Sunday, October 05, 2008

Bad mortgages caused the financial crisis

Credit crunch, housing did it all begin? A quick look at our history shows a different story. Know your history, know the truth, then spread it.

Fannie Mae Eases Credit To Aid Mortgage Lending

New York Times

Published: September 30, 1999

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.

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.

''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.''

cont'd (Please see New York Times for past archives)


Dave M said...

I think that is only a symptom of a much larger problem. The bubble bursting cycles we go through, is due to corporatist intervention in the "free" market. Don't get me wrong, I'm not anti-company, but this close relationship that is shared between large pressure groups (sometimes companies themselves) and our politicians is a scary trend. On top of this, our government encourages bad business practices in our banking system via the FDIC & the FED. Our government has essentially co-sponsored this fraud by allowing it to continue for literally decades. The S&L scandal was the same, it was fraud. The government literally cooked the books for the banks which allowed them to cash in multiple times before laying off all their debt on the US taxpayer. We are doing it again right now. The banks purposefully make risky loans to US citizens and other nations knowing full well if they are large enough, all they will have to do is petition congress for their bailout. Bailouts aren't a new trend, we've been doing them since at least the 70s.

So what really causes these issues, is our government rewarding bad business practices with bailouts. Let the "free" market take control and let these banks go under. Will it hurt? sure. In the long run it will hurt less though. As it is now, we all get to share in the bank's debt but not their profits. Private profits, communal debt. By printing more money the FED will increase inflation drastically which lowers the buying power of every dollar. It is essentially, a second tax on money we have already been taxed on.

Publisher said...

Dave -

I think we're on the same page on this one regarding the principle behind bail outs and that scary aspect of socialism where the federal government is essentially forcing us to pay for the mistakes of others.

There is an upside though -- because we're not the only ones affected and the rest of the world is scared to death in storing their investments in emerging markets, they all came back to the United States.

Right now the buying power of my U.S. dollar is the strongest its ever been in Asia in the past five years. For so long the dollar was falling and in the last month it wiped out those losses.

To give you an idea, when I came to Southeast Asia in Jan/Feb 2008, the exchange rate of the Philippines peso to the dollar was roughly 42 pesos to 1 dollar. Now it is 49 pesos to 1 dollar. Crazy, huh? You would think with our economy crashing people are scared of us; however, the world economies are crashing worst!


Dave M said...

Yeah that is very interesting, I was surprised to hear the dollar actually gained strength, for now anyway ;-)

I like your blog alot, keep up the great posts!