Private sector loans, not Fannie or Freddie, triggered crisis

McClatchy Newspapers ^ | October 11, 2008 | By David Goldstein and Kevin G. Hall

[RushingWater]

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.

[Aria]

Thanks....for an amateur this has been a learning process.

[Chaguito]

But with ACORN we can pin the tail on the DONKEY. Lets not talk about pissing away the Golden Goose.

That's the most mixed metaphors I've ever seen in a single argument! But I agree with you. Too much detail or too many targets obfuscates the situation.

[TheThinker]

Obama is just another race-baiting opportunist taking advantage of unfair minority-favoring lending laws.

[teletech]

Obama is just another race-baiting opportunist taking advantage of unfair minority-favoring lending laws.

Obama is a puppet and the man behind the curtain is pulling his strings.

[worst-case scenario]

65 trillion dollars in outstanding credit default swaps is the reason. THAT figure is big enough to create a worldwide financial crisis.

[worst-case scenario]

There’s an excellent discussion of this at
http://www.record-bee.com/ci_10683519 “Credit default swaps and those who issued them are to blame for crisis”. While Fannie and Freddie played some role, theirs was not the primary cause. Subprime mortgages that were heavily marketed and issued between 2002 and 2006 are the ones that are currently defaulting - the adjustable-rate mortgages that were supposed to allow you to “cash out the equity in your home”.

Didn’t anyone else here get the pitches, the phone calls, see the endless ads during that period? “Consolidate your high-interest credit cards debts with a home finance loan from BlaBlahBlah!” Low teaser interest rates, or mortgages with payments that were interest-only? These weren’t marketed to poor people, but to any American with a smidge of home equity. In the middle of this decade, home prices seem to shoot through the roof. You were called a fool if you didn’t take advantage of the “rise in your home equity” with a refinance that was supposed to let you do a remodel (granite kitchen countertops, anyone?), pay down other debts, or just “take that vacation you deserve”.

Not all of us took that bait. But plenty did. Their ARM monthly payments with those low interest rates shot through the roof, often tripling or even quadrupling. Those of us who stuck to those boring 30 year fixed-rate mortgages found out our caution paid off. But many, many middle-class Americans simply trying to move up in the world found out that they had to move out, instead.

The fact that the Fed voted in 2004 to let the five major investment banks loan out up to 30 times the value of the underlying aggregated mortgage securities meant that these firms faced bankruptcy if as little as 4% of these mortgages defaulted.

Perhaps all of us here know far more than all the economists in and out of the government and Wall Street, but even Henry Paulson isn’t pinning this all on mortgages underwritten by Fannie and Freddie. The fact is that the 5 largest investment banks were allowed to issue billions of dollars in paper based on their good name alone - the fact that they were so big that it was considered that it was impossible for them to fail. And the ARMs that were issued in mid-decade were fiscal timebombs that exploded in the slim mortgage portfolios that the banks used as the ostensible reasons to float all those credit-default swaps to begin with.

As much as we might like to say that it is all Fannie and Freddie and the Dems’ fault, that fact is that it was much more the sheer greed of Wall Street that has brought us to this debacle. A defaulted mortgage used to be a tragedy for the homeowner and perhaps the issuing bank. Now it is a tragedy for the entire world, because banks loaned out so much money against the value of the “mortgage-backed securities” - a compilation of mortgages that included the one that went bad along with all the others that were still being paid.

65,000,000,000,000 in outstanding credit default swaps. There is simply no way that this number could be the result of Fannie and Freddie alone. The bulk of defaulted mortgages weren’t even insured by those two corporations. This horrorshow is simply too big to be their fault.

[highpockets]

Great link. Thanks

[CutePuppy]

Very good and pithy description of current problem in the market - CDS, derivatives that fed on themselves and are now causing high interest rate spreads and lending freeze in financial markets now.

CDS fraud is apparently in the trillions of dollars because they were written into the accounts as assets.

Just to add, that because they were treated as assets on the books, it allowed the institutions (like AIG or any SIV funds) to compound overall leverage on these "assets" even further, to inflate their profitability. As you pointed out, no thought was given to the [fixed] liabilities on the balance sheet, as long as the [real estate] assets kept inflating. In many ways they were not that different from many "flippers" who bought the homes at ridiculous prices only to sell it to the "greater fool".

Maurice "Hank" Greenberg himself lost over $6B just since May in the collapse of company he spent 35 years building, and he was not even in a position to know the real damage caused to AIG by new management in the 3 years of his absence, forced out by Spitzer's vindictive corporate blackmail of public financial firms. By the time he unsuccessfully tried to retake control and management of the company, the damage was already done and it was already too late to save the company, let alone the market.

[highpockets]

The bulk of defaulted mortgages weren’t even insured by those two corporations

I may have missed something. I do not remember reading that these two GSE's operated an insurance department.

What am I missing?

[worst-case scenario]

My bad. I should have used the word “securitized”, rather than “insured.”

No more posting at 3 AM. Thanks for reading, at least.

[HawaiianGecko]

Fannie and Freddie finance about 40 percent of all U.S. mortgages, with $5.3 trillion in outstanding debt. Owned by private shareholders but chartered by Congress, they are exempt from state and local taxes and receive an estimated $6.5 billion-a-year federal subsidy because they can borrow money more cheaply than other investors. In return, they are expected to serve "public purposes," including helping to make home buying more affordable.

