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Thread: How it all began......

  1. #1
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    How it all began......

    I don't post much here, but being in the mortgage field I was just emailed an interesting article as to where this Housing Crisis Started just figured I would share cause I now find it interesting....

    From the new york times: [url]http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&&scp=1&sq=september%2030,%201999&st=cse[/url]

    Fannie Mae Eases Credit To Aid Mortgage Lending

    By STEVEN A. HOLMES

    Published: September 30, 1999

    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 systemsused by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

  2. #2
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    yeah funny thing

    i don't think it's fannie mae's fault

    it's all those mortgage brokers who were making 500k a year in 2006 for no apparent reason

    in other words it was your fault jack

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    Good article. Thanks.

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    That is, in fact, a big part of the problem. But not the only cause.

    Two other sthings were necessary to get us here:

    1) Banking deregulation that tore down walls between investment banks and other financial orgs, creating a market for mortgage-backed securities much wider than ever previously existed, and spreading the risk associated with them to a far broader base of companies. (By creating a larger pool of buyers for this risk, the banks made far more loans than they otherwise would have.) If not for this, the crisis would be limited to lenders like Countrywide and WaMu, and it wouldn't be nearly as pervasive. This is why outfits that don't make mortgage loans, like AIG and Lehman Brothers, have been destroyed by a mortgage crisis. You cannot understate the importance of deregulation in this crisis.

    2) The Federal Reserve kept interest rates way too low for way too long, creating the cheap money that inflated the bubble.

    At the end of the day, there's enough blame to go around.

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    [QUOTE=bitonti;2798141]yeah funny thing

    i don't think it's fannie mae's fault

    it's all those mortgage brokers who were making 500k a year in 2006 for no apparent reason

    in other words it was your fault jack[/QUOTE]

    Ha-ha, keep telling your self that.... on a personal note I never made a killing all those people are out of the field, now we are being regulated by everyone and their mother.

    the problem was this.... When I got into the business in 2002 there was such a saturation of Sub prime lenders... they were in your face, and they only took 2-3 days to close. meanwhile an FHA took 45-60 days so we all strayed from FHA because the borrowers wanted to close NOW, "this bank says they will close in 24 hours" and we were handcuffed if we actually wanted to make a living we would lose the business by doing FHA loans even though rates were 1.5-2% better then these sub primes loans and they were fixed....

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    The foreclosure rate in the US is currently 4.5%.
    There are 300 million people in the country.

    Figure that people are defaulting to the tune of, on average, $250,000.00.

    Do the math.

    Those 4.5% are not bankrupting the country.

    The Investment banks that sliced those into derivatives have bankrupted
    the country. Look up "CDO", "MBS" or "credit default swap"-all arcane, complex derivatives of mortgages that, while the housing market went up,
    returned nice percentages. But the housing market never keeps going up so
    instead of investing in, say, chinese shoe factories or domestic wind and
    solar energy production, the investment idiots kept piling on more of those risky products with a ton of leveraged money. For every dollar the bank had
    invested, they borrowed-on average-30 more. Recipe for disaster borne out of
    greed-pure and simple.

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    [QUOTE]nuu faaola- 1) Banking deregulation that tore down walls between investment banks and other financial orgs, creating a market for mortgage-backed securities much wider than ever previously existed, and spreading the risk associated with them to a far broader base of companies. (By creating a larger pool of buyers for this risk, the banks made far more loans than they otherwise would have.) If not for this, the crisis would be limited to lenders like Countrywide and WaMu, and it wouldn't be nearly as pervasive. [B]This is why outfits that don't make mortgage loans, like AIG and Lehman Brothers, have been destroyed by a mortgage crisis.[/B] You cannot understate the importance of deregulation in this crisis.
    [/QUOTE]


    I read this last night and it was interesting. This is a small portion of the article.

    [URL="http://www.kitco.com/ind/stansberry/oct072008.html"]http://www.kitco.com/ind/stansberry/oct072008.html[/URL]


    [QUOTE]And this is where AIG comes into the story.

