Tuesday, October 07, 2008


By way of about 20 or so Gentle Readers, I have been pointed towards the 30SEP1999 issue of the New York Times.


Due to the fragile and delicate nature of the World Wide Web -- where on-line stuff sometimes suffers sudden mysterious disappearances -- I have copied the article in question:

Fannie Mae Eases Credit To Aid Mortgage Lending

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.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''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.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

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.

I have taken the opportunity to high-light certain sentences in the above article that I find to be somewhat interesting in light of the Congressional hanky-panky of the last week.

September 30 of 1999 is, what, nine years ago that somebody saw this coming?

Yet, here is Congress -- including, I might add, Texas Representative Mac Thornberry and Texas Senator John Cornyn -- voting to take 850 billion dollars out of your wallet and out of my wallet -- 850 billion dollars of taxpayer money -- "because it's an emergency and we've got to do something NOW NOW NOW!"

I'm going to give Mr. Thornberry and Mr. Cornyn a bit of advice, free of charge: If you see something coming for nine years -- it isn't an emergency anymore.

Nine sodding years.

This -- amongst others of your sins of hubris and arrogance committed in the last week -- I'm definitely going to remember on Election Day.



Diane said...

The only surprise here is that the NYT printed this.

This whole mess began even before Clinton - with Carter's call for "affordable" home ownership for all, and the (mistaken) Democratic tenet that home ownership is a right rather than a priviledge to be earned.

I planned to buy a condo two years from now - with a full 20% deposit and my perfect credit record. I've pretty much given up on that idea, since most of my money will be going to help those who were allowed - nay, encouraged to buy houses they could not afford.

But no, I'm not upset or bitter at all.

Anonymous said...

Why, oh why, didn't Dubya stand over someone-anyone-with a stick and make them crunch the numbers eight years ago?
If he didn't know this was coming, his advisors ought to be hung by their thumbs.

Ted said...

I guess "failure to plan on your part doesn't constitute an emergency on my part" just doesn't apply in this situation. Grr.

D.W. Drang said...

Note the quote in there by Franklin Raines.

As for President Bush trying to fix this 8 years ago, he tried to get Congress to do so. John McCain, among other (all Republican) senators also tried. Couldn't get a hearing.

Among other things, too many (mostly Democrat) politicans were making money off of Fannie Mae. Plus, hard for any politican to come out against a program that benefits poor, mostly "ethnic" people...

Anonymous said...

Giving someone a loan who cannot pay it back is NOT a kindness. Mortgage loans are large, long-term things. When the borrower cannot pay and is finally foreclosed and evicted with his credit ruined, it is a bitter experience. Why can't people see that?

John said...

PLease read the following 2 articles, and then reply.

You folks are falling into the same trap that congress is, but backwards.

Anonymous said...

The Slate article is wrong...we don't blame the poor who took advantage of these loan programs...we blame the politicians and lawyers who set the programs up and then failed to regulate them properly...mostly Dems, though there were too many go along to get along republicans who also need to find them selves to be unemployed former congresscritters. It's called creating an attractive nuisance, in legal terms.

Doug in Colorado

LawDog said...


The first article (The Big Picture) starts out by insulting me and my readers -- dubbed, it seems, as "wingnuts" and "zombies" -- and the references to "pseudo-intellectual detritus" and "blathering" were particularly well geared -- at least I thought so -- towards persuasion.

The second article (Slate) opens by calling me a racist. It further accuses me of "racial and ethnic discrimination".

Insults are a poor debate tactic. And when they're used in a debate, it's not to inform or persuade your opponent.

So you'll pardon me if I gently suggest that the authors of your two articles should pound salt up their bums and go whiz up a rope.

TOTWTYTR said...

I'm not a conspiracy theorist kind of guy, but I have to believe that the people who foisted this Ponzi scheme on the American taxpayers knew this was going to happen sooner or later. They also knew that it was going to be the those self same taxpayers who would foot the bill for the legislator's largesse. It was a cynical and successful act of wealth redistribution.

The only way to teach a lesson is by voting against every incumbent no matter how much you may like him or her. The Republicans are no better, just more ineffective, than the Democrats. They spend this money like it comes from other people's wallets because it DOES come from other people's wallets.

TBeck said...

Now it's time for the House Finance subcommittee to walk onto the field of battle and bayonet the wounded.

Anonymous said...

If the President of the United States "can't get a hearing" why do we have one?
Oh, I forgot: that's so we've a target at which to shoot while the actual perpetrators run for cover.
Once again: if I charge up a lot of stuff for which I can't pay, does the government pay it for me? No. But then, I'm not what the government considers 'ethnic.' Affirmative action-type things don't work and aren't meant to work for the average hard-working slob who, if he can't afford a house, simply doesn't try to buy one.

TBeck said...

