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Thread: Private sector loans, not Fannie or Freddie, triggered crisis

  1. #1

    Private sector loans, not Fannie or Freddie, triggered crisis

    Intersting article.

    [QUOTE]McClatchy Washington Bureau
    Posted on Sun, Oct. 12, 2008

    Private sector loans, not Fannie or Freddie, triggered crisis
    David Goldstein and Kevin G. Hall | McClatchy Newspapers
    last updated: October 12, 2008 10:13:10 PM

    WASHINGTON As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

    Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

    Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

    Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

    Federal Reserve Board data show that:

    More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.


    Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.


    Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

    The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.

    Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages.

    "I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

    Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans.

    It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.

    This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.

    To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.

    But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.

    [B]Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent[/B], according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

    [B]During those same explosive three years, private investment banks not Fannie and Freddie dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.[/B]

    [B]In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.

    Fueled by low interest rates and cheap credit, home prices between 2001 and 2007 galloped beyond anything ever seen, and that fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market.[/B]

    [B]About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve[/B].

    Conservative critics also blame the subprime lending mess on the Community Reinvestment Act, a 31-year-old law aimed at freeing credit for underserved neighborhoods.

    Congress created the CRA in 1977 to reverse years of redlining and other restrictive banking practices that locked the poor, and especially minorities, out of homeownership and the tax breaks and wealth creation it affords. The CRA requires federally regulated and insured financial institutions to show that they're lending and investing in their communities.

    Conservative columnist Charles Krauthammer wrote recently that while the goal of the CRA was admirable, "it led to tremendous pressure on Fannie Mae and Freddie Mac who in turn pressured banks and other lenders to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."

    [B]Fannie and Freddie, however, didn't pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market.[/B]

    What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.

    These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.

    In a speech last March, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today's problems.

    "Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans," she said. "The CRA has increased the volume of responsible lending to low- and moderate-income households."

    In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, "that this new lending is good business."

    McClatchy Newspapers 2008[/QUOTE]

    [url]http://www.mcclatchydc.com/251/story/53802.html[/url]

  2. #2
    Sounds like a very liberal position on the issue. As one would expect, they don't lay any blame on the Govt., it's policies or liberal ideology about lending to those who couldn't afford it, but lay it all at the door of capitalism, i.e. the private market.

    Nothing new here, many of our posters have already made the same claims. The "it was the market and evil money-hungry capitalists" argument.

  3. #3
    I don't think McClatchy is a very liberal paper.

    Did you at least read it and look at the sources for the opinion?

    [QUOTE=Warfish;2802378]Sounds like a very liberal position on the issue. As one would expect, they don't lay any blame on the Govt., it's policies or liberal ideology about lending to those who couldn't afford it, but lay it all at the door of capitalism, i.e. the private market.

    Nothing new here, many of our posters have already made the same claims. The "it was the market and evil money-hungry capitalists" argument.[/QUOTE]

  4. #4
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    I don't buy the laying of the housing crisis at the feet of lending to poor buyers. It doesn't pass the smell test. Not that it wasn't a piece of the puzzle--of course loans were made to poor people that shouldn't have been made. But loans were made to middle class buyers that shouldn't have been made either. Hell, there was a hot market in loans to illegal aliens, and no government program could have pressured lenders to do that without causing a giant stink--the brokers and lenders did that on their own.

    For more than 2 years I've been a faithful reader of irvinehousingblog.com. It's a fantastic blog that follows the housing bubble in Irvine California--a decidedly upscale town. No poor or minority borrowers there--just greedy middle to upper class flippers and HELOC abusers treating their houses like ATM machines to fund lavish lifestyles. In many cases the flippers were real estate agents themselves! Give it a look--it's a really interesting site.

    Also lets not forget Allan Greenspan's roll in this mess. His continued slashing of interest rates to soften the dotcom burst was key in producing the cheap money that fueled this insanity.

  5. #5
    The problem was making banks give out loans to people who couldn't repay them.

  6. #6
    One part of the problem.

    [QUOTE=MnJetFan;2802418]The problem was making banks give out loans to people who couldn't repay them.[/QUOTE]

  7. #7
    Many of the defaulted loans were caused by the bursting of the housing bubble and the resulting devaluation of home prices.

    Many home owners found themselves with loan balances that were greater than the value of their houses so they just walked away from their homes and their mortgages.

