[P2P-F] Fwd: [gang8] Fannie Mae didn't cause the crisis

Sun Jul 10 09:44:25 CEST 2011

---------- Forwarded message ----------
From: Dante-Gabryell Monson <dante.monson at gmail.com>
Date: Sun, Jul 10, 2011 at 6:11 AM
Subject: Fwd: [gang8] Fannie Mae didn't cause the crisis
To: econowmix at googlegroups.com

---------- Forwarded message ----------
From: Michael Hudson <michael.hudson at earthlink.net>
Date: Fri, Jul 8, 2011 at 3:46 PM
Subject: [gang8] Fannie Mae didn't cause the crisis
To: GANG8 <gang8 at yahoogroups.com>

**

Dear Geoffrey,
    Re some thoughts you earlier had from reading the US press, here’s a
corrective.
Michael

*McClatchy Washington Bureau
*
*
*Posted on Sun, Oct. 12, 2008
*
Private sector loans, not Fannie or Freddie, triggered crisi**s

David Goldstein and Kevin G. Hall | McClatchy Newspape*rs

last updated: November 24, 2010 01:49:33 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.

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, 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.

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.

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.

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

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."

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.

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

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