Bring It On!

Putting The Fannie Mae & Freddie Mac Situation In Context

July 11th, 2008 | by Daniel DiRito |

Today, the stock market reacted negatively to speculation that the U.S. government could be forced to bail out the nations two largest sources of mortgage funding, Fannie Mae and Freddie Mac. Of the 12 trillion in mortgage debt, the two giants account for slightly less than 50 percent…a full 5 plus trillion dollars. Put into context, that number is equal to half of the entire accumulated debt of the United States.

From CNN:

NEW YORK (CNNMoney.com) — The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, reached a fever pitch on Friday and took shares of the companies and the broader markets on a wild ride.

They play a central role in the U.S. housing market, providing a crucial source of funding for banks and other home lenders, especially since a credit market crisis last summer left them the only major players in packaging pools of mortgage loans into securities for sale to investors.

If they were unable to do so, it would significantly raise the cost and restrict the availability of mortgage loans, causing significantly more problems for already battered housing prices and sales. That in turn would be another significant problem for the overall U.S. economy, as well as global credit markets.

The New York Times reported Friday that senior Bush administration officials are considering a plan to have the government take over one or both of the companies if their problems worsen.

But Paulson said Friday that the government’s primary focus is making sure that Fannie and Freddie remain “in their current form.”

“Fannie Mae and Freddie Mac have lost investor confidence evidenced by the rapid brutal sell-off in their stocks, which could dramatically hinder their ability to raise any additional capital going forward,” wrote Richard Hofmann of research firm CreditSights in a note Friday.

Hoffmann added that the firms’ ability to function normally “remain at the core of government efforts to stabilize the mortgage markets.”

If any of this sounds familiar, allow me to remind readers of the source. Back in the late 1980’s, the Savings and Loan industry experienced a meltdown that resulted in the seizure of numerous financial institutions by the government and the subsequent creation of the Resolution Trust Corporation (RTC) in order to liquidate the assets and allow the government to tally up the price tag taxpayers would have to cover.

With that said, the next step is to attempt to draw some comparisons between what happened during the S & L scandal and what could happen if Fannie Mae and Freddie Mac were to fail. To appreciate the gravity of today’s situation, it’s important to look at the numbers and the impact of the S & L scandal. The following excerpts are from the FDIC’s summary report.

From FDIC:

As of December 31, 1999, total direct costs attributable to the closing of insolvent thrift institutions over the 1986-1995 period amounted to $145.7 billion. Indirect costs due to the loss of Treasury revenue because of the tax benefits that accrued to acquirers of failed institutions under past FSLIC resolutions amounted to $6.3 billion. An additional $1.0 billion of indirect costs was incurred because interest expenses were higher with the use of REFCORP bonds than with Treasury financing. Thus, the combined total for all direct and indirect losses of FSLIC and RTC resolutions was an estimated $152.9 billion. Of this amount, U.S. taxpayer losses amounted to $123.8 billion, or 81 percent of the total costs. The thrift industry losses amounted to $29.1 billion, or 19 percent of the total.

The accumulated losses of $152.9 billion were higher than the official and private forecasts of the late1980s but lower than those made by the government and others during the early to mid-1990s. As mentioned above, during the late 1980s the full extent ofthe problem was unknown until the cleanup began; thus, many early forecasts underestimated the size of the problem.

The savings and loan crisis of the 1980s and early1990s produced the greatest collapse of U.S. financial institutions since the Great Depression. Over the1986-1995 period, 1,043 thrifts with total assets of over $500 billion failed. The large number of failures overwhelmed the resources of the FSLIC, so U.S. taxpayers were required to back up the commitment extended to insured depositors of the failed institutions.

As we see from the report, the financial risk for the S & L fiasco never exceeded 500 billion dollars in assets…which is one tenth of the five trillion that is at risk should the government be forced to step in and resolve the feared Fannie Mae and Freddie Mac insolvency. I repeat, one tenth.

Now that you’ve started to breathe again, let’s try this again…this time by extracting the FDIC’s closing statement from the above excerpt. The report concluded, “The savings and loan crisis of the 1980s and early1990s produced the greatest collapse of U.S. financial institutions since the Great Depression”. I repeat, since the Great Depression.

To understand the full impact of a collapse by these two financial giants, one must realize that single family residences, by and large, were not the type of assets at play in the S & L crisis. The distinction is significant. Yes, taxpayers ultimately footed the bill for the S & L scandal, but their own well-being was never in serious jeopardy.

While home values weren’t spared by the S & L meltdown, this current crisis would be a direct hit to homeowners. Essentially, the government would either be forced to establish an entity to liquidate the assets (single family homes) or elect to forgive huge amounts of debt and allow homeowners to retain their properties. Either way, the welfare of individual families would hang in the balance.

At the same time, whatever action the government would take would adversely affect home values and the ability to sell one’s residence. The market would be flooded with repossessed properties, at discount prices, as the government attempted to recoup the debt it would have assumed with the takeover. Looking at current predictions, the general consensus is that the housing market isn’t apt to recover any time soon. Unfortunately, those predictions do not take into account the possibility of government intervention and the impact it would have on the market. In my estimation, were that to happen, we would be a number of years away from any meaningful recovery of home values.

