"The mega-banks that funded the subprime industry were not victims of an unforeseen financial collapse as they have sometimes portrayed themselves," said Bill Buzenberg, CPI executive director. "These banks were deliberate enablers that bankrolled the type of lending that's now threatening the financial system."
Analyzing computer-generated government data on close to 7.2 million subprime loans made from 2006 through 2007, the Center's study also identifies the top 25 originators whose lending accounted for nearly $1 trillion--about 72%-- of the high interest loans made during the period that ranged from the peak to the collapse of the subprime boom. At least 21 of the top 25 were financed by banks that received bailout funds--through direct ownership, credit agreements or purchases of loans for securitization.
And in a discovery that Buzenberg called "bizarre," the study found that the epicenter of the profligate lending practices was Southern California, where nine of the top 10 subprime lenders were based.
The study results were released to the press last week in a Web- and teleconference presented by Buzenberg and John Dunbar, the Center senior fellow who headed the project. Naming names, the report calls the following lenders "The Subprime 25"and identifies the amount of their high-interest loans:
1. Countrywide Financial Corp.
At least $97.2 billion
2. Ameriquest Mortgage Co./ACC Capital Holdings Corp.
At least $80.6 billion
3. New Century Financial Corp.
At least $75.9 billion
4. First Franklin Corp./National City Corp./Merrill Lynch & Co.
At least $68 billion
5. Long Beach Mortgage Co./Washington Mutual
At least $65.2 billion
6. Option One Mortgage Corp./H&R Block Inc.
At least $64.7 billion
7. Fremont Investment & Loan/Fremont General Corp.
At least $61.7 billion
8. Wells Fargo Financial/Wells Fargo & Co.
At least $51.8 billion
9. HSBC Finance Corp./HSBC Holdings plc
At least $50.3 billion ***
10. WMC Mortgage Corp./General Electric Co.
At least $49.6 billion
11. BNC Mortgage Inc./Lehman Brothers
At least $47.6 billion ***
12. Chase Home Finance/JPMorgan Chase & Co.
At least $30 billion
13. Accredited Home Lenders Inc./Lone Star Funds V
At least $29.0 billion
14. IndyMac Bancorp, Inc.
At least $26.4 billion
15. CitiFinancial / Citigroup Inc.
At least $26.3 billion
16. EquiFirst Corp./Regions Financial Corp./Barclays Bank plc
At least $24.4 billion
17. Encore Credit Corp./ ECC Capital Corp./Bear Stearns Cos. Inc.
At least $22.3 billion
18. American General Finance Inc./American International Group Inc. (AIG)
At least $21.8 billion ***
19. Wachovia Corp.
At least $17.6 billion.
20. GMAC LLC/Cerberus Capital Management
At least $17.2 billion ***
21. NovaStar Financial Inc.
At least $16 billion
22. American Home Mortgage Investment Corp.
At least $15.3 billion
23. GreenPoint Mortgage Funding Inc./Capital One Financial Corp.
At least $13.1 billion
24. ResMAE Mortgage Corp./Citadel Investment Group
At least $13 billion
25. Aegis Mortgage Corp./Cerberus Capital Management
At least $11.5 billion
[*** includes subsidiaries]
In fact, # 1--Countrywide--said Dunbar, "was so big and controlled so much of the lending industry, they could almost dictate who they sold their loans to." Headquarters for Countrywide, whose name was discontinued when it was purchased by Bank of America, was Calabasas in Southern California's Los Angeles County.
Nine of the top 10 subprime lenders were located in California, seven of them in Orange and Los Angeles Counties, Dunbar pointed out, offering some reasons why the area was "such a hotbed of mortgage lending." Not only is it easy to get a mortgage lender's license in the state, he noted, but you can then hire as many unlicensed people as you want. Moreover, oversight was "generally lousy," he added. "And some were non-bank lenders who were not regulated by the FDIC.
"But before lack of regulation--state and federal--was demand. The overwhelming driver for these complex, mortgage backed securities was the tremendous demand for investment product. "Large institutions and investors around the world were looking for places to put their money," said Buzenberg, "and the only way to provide these bonds was to write more mortgages." The study found that from 2005 through 2007, U.S. and European investment banks "invested enormous sums in subprime lending due to unceasing demand for high-yield, high-risk bonds backed by home mortgages."
"Credit Default Swaps and the ratings agencies also played a role," Dunbar said, adding that "any regulatory responsibility" for MBS was "passed on to the ratings agencies."
No one felt responsibility for MBS. A "legal wall" allowed [responsibility] to be handed off in a circular fashion, Buzenberg explained, adding that, in his and Dunbar's opinion, cities and municipalities "will be going after these lenders."
Asked whether earlier "stress tests" like those recently implemented by the Federal Reserve would have prevented banks from such predatory lending, Dunbar replied, "That might have worked, but now they're like closing the barn door after the horse is out."