Govt pressure to blame for mortgage disaster?

[Doctor_J]

I talked to someone in the mortgage business today. She said that the government forced them to issue all of those "sub-prime" mortgages over the last 5 years, and they couldn't turn down mortgages they knew were going to default because "the applicants would have sued".

Does this jibe with what we know about the collapse, or is it hooey?

[Kutjara]

1. I heard something similar the other day.

In this person's telling is was Jimmy Carter who forced banks to lend a certain proportion of their overall portfolio to "sub-prime" borrowers (in an effort to give poorer people a start on the property ladder). Bill Clinton then extended the proportion and widened the categories of borrowers entitled to the loans. The result was apparently "welfare queens" occupying million dollar homes while their kids drank out of the toilet. Or something like that. I stopped listening when I heard the old cliches rolling out in a steady stream.

When I heard the twin boogiemen of Carter & Clinton issue from the speaker's mouth, I pretty much knew everything I needed to know about their political leanings (still blaming everything on people in office 30 years ago, eh?), so I didn't look into it any further. Like all freeper pronouncements, the story is no doubt 1% fact and 99% mindless bigoted shit.

[Doctor_J]

3. I suspected as much. Carter and Clinton didn't come up during

my discussion, but the "Government made us loan money to blacks" undertone was clear.

[MadMaddie]

2. It's interesting that this is the story that's going around

considering that the "subprime" mess escalated after the deregulation of the banks and the mortgage industries.

Whatever makes their boat float...

[EconomicLiberal]

6. It's the story that is going around because it is the story that right wing slime radio is pushing.

It's amazing how much influence the right wing smear merchants on radio have over the political dialogue in this country.

[notadmblnd]

4. Sure, just like the residents of California took advantage of ENRON

:sarcasm: Deregulation of the banking industry and greed is what caused this mess. Nothing more, nothing less.

[MadHound]

5. This sounds like more right wing bullshit

The kind that was going around during the run up to the election, how CRE loans were forced down the throats of banks and realtors. It was bullshit then, it's bullshit now. Banks were not forced to hand out nothing down, ARM loans, and people were not forced to accept them.

The mortgage crisis is simply where greed ran into stupidity, both on the part of the financial industry and those who took out those loans.

[zorahopkins]

7. Is Hooey The Same As Bullshit?

If hooey is the same thing as bullshit, then it's nothing but hooey.

[pscot]

8. Utter bullshit

Blame anybody but yourself. It's the Amerikan way.

[Arctic Dave]

9. Must have been the talking point of the day. I heard the same thing the other day.

He said it was Pelosi and the Dems made them give loans out. The person telling me the story is a winger radio listner so I just smiled and nodded.

If you ask them what government agency required the banks to issue the ARMs they look at you like your crazy. Then tell them if it was the gov. mandating this policy, ask them who was in charge of the Whitehouse and Congress during this period.

[jmg257]

10. Government mandating/sanctioning sub-prime loans started in earnest under Clinton. Bush continued

the trend, as he loved pointing out how much house ownership had risen.

It was at the gov't request in the '90s that lending institutions get "creative" in order for more people to find funding for housing.

[Waiting For Everyman]

13. Broad home ownership has always been a goal.

After WW2 the government funded VA mortgages for zero down to help achieve this. And btw before it comes up, VA and FHA (5%) have a lower default rate than conventional with 20% down payments.

A rooted and stable population is good public policy. Judging by those I've spoken to, younger people today don't seem to understand the value of that, or owning a home, at all.

Nevertheless, this policy is right. One of the few which is.

[jmg257]

14. Agreed. Right until the point that so many people can not afford or choose not to pay their loans.

[Waiting For Everyman]

15. 9% to 12% interest when others are paying 4-5% might have something to do with that.

It's wrong.

[Idealism]

11. This is comeplete horseshit

Clinton and Carter had nothing to do with this.

This is a popular GOP memo going around, blaming Carter and Clinton for an archaic stature that was losing its power before the housing crisis. You are referring to the Community Reinvestment Act, enacted by Carter in 1977 to stop "redlining," which was a wholly racist procedure where entire neighborhoods in low-income areas were not allowed to be authorized a loan. It had NOTHING to do with the current crisis, and according to independant analysis done by a highly respected law firm, it actually helped ease the problem.

-The government didn't "force" lenders to stop verifying debt-to-income ratios, profits did.

-The government didn't "force" lenders to waive down payments, or to use a HELOC (a 2nd mortgage) as a down payment, profits did.

-50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations.

-The government didn't "force" lenders to start issuing "No Money Down Mortgages," profits did.

-Where in the CRA did it mandate that Moodys, S&P's, and Fitch rate junk paper as AAA?