    These aren't people who couldn't afford their loans. These were people that refused to pay them.

  8. #8
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    [QUOTE=BushyTheBeaver;2802409]...irvinehousingblog.com...[/QUOTE]

    Nice site...my new favorite bookmark. I shall enjoy reading the posts of someone who shares the same disdain for greedy real estate agents as I do. Thanks...

    [QUOTE]...choose between an impartial observer giving advice based on detailed analysis, or you can place your faith in a group looking to profit off the transaction who have done no analysis at all. [/QUOTE]

  9. #9
    yes but it's Congress who empowered the private sector to create these loans out of thin air

  10. #10
    Oh the gov't made me do it theory. Classic.......


    [QUOTE=JetsCrazey;2802933]yes but it's Congress who empowered the private sector to create these loans out of thin air[/QUOTE]

  11. #11
    [QUOTE=cr726;2802420]One part of the problem.[/QUOTE]

    What were the other parts of the problem?

    I'm not trying to be a wise-ass, I'm serious.

  12. #12
    Read the article.

    [QUOTE=Roger Vick;2803029]What were the other parts of the problem?

    I'm not trying to be a wise-ass, I'm serious.[/QUOTE]

  13. #13
    [QUOTE=cr726;2802342]Intersting article.



    [url]http://www.mcclatchydc.com/251/story/53802.html[/url][/QUOTE]acorn and the dems cried racism when fannie mae wouldn't lower the credit standards.thats the root.your article doesn't say anything that would change that premise.

  14. #14
    And then Wall Street took that and ran with it.

    [QUOTE=2foolish197;2803059]acorn and the dems cried racism when fannie mae wouldn't lower the credit standards.thats the root.your article doesn't say anything that would change that premise.[/QUOTE]

  15. #15
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    [QUOTE=2foolish197;2803059]acorn and the dems cried racism when fannie mae wouldn't lower the credit standards.thats the root.your article doesn't say anything that would change that premise.[/QUOTE]

    Go grab yourself a Bud Light...

    [QUOTE]When liberals introduced the idea that there should be more minority home-owners, did the Republicans stand in the way of these lunatic liberal programs to give high-risk loans to Blacks and Latinos? A few Republicans did, but George W. Bush hopped on the liberal bandwagon and vowed to greatly increase the number of minority home-owners.

    In a 2002 speech, George W. Bush announced I set an ambitious goal. Its one that I believe we can achieve. Its a clear goal, that by the end of this decade well increase the number of minority homeowners by at least 5.5 million families.[/QUOTE]

  16. #16
    Many people on here bragged about the amount of homeowners in the U.S. and gave GW full credit for it.


    [QUOTE=PlumberKhan;2803078]Go grab yourself a Bud Light...[/QUOTE]

  17. #17
    Lowering the lending standards started it... greed and deregulation made it worse and spread it everywhere. You can't blame one factor without acknowledging the role of the other.

  18. #18
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    [QUOTE=cr726;2802420]One part of the problem.[/QUOTE]

    Exactly.

    When more than $2 Trillion in wealth evaporates from the planet in just a few weeks time there is usually more than one thing to blame.

  19. #19
    How refreshing to know that Fannie and Freddie didn't go belly-up...and no Democrats anywhere are to blame. Wonderful.

    Good job, Barney Frank - you and your "lover" have been vindicated!

    Now unfix that mess or go home and get your shinebox.

  20. #20
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    [QUOTE=PlumberKhan;2803078]Go grab yourself a Bud Light...[/QUOTE]

    [QUOTE]When liberals introduced the idea that there should be more minority home-owners, did the Republicans stand in the way of these lunatic liberal programs to give high-risk loans to Blacks and Latinos? A few Republicans did, but George W. Bush hopped on the liberal bandwagon and vowed to greatly increase the number of minority home-owners.

    In a 2002 speech, George W. Bush announced I set an ambitious goal. Its one that I believe we can achieve. Its a clear goal, that by the end of this decade well increase the number of [B]minority homeowners [/B]by at least 5.5 million families. [/QUOTE]

    The problem isn't minorities, it's people with poor credit and substandard incomes to support mortgage payments. I think it's great to support increased prosperity among the minority population through home ownership goals but no one said that home ownership should be entered into at artificially high prices by people who couldn't afford it.

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