Fannie Mae Eases Credit To Aid Mortgage Lending - 1999 | Hacker News Reader

Fannie Mae Eases Credit To Aid Mortgage Lending - 1999

linkrap.com

20 pointsbreck14 comments

Ex-Freddie-Mac-Now-Cato-Economist Arnold Kling claims (in this interview: http://bloggingheads.tv/diavlogs/14744) that Fannie basically had to lower their requirements in order to meet the HUD requirements mentioned at the end of this article. So a well-intentioned but unaccountable leader makes a decision with unintended consequences, but because that decision reverberates through the market power of enormous governmental structures, it leaves a much larger mark than would be otherwise possible or likely.

In a lot of ways this is an indictment of "social engineering." But I'd argue there are other factors at work here since "easing the requirements" is the equivalent of holding the door open...the lenders are the ones that walked through...

The government threatened lenders who were being too conservative, interpreting it as discrimination.

Oh, it's a just a whole hell of a lot more complicated than that. The really big threats came from big banks anxious to keep their subprime accounting tricks going as long as possible, and to keep up their oh so profitable derivatives game. The government SINCE 1999 has been quite anxious to keep the charade going as well, since housing and bubble equity was the one shell game that made the economy look like it was growing.

This article, from NINE YEARS AGO, is floating around the right wing blogosphere a lot, accompanied by pretty clueless commentary. Do people really think that if what this program became (and it changed significantly from a program that was simply designed to help more people buy a home) wasn't making bushel barrels of money for the people who helped keep a certain political party in power for most of this last decade, that it would have been allowed to remain?

What the hell has been going on the last nine years? Has there been anyone at the helm?

"The really big threats came from big banks anxious to keep their subprime accounting tricks going as long as possible, and to keep up their oh so profitable derivatives game."

Would these be same "oh so profitable" banks that are currently going backrupt?

"This article, from NINE YEARS AGO..."

Ummm, that makes the article all the MORE powerful, not less. Points are awarded for predictive power, the further in advance and the less conformist the thinking the better. "Conformist thinking" meaning "everything your professors, the mainstream media, the teacher's unions, and Hollywood shove down our throats.

"wasn't making bushel barrels of money for the people who helped keep a certain political party in power for most of this last decade,"

Finally, we are agreed. See my reply to powellb above. I didn't mention the names or the political affiliation of the top six recipients of donations from Fannie and Freddie. Strangely, you didn't either. Nor did you mention the name of the Congressional Caucus that has pushed this emtire mess on us from day 1. No need to link to it, in any case. It will be showing up in TV ads soon enough.

>wasn't making bushel barrels of money for the people who helped keep a certain political party in power for most of this last decade, that it would have been allowed to remain?

Exactly right. Bush did try to push some sort of regulatory scheme back in 2003 which may have prevented some of this, but a certain political party prevented it.

"Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing."

http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF...

The difficulty in this situation is that the Dems had a lot to gain by opposing regulation, while Republicans would gain very little by pushing it. So why waste political capital? Also, think about the narrative:

Anti-regulation: We want to help low income and minority homeowners.

Pro-regulation: We need to reduce lending to higher risk borrowers because someday in the future, house prices might not go up, and that would be bad because [insert all sorts of technical words here].

Favorite quote:

>The change in policy also comes at the same time that HUD 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. [emphasis added]

Interesting that they thought they had the whole risk level thing down... I remember reading in Good to Great how they had been able to buy riskier mortgages and make a profit.

"While many stock analysts thought that, as the provider of home mortgages, Fannie Mae's success would be completely determined by the spread in changing interest rates, Collins tells us that Fannie Mae realized that the key to Fannie Mae's market-independent success was not in the ratio of profitability per mortgage. Rather, Fannie Mae could become the world leader in understanding mortgage risk levels and profit by insuring that risk. Fannie Mae's key ratio became profitability per mortgage risk level."

http://www.thinkinglike.com/Essays/Good-To-Great-Lessons.htm...

I know the implication is to the current crisis, but to believe that sub-prime is what caused our current problems is plain incorrect. Sub-prime is to today's economic collapse as the Ferdinand's assassination was to WWI: a mere catalyst, but the system was primed by fundamental issues.

"I know the implication is to the current crisis, but to believe that sub-prime is what caused our current problems is plain incorrect... but the system was primed by fundamental issues."

You've simply stated an analogy rather than supporting facts. This does not move the discusson forward.

From the 1999 article: "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 expand them they did. The Community Reinvestment Act was signed into law in 1977 by Jimmy Carter, when Democrats controlled both houses of Congress (post-Watergate). It didn't have many teeth then, though, and the damage was minimal. In 1998, Clinton signed into law a version with serious bite. It allowed "community activists" such as ACORN (Association of Community Organizations for Reform Now) to harass any banks they felt weren't "reinvesting" in the "community", blocking future expansions, etc.

You'll notice that, of the 5,700 retail (as opposed to investment) banks in the Federal Reserve System, only about 40 are in trouble. They just happen to be the ones operating in America's larger cities. Rural and small town banks are doing fine. Nor are State Banks in trouble. You'll also notice that overseas retail banks are not having problems either. Strange, no?

The retail banks in the big cities, which were subject to pressure from "community organizers", knew the subprime mortages were garbage and looked around for ways to offload the risks forced onto them by government, so they bundled the loans up into tranches ("securitization") and sold them to investment banks like Bear Stearns, Morgan Stanley, Northern Rock (British bank, now bankrupt), etc. Now the cancer of risk spread through the system and bodies began showing up at the morgue.

It didn't take long for the fun to start. Superior Bank of Chicago failed in July, 2001. According to a press release from the Office of Thrift Supervision,

"Superior Bank suffered as a result of its former high-risk business strategy, which was focused on the generation of significant volumes of subprime mortgage and automobile loans for securitization and sale in the secondary market. OTS found that the bank also suffered from poor lending practices, improper record keeping and accounting, and ineffective board and management supervision."

George Kaufman, a finance professor at Loyola University Chicago called Superior's failure "a tale of gross mismanagement," adding that "[Superior] was engaged in relatively unethical practices, fancy-footwork accounting, playing it very close to the edge."

The Pritzker family, including Penny Pritzker, were fined a record $460 million for violations of the RICO Act.

http://en.wikipedia.org/wiki/Superior_Bank_of_Chicago (Sorry about the Wikipedia link. The best I could do on short notice.)

Completely by coincidence, Penny Pritzker is Campaign Finance Chairpersion for a very famous politician from the same city as Superior Bank. Who used to be a community organizer in Chicago. Who used to do legal work for ACORN. This just happens to be the same politician who received more money from Fannie and Freddie in the last four years than any of the other 535 members of Congress.

Of course, you've already seen all this in the mainstream media, right? Right?

We are about to have the world's first Politically Correct Recession, boys and girls, and You Are There.

Nothing to see here folks. Move along, move along.

Not exactly. Here's a great rebuttal from the other side of the political spectrum, that makes some great points: http://www.prospect.org/cs/articles?article=did_liberals_cau...

"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." There are so many prescient quotes in this article.

It looks like a stupid idea prima facie. Charge people you don't think are going to pay more? What kind of "educated" individual thought that one up?

I'd laugh if it weren't on you and me to fix their stupidity.

If you watch your last 30 years of politics, you see that both red and blue parties were at the helm during significant decisions that effect us now. The only thing you can conclude is both parties are full of dangerous "public servants" and we should clean house.

DONT VOTE FOR PARTIES!!! VOTE FOR PEOPLE!!!!

Reply on news.ycombinator.com