October 23, 2008
Clinton's Smoking Fannie
Friend Lee has gone big-game hunting, and he bagged a major trophy: A smoking-gun article from the New York Times, September 30th, 1999, that settles once and for all who is to blame for the current economic collapse. The title of the article says it all: Fannie Mae Eases Credit To Aid Mortgage Lending.
First, let's settle the evidently still "open question" of who was behind the move to lend too much money to people who had no ability to repay it:
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.
The article notes that "banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers." Then it quotes our good friend Franklin Delano Raines, who it identifies only as "Fannie Mae's chairman and chief executive officer."
In fact, during Jimmy Carter's administration, Raines was a top official at the Office of Management and Budget (OMB) and also on the White House Domestic Policy Staff; later, he became Fannie Mae's vice chairman in 1991 -- then leapt back onto the White House staff in 1996, as Bill Clinton's director of OMB.
Three years later, in 1999, he flipped and twisted right back into Fannie Mae -- this time as CEO. Raines' career perfectly illustrates the flying trapeze of the Clinton administration, where high officials float through the air with the greatest of ease between quasi-private businesses and the very bodies that regulate those same businesses. Thus Raines helps rewrite the rules for Fannie Mae, then immediately leaves to run the company under the rules he just helped change in Fannie Mae's favor.
Which point the Times fails even to mention. Welcome to the New York Times, the great dissembler: "All the news we see fit to print!"
Here is Raines, carefully explaining the wonderful intentions behind subprime lending:
''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.''
Well don't worry; we'll fix that little discrepency.
(Five years later, Raines was forced to accept "early retirement" for his accounting shenanigans, which put millions of dollars from Fannie Mae into his own pocket -- as much as $90 million in extra compensation based upon overstated earnings. He later settled for a $3 million fine, which is actually paid by Fannie Mae's insurance policy. So it goes in the Democratic era of Clinton; think "Sandy Berger.")
Why would the Clinton administration and congressional Democrats be so anxious to lower the borrowing requirements? Back in 1999, basking in the glow of the golden age of Clinton, the Times was rather more forthcoming about the purpose:
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.
Oh, and while we're at it:
The change in policy also comes at the same time that HUD [the Department of Housing and Urban Development] is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.
Somehow I suspect that findings of "racial discrimination" directly bolstered congressional support for the Clinton policy that Fannie Mae (and Freddie Mac) scrap credit requirements in order to dramatically increase the number of mortgages extended to minority home buyers. As we have seen this year, it's very hard to avoid flinching when the Left begins lobbing racism artillery shells; it's the ammunition that never runs low.
What an astonishing coincidence: An investigation by HUD into "racial discrimination" in credit ratings -- probably based entirely on the "disparate impact" of such ratings on the ability of blacks and Hispanics to get home loans, rather than any comparison of default rates among whites, blacks, and Hispanics -- followed immediately by deregulation that allows Fannie Mae to essentially ignore credit rating when it buys or guarantees mortgages, with the avowed purpose of increasing the rate of lending to minority home owners.
HUD was run at the time by Andrew Cuomo, who was the cabinet official most anxious to scrap the Fannie/Freddie credit rules; I am not sanguine that the "investigation" his department initiated was conducted in an unbiased and non-politicized fashion. Color me cynical.
Speaking of prescience, the American Enterprise Institute, a conservative think tank, issued a blunt warning back in 1999:
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.''
This article should end all question of who is to blame and who tried to stop the insanity; but of course, the Times will not report on this point... even to the extent of not reporting in 2008 what it itself openly reported nine years ago. Back then, the bad-credit mortgage program was a feather in Bill Clinton's cap, leading to more minority home ownership; but today, it's a black eye for the Democratic Party, and particularly damaging to the ascendance of the One We Have Been Waiting For. And that makes all the difference in its newsworthiness.
Hatched by Dafydd on this day, October 23, 2008, at the time of 3:50 PM
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The following hissed in response by: Dick E
Conservative orthodoxy these days attributes the mortgage meltdown to OVER-regulation, rather than deregulation.
As you state above:
Thus Raines helps rewrite the rules for Fannie Mae, then immediately leaves to run the company under the rules he just helped change in Fannie Mae's favor.I suppose it’s possible that, prior to the late ’90s Fannie Mae was forced by regulations to follow normal business practice: Charge higher interest to poor risks (or don’t accept such loans at all). Are you saying that after Raines et al removed the offending regs Fannie Mae had an incentive to charge lower rates to poor risks?
I realize Fannie Mae is not a normal business, but this seems counterintuitive.
Can you please elucidate?
The following hissed in response by: Dafydd ab Hugh
Are you saying that after Raines et al removed the offending regs Fannie Mae had an incentive to charge lower rates to poor risks?
Yes. From the above-linked NYT article:
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....
Under Fannie Mae's pilot program, [subprime] 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.
So in 1999, at the urging of the Clinton administration and with the active efforts of former Clintonista turned Fannie Mae CEO Franklin Delano Raines, the 3-4 point premium for subprimes was reduced to only 1 point -- and even that was eliminated entirely after two years.
