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Looking Back At How This Mess Was Created

1 October 2008 3 Comments

With all the bailout discussions and debates, I wanted to take a look at some of the real causes of this mess. If you listen to Nancy Pelosi, everything is caused by the Bush administration. I’m a firm believer that the blame should be placed on lots of parties. Here is an interesting article from the New York Times dated September 30, 1999 which is interesting. Please note, Nancy, that this is before Bush took office. You have to see this.

The article is entitled Fannie Mae Eases Credit to Aid Mortgage Lending. You can see the full article here. Below is some of the text from the article:

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.

Again, I believe many parties are at fault. I do believe a big cause in this mess was a move from the Democrats in power to expand lending to put more people in homes. The biggest problem is that we have a system that doesn’t look into details of big concepts such as this. Think about it… if Clinton says I want to put more people in homes, of course that sounds good. The question is in the implementation.

Furthermore, many institutions are at fault since many of them did not stand up and say “Hey, we’re making too much money, but this could end bad.” And lastly, there probably was a huge lack of oversight in the whole process. So to conclude, don’t buy the political rhetoric. This started a long time ago and many people are to blame.

Hopefully, our leaders make better decisions moving forward.

3 Comments »

  • rebel said:

    I am glad you found that. Some friends of mine and I were discussing this through email, but our memories of the details were unclear. Bottom line, while Bush hasn’t helped matters much it is not all his fault. What is odd to me though is that the republicans seem to have short term memory too. They are not bringing this up. Of course, blaming isn’t going to fix the mess.
    I am curious, what do you think should be done?

  • kevin duffey said:

    I think banks should be forced to re-capitalize as much as possible using the issuance of new equity and the government should try to encourage similar action to Buffett investing in Goldman Sachs. It penalizes the banks and helps them raise money at the same time.

    For the banks unable to raise capital this way, I guess the government will need to help them out but it should be done in a way that really discourages future institutions from looking to the government for a bailout. Find ways to penalize them while at the same time providing them with capital to improve liquidity in the system.

    Just some thoughts…

    lastly, i hate to say it but i think most in congress want to get this thing done so they can go on vacation or go home and work their campaign to get re-elected. it’s a shame, but probably true.

  • Stephen Ponce said:

    Sorry for the double post but I figured I should give myself some credibility by linking to some more info on android and the future of mobile applications:

    -> http://www.google.com/intl/en/press/pressrel/20071105_mobile_open.html