back to the Statute of Frauds (1677).  This is still valid law and on the books throughout the United States.  What this law states is that in any real estate contract it must be done in writing.  It also must be signed by all parties to the agreement.  This law also goes into the fact that if there are any changes to the contract agreement, any and all of the changes must be signed by all parties of the agreement.  This is the only way to make sure that the contract has a meeting of the minds throughout the duration of the agreement.

So, why was there such a lengthy timeframe where these contracts were not signed by both parties, or if there was a substitution of a trustee that this document was never signed by the borrower?  What was it in 1998 that happened that changed how these contracts seemed to be being used?

I looked deeper into changes in the laws regarding borrowing, lending and the power of sale in the state of CA.  I scoured through scores and scores of pages of legalese that made my head spin trying to find any change that I might put to reference that would explain why this might be the case.  I read and re read civil code 2924, et al, that dealt with foreclosure in California.  This is the code which dictates the power of sale clause in a deed of trust agreement in the state of CA.

I wanted more information, but I still needed to focus on the lawsuit.  I now knew that I had a true Deed of Trust Agreement as it is outlined in the rule of law.  I also knew that I had a true Substitute Trustee document as it is to be written according to the rule of law.  I also knew that I had found a true Re-Conveyance document as it is to be written according to the rule of law.  I could now used these documents in the courtroom as evidence to compare my documents with these others that exemplify by the rule of law as to what these documents are supposed to look like.

I noticed at that time that the CA Civil Code 2934a stated that a bank was able to name a new trustee.  It stated that the new substituted trustee would take on and possess all of the rights and actions deemed the previous trustee in a deed of trust agreement.  This got me thinking that if a bank could name a new trustee how did that relate to the independence of the trustee in a deed of trust?  So, a bank can “name” a new trustee, I find no issue with this.  However, substituting a trustee without the consent or signature by the borrower defies the Statute of Frauds.  It also means that if a bank has the right to substitute a trustee, and the previous trustee has no means of refusal of this substitution, then this simply means that the trustee holds no power against the will of the lending institution.  A new trustee could be substituted if the original or presiding trustee was no abiding by the actions of the bank.

So, if a trustee was calling to task some of the actions that a bank needed to address in a foreclosure action, and the bank was not addressing legitimate tasks regulated for them to do in a foreclosure action, the bank could substitute the trustee holding the bank to task and replace them with a substitute trustee that will allow the bank to act in whatever way it suits the bank and to file whatever document necessary to file stating that the bank has complied with all of the rules when in fact they did not.  Due to the fact that the bank might not have complied with the rules according to the power of sale, but the substituted trustee files the documents and asserts to the court that they did in fact comply and are acting in accordance to the rules the bank could foreclose on anyone, at any time, for any reason or no reason at all because there would no longer be a party entrusted by the state, namely the trustee, that will be tasked with oversight against the bank.  The oversight cannot be enforced by the trustee.  Because if they did try to enforce true oversight against the bank acting under the power of sale, if the trustee was not acting in the interests of the bank, the bank could substitute them with another party who would act in the way the bank wanted.  The bank would then be able to file any document, against any borrower, or against any property at any time.

This seemed out of line with the rule of law.  First, as per the Statute of Frauds any and all parties involved in the real estate contract must sign on all documents to the contract and all changes to any document to the contract throughout the life of the contract agreement.  Second, the CA Supreme Court rule in 1978 that the trustee is to be a third and independent party in a deed of trust agreement.  The trustee is to be at arms length from all parties involved in order to hold no bias to either party in the agreement.  It was the trustee who was to make sure that both parties acted in compliance with the rule of the contract.  It was the trustee who was tasked to protect the borrower’s title from any wrongdoing from the bank, and to protect the rights of the bank to be able to foreclose if the borrower failed to pay.  If either party did not act in accordance to the rules of the contract, including the power of sale clause, the trustee had the power to stop the foreclosure and make the bank act in compliance to the rules of the power of sale.  Third, if the trustee holds no power of oversight against the lender in a deed of trust agreement and they can be replaced at will by the lender in the agreement with another trustee who will act on behalf of the bank this means that there is absolutely no protections held for the borrower or the borrower’s title in a deed of trust.

This means that there is no true trustee and the trustee is a strawman acting on behalf of the banks.  This means that the banks know that they can manipulate the trustee to act on their behalf and know that the borrower has no protections to their title.  This means that everything that the deed of trust agreement stands for is moot.  This means that unless the banks inform the borrowers of this information which would make every borrower change their mind to whether or not they would sign a deed of trust agreement, prior to signing of the deed of trust agreement, this constitutes and act of fraud.  The fact that the banks are privy to knowledge about the trustee and the deed of trust that the borrowers are not privy to when the borrower signs the deed of trust agreement then there is not a meeting of the minds, that there is a misrepresentation of facts regarding the contract and therefore the contract is VOID.  if the contract is void the borrower is under no obligation to pay the lender for the money borrowed.  If the contract is void, there is no legal way a bank can foreclose against a borrower using the power of sale clause in the contract because there is no contract.  This means that a bank is unable to foreclose against a borrower if the bank used a deed of trust agreement to secure the money lent to the borrower.  This means that a bank holds no right to foreclose and the borrower holds the right of title free and clear.  If is as if the contract were 13 sheets of blank paper there would be just as much legal reference to the contract as it stands.  The banks participate in this misrepresentation of facts in every deed of trust document throughout the state of CA since 1998.  Let this sink in.

After I submitted this information in my fourth amended complaint and the defense attempted to argue various points of law in order to demurrer the complaint that I chose not to argue or respond to any of their legal points or case law that they were spewing out.  Because none of it was relevant.  I responded by stating that they must first prove that they have a true and legitimate contract to begin with.  They must first prove that they have and are in possession of a true and legitimate deed of trust contract as outline by the rule of law.  I was now holding them to task to prove that the deed of trust was legitimate as to the rules of law in the state of CA.  They must show the court that the trustee holds an independent position in the deed of trust agreement.  They must show the court that the trustee would be able to hold the banks accountable for wrongdoing against a borrower’s title without recourse against them by the banks if the banks were to chose to do so.  They must show that all parties have signed off on all documents and changes to the deed of trust agreement throughout the duration of the contract.