Now toss in the residual economic impact of such a crisis and one can easily imagine the downward spiral that could ensue. Every sector of the economy would be drawn into the mess and the pieces would begin to fall like dominoes. Until that process were played out, the prospect of a recovery would be out of the question.

I want to close with one final observation. The Bush administration has argued for years, as part and parcel of its grandiose vision of an “ownership society”, that more and more Americans have been able to join the ranks of home ownership. They failed to note that it was being accomplished through artificially low interest rates, gimmick mortgages, and non-existent lending restraint. So much for George Bush’s “ownership society” now that the bubble has burst, eh?

Cross-posted at Thought Theater

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  1. 46 Responses to “Putting The Fannie Mae & Freddie Mac Situation In Context”

  2. By Badtux on Jul 11, 2008 | Reply

    Silly person, Dear Leader did not say who would own everything under his Ownership Society. I assure you that the wealthy elites are not going to own one whit less once this all falls out. Indeed, they’re going to pick up all these repo houses for pennies on the dollar (since you won’t be able to get a mortgage loan to buy them because, duh, all the mortgage lenders have failed, our ruling elite are the only people who’ll have enough money to buy these homes). Then rent them to us peasants, who will simply have to learn our place.

    This is the sorta plan put into place by folks whose favorite toy as a child was the Marie Antoinette Barbie Doll (pull the string and it recites a dozen conservative economist’s wise statements, such as “regulation is evil” and “let them eat cake”!), and I figured it out pretty quickly around 2002 or so when I saw what was going down. Deflationary spirals are always good for our rulers, who gain control of everybody else’s assets for pennies on the dollar. Almost led to a Communist revolution in 1932 that was only barely averted by FDR’s election. But nowdays there are no Communists around to assert an alternative to rule by our capitalist elites, so they feel comfortable setting up things so that they get the dough, and we get the service… as in, what a stallion does to a mare.

    – Badtux the Economics Penguin

  3. By Chris Radulich on Jul 12, 2008 | Reply

    The problems were caused by a combination of greed and government encouragement.

    From a Fortune 2002 Article

    Assuming the industry expands 8% to 10% annually, Raines believes he can continue to ratchet up Fannie’s earnings 15% a year over the next decade. Part of this growth will come from modest market share gains; the rest will come from increasing the proportion of loans the company buys outright, which generate far more profit than the loans Fannie merely guarantees. Most analysts agree with Raines’ assessment. “For as far as the eye can see, Fannie has the ability to grow in the low double digits,” says Bradley Ball, an analyst at Prudential Financial.

    That sounds pretty good, not to mention pretty safe. But in the testy post-Enron world, Fannie Mae’s growth strategy is getting a lot of heat. Some lawmakers have looked askance as the company recently inched into the risky–but potentially lucrative–subprime market. Here, homebuyers with weak credit are charged higher interest rates to compensate for the greater probability of default. Subprime lending represents a small slice of the total mortgage market (about 8%) and Fannie is not yet a big player. But the issue came to a boil recently when Illinois Democratic Representative Jan Schakowsky learned that Fannie had asked to be exempted from predatory-lending laws in California and Georgia–laws aimed at curbing unscrupulous lending practices in the subprime market. Fannie later rescinded its request in Georgia, but it did win an exemption in California.

    Raines says Fannie’s designs on the subprime market have nothing to do with the company running out of steam in its primary businesses. He says the company is merely responding to requests from the Department of Justice, the Federal Trade Commission, and the Office of Thrift Supervision. The idea, he says, is that by pumping more cash into the subprime market–which is dominated by low-income and minority homebuyers–Fannie will encourage more high-quality lenders to participate. “It’s the right thing to do,” says Raines. “About half the people in that market could be getting a better deal.”

  4. By manapp99 on Jul 12, 2008 | Reply

    While the failure of Fannie and Freddie would be a big deal there is no need to make it sound bigger than it is. Their combined mortgage holding are 5 trillion. The amount of over due mortgages (90 days or more) is about 1 percent of the 5 Trillion or about 50 billion. While 50 billion is still huge it is not as if the tax payer will be on the hook for the entire 5 trillion.

  5. By manapp99 on Jul 12, 2008 | Reply

    As far as the lending practices that precipitated this mess you have to go back a long way. This 2000 article from the NY Times shows that congress in 1994 was attempting to deal with preditory lending practices:

    http://query.nytimes.com/gst/fullpage.html?res=9F00E3DE1E3CF931A35757C0A9669C8B63

    “After several years of inaction, pressure is building in Washington to impose tighter rules on banks and finance companies that specialize in lending money to homeowners with blemished credit records.

    Representative Jim Leach, the Iowa Republican who is chairman of the House Banking Committee, said last week that his committee would be pressing for more vigorous enforcement of a law adopted in 1994 to combat deceptive lending practices, and may do more.

    ”The question is, do we need stronger legislation, more aggressive regulatory oversight or both?” Mr. Leach said in an interview. ”I am increasingly thinking we need both.”

    And this from the NAACP:

    “For years, people of color have been concerned with getting fair access to credit, particularly home loans. In 1977 , Congress enacted the Community Reinvestment Act (CRA) specifically to make home loans more available to people underserved by traditional banking institutions—women, African-Americans, Latinos, rural residents, and low-wealth families. At that time, no one could have foreseen the growth and development of the subprime industry, which did not begin in any significant way until 20 years later.”

    So the original bill was in 1977 with congress intending to help low income people secure home loans.