-What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?

Hmm, sounds like you aren't convinced it wasn't all the government pushing this stuff. How about Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference in Februrary, 2003 (before being taken-over by Bank Of America, Countrywide was the nation's biggest Mortgage lender) advocating zero down interest payments--was that a CRA requirement too, or just a grab for more market share, and bad banking?

[jmg257]

12. Not so much the CRA, as the National Homeownership Strategy of 1994.

"For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership."

From Wiki...
Increasing home ownership was a goal of the Clinton and Bush administrations. There is evidence that the Federal government leaned on the mortgage industry, including Fannie Mae and Freddie Mac (the GSE), to lower lending standards. Also, the U.S. Department of Housing and Urban Development's (HUD) mortgage policies fueled the trend towards issuing risky loans.

In 1995, the GSE began receiving government incentive payments for purchasing mortgage backed securities which included loans to low income borrowers. Thus began the involvement of the GSE with the subprime market

[wuushew]

16. please provide the wikipage you are citing.

n/t

[Telly Savalas]

17. Krugman argues that GSE's weren't a major factor in the subprime meltdown

Fannie/Freddie did some bad things, and did, it turns out, get to some extent into subprime. But thanks to the accounting scandals, they were actually withdrawing from the market during the height of the housing bubble — the vast majority of the loans now going bad came from the private sector.

http://krugman.blogs.nytimes.com/tag/subprime-loans/

I'm too lazy to go hunting for it, but I'm pretty sure Krugman or Brad DeLong recently posted a more detailed analysis of this which offered more specific numbers of where the bad loans were coming from.

Additionally, most of the loans which turned sour in this crisis were originated between 2003 and 2005. The GOP controlled all three branches of the federal government during this time, so any attempts to pin this on the Democratic Party is baseless whining.

[Mojorabbit]

22. McClatchy also

had this article back in Oct when this right wing meme started

Private sector loans, not Fannie or Freddie, triggered crisis

By David Goldstein and Kevin G. Hall | McClatchy Newspapers

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.
more at link
http://www.mcclatchydc.com/251/story/53802.html

[Hassin Bin Sober]

18. Most of Fannie/Freddie's bad loans were written in the last few years.

I thought I read 80% of their bad loans were written since 2005.

Anyway, I'm in the buisness.

This meltdown has little to do with any these homeowner initiatives.

The Fannie (My Community Mortgage etc.) and Freddie (Affordable Gold etc.) products are pretty generic/conservative 30 year fixed products. Furthermore, these programs had relatively low/affordable rates and low PMI insurance rates to keep the payments reasonable. These are not the source of their troubles. There have been many studies posted here showing the lenders heavily involved in these programs are less likely to be in trouble - the loss rates on these programs are relatively low.

In the last couple years, Fannie, to recapture some of that sub-prime market, started buying level 3 paper from us at high rates and crippling PMI insurance rates - THAT was their problem. Whatever they were doing on the back end (secularization and hedging with default swaps???) to justify these loans, they didn't make any sense with their high rates and OUTRAGEOUS pmi insurance premiums ($400 per month 200k) and high debt ratio allowances.

Don't buy any of that right-wing bull shit.

The non-CRA-regulated players like sub-prime lenders and non-thrift-regulated portfolio players - (lenders that portfolio or don't sell to GSAs) are the main culprits in this fiasco. Keep in mind 200 plus lenders bit the dust before Fannie/freddie went belly up.

Off the top of my head:

GreenPoint Mortgage (Capitol One)- ALT-A ,,, no income loans interest only etc.
Aurora Loan Services (Lehman Bros.) Alt-a no doc loans
Option One (H&R Block) Sub-prime
BNC Mortgage (Lehaman) Sub-prime
Long Beach (WAMU) sub-prime

[Idealism]

19. GSE's don't issue loans, they hold them

All they do is buy CMO's currently(Collateralized Mortgage Obligations) aka Mortgage Backed Securities.

Most subprime loans were originated by Mortgage brokerages/thrifts NOT subject to government inspection.

The GSE's starting in 2003 didn't even have 40% of the market share on CMO's, they couldn't get enough of them because they were seen as the safest investment so prices on them went up and CMOs became harder to come by. It was in this time that banks started buying them up as assets. Bush promoted universal home ownership more than anyone. Clinton did not do the things Bush did, I care less what some wikipedia page says. The main cause for housing to boom was that due to CMO's being seen as the "safest" investment money can buy, house prices skyrocketed beyond what most people could afford. Thus, they made up a bunch of mortgages that weren't around before: NegAm, No-Interest,Principal-Only, AdjustableRate's,No-Money-Down's. All to make up the income that these people didnt have because EVEN IF THE PEOPLE DIDNT HAVE THE MONEY TO PAY THE MORTGAGE, BANKS COULD:

a. Provide a HELOC to till there wasn't any equity left
b. Foreclose on the house then sell the property at a profit due to ever-increasing home prices.