The defense was unable to do so.  The court was now in the unenviable position to side with a homeowner who has proven to the court how all of the deeds of trust in the state of CA since 1998 are based on VOID paperwork.

After this information was presented in the courtroom and there was no response available from the defense the judge looked at me and smiled and said, “Mr. Boggs, I know exactly what you are trying to state now.  I understand your argument and see where you are going with this.  Since we have nothing else from the defense,” he stated, “that I will have to take this under consideration in my chambers.”  Note that when he said this the courtroom was filled with other people from other cases and other witnesses that were listening quite intently.  So, by his “taking into consideration” meant that he would not rule in the courtroom so that all of the people would hear his response or decision.

So, he dismissed the case and took the documents out from public view and access.  This was how he silence my court documents.  The reason why he silenced the court documents should be clear at this point.  His decision that Wells Fargo Bank issued a fraudulent contract based on the fact that there is no legitimate trustee participating in the contract and that the bank failed to represent this fact to me prior to the signing of the contract makes the contract void means that all other deed of trust agreements in the state of CA could now file an actionable defense against the lender in the other contracts therefore negating every deed of trust in the state of CA dating back to 1998.  This also means that all of the money spent on all of the contracts by law should be returned to the borrowers who were lent money under the bank’s deceptive practices and misrepresentation of facts.  This means that the entire non-judicial foreclosure system is a fraud and broken.  This means that all foreclosures in CA must immediately be stopped and reviewed.  He also knew that there are 36 deed of trust states in the United States to which all of them have similar rules allowing similar practices across the nation.  This would have set a precedent that would have had a domino effect that would have collapsed Wall Street much more than what took place in 2008.  This not only would have set up a precedent that would have negated all deed of trust contracts in 36 states, but this would have also negated every mortgage backed security that used any of these mortgage agreements that these deeds of trust were held with that had been traded since 1998.

I think you can now understand why the judge silenced my court documents.

This is our judicial system.  There won’t be a ruling on truth, but only a ruling that works in the best interest of keeping the flow of capitalism as we have come to know it.  Despite the fraud, despite the corruption, despite any truth.



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I welcome those reading my story. I appreciate all of the emails I have been receiving. I also appreciate those who have registered and subscribe to this blog. If you have come from Facebook please comment on this site, rather than any Facebook post of this page due to the fact that there are many readers who are not part of Facebook forums, or even Facebook itself. I encourage all readers to put their comments on this site so that all of the information will be accessible to all readers from all parts of the internet. I urge you to join this site and receive the RSS feed, or bookmarking us, sharing us with your friends on Facebook and Twitter. If you know of anyone who might benefit from this information I urge you to pass on this website address! Share and let’s make some change together!

Thank you for stopping by.


©2014-2017 Doug Boggs All Rights Reserved

The Trustee is given the presumption of correctnes

The Trustee in a non-judicial foreclosure procedure is given the presumption of correctnes[s] in the performance of their position.  This is what the banks or beneficiaries are well aware of and use to their advantage in a non-judicial foreclosure procedure.  Because, by law as ordered by the CA Supreme Court, the Trustee is ruled to be independent and act on behalf of the court in the transaction and is to be at arms length from either the borrower or the lender, the documents filed by the Trustee are considered to be true and correct.  What exactly is true and correct anymore?  As we move forward through this post I may repeat myself a few times in order to make sure of the reader’s clarity.

You see, the Trustee is given the power of the court and subsequently is given the presumption of correctness.  Meaning that, if there were to be a legal action taken by a borrower against a beneficiary for wrongful foreclosure in a non-judicial foreclosure action, the court will first abide by what the Trustee says to be true and correct because they are acting as the court.  It is now the job of the party being foreclosed on to show the court of the illegalities being made by the beneficiary, rather than the Trustee doing their job to begin with, because the Trustee works for the banks and is a strawman in the transaction acting in the best interest of the bank.

It is the job of the Trustee to be independent and to make sure that the paperwork being filed is done according to the rules and is true and correct as it relates to the necessary actions to be taken in the power of sale.  What this truly means is that the paperwork that is submitted by the beneficiary is to be filled out correctly, however, this does not mean that the contents and actions which are stipulated within the documents have been done correctly and in accordance to the rule of law.  So, therefore, the Trustee oversees that the paperwork might be FILED correctly, however, that does NOT mean that the actions to which the beneficiary is claiming to have done, that have been stipulated within the documents in order to comply with the rules of the power of sale, or the contents of the documents, have been done correctly or if at all.  But, because the Trustee is given the presumption of correctness by the court it is assumed by the Superior court that things have been done according to the rules of the power of sale.

So, what happens when the beneficiary does NOT follow the rules of the power of sale?  According to the court, because the Trustee allowed the paperwork to be filed in the County Recorder’s Office, the Superior and Federal Courts assume that the contents of the documents are true and correct.  Why is this?  Because the Trustee is to be independent of both parties in the contract and is to be without bias to the information one way or the other.  It is because of this assumed independence that the Trustee is given the presumption of correctness in their actions.

The beneficiaries know that they have owned the Trustee and have since 1998.  They know that the Trustee is not independent and that the Trustee works in the best interest of the beneficiary and with no interest to the borrower.  For this reason, the Trustee will file any document that is filled out by the beneficiaries, or any party acting as a beneficiary, even if all of the information in those documents are a lie, false, and fraudulent.

When Wells Fargo came at me with guns blazing and filing their Notice of Default, I noticed that the documents were filled with incorrect information.  See my post Notice of Default.  The contents of the information were incorrect.  The papers that were being filed were being filed in order to deceive the court so that the beneficiary could quickly foreclose without allowing us the opportunity to rectify the situation from our end.

