Tuesday, 23 September 2008

Nostradamus 1999 - Freddy and Fannie

From September 30, 1999, comes this piece by Steven A Holmes in the New York Times:
Fannie Mae Eases Credit To Aid Mortgage Lending

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.
The goal of the Clinton administration was to make loans more accessible to minority groups who could not otherwise get affordable credit.

A laudable goal you might think.

However, the research showing racial bias in home lending was later debunked completely but, of course, the changes stayed and now the world is in a mild financial mess.

I use the term 'mild' because that's what it is, at this point anyway. If things don't get worse then the result is to simply set market values back a couple of years. Press the play button for five years and the market will be much higher than before the recent perturbation.

I made a point in a recent comment about the best description of how Fannie and Freddy got into the current mess, which is that it's akin to telling someone that they can go and gamble in Las Vegas and that their losses will be covered but that they can keep their winnings. It simply must lead to more risky behaviour.

The market always understood that Fannie and Freddy were government backed so their management were in an all care, no responsibility position.

President Bush and John McCain have both attempted to reduce the risk to taxpayers of exactly the type of failure that we now see but were thwarted by Democrats, for whom Fannie and Freddy are a source of post-political jobs as well as large campaign donations, and a handful of Republicans who had also been corrupted by the large amount of money to be had from those organisations.

I prefer to let the markets work but if there's no liquidity then there's no market.

There's another point that is being somewhat overlooked, which is that millions and millions of people have benefited from the access they've had to 'easy' credit in order to purchase a home. The majority of those will retain their homes and continue to make payments.

The usual suspects on the left are talking about the meltdown being an example of the failure of capitalism.

No surprise there.

In their usual ignore-the-good-news manner they completely ignore the fact that emerging economies - China, India, Brazil etc - have had access to much more capital since deregulation in the 1980s than they would have through the traditional source of the World Bank, which has led to improved living standards for hundreds of millions of people.

(Nothing Follows)

5 comments:

Anonymous said...

Hey Kerplunk!
Thanks for the article.

Could you place a follow-up comment here with link to sources for"
"However, the research showing racial bias in home lending was later debunked completely but, of course, the changes stayed and now the world is in a mild financial mess."

Thanks

S.

Jack Lacton said...

S,

That info goes back a few years so I'll see what I can Google.

In summary, if, for example, you earned $40,000 per year and had 5 jobs in the last 3 years then blacks, whites and Hispanics had almost exactly (within the margin of error) the same success rate at getting loans.

Anonymous said...

Hey Jack. Here's another wonderful article from 1999 in the LA TIMES. They thought they were writing a puff piece on Bill Clinton's enlightened use of the powers of government to pressure/require the banks and lenders into making loans that they wouldn't ordinarily have made due to the qualifications of the borrower.....you know like 20% down in cash, a job, good credit, 3 years of tax returns and overall debt within certain ratios.

Instead, they have left a trail of breadcrumbs that permit us to follow back through time to find the culprits who caused this mess.

It's a splendid example of the loopy libs thinking they were immune to consequences. So they had no hesitation speaking directly about regulating these banks into this problem.

The Secretary of Hud was going to require Fannie and Freddie to increase the level of their holdings of this stuff and Fannie was resisting saying that "a higher target would only produce more loan defaults by pressuring banks to accept unsafe borrowers".

Isn't it just a miracle that that is precisely what happened?

This is a regulation problem. Not a deregulation problem.

And the looselugnut libs own it.

---Krumhorn

for IT the said...

Very informative article. I liked it.
corporate training in chennai | corporate training companies in india | corporate training in chennai | corporate training companies in chennai | | Angular 2 Corporate Training

for IT the said...

Java Corporate Training Companies in Chennai Corporate Training Companies in India Corporate Training Companies in India

Corporate Training in Chennai Corporate Training in Chennai

Corporate Training Companies in India Corporate Training Companies in India

Java Corporate Training Companies in India Java Corporate Training Companies in India

Java Corporate Training Companies in Chennai