The origins of the mess...

[danielh41]

An article in the New York Times from September 30, 1999 (the bold emphasis added is mine...) http://query.nytimes.com/gst/fullpage.h ... nted=print

September 30, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

[silverscreenselect]

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

That's not the type of loans that got the mortgage lenders and eventually the mortgage holders into trouble. Instead it was a bunch of bizarre, no down payment, adjustable rate, negative amortization, extremely high interest (after the initial period), balloon payment loans whereby people wound up with no equity and were practically an invitation for people to walk away after a short period of time.

The type of loan described in the article would have been a much lower risk loan with adequate collateral and a payment structure that a lot of people could live with.

But the big investment banks were looking for a higher return on the dollar with the appearance of adequate collateral so they could satisfy their accountants that these investments could be carried on the books for the full dollar value. And the mortgage lenders like Countryside made big fees and commissions generating as much of this mortgage paper as possible. The mortgage lenders were at best horribly negligent in their underwriting practices and the bankers and other financial institutions were at best horribly negligent in their accounting practices. And there is a good possibility that many of the people in these institutions crossed the line between negligence and active fraud.

It's now fashionable to try to put the blame on Clinton housing policies when the loans made during that time period are not the ones that got everyone into trouble. It's the more recent crop of ridiculously silly loans that have taken place under the Bush administration that are the ones that have imploded.

[danielh41]

My point in post the article was to show that this crisis was not a failure of capitalism or the free market. It was not the result of a lack of regulation. It was the result of too much regulation. The lenders were told by the Clinton administration to make more loans to low income people--people who couldn't otherwise obtain a mortgage. This got the ball rolling. The mortgage market had done just fine for 60 years before this government intervention. And not only that, but this current mess was predicted 9 years ago by a liberal newspaper based directly on the actions of the Clinton administration.

[Bob Juch]

My point in post the article was to show that this crisis was not a failure of capitalism or the free market. It was not the result of a lack of regulation. It was the result of too much regulation. The lenders were told by the Clinton administration to make more loans to low income people--people who couldn't otherwise obtain a mortgage. This got the ball rolling. The mortgage market had done just fine for 60 years before this government intervention. And not only that, but this current mess was predicted 9 years ago by a liberal newspaper based directly on the actions of the Clinton administration.

You still don't get it: Most of the loans that are in trouble were issued recently - under Bush, not Clinton.

[danielh41]

My point in post the article was to show that this crisis was not a failure of capitalism or the free market. It was not the result of a lack of regulation. It was the result of too much regulation. The lenders were told by the Clinton administration to make more loans to low income people--people who couldn't otherwise obtain a mortgage. This got the ball rolling. The mortgage market had done just fine for 60 years before this government intervention. And not only that, but this current mess was predicted 9 years ago by a liberal newspaper based directly on the actions of the Clinton administration.

You still don't get it: Most of the loans that are in trouble were issued recently - under Bush, not Clinton.

You still don't get it. I'm not defending Bush here. I'm defending capitalism. And the recently issued loans that are in trouble were only issued because of the policy put into place by Clinton. But as for Bush, here's a few items from the last two years, while the Congress has been run by Pelosi and Reid....

2007

August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying "first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options." (President George W. Bush, Press Conference, The White House, 8/9/07)

September: RealtyTrac announces foreclosure filings up 243,000 in August – up 115 percent from the year before.

September: Single-family existing home sales decreases 7.5 percent from the previous month – the lowest level in nine years. Median sale price of existing homes fell six percent from the year before.

December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs – and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon." (President George W. Bush, Discusses Housing, The White House, 12/6/07)

** 2008

January: Bank of America announces it will buy Countrywide.

January: Citigroup announces mortgage portfolio lost $18.1 billion in value.

February: Assistant Secretary David Nason reiterates the urgency of reforms, says "A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully." (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)

March: Bear Stearns announces it will sell itself to JPMorgan Chase.

March: President Bush calls on Congress to take action and "move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages." (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)

April: President Bush urges Congress to pass the much needed legislation and "modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by … helping people stay in their homes." (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)

May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.

"Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance sub-prime loans." (President George W. Bush, Radio Address, 5/3/08)

"[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator." (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)

"Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans." (President George W. Bush, Radio Address, 5/31/08)

June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying "we need to pass legislation to reform Fannie Mae and Freddie Mac." (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)

July: Congress heeds the President's call for action and passes reform of Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.

[silverscreenselect]

You still don't get it. I'm not defending Bush here. I'm defending capitalism. And the recently issued loans that are in trouble were only issued because of the policy put into place by Clinton.