Let's talk about unintended consequences (the principle, not the novel).

Congress passes legislation that requires banks to loosen loan underwriting requirements like the ability to actually pay back the loan principal. They authorize the securitization of mortgages based upon these new underwriting guidelines.

Banks, like Citi, then get sued by lawyers like Obama for not making enough of these loans. The banks run the numbers and discover that these loose standards can apply to EVERYBODY, not just the poor. And best of all, they can sell these loans to Fannie just as fast as they can make them.

So, under the guise of helping the poor, these banks take advantage of the laws that Congress wrote and the FDIC enforces to earn a whole lot of fees making loans to people who really should have known better while transferring the risk to the .gov or investors who really should have known better.

The current fiscal crisis is based upon paranoia and distrust amongst the banks. They do not trust each other to pay back loans made to each other, or even to honor counterparty clearing accounts. I guess there really is no honor among thieves.

For Congress to now stand up on its hind legs and demand explanations, apologies, and resignations is disgusting. Rep. Frank was apparently okay with maintaining an intimate relationship with a Fannie Mae executive while Rep. Frank wrote laws that directly affected Fannie Mae. I do not need to hear lectures on corporate responsibility from the likes of him.

martywd said...

You'll realize that this latest economic debacle is just a precursor to even larger financial crises looming on the horizon, right?   Social Security and Medicare entitlements are next on the catastrophic agenda!   I'm no fan of President Bush, but he did try to get some reform moving on Social Security, but nobody wanted/wants to touch that economic time bomb either.

John said...

if that's the take you want on the situation, I'm not going to be able to change your mind. But you know there's that saying about laundry: I hang some up, and you claim it's a fit. Not much I can do. I didn't think it did, or I wouldn't have sent you the links.

I was there (on Wall St) in 1975 and very much aware of the situation, I've been following it for 30+ years. Almost all of the "analysis" I see, right and left, ignores major facts. These 2 articles, while by no means perfect, are a couple that push back against the most common threads in this blog.

Doug in CO, the biggest pushers of the CRA were BANKS, and their lobbyists. Along with the Real Estate lobby, and the only real objections in congess at the time was about how the spoils were to be divided. (Apart from Proxmire, FWIW). If you look up the compromise bills, you will find more than 50 republican Senators, and over 125 House members in support of one form or another of the original CRA.

Anyway, sorry to have left a bad taste in your mouths. All I can say is that my intention was good: I wanted to point out that by playing the blame game, you are falling into the same trap as Congress is, just picking different players, from farther back. I had no intention of using insults as a debate tactic: I am neither Coulter nor Malkin. As you may gather from other comments I have left here, I am very much interested in polity and finding a common ground.

LawDog said...


You have nothing to apologize for.

As I have stated before, I know next to nothing about either economics or finance -- there is no doubt that you have a better grasp of the situation than I do.

If you say I'm wrong, and you point out why -- using small, simple non-insider-specific words and facts that I can check for myself -- I'll believe you.

An article that starts off by stating that anyone who doesn't think the way the author does is a racist nutjob, then spins off into a morass of insider code-words -- what the hell is a "credit-default-swap"? Or a "Neg-Am Loan"? Then fills the rest of the article with enough insider-specific allusions as to make it unintelligible to the anyone outside of the business (...outfits such as Argent ... -- who the hell is Argent?)

No. I don't think so. I am not a Congresscritter. You do not insult my intelligence -- ever -- then throw a mish-mash of tech-speak and code-talk at me, and hope the the baffling bullspit cows me into nodding happily along, pretending to understand.

You, John, I have no problem with. It's the authors of those articles you linked who can get busy with the salt and the rope.

Gay_Cynic said...

I dunno how welcome it'll be, but the negative amortization loan explanation I found that made sense to me can be found here:


JimB said...

Wait until the folks who couldn't pay their mortgages before still can't after they are adjusted by the gov't. The gov't will be obligated to forclose.. Various congrescritters will howl that certain "ethnics" are being discriminated against.. The cure=forgive the loans. Oh why didn't I sign up for a "free" house when I had the chance. You ain't seen nothing yet....

Anonymous said...

Ok. There's man, about 40, the son of lifelong friends of mine. He has had his troubles in the past, but has been taken under the wing of a little church here, and has been doing very well for about two years.
Unfortunately, for one of those years, he has been terribly ill. Of course, he has no insurance, and he's been rejected by Welfare. The man is totally willing to work, he's just too sick to. His wife works 8 hours a day for $2.15 plus tips; in a town of about 2500, you can guess how much she makes in a week.
Oh, yeah, and he hasn't bought a house he can't afford.
I don't see the almighty government handing out money to save his life, now, do I?
We aren't talking high finance or economics here when it comes to Fannie and Freddie; we're talking about what's FAIR. And the bailout isn't.