The beneficiary is able to use the accepted public perception, and the rule of law set down by the CA Supreme Court in 1978, which dictates that the Trustee is independent.  In this independence it is the intent that the Trustee act on behalf of the court.  Therefore the paperwork is considered true and correct because of the presumption of correctness that is given to the Trustee no matter what the information in the paperwork seems to state.  This is how someone who is current on their payments can be foreclosed on.  This is how someone who paid cash can be foreclosed on.

The Trustee has worked for the banks and has been since the Senate Bill 1638 was passed as law and became active law on January 1, 1998.  The courts have turned a blind eye on fact that the beneficiary and the Trustee are to be independent.  The courts have incorrectly allowed or acted in a complicit nature to the fact that the banks and the Trustee are able to work together in a fraudulent manner.  The courts have turned a blind eye to the fact that when there are any changes to a real estate contract they must be signed by all parties.  The State has incorrectly allowed or acted in a complicit nature in order to allow the banks to fraudulently use a deed of trust mortgage since the year 1998.

(NOTE: If you have not read my previous posts on this issue you can do so and catch up by clicking How is your deed of trust VOID?)

The judicial system itself sold out to a law that had been in the books since 1677.  In 1998 when CA Civil Code 2934a was amended through Senate Bill 1638, and instilled into law on January 1, 1998, it was reiterated in the new law that all parties must sign to any changes to the contract agreement.  Because the courts have turned a blind eye to the fact that the Trustee is to be independent is the exact reason that the deed of trust agreement is fraudulent and VOID.  Because the courts and the state have turned a blind eye to the fact that all parties must sign any and all changes or substitutions that are done to the deed of trust agreement also show how corrupt things have become.



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I welcome those reading my story. I appreciate all of the emails I have been receiving. I also appreciate those who have registered and subscribe to this blog. If you have come from Facebook please comment on this site, rather than any Facebook post of this page due to the fact that there are many readers who are not part of Facebook forums, or even Facebook itself. I encourage all readers to put their comments on this site so that all of the information will be accessible to all readers from all parts of the internet. I urge you to join this site and receive the RSS feed, or bookmarking us, sharing us with your friends on Facebook and Twitter. If you know of anyone who might benefit from this information I urge you to pass on this website address! Share and let’s make some change together!

Thank you for stopping by.


©2014-2017 Doug Boggs All Rights Reserved

How is your deed of trust VOID?

How is your deed of trust VOID?  The example herein will be using CA law, however keep in mind that there are 34 other states that use deeds of trust.  Due to the nature of the foreclosure fraud that happens throughout the country in EVERY state, there is a sure chance that there are similar laws and rules that dictate a similar scenario in your state.


If someone lends you money it seems quite natural to pay them back for that action.  This is the world we have all seemingly agreed to live within.  In our global paradigm of capitalism it is natural to most people that it is honorable and just to pay the lending party back for the money that was borrowed.  This seems fair and responsible to want to pay back the lending party for their generosity.  This is something that I have heard from everyone that I have spoken to on this subject.  Sometimes there are transactions that have the person who lent the money receive interest for the money that they lent the borrowing party. All of this seems quite natural in the order of things.  People find it honorable and their personal responsibility and duty to return borrowed money.  This seems to be human nature.

There are also times when money gets exchanged and there is a contract involved outlining the details of the exchange.  In normal contract law, both parties must understand all of the details that are outlined within the documents.  It is the obligation of the contracting party(lender) to make sure that the borrower understands all of the details that pertain to the contract.  If there are certain details that are within the contract that the borrower does not understand it is the job of the lender to make clear of any questions or concerns for the borrower.  There must be a “meeting of the minds”.  Everyone must be “on the same page”.  This means simply that the lender and the borrower must know and understand all of the terms of the contract and must agree to all of the terms of the contract.

Now, let’s put this into a context using real estate.  In this context, the contract MUST be in writing.  This dates back to a law called the Statute of Frauds, back to the year 1677.  All of the terms and conditions of the contract MUST be clear and understood by the borrower, as we said that this is standard contract rules.  In real estate, the contract, through the life of the contract, MUST be signed by all parties within the contract.  This comes from the Statute of Frauds.  If there are changes in a contract, then the changes or amendments create a new contract between the parties, therefore, all parties must sign off on any changes throughout the duration of the contract.  Seems fair, right?  If this doesn’t take place and there is confusion about any of the terms of the contract this means that the contract is voidable.

What if the lender does not inform the borrower of certain terms and conditions that are in the contract?  This would mean there is never a meeting of the minds and the contract is voidable. However, what would happen if the lending party actually deceived the borrower, by hiding certain details that exist in some of the terms of the contract, in order to entice the borrower into signing a contract that if the borrower were to know that information would not sign the contract?  These details that are withheld are paramount to the meaning of the contract itself and if the borrower were to have known the details of this withheld information prior to signing the documents they would have not agreed to the terms of the contract.

If this were to happen then the contract is not voidable, it is VOID.  The contract is not worth the paper it is printed on.  This is due to the fact that the lending party knowingly defrauded the borrower by not informing the borrower of imperative details of the contract agreement, so therefore through the actions and choices made by the lender in an attempt to deceive the borrower in order to create the transaction, the contract is VOID.  The borrowed money doesn’t need to be paid back because it was created out of fraud.  If a contract is created out of fraud it is not voidable, the contract is void.  This is clear law.  It is VOID because it was knowingly created in order to deceive one party over the other.  So, the party who attempted to deceive the other is out that money due to the risk of deception they chose to enter into in order to orchestrate the contract agreement.

Everyone knows that there is some level of deception in a monetary transaction when they go to the table in Vegas to gamble.  Everyone knows that the house always wins.  However, in real estate we don’t normally think that we are being deceived when we borrow money to buy a property.  In this case, your house doesn’t win, you lose your house.