    “Theoretically, the subprime market could serve to expand ownership and bring greater prosperity to underserved communities. For borrowers with limited or impaired credit histories, a subprime loan could act as a bridge to prime financing.”

    Here we see the government attempting to do a service to the less privileged but instead we get this:

    “In reality, subprime lenders have made it difficult for families with subprime loans to improve their financial position. Today the subprime market is poised to bring about the greatest drain of wealth the African-American community has ever experienced.”

    Since 1977 the congress has attempted to reign
    in the practice such as the law adopted in 1994 however:

    “Predatory mortgage lending emerged as a serious problem as the subprime market began to grow and expand during the late 1990s. Back then, the major problem was equity stripping, as unscrupulous lenders targeted borrower with certain characteristics—seniors, women, and racial and ethnic minorities—for abusive refinanced mortgages. These lenders packed on excessive and unnecessary fees that would drain away all of the borrower’s equity.”

    In conclusion we see the congress trying to get more home ownership to minorities with action in 1977 and attempting to deal with the unintended consequences ever since. Since the financial “stew” has been brewing through Democrat and Republican congresses and Democrat and Republican presidents, I do not see how we can place the blame on one party or one president. The blame for this mess is the government getting involved where it ought not to. This should be the underlying lesson going forward. More government equals more disaster down the road. You see this formula repeated over and over with government programs.

  6. By manapp99 on Jul 12, 2008 | Reply

    The NAACP link:

    http://www.naacp.org/advocacy/theadvocate/rat_sped/july_07/lending/index.htm

  7. By Chris Radulich on Jul 12, 2008 | Reply

    While the government encouraged the banks to make loans the main problem was the greed and stupidy of free enterprise. They believed thier own hype about being masters of the universe and needed to chase double digit returns. Citbank, bears, county wide, leaman brothers and the other banks are not government enities. Even Fannie Mac and mae are not truely government entities.

    Government is NOT the problem. If anything is the problem it is the disconnect between owning stock and owning the company. Nobody truely owns most modern corporations and upper management very rarely pays for their errors.

  8. By rube cretin on Jul 12, 2008 | Reply

    yep, this is interesting. By my calculations most american families have about 200 square feet of conditioned space in their future. who the hell do we think we are.

  9. By manapp99 on Jul 13, 2008 | Reply

    Rube, 200 Sq ft of conditioned space? Conditioned by what?

  10. By manapp99 on Jul 13, 2008 | Reply

    Chris:

    “The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and thrifts to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as “redlining.” The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses.”

    The CRA REQUIRED mortgages be given to ALL areas of community. The positive was to allow those without steller credit ratings from groups with steller credit ratings to get loans. This was a good thing. The by product was the companies had to meet a quota of loans to low to moderate income groups. Also a good thing except the obvious risk of default is going to increase in lower income groups. They are the people that are closer to default as they have less reserve funds to weather an unforseen financial event.

    This started the ball rolling.

    “The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution’s application for deposit facilities, including mergers and acquisitions. The CRA is enforced by the financial regulators (FDIC, OCC, OTS, and FRB). In 1995, as a result of interest from President Clinton’s administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators’ attention on institutions’ performance in helping to meet community credit needs. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for five years. Thus in 2002, the regulators opened up the regulation for review and potential revision.

    “The 1995 revisions were credited with helping to substantially increase the amount of loans to small businesses and to low- and moderate-income borrowers for home loans. Part of the increase in the latter type of lending was no doubt due to increased efficiency in the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997. [1]”

    In 1995 the congress and president heated up the soup with more pressure for more low to middle income loans. More risky loans.

    So to say the government had no role in the subprime debacle is not correct. Yes there is the personal accountability of the individual to understand a major financial transaction and yes there were greedy lenders the preyed on the less savy lender but you cannot deny the government role.

    Moral of the story is well intended government programs usually end badly for the very people they are trying to help. As is the case with the CRA legislation of 1977 the government not only sets in motion a time bomb, the make it worse trying to fix it as they did in 1995 and 2002.

    How about they stick to running the military and fixing the roads and skip screwing the country with failed attempts at social engineering.

  11. By manapp99 on Jul 13, 2008 | Reply

    link:

    http://en.wikipedia.org/wiki/Community_Reinvestment_Act

  12. By manapp99 on Jul 13, 2008 | Reply

    Whoops

    This line:

    “The positive was to allow those without steller credit ratings from groups with steller credit ratings to get loans”

    Should have read:

    The positive was to allow those without steller credit ratings from goups WITHOUT steller credit ratings to get loans.

  13. By rube cretin on Jul 13, 2008 | Reply

    mana,
    conditioned, you know dry heated space. this whole mess is just another example of privatize the profit, socialize the costs. good ol american free market capitalistic system. ain’t it great.

  14. By manapp99 on Jul 13, 2008 | Reply

    Rube, in reality this is an example of socializing a private affair, lending money, which resulted in increased profits for a time then record losses now. Have you not read about the massive write downs the mortgage companies have endured? Due to the government intrusion into private lending we are NOW socializing the costs as we bail out private companies. A bail out that would not have occured without the congressional actions I have outlined.
    We in the great middle have to endure both ends of the whammey stick with our tax dollars being spent to rectify this issue as well as credit being tightend making it harder to get home and business loans. This credit issue is now taking its toll on construction jobs directly and countless others indirectly.