    Around the world, banks must comply with what are known as Basel II regulations. These regulations determine how much capital a bank must maintain in reserve. The rules are based on the quality of the bank's loan book. The riskier the loans a bank owns, the more capital it must keep in reserve. Bank managers naturally seek to employ as much leverage as they can, especially when interest rates are low, to maximize profits. AIG appeared to offer banks a way to get around the Basel rules, via unregulated insurance contracts, known as credit default swaps.
    Here's how it worked: Say you're a major European bank... You have a surplus of deposits, because in Europe people actually still bother to save money. You're looking for something to maximize the spread between what you must pay for deposits and what you're able to earn lending. You want it to be safe and reliable, but also pay the highest possible annual interest. You know you could buy a portfolio of high-yielding subprime mortgages. But doing so will limit the amount of leverage you can employ, which will limit returns.

    So rather than rule out having any high-yielding securities in your portfolio, you simply call up the friendly AIG broker you met at a conference in London last year.

    "What would it cost me to insure this subprime security?" you inquire. The broker, who is selling a five-year policy (but who will be paid a bonus annually), says, "Not too much." After all, the historical loss rates on American mortgages is close to zilch.
    [/QUOTE]
    Last edited by chicadeel; 10-10-2008 at 04:00 PM.

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    [QUOTE=GeorgeJetson80;2798157]Ha-ha, keep telling your self that.... on a personal note I never made a killing all those people are out of the field, now we are being regulated by everyone and their mother.

    the problem was this.... When I got into the business in 2002 there was such a saturation of Sub prime lenders... they were in your face, and they only took 2-3 days to close. meanwhile an FHA took 45-60 days so we all strayed from FHA because the borrowers wanted to close NOW, "this bank says they will close in 24 hours" and we were handcuffed if we actually wanted to make a living we would lose the business by doing FHA loans even though rates were 1.5-2% better then these sub primes loans and they were fixed....[/QUOTE]

    yeah im sure the mortgage brokers working on commission are completely blameless in this situation

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    This is some of the stuff Newt Gingrich was talking about.

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    [QUOTE=bitonti;2798435]yeah im sure the mortgage brokers working on commission are completely blameless in this situation[/QUOTE]

    No we have to take some of the blame tell people how easy it is to buy a house "All you have to do is state your income" History of not paying any of your debt? "NO PROBLEM", but so do the consumers...your told your mortgage payment alone is 2500 per month and you net per month 4-5K, how can you realistically afford this payment with taxes and insurance and other monthly obligationgs? you cant! people weren't thinking, this the American mentality I want this because I can have it because its so easy for me to get. make it happen I don't care that its not for more then 2 or 3 years.

    But in no way do I want to say Brokers AND Bankers are innocent in this. We all are guilty (mortgage professionals AND consumers)....

  11. #11
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    [QUOTE=GeorgeJetson80;2798481]No we have to take some of the blame tell people how easy it is to buy a house "All you have to do is state your income" History of not paying any of your debt? "NO PROBLEM", but so do the consumers...your told your mortgage payment alone is 2500 per month and you net per month 4-5K, how can you realistically afford this payment with taxes and insurance and other monthly obligationgs? you cant! people weren't thinking, this the American mentality I want this because I can have it because its so easy for me to get. make it happen I don't care that its not for more then 2 or 3 years.

    But in no way do I want to say Brokers AND Bankers are innocent in this. We all are guilty (mortgage professionals AND consumers)....[/QUOTE]

    For the past 25 or so years, people have been taught that they deserve what they want, when they want it. A lot of people have grown up with that mentality.

    Whether it be a consumer who wants that bigger house now, the mortgage lender who wants the commission now, the bank who wants to grow their asset base now, the financier who buys the mortgage backed securites (and leverages them) in order to grow his firms earnings and his own bonus...now, the politician who doesnt want a recession on his watch - just wants the economy to remain strong now...the home improvement retailer who just wants everyone to fix up the house they just bought...the butcher, the baker, the candlestick maker...everyone wants what they want, when they want it.

    And you can do that with smoke and mirrors for a while...sometimes a long while. But now it's all unraveling. Now those people have to pay for all that.

    This isn't a bad thing.

    As a matter of fact, if you're 45 or under, and you're willing to work hard and invest wisely, this is the absolute best thing that could happen to you from an economic standpoint. You're still in the buying-and-investing part of your economic life-cycle, and now assets are being re-valued to the point that they are reasonably priced. In a lot of cases cheap! I'm finding bargains all over the place, in real estate, stocks, bonds...you have desperate sellers just tripping over each other to unload this stuff at discount prices.

    Yeah, if you're older and you're seeing your savings dwindle I'm sure it's unsettling. But, personally, I'm loving this.

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