These banks weren't forced to lend to non-credit worthy people, they did so because worst-case scenario, they could resort to Option A or B and still make a profit. Lending was so cheap too, thanks to Bush telling Greenspan to slash interest rates from 6.5% in 2000 to 1% in 2001 (a 45-year low) and kept them there for 1 year, that it encouraged real estate speculation-- further leading to unrealistic home price increases and the bubble.

[mbee]

20. The mess was caused by current White House occupants -

The economy has been in the tank for a long time with people either becoming unemployed or being underemployed. Bushco got the car companies to give zero percent financing and the banks loaded up everyone with equity loans because a lot of people otherwise couldn't pay the bills off their earnings. That's why Obama won in a landslide because people in both parties finally recognized what had happened. Clinton had the best economy ever so let the 15% or 20% Bush supporters believe all the goofy stories they want, but I don't think the rest of the country is in any mood to listen to this hogwash!

[Igel]

21. There are lots of links in the chain leading from solvency to insolvency.

That was one of them.

In the mid '90s it was called "redlining". It was evil. It was bad. And after hearings, no law was passed to dispose of it; instead of waiting for regulations, the industry resolved the problem by altering its practices. Under Clinton, the government monitored industry practices.

Older forms of redlining were so-called because of lines drawn around districts--those living in the districts would get no loans. It was a conscious decision, and often race-based. Redlining in the '90s was a distributional artefact: You map where people who received loans lived, and where those who were denied loans lived, and you noticed that those denied loans lived disproportionately in certain areas.

Problem is, a lot of, if not most, of this kind of redlining was based not in racism, but in numbers: You don't give loans to people that are bad risks or have few assets. If you look at American society and look at the distribution of middle- to upper-incomes, you note a racial bias; if you look at the distribution of assets, you note a racial bias; if you then note where people with low incomes and few assets live, you note a tendency towards segregation. Now, you don't give loans to people with low incomes and few assets, you wind up with fewer loans going to some neighborhoods. Hence the distribution, and the use of the term.

Solution: Make sure those in poor areas get loans. Even if it means they have few assets and low-paying jobs or are just bad credit risks. Link 1.

However, banks don't want to make such loans. They're likely to be a problem, and if you have too many in your portfolio you can run into problems. The solution: Offloading them. Securitizing them. This was first done in '97, I believe, and quickly came to include lots of bad quality loans. And, when ARMs became more popular, ARMs. Link 2.

Now that you can offload low-quality loans, you can make more. It made government watchers happy; it made community advocacy groups happy. Banks boasted of the number of loans made to people who otherwise wouldn't have gotten them. Freddie and Fannie helped implement it early on; they were leaders. Link 3.

Once the mechanism was worked out, it was seen as a very profitable venture. You make loans, sell them at a little loss (knowing that you'll recoup the loss in making more loans), make more loans with the money you were just given, sell those loans ... etc., etc. At this point, subprime loans were decoupled from politics. Lots of people that weren't poor minorities--who weren't "redlined"--now got them. Freddie and Fannie lost market share. Link 4.

All that's needed is for housing prices to go flat or decline (link 5) for all hell to break loose. Why? Because lots of banks, investment firms, pensions, IRAs, etc., etc. wound up owning these securitized mortgages. Voila: Insolvency.

Along the way various and sundry people thought more regulation was in order. Freddie and Fannie fought regulation in the early '00s, when they still had a very large portion of the market. They were still fighting it in '05. This might have broken links early enough to keep the financial mayhem manageable. Or maybe not. Perhaps the chain's not just one link connected to another, but more complex so that at least two links needed to be broken.

People want to blame those who voted against the regulation at one point or another. Or those who started the ball by whining about redlining. Or banks who relaxed lending standards. Or they point to securitizing mortgages, and the regulations involving them--regulations which were relaxed. Or they point to the money that got some mortgage brokers to be foolish and corrupt. Very few people point to more than one, and the one they pick usually is the opposite of their own political party membership: Many repubs blame Clinton (or his predecessor, Carter), or people like Rahm when he was on Freddie Mac's board, or Franks who echoed Raines in saying, in '05, that Freddie and Fannie were as good as gold and needed no regulation, etc., etc. Many dems blame Graham (R) for relaxing the regulations, or on greedy mortgage brokers, or on repubs who fell for the lobbying and weakened proposed regulations, etc., etc.