This is what happens everyday, in every deed of trust contract, in CA, and all other states throughout the country.  Again, we will use CA as an example for this, but there are another 34 other states in the United States that use deeds of trust.  And many of the other states are attempting to pass legislation that will create deeds of trust states.  If you are a homeowner then this is what happened to you, or your family, your neighbor and every homeowner you know who borrowed money using the regular avenues of institutional financing.  This has been happening in the state of CA everyday, on nearly every deed of trust agreement since the year 1998.  Whether the property is valued at $1 or $100,0000,000, or more.

How is that?  Some of this is laid out in my previous post found here, but we’ll go over it again in order to make things clear.  Do review the previous post as well for a broader scope of information and point of view.

It is hard for people to grasp that they have been swindled when they are still in their homes, are paying for their money that they borrowed and no one is knocking on their door demanding for their money.  Life seems “normal”.  It seems that all is okay and that they were not defrauded.  I hear it every time I talk with people.  They say, “Oh, that didn’t happen in my case, because everything is going well.”  However, you have been swindled and the bank is betting on your moral compass that you will pay them for defrauding you.  And the banks are winning.  You’ve all been duped.

But, what if the contract were VOID and you didn’t have to pay back the bank for defrauding you out of your hard earned money?  How would that change your life?  How would that change our society?  What would you do with all of that money?  How different would your life be if you didn’t have to pay back the bank every month for their deceptive behavior?  It was their actions, not yours, which dictated the result of them not receiving their money back because they lent the money through deceptive means.  Why should the bank be rewarded the return of their money if the only way for you to borrower it was to deceive you?

What makes the banking industry immune to the rule of law?  Why are they able to lie to every borrower in order to secure a contract?  Why are they able to cheat every borrower out of hundreds, thousands or millions of dollars on a monthly basis?  Every month, every year, for decades?  Every month a property owner receives a statement requesting payment for a mortgage.  Every month a property owner is deceived out of their money through this statement from the financial institution requesting payment for the VOID contract that they are collecting on.  Every month, on every deed of trust real estate contract, the bank is defrauding you of your money.  This is mail fraud, and this goes on for each contract throughout the country, month after month, year after year.

How are the banks able to steal homes when someone paid cash for their home and never had a bank in the transaction?  How are banks able to steal homes from people who are current on their mortgage?  If these actions can happen does this mean that the entire system is wrong?

No, actually.  There are laws in place that are designed to orchestrate a proper real estate transaction.  The laws just aren’t being followed or policed.  What it means is that the entire system is corrupt, that’s all.  The systems that pertain to real estate are the lending system and the judicial system.  Both are corrupt in this transaction, otherwise we would have had solutions to this specific issue and I wouldn’t need to be writing this.  But, this is not the case, and I am sitting here writing.

You see,  in 1978, the CA Supreme Court issued a ruling in the Garfinkle v Superior Court for Contra Costa County, respondent being Wells Fargo Bank, specifically detailing the independence of the trustee in a deed of trust agreement.  The independence is what makes the deed of trust work.  They were clear on this, because the Trustee in the transaction is given the power of the court in the transaction.  The independence is what makes the “court” fair and just.

In CA, the process of foreclosing on a borrower is called a non-judicial foreclosure procedure.  The non-judicial foreclosure process was created in order to alleviate any burdens to the court system of any frivolous lawsuits and to help streamline the foreclosure process.  So, if the Superior Court was taken out of the foreclosure process, then another party needed to be reinstated to act as the court in order to conduct a fair and just foreclosure procedure.  So, as the “court” now being the trustee, which the CA Supreme Court ordered was to be independent to both the lender and the borrower in the real estate transaction, they are the rule of law.  It is their position to act independent of all parties and to make sure that both parties in the transaction follow the rules of law as it pertains to a deed of trust agreement.

These rules are outlined in the CA Civil Codes.  The Civil Codes create rules which dictate what is known as a Power of Sale clause that is in a deed of trust real estate agreement.  This rule is CA Civil Code 2924.  When the borrower defaults on the loan payments the Power of Sale becomes activated and the bank is able to begin the foreclosure process.  However, there are also a set of rules with which the lender must comply with.  They must comply each and every rule in order for the non-judicial foreclosure process to be done in accordance to the rule of law. If there is a rule that is missed or done incorrectly, it is the duty of the Trustee stop the foreclosure process.  It is then their duty as “the court” to make the banks comply with the certain code that they failed to comply with.  In other words, the foreclosure process must stop, the lender must make the efforts to comply with the rules of foreclosure and begin the foreclosure action again so that the lender then does in fact comply with all of the rules as they pertain to the foreclosure civil codes and rules of procedure.

So, if the bank doesn’t comply with the rules accordingly, the Trustee is able to stop the bank from wrongly foreclosing on the borrower.  One would think, but no.  It is this reason that people who have paid cash for their home are able to be foreclosed on.  It is for this reason that someone who is current on their mortgage can be foreclosed on.

You see, in the year 1996, the bank lobbyists wrote Senate Bill 1638.  It was brought to the table by then Republican Senator Ross Johnson and signed into law by then Republican Governor Pete Wilson.  This bill became enacted law on January 1, 1998, to amend CA Civil Code 2934a, which is part of the Power of Sale.  What was it that was in this bill that created every deed of trust to become VOID?

 SB 1638, Johnson.  Deeds of trust:  trustee substitution.
   Existing law sets forth the procedures for the substitution of
trustees under a deed of trust upon real property or an estate for
years therein.
   This bill would, as an alternative procedure, set forth the
procedures for the substitution of trustees under a deed of trust
upon real property or an estate for years, given to secure an
obligation to pay money, by the beneficiary or beneficiaries under
the trust deed who hold more than 50% of the record beneficial
interest of a series of notes secured by the same real property or of
undivided interests in a note secured by real property equivalent to
a series transaction.  The bill would also establish a process
through which all of the beneficiaries under a trust deed can agree
to be governed by beneficiaries holding more than 50% of the  record
beneficial interest of a series of notes in real property or
interests in a note equivalent to a series transaction, as specified.
  In order to substitute trustees or agree to be governed by the
majority interest holders, all parties to the transaction would be
required to sign and record a document containing specified

So, as an alternative procedure, the new law set forth the procedures for the substitution of trustee under a deed of trust upon real property.  So, this new law pertains to the party (beneficiary) or beneficiaries under the deed of trust who hold more than a 50% control of the record beneficial interest of the note or a series of notes secured by the property.  In other words, this new law allows the beneficiary to be the party to dictate the substitution of a trustee under a deed of trust.  It goes on to state that in order to substitute a trustee that all parties to the transaction would be required to sign and record a document containing specified information.