    I am not debating the desire of wanting to have those in the lower and marginal middle class to have access to credit ( I am an example of one on the bubble who was able to secure both a business and home loan as a result) however it is a shining example of how a feel good idea can be screwed up by the government.

    This is a lesson to be learned as we are in a presidential election cycle that has candidates (Obama in particular) promising even more government “solutions” to our problems.

  15. By Chris Radulich on Jul 13, 2008 | Reply

    None of forced securitize of loans or issue liars mortages. That was the decision of the private economy. So what it says is that the government made a mistake in thinking private industry could do a good job. Rather the government should have kept a tight rein on them.

  16. By Badtux on Jul 13, 2008 | Reply

    Yes, I read all of what you listed. But you are twisting facts to fit your agenda. The problem here was not that loans were going into lower income neighborhoods, the problem is that the loans were structured in such a way as to be unaffordable because the banks were betting they could unload the loans onto investors before the interest rate hikes kicked in and the loans defaulted, and then secondly betting that housing prices would keep going up so that when the loans defaulted they could not only get their money back but could strip equity out of the home. Instead, home prices started falling and investors quit buying. Meaning their entire pillage and rape business plan has come back on them.

    You seem to have an interesting notion of what “redlining” was. “redlining” was when banks would refuse to loan into certain neighborhoods — regardless of the credit rating and income of the borrower. It was primarily used to make sure the niggers knew their place (sorry, that’s how a loan officer explained it to me in 1977 in a city in the deep South when explaining why a loan would not be made on a somewhat run down but still splendid home that was in a red-lined neighborhood). The goal was to keep homes in those neighborhoods in the hands of wealthy slum lords who could buy them for cheap with cash then rent them out to poor people, primarily blacks. Since these wealthy slum lords were also the board of directors of the banks (in this era before interstate banking), they benefitted greatly from the practice — they got cheap rental property without having to pay market price, and they got to indulge their racism too by basically cooping up the black population into “nigger town” (once again, their term).

    None of this has anything to do with banks making loans that could not be repaid, a practice, I might add, that was not restricted to minority neighborhoods — in some neighborhoods locally homes that sold for $600,000 only three years ago are now on the blocks for $300,000 and those homes were NOT sold to lower-income people three years ago, what happened is that the rate reset to a rate that the bank knew was not going to be payable at the time the money was borrowed and the borrower defaulted and told the bank “here’s your keys, it’s all yours”. But the deal is that the bank had bet that housing prices would keep going up so when they got possession of those keys, the price of the home would have gone up by 20% so they could make a profit selling it on top of the profit they made from selling the original loan. Instead, prices have fallen by 50% in some neighborhoods locally, and probably will fall by more before it’s all over.

    In short, banks let their greed rule over their common sense, bet that housing prices would keep going up, and lost the bet. Also note that Fannie and Freddie are for *conforming* loans — not the sub-prime loans that went to people with below-average credit. ALL OF THESE LOANS WENT TO PEOPLE WITH “GOOD” CREDIT. To say that these loans were going to people because of some federal law about redlining is just making up nonsense to fit your agenda. I call bullshit.

    - Badtux the Financial Penguin

  17. By Chris Radulich on Jul 13, 2008 | Reply

    This is why redling was outlawed. It has nothing to do with risky loans

    Redlining is the practice of denying or increasing the cost of services, such as banking, insurance, access to jobs,[2] access to health care,[3] or even supermarkets[4] to residents in certain, often racially determined,[5] areas. The most devastating form of redlining, and the most common use of the term, refers to mortgage discrimination, in which middle-income black and Hispanic residents are denied loans that are made available to lower-income whites. The term “redlining” was coined in the late 1960s by community activists in Chicago. It describes the practice of marking a red line on a map to delineate the area where banks would not invest; later the term was applied to discrimination against a particular group of people (usually by race or sex), no matter the geography. During the heyday of redlining these areas were most frequently black inner city neighborhoods. Later, through at least the 1990s, this discrimination involved lending to lower-income whites, but not to middle- or upper-income blacks.

  18. By manapp99 on Jul 13, 2008 | Reply

    You are correct that “redlining” was about not extending mortgages to people based on a geographic area however it had nothing to do with social engineering by the banks and everything to do with traditional ability to repay the loan base on historical tables. Much the same as is done with life and vehicle insurance today. If you have a sterling DMV record yet live in an area that has a higher percentage of indidents you will pay more for insurance. You can be in great health and pay more for life insurance just due to being male.

    The lending institutions are in the business of lending money and making a profit on the interest. Pure and simple. If they were left to their own they would only loan to those with the greatest ability to pay. The government stepped in and changed that in 1977. They further tweaked this in 95 and 02. They clearly interjected themselves into a private business practice. For better or worse. I argue it was for good intent yet ended badly.

    The article I linked from the NAACP agrees with me:

    “Theoretically, the subprime market could serve to expand ownership and bring greater prosperity to underserved communities. For borrowers with limited or impaired credit histories, a subprime loan could act as a bridge to prime financing.”

    “In reality, subprime lenders have made it difficult for families with subprime loans to improve their financial position. Today the subprime market is poised to bring about the greatest drain of wealth the African-American community has ever experienced.”