HUD officials dispute allegations that the agency encouraged abusive lending and sloppy underwriting standards that became the hallmark of the subprime industry. Spokesman Brian Sullivan said the agency and Congress wanted to increase homeownership among underserved families and could not have predicted that subprime lending would dominate the market so quickly.

"Congress and HUD policy folks were trying to do a good thing," he said, "and it worked."

Since HUD became their regulator in 1992, Fannie and Freddie each year are supposed to buy a portion of "affordable" mortgages made to underserved borrowers. Every four years, HUD reviews the goals to adapt to market changes.

In 1995, President Bill Clinton's HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. HUD expected that Freddie and Fannie would impose their high lending standards on subprime lenders.

Banks typically back prime loans with customers' deposits. But subprime lenders often rely on money from Wall Street investors , who buy packages of loans as investments called mortgage-backed securities.

In 2000, as HUD revisited its affordable-housing goals, the housing market had shifted. With escalating home prices, subprime loans were more popular. Consumer advocates warned that lenders were trapping borrowers with low "teaser" interest rates and ignoring borrowers' qualifications.

HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower's ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans.

That year, Freddie bought $18.6 billion in subprime loans; Fannie did not disclose its number.

In 2001, HUD researchers warned of high foreclosure rates among subprime loans.

"Given the very high concentration of these loans in low-income and African American neighborhoods, the growth in subprime lending and resulting very high levels of foreclosure is a real cause for concern," an agency report said.

But by 2004, when HUD next revised the goals, Freddie and Fannie's purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.

That year, HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and "must do more."

[Carling]

The “private lenders” were assuming that Fannie/Freddie would back the loan. Most of these lenders depended on Fannie/Freddie “capital” in the first place.

What a garbage article.

[Arthur Wildfire! March]

The Timeline Project / Link List of Bailout History
http://www.freerepublic.com/focus/f-bloggers/2093845/posts

One of my latest posts there:

Five Million Illegal Aliens get Fraudulent Loans?

Near top of a google list, Newsbusters:

headline: Calling the Old Media: Five Million Illegals Have Illegal Mortgages in U.S.A.!

http://newsbusters.org/blogs/warner-todd-huston/2008/10/09/calling-old-media-five-million-illegals-have-illegal-mortgages-u

Here are some snippets:

” ... One illegal alien was arrested this year in Tucson after allegedly using a stolen social security number to buy two homes and rack up over $780,000 in bad debt. ...”

” ... It’s not known how many of those have contributed to the subprime housing mortgagemeltdown, but it has affected every state, including Arizona. ...”

One FR link in which HUD denies the charge:
HUD cries foul over illegal immigrant mortgage data
http://www.freerepublic.com/focus/f-news/2101844/posts

Oldexpat posted: Whether it is 1m or 5m is irrelevant. No bank should have been giving mortgages to someone who could be deported any day. Makes no sense. All I know is we have a friend foreclosing on almost one house a day in Orange Co. CA.

Related link:

HUD Mum on Illegal Mortgages
http://www.freerepublic.com/focus/f-news/2103625/posts

[nhwingut]

Nice try. Even if you got your loan through a private bank, if you were a risky borrower, F&F were part of transaction. They were the evntual holder of note.

[EVO X]

I think there is something much more sinister than that going on here. These loans have been made in California for years. We didn’t just wake up a couple of weeks ago to this.

The problem is California style loan approval methods started to get made in the rest of the country.

[major-pelham]

I don’t get this thread or the article. Private lenders risking their own capital for returns they deem suficient. Bravo.

Private lenders do not have depositor money, they lend only one dollar for each dollar they have plus any fees they can generate. You got a million. Do a few loans and your all done. Unless, you can SELL the loans to somebody else, get your principal back and start all over again. Selling loans for securitization is a good thing because it keeps liquidity for the lenders in all the local real estate markets. It’s even better for consumers so then they have CHOICE and price competition on where to go.

These private lenders are capitalists and if there’s a market to sell crappy credit quality guess what they are gonna do? This never happens becasue there’s no place to SELL the mortgages for securitization and the lenders arent going to take the risk themselves. Lefty whacko egalitarian policy provided GSE’s as a place to go and sell or insure them. Bingo ! We got a place to sell crappy stuff, let’s go get some !

The lousy credit mortgage market developed from private lenders only because at the end of the day, up the food chain,there eventually was sumbddy that would take the credit RISK. Becasue no sane lender would take that risk for the measly interst rates earned on mortgage lending.

The answer here is simple: If the government had not taken the risk out of lending the money, it would never have been lent in the first place. This isn’t a failure to regulate problem. It is a government created problem: Dem policy provided a false backstop for the credit risk inherent when you lend without adequate collateral (overblown housing value), equity (think downpayments), and personal responsibility to make the payments (awful FICO scores).

The understanding that you could sell ANY mortgage made coupled with the America’s insatiable thrist for credit led to this day. Everyone knows nothing stupid can last forever.

[doberville]

You are a master of the mixed metaphor!

[Mamzelle]

FM and FM bought and supported the subprime loans. Of course private institutions made the loans.

Is there a "Fanny Mae S&L" in your home town?

[ExiledChicagoan]

2006 is only a snapshot of one year. Go back to when CRA was started, not pull something out of total context.

[WashingtonSource]

Yes, private sector loans were the riskiest, but guess who created the market for these? Fannie Mae and Freddie Mac! It’s these assets on their books that sent them into a tail spin.