Let’s tear this apart.

If the bank is the beneficiary, which in many cases is so, then this gives the bank the power to substitute a new trustee.  So, this means that if an original or other substituted trustee is not allowing the bank to perform illegal actions against the borrower, this law gives the bank the right to substitute to a trustee who will allow the bank to perform illegal actions on behalf of the bank in order to wrongly foreclose on someone.  It also means that every borrower must be a party to sign the substituted trustee when the bank is attempting to do this action.

Now, let’s tear this apart further.

If a bank chooses to foreclose on a borrower who is current on their mortgage and the Trustee is not allowing the bank to file the necessary fraudulent documents into the court, or the County Recorder’s Office, because the bank is unable to prove that the borrower has defaulted on their obligation, then the new law has now given the bank the right to change that Trustee to a party who will comply with the illegal activities of the bank who is choosing to illegally foreclose on someone.  So, let’s take this a bit further.  If someone has paid cash for their home and the bank’s computer spits out an address through their foreclosure software, or a human being puts in an address 222 instead of an 888 into the address of the party to be foreclosed, and there is no independent trustee to put a stop to the wrongdoing, then the wrong home will be foreclosed on.

So, when the bank offers the borrower a deed of trust agreement in the real estate transaction, it would be only natural for you as a borrower to assume that there is an independent Trustee that is in the transaction to make sure that the bank complies with all of the appropriate rules and regulations of the foreclosure process in order to protect your title, your home, your asset. The fact that the bank does not inform the borrower that they know that they can replace a Trustee who acts in the interests of the bank, and holds no interest to act on behalf of the borrower in order to protect the borrower’s title, is fraud.  Because this is fraud, the contract is VOID.

Would you sign a real estate contract if the bank, or realtor, told you that the trustee will not act on your behalf and will not protect your title if the bank were to decide to foreclose on you whether you defaulted, or whether you were current on your payments?  No, nobody would.

The courts have also allowed, because of this rule, the banks the ability to substitute the trustee in all deed of trust real estate transactions for decades.  They have also allowed this action to take place without the borrower’s signature, as it was outlined in the new law, as well as, the Statute of Frauds rule dating back to 1677.

The Trustee is a strawman.  Black’s Law Dictionary defines a strawman as a third party used as a cover in illegal or shady deals; a weak or flawed person with no standing.  So, if the banks know that they have the power to create a strawman for a trustee then there is in fact no independent trustee in the transaction as it was defined by the CA Supreme Court in 1978.

So, the law states that there is to be an independent party, named Trustee, in a deed of trust agreement.  But, the banks have the power to substitute a new trustee.  The courts have allowed the banks to levy this power without the borrower’s signature since 1998.

So, it is very clear that every deed of trust contract agreement that has been signed since the year 1998 is fraudulent.

How did I find this out?

When the very first documents in my non-judicial foreclosure action had incorrect information in them allowing Wells Fargo bank to quickly and illegally foreclose on me, I began to look into the computer archives at the county recorder’s office for a legitimate deed of trust agreement and a legitimate Substituted Trustee that was signed by all parties involved in the transaction, as the 1996 law stated was to be the case, I had to go back into the archives to the year 1997.  It was only then when I began to look into why.

When I began to understand the gravity of this specific issue, I realized that this was the needle in the haystack that no one is talking about.

When I formulated my argument in the court for the 4th Amended Complaint, Judge McGuiness of Superior Court in Alameda County looked me straight in the eyes and told me he understands what I am trying to state.  That he now fully understands my argument. He stated that he gets my points of fact and he would need to take this into consideration.

Why didn’t he simply rule on my case then?  Because the courtroom was filled with people.  Because it would become precedent and common knowledge that all deeds of trust, in CA, were fraudulent and illegal and VOID.  Since 1998…This would have created a situation that would have made every real estate contract either go into litigation and become VOID dating back to 1998, or certainly some other repercussion that was to be measured only as astronomical in our capitalistic paradigm.  But, I believed it is necessary for us to make these type of changes since the entire system is actually based on fraud.  And this is only the beginning.

My case was immediately dismissed and my court files were quickly silenced.


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I welcome those reading my story. I appreciate all of the emails I have been receiving. I also appreciate those who have registered and subscribe to this blog. If you have come from Facebook please comment on this site, rather than any Facebook post of this page due to the fact that there are many readers who are not part of Facebook forums, or even Facebook itself. I encourage all readers to put their comments on this site so that all of the information will be accessible to all readers from all parts of the internet. I urge you to join this site and receive the RSS feed, or bookmarking us, sharing us with your friends on Facebook and Twitter. If you know of anyone who might benefit from this information I urge you to pass on this website address! Share and let’s make some change together!

Thank you for stopping by.


©2014-2017 Doug Boggs All Rights Reserved


hy·poc·ri·sy –  həˈpäkrəsē/ – noun
1. the practice of claiming to have moral standards or beliefs to which one’s own behavior does to conform; pretense.

synonyms: dissimulation, false virtue, cant, posturing, affectation, speciousness, empty talk, insincerity, falseness, deceit, dishonesty, mendacity, pretense, duplicity;

More antonyms: sincerity
Origin – Middle English: from Old French ypocrisie, via ecclesiastical Latin, from Greek hupokrisis ‘acting of a theatrical part,’ from hupokrinesthai ‘play a part, pretend,’ from hupo ‘under’ + krinein ‘decide, judge.’