That's kind of like blaming Medicare for doctors and insurers who engage in Medicare fraud, or blaming the Treasury for people who print counterfeit money.

There are always people looking to cut corners to make a fast buck who will take advantage of anything they can. Government policy encouraged lenders to make somewhat riskier but still basically prudent loans and be rewarded by being able to charge a modestly higher interest rate (and have a quasi-governmental entity willing to help out). Instead of this, they kept making riskier and riskier loans that stood to make them bigger and bigger profits. And other financial institutions jumped at the chance to buy up this paper because, on paper, it looked good, a high interest rate for a "fully secured" obligation. And ratings agencies overrated this paper and government regulators overrated this paper so the policy continued until a combination of excessive greed, lax regulation, and a downturn in the housing market (aided in good part because the rise in housing costs was fueled to a considerable extent by the availability of easy mortgage money) collapsed the whole house of cards.

Capitalism is a good system, but it is a survival of the fittest system that needs occasional failure to work. Usually, when a mismanaged company fails, it is the stockholders, creditors, customers, and employees of the company who suffer. Here, there's a lot more people at risk, which is why the system needed to be more heavily regulated.

[danielh41]

This is a pretty neat little video: http://www.youtube.com/watch?v=H5tZc8oH--o

My only complaint with it is that they censor my favorite Dire Straits song. No one saw the need to censor it in 1985.

[Weyoun]

My point in post the article was to show that this crisis was not a failure of capitalism or the free market. It was not the result of a lack of regulation. It was the result of too much regulation. The lenders were told by the Clinton administration to make more loans to low income people--people who couldn't otherwise obtain a mortgage. This got the ball rolling. The mortgage market had done just fine for 60 years before this government intervention. And not only that, but this current mess was predicted 9 years ago by a liberal newspaper based directly on the actions of the Clinton administration.

You still don't get it: Most of the loans that are in trouble were issued recently - under Bush, not Clinton.

Bush personally issued these loans?

[earendel]

My point in post the article was to show that this crisis was not a failure of capitalism or the free market. It was not the result of a lack of regulation. It was the result of too much regulation. The lenders were told by the Clinton administration to make more loans to low income people--people who couldn't otherwise obtain a mortgage. This got the ball rolling. The mortgage market had done just fine for 60 years before this government intervention. And not only that, but this current mess was predicted 9 years ago by a liberal newspaper based directly on the actions of the Clinton administration.

You still don't get it: Most of the loans that are in trouble were issued recently - under Bush, not Clinton.

Bush personally issued these loans?

To the same extent that Clinton did.

[danielh41]

This is a pretty neat little video: http://www.youtube.com/watch?v=H5tZc8oH--o

My only complaint with it is that they censor my favorite Dire Straits song. No one saw the need to censor it in 1985.

Now that I think about it, the way they censored the song is what I don't like more than the actual censorship. Most radio stations will play the song with the offending lines removed. The author of the video left that part of the song in, and just took obscured the three instances of the word in question. Perhaps he did that as a veiled insult at Barney Frank, who figures in the video. If so, then that's pretty low, and he just diluted the overall message of the video (which I agree with).

[ghostjmf]

I just heard an interview (NPR's syndicated "Here & Now" program, if you're interested) with Bruce Marks of Neighborhood Assistance Corporation of America, which is in the business of doing fixed-rate 30-year 6% no-down-payment mortgages to "sub prime" people, very few of whom have bailed on their loans. He opposes the mega-bail-out of Wall Street because he says it just rewards those people who made adjustable-rate & inflated mortgages to the same people he serves in a sober & informed manner.

He saw his firm's business go way down during the years that these banks that now need a bail-out were offering candy. He says the way his firm differs from theirs is that they wouldn't loan somebody more money than the loanee could realistically afford, based on careful examination of the loanee's resources & situation, they offerred only fixed-rate mortgages, & they didn't sell the mortgages to 2nd & 3rd parties.

I probably disagree with him re the bailout, but he impressed me enough to look up his firm if & when I look to own my own home. I was looking for no- or low-down-payment deals a while ago, but all the local agencies told me they didn't make them to single people; to qualify for what is basically subsidized housing around here, you have to be below a certain income level (for some, I did qualify on those terms), have below a certain level of savings (anyone can qualify on this term by putting their overage into IRAs, which effectively & legally takes it out of what is considered savings for the purpose of these loans) & be at least a couple or a single parent. That last is what knocked me out of the box.