What really happened

There has been alot of finger pointing and scapegoating in the current sub prime mortgage market. To cut through the chatter, I have been doing some research into it, and this is what I have learned so far about the underlying causes. No particular persons or parties are to blame, they all are.

*In 1980, The Depository institutions Deregulatory and Monetary control act was passed and signed eliminating rate caps on mortgages, this allowed higher interest rates and made loans to risky credit more feasible.
*The tax reform act of 1986 eliminated tax deductions on consumer and auto loans while making mortgage loans deductible, this made mortgages the preferred way to borrow money.
* During the mid nineties several "Sub-prime" money lenders came onto the market, such as "The Money Store" and started making significant inroads into the loan market, cutting the prime loan market significantly
* Financial institutions, who previously were only in the prime loan market, started making sub-prime loans and or buying the sub-prime lenders up.
* sub-prime loans jumped from 535 billion in 1994 to 5125 billion in 1997, this created an atmosphere where everyone in the market was making money due to the new loans being transacted and originated.
* In 1998 the Russian Ruble de-valued and caused the Russian government to default on its Bonds, causing a panic in the Japanese and European market. They sold off their off shore bonds and bought American bonds causing a drop in interest rates and a huge loss to sub-prime lenders.
* this caused several sub-prime lenders to go under and a panic in our market.This caused a push to dispose of the riskier loans (sub-prime) to the secondary market buyers.
* Fannie Mae( created in 1938 to purchase loans so as to provide fresh money to banks to make new loans) and Freddie Mac ( began in 1970 to do the same thing) Was slowly buying more and more sub-prime loans. The loans were bundled and sold to Fannie and Freddie with a few prime loans. This allowed the banks to pass the risk of the sub-prime loans on to the quasi-governmental institutions and then make more loans and collect the origination fees for same.
* Through 1998-2003 , more and more sub-primes came onto the secondary market, and Fannie and Freddie continued to buy.
*Global consumption of gasoline grows significantly. Prices rise from $1.50 a gallon in 2002 to $3.50 a gallon in 2007, while salaries stay at an average growth of 1-2 % per year.
* The Government mandate of the use of Ethanol, causes the price of corn to go up. This causes farmers to plant more corn and fewer secondary food crops, causing a spike in feed grain and meat products, causing the price of everyday items to increase.
* In 2005, Fannie and Freddie have a stake in approximately 1 in 2.5 loans in the U.S.
*From 1999 to 2006 Housing prices increase at an artificially inflated rate, causing even larger loans on overpriced housing. The introduction of interest only loans spurs this growth. When it comes time to start paying on the principal of the loan, the housing market is cooling and prices are dropping. People who borrowed more than the house was worth cannot re-finance and can't make the adjusted payments. Defaults begin to happen and grow as more of the loans become "Due". Fannie and Freddie hold many of them and are placed in a financial bind.
* In 2005, attempts are made to change the way Fannie and Freddie are run, but are thwarted by congress. Even though the default rate for sub-prime loans is increasing, Fannie and Freddie continue to buy.
* In 2008 Fannie and Freddie have reached a breaking point and are placed in conservatorship of the federal government. This causes a collapse of the secondary loan market. Banks can no longer dispose of risky and threatened loans easily and are being forced to take the losses, causing failures of major financial institutions.
(This last part is my opinion) The federal government signs a giant bail out and literally socializes our financial markets.
I believe I have covered most of the major causes. There are probably several hundred other minor ones, but if anyone asks, you can give them this information on how this financial donnybrook occurred. In my opinion, it happened because our government chose to ignore it and keeps thinking the solution to everything is to throw money at it or put a bunch of bureaucrats in charge
Sources:
Fannie Mae
Freddie Mac
A Short History of Subprime
Gas prices doubled over the last six years