How can we dig ourselves out of such a hypocritical system?  We live in a financial world where we use words like Trust, Trustee, Deed of Trust.  In 35 of our 50 states, someone who is borrowing money to purchase a home is given a Deed of Trust contract agreement by a financial institution.  In this system, through my own personal lawsuit against Wells Fargo Bank for fraud, I uncovered that through revisions that were done to Ca Civil Code 2934a, in 1998, a financial institution is well aware of the fact that a Trustee in a Deed of Trust contract holds no protections for the borrower and the borrower’s title.  The financial institution is well aware that the Trustee is a straw man, and that the bank is able to control and manipulate the borrower’s title the moment the borrower signs the paperwork.  The banks are well aware of this, yet, fail to inform the borrower of this fact, therefore, deceiving the borrower into a false contract agreement making this entire contract void on its face.

We live in a confused hypocritical world where our leaders are filled with empty talk, dishonesty, insincerity, posturing and deceit.  Where their duplicitous nature seems to be the norm.  Where one stands up against drugs and touts the continued need for the failed ‘war on drugs’ only later to be found with cocaine and marijuana after being stopped in a routine traffic violation.  Where another married, white, maleCongressman who stands firm against LGBT or minority rights, is only later to be found shagging an African-American transvestite in the congressional bathroom.

The people in the United States live in a perceived ‘democratic’ society.  But, our own previous President, Jimmy Carter, has called it an Oligarchy.  This oligarchical system where we have our armed forces, at the bequest of American corporations, travel all over the world overturning democratically elected officials of other countries, overthrowing those politicians in order to install a more politically American friendly despot. Of course, all of this is done in the facade of spreading democracy around the world in order for American companies to have a more strategically powerful capitalistic stronghold over another country’s own labor, oil or mineral reserves.

Americans live in a system where we are taught that our vote can make a difference.  Yes, the original ideals of our system of government are the idea of one person one vote, however, history shows us that through the gerrymandering and redistricting of voting boundaries, our one person one vote is shut out to a specifically calculated populace that will create a delegate who will vote, as in many cases found,  for whichever political party that they are paid to do so.

Our ‘democratic’ system is continuously passing new and more refined voting laws that have shut out the elderly, the minorities, the sick and frail to fend for themselves.  These new laws create so much confusion that when people show up to cast their vote, they show their government supplied ID or drivers license, but then they are told that they cannot vote because they do not have the proper new identification that is necessary due to some new rules that was instituted.  Or, that people in these new redistricted areas find that they have less voting centers and must travel many miles to cast their vote, as well as, wait in line for hours on end in order to do so.  I guess it is up to us to find the time to stand in line, as seen recently in Arizona, 6 hours to vote, allthewhile, needing to work 60 hours a week just to keep food on the table.  Fit that into your schedule.  Our government knows that creating a national holiday can be dangerous, because that would make more people have the opportunity to vote.

I think we are all well aware of the fact that our political system is rigged and filled with fraud and corruption.  We know that there are some voting machines that are reporgrammed and tampered with, that change a vote from one party to another, or one candidate to another once the vote is cast, but we can only hope that all of the machines aren’t re-programmed in this way.

We all live in a world where politicians lie in order to acquire the trust of the people who are tasked to vote for them.  Where the Supreme Court has allowed politicians the levity to lie and make it okay to do so in the political arena.  Yet, we are asked to vote for the politician who has the best interest of the public in mind.

We live in a country where the Constitution states that one person is one vote.  We live in a country where a corporation is considered a person.  Albeit, a person who has more rights that another person.  Our Supreme Court ruled in 1818, in the decision of the Trustees of Dartmouth College v. Woodward(17 U.S. 518 (1819)), writing: “The opinion of the Court, after mature deliberation, is that this corporate charter is a contract, the obligation of which cannot be impaired without violating the Constitution of the United States. This opinion appears to us to be equally supported by reason, and by the former decisions of this Court.” Beginning with this opinion, the U.S. Supreme Court has continuously recognized corporations as having the same rights as natural persons to contract and to enforce contracts.

Seven years after the Dartmouth College opinion, the Supreme Court decided Society for the Propagation of the Gospel in Foreign Parts v. Town of Pawlet (1823), in which an English corporation dedicated to missionary work, with land in the U.S., sought to protect its rights to the land under colonial-era grants against an effort by the state of Vermont(the home of Bernie Sanders) to revoke the grants. Justice Joseph Story, writing for the court, explicitly extended the same protections to corporate-owned property as it would have to property owned by natural persons. Seven years later, Chief Justice Marshall stated: “The great object of an incorporation is to bestow the character and properties of individuality on a collective and changing body of men.”

Since the Supreme Court’s ruling in the right winged Koch Brother’s private organization called, Citizens United, things have changed dramatically.  Through the Citizens United v. Federal Election Commission in 2010, the United States Supreme Court upheld the rights of corporations to make political expenditures under the First Amendment. Since, there have been several calls for a U.S. Constitutional amendment to abolish Corporate Personhood.  While the Citizens United majority opinion makes no reference to corporate personhood or the Fourteenth Amendment, Justice Stevens’ dissent claims that the majority opinion relies on an incorrect treatment of corporations’ First Amendment rights as identical to those of individuals.  Riiiiiiight…

We live in a system where that one person is allowed a maximum political contribution of $2700, yet, due to the ruling of Citizen’s United, corporations are allowed to give unlimited amounts to any specific candidate.  Perfect way to keep an oligarchy running.

As you may have been these last few days, people rush to complete their tax filings.  Yet, it is well documented and public knowledge, which most people seem to refuse to acknowledge or believe, that the income tax system of the United States was never ratified by all of the states and because of that fact that there is absolutely NO law that requires any person in the country to pay their hard earned money to the IRS.  Many people cannot wrap their head around the fact that our tax system is designed around a private corporation, called The Internal Revenue Service.  This private company is tasked to extort and collect money from the citizens of the United States in order to pay another private corporation called The Federal Reserve.

