I seem to remember even in the 90s, you had conventional conforming, some banks doing loans in their own portfolio (i.e., not securitized or sold), and the only subprimers were the Citifinancial and Household types. And they still required some equity or down payment.
Then you had FHA. That’s about it. Even when FNMA allowed down payments as low as 10%, which I think started in the 90s, it wasn’t too bad.
I do wonder if we need to roll back or modify the Gramm–Leach–Bliley Act...if I’m correct I think that was the catalyst for a lot of this.
Gramm-Leach-Bliley gutted much of what remained of the Glass-Steagall Act. Glass-Steagall was the Depression era law that separated investment banking from retail banking.
Investment bankers, Wall Street if you will, wanted to get back into making loans to consumers. I don’t think it’s a coincidence that we found ourselves in a major financial crisis less than ten years after gutting Glass-Steagall.
Household Finance and Aames Home Loans were the inspiration for the big subprime houses. Household and Aames made very small consumer loans, charging high interest rates.
The high interest rates fascinated Wall Street but Wall Street needed a product much larger than the small consumer loans Household and Aames dealt in. They needed something bigger, like mortgages. How could you get a loan the size of a mortgage but with the yield of a consumer loan? You loan to people who have bad credit and charge them a high interest rate for the privilege of getting the loan. And that’s how Wall Street got into the business of subprime lending. Unlike retail banks they weren’t pressed into it by the government. They were eager to get into subprime lending because it offered high yield paper.