  19. By Badtux on Jul 13, 2008 | Reply

    Once again, Manapp, *THIS LAW YOU KEEP DRAGGING OUT HAS NOTHING TO DO WITH FANNIE/FREDDIE!* Fannie/Freddie dealt only with “conforming” mortgages written to traditional lending standards, not sub-prime. You are letting your agenda drive your thinking, rather than the facts.

    The cause of the current crisis with Fannie/Freddie is a crisis in *PRIME* lending — i.e., lending to people who would meet any traditional lending standards — not anything to do with sub-prime loans, red-lining, or the laws you keep dragging out to fit your agenda. It’s all about bad loans and a bad bet that the banks made — that housing prices could just keep going up forever — and nothing to do with sub-prime or redlining.

    - Badtux the Finance Penguin

  20. By manapp99 on Jul 13, 2008 | Reply

    From CNN

    “The vast majority of Fannie Mae’s mortgages are loans to borrowers with good credit, but over the past five years the government sponsored enterprise became exposed to mortgages that were made to people with poor credit - subprime mortgages - and to mortgages that were made with incomplete documentation of borrowers’ income, called Alt-A mortgages in industry parlance.”

    From Fannie Mae Website:

    “Fannie Mae has a history of working with lenders to serve families who don’t have perfect financial profiles. “Subprime” is, after all, simply the description of a borrower who doesn’t have perfect credit. We see it as part of our mission and our charter to make safe mortgages available to people who don’t have perfect credit. In the past several years, for example, we have designed mortgage options to give borrowers with blemished credit access to high-quality, low-cost, non-predatory loans. We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families.”

    http://www.fanniemae.com/media/speeches/printthispage.jhtml?repID=/media/speeches/2007/speech_267.xml

  21. By manapp99 on Jul 13, 2008 | Reply

    Freddie Mac

    “FREDDIE MAC ANNOUNCES TOUGHER SUBPRIME LENDING STANDARDS TO HELP REDUCE THE RISK OF FUTURE BORROWER DEFAULT
    Company Also to Develop Model Subprime Mortgages

    McLean, VA – Freddie Mac (NYSE: FRE) today announced that it will cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure. First, Freddie Mac will only buy subprime adjustable-rate mortgages (ARMs) – and mortgage-related securities backed by these subprime loans – that qualify borrowers at the fully-indexed and fully-amortizing rate. The goal is to protect future borrowers from the payment shock that could occur when their adjustable rate mortgages increase.

    Second, the company will limit the use of low-documentation underwriting for these types of mortgages to help ensure that future borrowers have the income necessary to afford their homes. In addition, Freddie Mac will strongly recommend that mortgage lenders collect escrow accounts for borrowers’ taxes and insurance payments.”

    You can’t stop doing something you didn’t do.

  22. By manapp99 on Jul 13, 2008 | Reply

    From a 2002 article:

    “The recent foray into the subprime mortgage market by Fannie Mae and Freddie Mac has renewed the debate over their role in the affordable housing arena. The subprime market targets borrowers with credit problems or limited credit histories who do not qualify for cheaper, prime loans. Fannie and Freddie traditionally have purchased a small share of these loans, but this figure is expected to grow significantly in the next few years.”

    http://www.nhi.org/online/issues/125/goingsubprime.html

  23. By Chris Radulich on Jul 13, 2008 | Reply

    You are correct that “redlining” was about not extending mortgages to people based on a geographic area however it had nothing to do with social engineering by the banks and everything to do with traditional ability to repay the loan base on historical tables.

    No redlining had nothing to do with the ability of the people to repay.

    Again for wikapedia

    ater, through at least the 1990s, this discrimination involved lending to lower-income whites, but not to middle- or upper-income blacks.

    Also from the St pete Times Editorial page

    ” In recent years our coporate and investment sectors have been roiled by scandals that could have been avoided had regulators been on the job. The collapse of huge entities like Enron was the blatant and self-serving accounting manipulations that mislead investors. And the current crisis in mortgage-back securities is largely a consequence of eyes-averted approach by federal banking authorities.”

    Given the state of most modern corporations, it is a guarantee that given enough freedom they will immolate themselves and us.

  24. By manapp99 on Jul 14, 2008 | Reply

    Chris, the feds invented redlining and although it largely affected black neighborhoods it was based on the abilities of a district to repay loans instead of the individual.

    From the wiki entry you cite:

    Although in the United States informal discrimination and segregation have always existed, the practice called “redlining” began with the National Housing Act of 1934, which established the Federal Housing Administration (FHA).[6] The federal government contributed to the early decay of inner city neighborhoods by withholding mortgage capital and making it difficult for these neighborhoods to attract and retain families able to purchase homes.[7] In 1935, the Federal Home Loan Bank Board (FHLBB) asked Home Owners’ Loan Corporation (HOLC) to look at 239 cities and create “residential security maps” to indicate the level of security for real-estate investments in each surveyed city. Such maps defined many minority neighborhoods in cities as ineligible to receive financing. The maps were based on assumptions about the community, not accurate assessments of an individual’s or household’s ability to satisfy standard lending criteria.”

    This means that a poor white neighborhood would not be able to secure loans.

    This also means the the government screwed this up like most things they touch.

    The moral of the story is still to not trust the government to fix your problems.

