by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
From the Wayback Vault in The New York Times Building:
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.”
Some Lessons I’ve Learned From The Credit Meltdown:
(1) Borrowers who can’t meet prime underwriting guidelines are “sub” prime
(2) When government regulates private industry to make crappy loans and the crappy loans are the cause of the crisis, you can’t blame the theory of deregulation; you must levy the blame at overregulation.
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.
(3) When you move down the credit and income scale, you can expect more defaults.
Here’s Senator Obama, talking about his solution:
Finally, I will modernize our outdated financial regulations and put in place the common-sense rules of the road I’ve been calling for since March – rules that will keep our market free, fair, and honest; rules that will restore accountability and responsibility in the boardroom, and make sure Wall Street can never get away with the stunts that caused this crisis again.
But just as we demand accountability on Wall Street, we must also demand it in Washington. Because we cannot afford another four years of the kind of deficits we’ve seen during the past eight. We cannot afford to mortgage our children’s future on another mountain of debt. That’s why I’m not going to stand here and simply tell you what I’m going to spend, I’m going to tell you how we’re going to save when I am President.
I like Senator Obama’s tough talk but I wonder if he REALLY wants the truth about the cause of the lending crisis to come out.
Deregulation isn’t the problem, overregulation is
Orlando FHA Loans says:
Brian, this is a huge post… I personally like point #2 the best. If free-markets were really allowed to run free… this seriously may have NEVER surfaced.
October 3, 2008 — 6:07 am
Tina Fountain says:
Brian, great information and good job digging this up. I bet you’ll not see this in the mainstream media!
October 3, 2008 — 7:09 am
Tom Hall says:
Is it over regulation or the way these loans were packaged? Wall Street is familiar with junk bonds – just wondering if the sub prime loans could have had a different category in terms of how they were sold and repackaged.
Just wonderin’?
October 3, 2008 — 6:40 pm
Orlando FHA Loans says:
One thing is for sure, if banks weren’t strong armed into providing these ‘affordable mortgages’ through the Administration-at-the-times efforts, the private sector wouldn’t need a bailout… certainly to this magnitude…
[Political vagueness intentional, anyone that is reading this should know who it was.]
Chris
October 4, 2008 — 5:59 am
Brian Brady says:
That’s a great question, Tom.
Two pieces of legislation and one big “directive” caused this mess:
1- The CRA mandated bad lending practices to banks (they had to make loans to borrowers who couldn’t pay…or else). ACORN, among other radical socialist groups, insured compliance by suing banks to make more loans to borrowers who couldn’t pay.
2- The Clinton Administration allowed new “securitized subprime” to count for a bank’s CRA allotment. This opened up the floodgates for Wall Street to profit off the mandated bad loan industry.
3- Fannie Mae started guaranteeing these bad loans, removing the risk from the lender/investor.
There is so much wrong about what was done but the worst part is that we’ve wrecked low-income borrowers’ hope. These are folks who won’t try to come back into the housing market because they’ve been burned by the government policy. Rather than encouraging them to save and pay bills, we gave them a handout, a handout that had no chance for success.
In an interest to buy votes, we’ve set people up for failure…and done a great disservice to folks who so desperately want to better their lives
October 4, 2008 — 6:59 am
Tom Hall says:
I’m here waiting for yet another no show – anyway, i don’t think the overegulation was the issue considering the dirty little secret called the credit swap derivative. $5 trillion is debt leveraged by $60 trillion in outstanding CSDs all completely unregulated.
A bipartisan blunder in 2000 that failed to agree to regulate the CSD market – deemed too complex for government regulation. The house of cards fell swiftly, snagging giants AIG and others.
Perhaps the irony for me is the fact that it was too complex to regulate, however, the plan to rescue this nightmare was engineered by a Wall Street insider.
Both Wall Street and our friends in Washington are equally responsible in my opinion.
October 4, 2008 — 12:52 pm
Brian Brady says:
All true statements, Thomas but all ancillary reasons.
When government mandates loans that will lose money for banks, then provides financial incentives for them to make, package, borrow against, and sell those loans, you have a recipe for disaster.
I know it’s politically incorrect to suggest that making loans to people whom are unable to repay them. It’s far more convenient to blame it on Wall Street greed.
Here’s the real problem…we, as a country, took complete advantage of poor people by selling them an unattainable dream. Now, we’ve broken their spirit and will to join the middle-class.
We should be ashamed of ourselves for what we’ve done. Hopefully, we, as a country, will learn to say no means no
October 4, 2008 — 1:41 pm
Brian Brady says:
“I know it’s politically incorrect to suggest that making loans to people whom are unable to repay them. It’s far more convenient to blame it on Wall Street greed.”
I wanted to say:
I know it’s politically incorrect to criticize the practice of making loans to people whom are unable to repay them. It’s far more convenient to blame it on Wall Street greed.
Te real truth is that the CRA advocates were predatory lenders (by strict definition)
October 4, 2008 — 1:43 pm