This certainly qualifies as "charg[ing] lower rates to poor risks"... 4% lower than under the earlier regulations. In today's market, that would mean that bad risk borrowers who previously could only get mortgages for, say, 9.5% -- and were thus discouraged from getting loans that were beyond their means -- would immediately start getting mortgages from private banks (because guaranteed by Fannie Mae) at 6.5%, which after two years would drop to 5.5%.
Regulations that previously (and properly) discriminated against bad credit, bad risk borrowers were rewritten to put them instead on the same plane as good credit, good risk borrowers. This is, of course, a huge incentive for those with bad credit to take out even more loans they'll never repay.
And today, Rep. Barney Frank and Sen. Chris Dodd, not to mention Barack Obama, are feverishly working day and night to find a way to keep those bad credit borrowers in the houses they bought but couldn't afford. This is an even greater incentive for bad borrowers to do it all over again, now that they know there will be no consequences to their financial folly.
I don't know whether you would call that overregulation, deregulation, or simply altered regulation; but the effect was to remove the premium price charged on mortgages to those with bad credit. Since it's impossible to control the actual cost associated with bad risk borrowers, something between price and cost had to "give."
That something turned out to be the entire credit market.
The above hissed in response by: Dafydd ab Hugh at October 23, 2008 6:34 PM
The following hissed in response by: Dick E
Sure was a hare-brained idea, wasn’t it?
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers.
Why would banks, etc. be “pressing Fannie Mae to help them make more loans to so-called subprime borrowers”? Gotta be the Community Reinvestment Act.
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.
This sounds like the 3-4 percent premium was caused by market forces, rather than regulations.
I think what happened here was that the CRA required lenders to make subprime loans to “preferred” (by the government) borrowers. Lenders couldn’t do this on their own without charging the 3-4 percent premium to compensate for additional risk. This made it even more difficult for subprime borrowers to qualify for loans. And that, of course, was “unfair.”
But if Fannie Mae is willing to reduce their credit standards and buy subprime loans at par (i.e. no discount for the higher risk with no additional interest) lenders are taking absolutely no risk. Why wouldn’t lenders jump at the opportunity?
I think what Raines did in the late ’90s may not, really, have been new regulation of or by Fannie Mae. He was just responding to demand for low-interest, subprime loans artificially created by the CRA.
Then, of course, it got worse. If Fannie Mae would buy any old kind of loan, why not create exotic new flavors -- interest only ARMS with balloons (or LEGS with heads and torsos)? We were doomed.
So I guess the conventional wisdom is right. The mess was created by over-regulation -- in the form of the CRA, but facilitated by Fannie and Freddie.
The following hissed in response by: thumper
"Then, of course, it got worse. If Fannie Mae would buy any old kind of loan, why not create exotic new flavors -- interest only ARMS with balloons (or LEGS with heads and torsos)? We were doomed."
Then "normal" market forces took over. If the business was there and if it was guaranteed by the fed, then you (the person trying to get the business) needed something snazzy to lure the business to your bank (or mortgage broker) and away from the competition. The result: all the toys and body parts you list. Remember, prices were rising, the market was growing and it was fast, easy (almost guaranteed) money. TV shows like Flip This House showed how anyone could make several thousand quick. Thank you Clinton, Carter, Dodd, Raines, Frank and friends.
Yesterday, Biden promised that those on Wall Street who were involved in this mess would pay for it. According to him, their pensions would be the first thing he would go after. OK. How about if we include those in Congress and the Executive who hatched this hair brained scheme. Funny, but I think that legislation would somehow find its way to the back burnner very quickly.
The following hissed in response by: hunter
Carter's ignorant naive ideal- houses for everyone no matter what.
To Clinton's turning loose the dogs of greed
To Bush's inability to make a point.
All driven by lefty hacks who hate America and want the government to run it all, taking advantage of our own greed and corporate corruption.
The following hissed in response by: Xpressions
The liberal illuminati administration urged these institutions to give credit, but that put us in this financial crisis. People will take credit, but there is not guarantee they can pay on it. The economy should be stable, but it's not, because the left-wing urged banks to loan and people to over-extend themselves.
The following hissed in response by: Geoman
I agree with all of the above....but
Fannie and Freddie only bought about 20% of the subprime loans. It was the direct cause of their failure, but had little to do with Lehman Brothers, Bear Sterns, etc. The second tier of the story was the innovative securitization of loans by the investment banks, which was something both Ds and Rs encouraged, and somehting that lowered interest rates around the world. Subprime loans were cleansed (converted from crappy failure prone loans to AA bonds) via this method and sold on the open market.
The third tier of the credit failure was China, Norway, Russia, and everyone's 401 k etc. who were all desperately looking for safe, solid U.S. investments. What could be better than AA bonds backed by U.S. mortgages?
The last tier - lots of people buying insurance against bond failure. That is what broke the back of AIG.
I agree that congress should have never pressed to lower standards for the subprime loans. But on the flip side, they should have more carefully regulated securitization and the derivative markets. Arguably the worst of the crises emanated from there.
The following hissed in response by: David M
The Thunder Run has linked to this post in the - Web Reconnaissance for 10/24/2008 A short recon of what’s out there that might draw your attention, updated throughout the day...so check back often.
The above hissed in response by: David M at October 24, 2008 10:21 AM
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