  25. By Chris Radulich on Jul 14, 2008 | Reply

    the federal government discriminated. Shocking news if you a two year old. yes the federal government does screw things up. it is made up of people. That is the same reason capitalism ( free market ) always screws thing up. That is why you need both and have tp pay for both. A pure command economy will fail as in Russia. A pure capitalist society would also fail. It has only not failed here because government became the grease in the wheels.

  26. By Badtux on Jul 14, 2008 | Reply

    Sigh. Manapp is still beating that same drum.

    For the record, Fannie and Freddie ARE NOT COVERED BY THAT LAW YOU KEEP TROTTING OUT! They could choose (or not choose) to buy particular loans according to whatever criteria they desired, as long as it did not explicitly violate federal anti-discrimination laws and complied with the limits written into their federal charter. Furthermore, Fannie and Freddies problems today are NOT due to sub-prime loans, which account for under 5% of their portfolios ($182 billion out of a total of $4 TRILLION dollars according to MarketWatch). Fannie and Freddie’s current problems are with *prime* loands, not with sub-prime loans. Every single one of their sub-prime loans could go south and it’d be a bad day for Fannie and Freddie but it wouldn’t kill them. But with PRIME loans going south…

    The fact of the matter remains that this is a case where bankers made the bet that “housing prices are always going to go up” when they made bad loans, expecting a lot of those loans to go bad but then expecting that they could then strip the equity from the houses rising in value once they repo’ed the houses in order to make up their losses. Except housing prices did NOT keep always going up. They made their bets, and lost. And it all happened in the era 2001 through 2007, years *AFTER* the laws you mention were passed…

    In short: You keep warping the facts to meet your agenda. But reality is that your agenda simply doesn’t match up with the facts. This isn’t a problem that was caused by government. This is a problem that was caused by stupidity on the part of lenders who assumed that housing values would always go up. When housing prices went down, instead… then the equity they were betting on being able to strip off the repo’ed houses to make up for their losses was no longer there. Uh-oh! But nobody in government forced them to take on these bad loans, unless you truly believe that the Bush Administration gave a crap about some law passed in 1991 or 1998 and only in 2001 actually started enforcing it…

  27. By Chris Radulich on Jul 14, 2008 | Reply

    When united went bankrupt the y lost most of their pensions.

    When Enron went bankrupt they lost all of their pesions and 401k.

    When Worldcom went bankrupt many people lost their 401ks.

    The moral of the story do not rely on capitalism to fix your problems.

  28. By Chris Radulich on Jul 15, 2008 | Reply

    A quote by Irwin Stelzer of the Hudson Institution

    “You Have to have the person who’s writing the risk bearing the risk. That means a whole host of regulations. No way around it.”

    IE. you need the government.

  29. By Michael on Jul 15, 2008 | Reply

    This bailout of Freddie and Fannie is counterproductive. Another congressional initiative, the Mortgage Bailout, will tax Freddie and Fannie to the tune of $530 million/ YEAR. So Congress wants to bail out an institution and tax it as well? What’s going on? Call your senators/representatives and tell them: Back off the Mortgage Bailout Bill and Back off Bailing out Fannie and Freddie Mac!
    http://www.freedomworks.org/newsroom/press_template.php?press_id=2585
    Blue Dog House Contact info:
    1-866-887-5841
    http://www.freedomworks.org/newsroom/press_template.php?press_id=2580

  30. By Chris Radulich on Jul 20, 2008 | Reply

    so your saying that the problem was that the government gave the banks too much freedom and they were not bright enough to handle it correctly. In other words the free market failed to act responsible.

  31. By Chris Radulich on Jul 20, 2008 | Reply

    That last comment was addressed to manapp99

  32. By manapp99 on Jul 20, 2008 | Reply

    No Chris, I am saying the government gave a mandate to lending institutions to provide mortgages to people less credit worthy in order to increase the ownership numbers in the less fortunate communities. This was done through the CRA:

    “The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and thrifts to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as “redlining.” The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses.”

    The CRA was instituted to correct the wrongs of redlining which was mandated by the government in the National Housing Act of 1934.
    Yes there have to be some regulations such as truth in lending laws however the subprime loan mess was largely the result of government intrusion into private mortgage lending.

    So what I am saying is that the government did NOT allow the lenders the freedom of determining who was eligible for mortgage loans. In other words the government failed to act responsibly

  33. By Badtux on Jul 20, 2008 | Reply

    Once again, MA, that law does not apply to Fannie/Freddie. Why are you bringing it up again? Fannie/Freddie’s problems stem from problems in the *PRIME* market, not from problems in the *SUBPRIME* market. Even you admit that under 5% of Fannie/Freddie’s loans are subprime. And none of their subprime loans are the “liar” loans or the “toxic” adjustable payment loans that have taken out so many of the subprime lenders, they never bought or guaranteed those sorts of loans. Even so, even if 100% of Fannie/Freddie’s subprime loans went sour, that would be no big deal if it wasn’t for the fact that now their prime loans are going sour due to the worsening economy (median income has fell by $4700 over the past 7 years) and falling housing prices (which don’t allow for simply foreclosing on homes to make up losses).

  34. By manapp99 on Jul 20, 2008 | Reply

    Badtux, this was my orginal comment on the idea that a failure by Fannie/Freddie would result in a 5 trillion dollar problem to the taxpayer:

    “While the failure of Fannie and Freddie would be a big deal there is no need to make it sound bigger than it is. Their combined mortgage holding are 5 trillion. The amount of over due mortgages (90 days or more) is about 1 percent of the 5 Trillion or about 50 billion. While 50 billion is still huge it is not as if the tax payer will be on the hook for the entire 5 trillion.”