We must have the courage to take deeper look into the hypocrisy of our society and what we as a society are going to do change our systems to allow us to live in a more sincere civilization.  It is our responsibility to create the world we wish to live in.  We cannot ask those hypocritical leaders to create a sincere civilization.  In the words of Mark Twain, “If voting made any difference they wouldn’t let us do it.”


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I welcome those reading my story. I appreciate all of the emails I have been receiving. I also appreciate those who have registered and subscribe to this blog. If you have come from Facebook please comment on this site, rather than any Facebook post of this page due to the fact that there are many readers who are not part of Facebook forums, or even Facebook itself. I encourage all readers to put their comments on this site so that all of the information will be accessible to all readers from all parts of the internet. I urge you to join this site and receive the RSS feed, or bookmarking us, sharing us with your friends on Facebook and Twitter. If you know of anyone who might benefit from this information I urge you to pass on this website address! Share and let’s make some change together!

Thank you for stopping by.

©copyright 2014-2016 Doug Boggs

CA Rule of Court 8.25, Filing and Service to stop our foreclosure sale

confused w pile of books

Before I get into CA Rule of Court 8.25, about filing and Service of court documents I wanted to step back a second. Once we got our case completed, prior to filing it with the court, we found the Lis Pendens and complaint then needed to be reviewed by a judge. (NOTE: only because we filed in Pro Per, attorney’s don’t need to have a judge’s permission to file a Lis Pendens. Another way the court makes it harder for the self litigator…and it is said that justice is fair…) We then submitted it to the Clerk of Court after waiting in the line for nearly two hours. Once the clerk reviewed all of the documents and made sure all of our paperwork was filled out correctly, she took our case documents and stamped them with a docket number. I felt a huge rush of energy flow through me when she stamped the documents. I felt a confidence building within me that I had not felt in the past few years. I had a moment where I felt empowered in all of this living hell…if only for a moment.

Upon receiving our docket number, I was then able to run across and up the street a block to the County Recorder’s Office. We then filed our Lis Pendens with the County Recorder. After filing the Lis Pendens with the County Recorder, I walked back to the Clerk of Court and I filed the County Recorder’s stamped copy of the filed Lis Pendens, with the court.

Now, the clerk of court had asked for two copies to keep, and I brought another copy for them to stamp that I could take for my files. I did this every time I filed anything with the court for the next 3 1/2 years.

Over the previous three months in order to get to this point it had all been a whirlwind. It was nearly all I did was focus on our lawsuit. I had been unemployed for a very long time, due to the collapse of the housing industry during the collapse of the economy, which beginning for me was, in the middle of 2009. I had no children. My health was good, outside of some feelings of anxiety, helplessness, depression, exhaustion, and other overwhelming feelings. I took the time to dive in and do the work. We lived sparsely in order to stay focused on the problem at hand.

My point for rushing to get things filed on the dates we were attempting to was to stave off the impending auction of our house that had been scheduled within the upcoming few days. I wanted to make sure that all parties were privy to the filing, and not by simply filing with the court. We also wanted to make sure they were served before the auction was to begin. So, in order to stop the auction of the property, we felt we should serve the defendants the court documents by overnight mail.

As I had stated previously, in order to find the appropriate addresses necessary to serve a corporation legal documents I reviewed the corporate information to all of the parties mentioned in our case as defendants on the website of the Secretary of State.

I made sure that I would get a signature and time stamp of when the service was completed. After serving the court documents to all of the parties it is the rule of the court that you must then file the proof of service documents to the court for all of the defendants. Rule 8.25 is the rule of the court for service, filing and filing fees can be found at: Rule 8.25. Upon completion of service to all defendants you must then file with the court the proof of service of the documents. This is to be done for every moving paper throughout the duration of the case.

I went to the courthouse steps on the scheduled court auction date. The auction was to begin at 12:30pm. We had made posters that I was to hold up if anyone was to decide they might want to place a bid on our property. We also made those posters smaller to be used as handouts as well. I began giving the handouts to all of the bidders, the bottom feeders, that were there to bid on homes. I had never reflected on those people before. The were simply doing their job working with property management firms, property speculators, builders, developers, etc. I know they thought that all people going through a foreclosure were deadbeats who didn’t pay their mortgage. So, now they were going to be looking at one of those people straight in the eyes, as I would inform them when I gave them the handout, “If you place a bid on this property you will become part and parcel of the lawsuit that is filed against this property. There is a filed Lis Pendens and lawsuit on this property. The information is there for your review.”

I waited. The person who was acting for the “trustee” came up to the top of the steps and began setting up his stand. Once he got settled into his chair and his computer was logged into his system he began to read out the rescheduled or cancelled properties. Different addresses in different cities began spewing from his mouth. I waited. I moved about handing out more handouts. I waited. Then he mentioned my property address!

VICTORY! We had gotten a small respite! The bank had taken our property off of the list! We were now able to stay in our home a bit longer. How long? We had no idea. The auctioneer acting for the “trustee” gave us no indication of another date.

We could sleep in our home for another night.

I welcome those reading my story. I appreciate all of the emails I have been receiving. I also appreciate those who have registered and subscribe to this blog. If you have come from Facebook please comment on this site, rather than any Facebook post of this page due to the fact that there are many readers who are not part of Facebook forums, or even Facebook itself. I encourage all readers to put their comments on this site so that all of the information will be accessible to all readers from all parts of the internet. I urge you to join this site and receive the RSS feed, or bookmarking us, sharing us with your friends on Facebook and Twitter. If you know of anyone who might benefit from this information I urge you to pass on this website address! Share and let’s make some change together!

Thank you for stopping by.