    You say that only 5% of the paper held by Fannie/Freddie is subprime. I pointed out that only 1% of ALL loans be they prime or subprime are in trouble.

    I then brought this up:

    “As far as the lending practices that precipitated this mess you have to go back a long way.”

    I stand by that conclusion. If the government had of left the mortgage companies to decide who to lend money to, the subprime loan would not exist. If the subprime market were not there, home ownership would have been at a slower more measured pace to those people most likely to be able to repay. Bring in 0% down and stated income and ARMS and you have more people getting homes and the housing market being short of inventory. This in turn makes existing homes and homes new to the market more sought after and therefore prices go up. The new “easy money” policies allow more people to enter the market and pay more for the houses available due to “teaser rates” and ARMS that make the payments artifically low. As long as people will pay more, houses cost more but monthly payments do not accurately reflect the cost of the house, the rate reset and the bubble burst. Builders go out of business, carpenters are out of work and real estate agent numbers are reduced. Many of these people employed in the housing business had home loans themselves. Even the realtor with a “prime” loan finds themselves in jeopardy. This spirals throug the economy and finally settles taking some in the subprime and some in the prime. Most in both markets will be o.k. however a reduction in equity (for a time) is inevitable. However, if you bought your house before 2006, in most markets, you are still in a positive equity position. Now everything has to reset and we will not likely see 0% down or stated income loans. Low docs and no docs are a thing of the past (until the government intervenes again)and the housing market will adjust. New money will be tight but if your in and your time horizon for resell is more than 5yrs, IMO, you will regain the lost equity and be back to solid growth again. In my market, sales are slow but there has been little loss in equity. Markets are different in different parts of the country. There is no national housing market. It is all regional.

    The housing market is like all other markets when it comes to gains and losses. The biggest difference is that losing money in 401k is bad but losing your house is worse. However, those losing there houses are still going to need someplace to live and will resort back to renting. This will increase the demand for rental property and will help the market recover, albeit for land lords more than individual home owners for a time.

    My contention about government meddleing for purpose of social engineering has been illustrated in the various links and quotes I provided. I stand by my conclusion.

  35. By Chris Radulich on Jul 26, 2008 | Reply

    The government gave no such mandate to the banks. What they did was loosen the rules. The banks are the ones who went crazy.

  36. By manapp99 on Oct 12, 2008 | Reply

    Yes Chris, the government did mandate the low income loans due to the CRA.

    Here are a couple of links that explain it.

    I will split them up so they will post.

    http://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html

    “It is popular to take low lending standards as proof that the free market has failed, that the system that is supposed to reward productive behavior and punish unproductive behavior has failed to do so. Yet this claim ignores that for years irrational lending standards have been forced on lenders by the federal Community Reinvestment Act (CRA) and rewarded (at taxpayers’ expense) by multiple government bodies.

    The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?”

  37. By manapp99 on Oct 12, 2008 | Reply

    This one is a PDF.

    http://www.rc4systems.net/Downloads/Docs/CRA-Notes-27Sep2008.pdf

  38. By Chris Radulich on Oct 12, 2008 | Reply

    They did not mandate it but they did put pressure on Fannie mae and Fannie mac to lower thier standards. But so did the shareholders and the senior management was was eager to do so. As for the rest of the banks and wall st that was a free market capitalism.

    As for your link it contains the usual set of lies.

  39. By manapp99 on Oct 12, 2008 | Reply

    “They did not mandate it but they did put pressure on Fannie mae and Fannie mac to lower thier standards.”

    They put pressure on ALL lending institutions to lower their standards. Fannie and Freddie just helped the lenders breath easier about it as they knew that they could sell the loans to them.

    Perhaps the congress should have been looking more at Fannie and Freddie as the GOP warned. But noooooooooo…Barney Frank’s lover was a high ranking exec at Fannie and Barney wasn’t going to let no damn rules keep his man from the millions he deserved.

    There is no arguing against the fact that the GOP wanted to reign in Fannie and Freddie and it was the Dems that stopped them.

    I know you don’t want to hear any facts that might interfere with your predisposed stand but the articles I linked are but a sample of those espousing the same views. You may disagree but they are hardly lies.

  40. By manapp99 on Oct 12, 2008 | Reply

    More from the Forbes article:

    “The government has promoted bad loans not just through the stick of the CRA but through the carrot of Fannie Mae and Freddie Mac, which purchase, securitize and guarantee loans made by lenders and whose debt is itself implicitly guaranteed by the federal government. This setup created an easy, artificial profit opportunity for lenders to wrap up bundles of subprime loans and sell them to a government-backed buyer whose primary mandate was to “promote homeownership,” not to apply sound lending standards.”

  41. By manapp99 on Oct 12, 2008 | Reply

    Once again the federal government shows their penchent for acting untimely, incorrectly and with disasterous and expensive results.

  42. By Chris Radulich on Oct 12, 2008 | Reply

    Your contention is ludicrous. An act that was passed in 1977, that you says forced the banks to give bad loans, blows up the system in not 1 year, not 5 years, not 10 years. Not even 20 years later. No it takes 29 years.