©copyright 2014 Doug Boggs

Lis Pendens

legal contract

First of all, I wish to express my profound gratitude for all of those people throughout the world who have registered to become members of this blog, which deals with my court history of the fraudulent and illegal foreclosure procedures by Wells Fargo Bank’s attempt to wrongly foreclose on my property, to which I subsequently fought against them in court while acting as my own attorney.  I am also very grateful and humbled by the emails I am receiving.  Please grant me time to respond to your email inquiries, but I will do so at my earliest convenience.

As we have found through my learning of the statute of frauds, a law which dates back to 1677, that any transfer of any rights or privileges to a real estate contract must be done in writing and signed by all parties involved.  This is so that all parties involved in the transaction become privy to the changes and knowledgeable of any changes and of any new parties in the contract.

In US law, a lis pendens is a written notice that a lawsuit has been filed concerning real estate, involving either the title to the property or a claimed ownership interest in it. The notice is usually filed in the county land records office. Recording a lis pendens against a piece of property alerts a potential purchaser or lender that the property’s title is in question, which makes the property less attractive to a buyer or lender. After the notice is filed, anyone who nevertheless purchases the land or property described in the notice takes subject to the ultimate decision of the lawsuit.

Lis pendens is Latin for “suit pending.” This may refer to any pending lawsuit or to a specific situation with a public notice of litigation that has been recorded in the same location where the title of real property has been recorded. This notice secures a plaintiff’s claim on the property so that the sale, mortgage, or encumbrance of the property will not diminish plaintiff’s rights to the property, should the plaintiff prevail in its case. In some jurisdictions, when the notice is properly recorded, lis pendens is considered constructive notice to the other litigants or other unrecorded or subordinate lienholders. The term is sometimes abbreviated as “lis pend“.

The County Recorder’s Office will record a lis pendens upon request of anyone who claims to be entitled to do so (e.g. because they have filed a lawsuit). If someone else with an interest in the property (e.g. the owner) believes the lis pendens is not proper, they can then file suit to have it expunged.

Some states’ lis pendens statutes require the filer of the notice, in the event of a challenge to the notice, to establish that it has probable cause or a good likelihood of success on the merits of its case in the underlying lawsuit; other states do not have such a requirement.

This specific document had been on the forefront of the paralegal’s mind, every time we would meet, as we were preparing documents to initially file the case.  Due to the fact that there was a scheduled date set for the sale of the property, we had been under the gun to try to get all of the necessary paperwork put together in order to file the lawsuit.  The paralegal made sure to impress upon us the necessity to look into also filing a lis pendens, after we would file our case paperwork.  This is because a lis pendens can be a legal document that helps to stop the foreclosure process in its tracks and this is because a buyer at a foreclosure sale is much less likely to purchase a property in foreclosure if it has outstanding liens or litigation against the property thereby they would move on to another property to purchase or rather wait until the liens or litigation on the property would get settled.  Also, the parties orchestrating the foreclosure procedure might be inclined to take the property off of the foreclosure timeline due to the fact that they would hold liability as to their actions if they were to wrongly or illegally sell off a property that then ends up being litigated in favor of the plaintiffs.

One thing I found throughout my legal history is that the judicial system does not make, or wish to make, things easy for someone who is within the system acting as their own attorney.  The system is filled with judges with whom all judges used to be lawyers.  Those judges understand that when someone is litigating their case as a Pro Per, or Pro Se, they are taking business away from a lawyer.  The judge’s are simply looking out for their fellow golfing buddies.  So, it is simple that judges can, and do, make the process difficult for those acting on their own behalf.  Perhaps so that the pro per party might finally end up getting fed up with the system and subsequently would eventually hire an attorney.  It is also because, judges do not wish to deal with people who don’t understand the legal procedures or perhaps do not have the acumen to argue their case in the same manner that a trained lawyer might.  This would mean that the judge would have to actually do some real thinking in order to see within the thoughts and reasonings of a “normal” person, rather than the systemic legal authorities that are quoted on a daily basis which make a judge’s decision easy.  Plus, the judge will be less likely to get any payola under the table in order to settle or end a case from a “normal” citizen, who is acting as their own attorney, than they might receive a payoff from a corporate law firm with whom the judge just may have stock in their own personal retirement portfolio of that financial institution.  But, I digress…

I say all of this because only when I went to the county recorder’s office to file our lis pendens did I find that, in the state of CA, according to California Civil Code of Procedure 405.21 states, that if you are acting as your own attorney you must have a judge review your case and sign off on your lis pendens before you can make it active and record it into the public record.  Therefore, we had to run back to and around the courthouse looking for an available sitting judge who would review the case documents in order to then sign off on the lis pendens.  There was no guarantee that the judge would sign, and we were at the last day prior to the scheduled sale of the property which was to take place in only a few short days after the weekend.  The pressure was on.

We finally were able to see the judge.  He took our case file to his chambers and reviewed the documents for about 45 minutes before he then came out of his chambers, handed the docs to the court secretary, who then asked us to approach.  She gave us our documents.  We turned the front page over to the next to see.  The judge had signed his approval and we ran over to the County Recorder’s office and filed the lis pendens and made it part of the public record.

My filed Lis Pendens

One thing I wanted to impress a point on was the fact that if someone else with an interest in the property believes the lis pendens is not proper, they can then file suit to have it expunged.  I wanted to state that Wells Fargo Bank, after we filed our lawsuit and moved it forward through the life of the lawsuit, they never attempted to have the lis pendens expunged.  Interesting, to say the least.

I welcome those reading my story. I appreciate all of the emails I have been receiving. I also appreciate those who have registered and subscribe to this blog. If you have come from Facebook please comment on this site, rather than any Facebook post of this page due to the fact that there are many readers who are not part of Facebook forums, or even Facebook itself. I encourage all readers to put their comments on this site so that all of the information will be accessible to all readers from all parts of the internet. I urge you to join this site and receive the RSS feed, or bookmarking us, sharing us with your friends on Facebook and Twitter. If you know of anyone who might benefit from this information I urge you to pass on this website address! Share and let’s make some change together!

Thank you for stopping by.

©copyright 2014 Doug Boggs