    Don’t forget that the banks and the fannies fought for the right to make those bad loans. They spent millions in lobbiest to make sure that they could make those loans.

    Once again unregulated capitalism proved it’s ability to destroy itself.

  43. By manapp99 on Oct 13, 2008 | Reply

    Chris you need to read the history of the CRA. It was enacted in 77 but was acted upon several times.

    For instance:

    Legislative changes 1992
    Although not part of the CRA, in order to achieve similar aims the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac, the two government sponsored enterprises that purchase and securitize mortgages, to devote a percentage of their lending to support affordable housing.[7]

    In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied “AAA” rating.[18][19] The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.[20]

    In October 2000, in order to expand the secondary market for affordable community-based mortgages and to increase liquidity for CRA-eligible loans, Fannie Mae committed to purchase and securitize $2 billion of “MyCommunityMortgage” loans.[21][22] In November 2000 Fannie Mae announced that the Department of Housing and Urban Development (“HUD”) would soon require it to dedicate 50% of its business to low- and moderate-income families.” It stated that since 1997 Fannie Mae had done nearly $7 billion in CRA business with depository institutions, but its goal was $20 billion.[19] In 2001 Fannie Mae announced that it had acquired $10 billion in specially-targeted Community Reinvestment Act (CRA) loans more than one and a half years ahead of schedule, and announced its goal to finance over $500 billion in CRA business by 2010, about one third of loans anticipated to be financed by Fannie Mae during that period.[23]”

    Read about it here:

    http://en.wikipedia.org/wiki/Community_Reinvestment_Act

    You can deny the CRA and Fannie/Freddie involvement all you want but the facts say differernt.

    Government invovement in the free markets brought us this mess and now the tax payers are on the hook to clean it up.

  44. By Chris Radulich on Oct 14, 2008 | Reply

    from the same wikipedia

    he public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.[20]

    n October 2000, in order to expand the secondary market for affordable community-based mortgages and to increase liquidity for CRA-eligible loans, Fannie Mae committed to purchase and securitize $2 billion of “MyCommunityMortgage” loans.[21][22] In November 2000 Fannie Mae announced that the Department of Housing and Urban Development (“HUD”) would soon require it to dedicate 50% of its business to low- and moderate-income families.” It stated that since 1997 Fannie Mae had done nearly $7 billion in CRA business with depository institutions, but its goal was $20 billion.[19] In 2001 Fannie Mae announced that it had acquired $10 billion in specially-targeted Community Reinvestment Act (CRA) loans more than one and a half years ahead of schedule, and announced its goal to finance over $500 billion in CRA business by 2010, about one third of loans anticipated to be financed by Fannie Mae during that period

    All done during a period of republican control of white house, congress, and senate. So if your contention is true blame the republicans.

    Speaking in 2007, Federal Reserve Chair Ben Bernanke noted that, “managers of financial institutions found that these loan portfolios, if properly underwritten and managed, could be profitable” and that the loans “usually did not involve disproportionately higher levels of default”.

    In 2003, researchers at the Federal Reserve Bank of New York noted that dramatic changes in the financial services landscape had weakened the CRA, and that [in 2003] less than 30 percent of all home purchase loans were subject to intensive review under the CRA.[33]

    n 2007 Ben Bernanke suggested further increasing the presence of Fannie Mae and Freddie Mac in the affordable housing market to help banks fulfill their CRA obligations by providing them with more opportunities to securitize CRA-related loans.[37]

    Once agin nothing forced the banks to make the loans. That was their decision. What they were forced to do was not discriminate on the the basis of color. When wall street first crashed in 29, one of the prime reason was because credit had been given to everyone in large amounts( buying on the margin no government regulation). What makes you think humans have changed in 80 years and become saints? For a group that believes in personal responsibility, you guys run from it pretty fast.

  45. By manapp99 on Oct 14, 2008 | Reply

    “All done during a period of republican control of white house, congress, and senate. So if your contention is true blame the republicans.”

    Dude, Bush did not take office until Jan. 2001.
    Clinton was still president in 2000.

    This does not change my contention that goverment was a major part of the problem. Both parties. If the government were not backing loans via Fannie and Freddie to shaky borrowers the lending institutions would not have made the loans. If the government were not requiring a percent of loans be made to less than credit worthy borrowers, lending institutions would not have done so unless the same government was willing to back these same loans. Banks are not in the business to make bad loans unless some outside entity assures them that they will not be on the hook in case of default.

    Another example of government intrusion that helped lead us to this morass was “mark to market” rules.

    This unpopular bail out is done with Dems in control of the congress and Bush a lame duck. We will have to wait and see the results however it is another case of Government getting us into a hole and then trying to use a shovel to dig us out. We are likely to just end up deeper in when it all settles out.

    We already have a massive debt and all the spending the feds are proposing will only add to that number. There seems to be no real talk about cutting current spending to pay for the new programs so the debt will just get passed on to future generations.

    Washington, like wall street needs to clean house but it looks more like the plan is to just add to the clutter.

    This line from your post:

    “n 2007 Ben Bernanke suggested further increasing the presence of Fannie Mae and Freddie Mac in the affordable housing market to help banks fulfill their CRA obligations by providing them with more opportunities to securitize CRA-related loans.[37]”

    proves that banks had obligations under CRA or else why would Bernanke say they needed help fulfilling them?

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