Richard said...

Thanks, LawDog, for posting this info.

I'm no expert on these high finance matters, so I comment as an average Joe layman.

I'm 62; worked all my life starting at age 15 (to help support a large family). Bought my first house with help from the GI bill, relocated twice since, and bought those two on my own standing.
Worked hard and paid for everything, taking a second job occasionally to get through the tough times.

Now, close to retirement, it appears I'm being asked (forced?) to pay for the failures of greedy banks and folks who've been sitting on their butts expecting someone else to pick up their tab.

Frankly, this whole mess looks like a PC motivated, thinly veiled Socialistic experiment that has failed (no surprise there).

But I'm not upset or bitter. Not me.

I'm extremely pissed.

John said...


Thanks. I appreciate that the tone of the article isn't the best, but there are damn few overviews that aren't really technical, and this is the best I have come up with. If you can get past the first few lines, and are willing to use Wikipedia for some definitions, then there is a wealth of good info there.

Most blogs talking about the "meltdown" are about as accurate and informed as the people who ask you, "why couldn't you just shoot the gun out of his hand?" and similar stuff. They just don't have a clue about what it really takes to be an LEO, and how it all comes together ( I was a sworn officer for 2 years in the mid 80's in central Oregon.) Ditto for the financial markets. It takes time and patience to understand the way the whole thing comes together, and me standing here explaining Credit Default Swaps and negative amortization is maybe a poor use of your comment space. I'll do it if you'd like, but you'd be better off searching the NYTimes for articles by Joe Nocera and Gretchen Morgenstern, who have done an admirable job laying out the general outlines. Again, they're not perfect, but better than most. Also, a look at the non-editorial areas of the Wall Street Journal has tons of good info, but it is aimed at a more experienced audience.

Diane, I think you're a bit mistaken on the tenet: the belief, common among both parties, is that home ownership is stabilizing in urban areas. Additionally, blue states are typically ones with LOWER home ownership, and red ones with higher, because of the urban/rural split. Also, even though Carter was the one who started the idea, it was very well received among both parties, each for their own reasons. BTW,you should be able to buy your condo sooner now, as prices have sagged in all major markets, and if you have cash, you are very well placed to bargain strongly.

Anonymous @5.21 You are so right. But imagine yourself in the situation that maybe for the first time in your life, you can see owning something, and the people who "really understand" are telling you it's a good thing. Further, imagine that like almost 1/2 of americans, you are literate at the 8th grade level, at best. Now read and understand the contracts. Remember, people you believe know more than you do are telling you it's OK to do this... and you really want to. Almost anyone would sign in that circumstance. And for YEARS it worked.

A last thing, if you don't mind: on many blogs, "Wingnut" isn't an uncommon word; on this blog Democrats and liberals have been called much worse, so I figured it wasn't an issue.

Towerclimber said...

oh..no worries. I sent the same sort of note to my senators here in Tennessee Lawdog. they will NOT be getting my vote come time for re election.
funny, both house representatives will keep their job..they voted against the bill...even the reformed bill.
I guess senators think that they're special because they have 6 years between re-election.

Anonymous said...

john, if it "worked for years," why are we in this mess, and how did it get so large? Obviously it has not worked for a very long time, if it ever did.
Selling a house to the same sort of people who took their FEMA cards after Katrina and instead of buying food for their children bought designer purses and beer, or who get virtually free project housing, take the garbage disposal and sell it, then tear out the window screens to toss the trash into the yard doesn't and never has made sense.
I don't see why I should spend 30 years paying for a $50,000 house at approximately 9% interest, paying taxes and insurance and upkeep on it when someone else gets off for less than half of that just because of their economic/educational condition.
It is simply unfair to those of us who WORK and PAY THEIR OWN BILLS.
In short, I'm neither a socialist nor a communist, and the Fannie/Freddie plan has always smacked of that.
And, as a random thought, can you imagine what $850 billion would do for our illegal alien problem? The drug problem? The runaway insurance and medical costs problem? Cancer research? TEMPORARY help for those who are down on their luck? Income supplement for our elderly?
This whole thing is just disgusting.

John said...

Anon @9.46
Look, friend, you make a great point: there were people who clearly abused the system (from both ends, lender and borrower). But, forgive me, O'Reilly and CO are wrong when they say that this is most of the people who took out loans, even no doc loans. As far as I can tell, the actual number of non-performing No Income verification, No Assets (NINAS) loans was less than 15% overall before the bubble burst. But due to the extreme leveraging that companies like Countrywide engaged in (33 to 1!) the damage was multiplied.
And while it was not well known, you should have been able to re-finance your mortgage as rates fell. But your bank/mortgage company wanted you to keep paying 9%, so THEY didn't tell you.
Anyway, it is unfair. Just like it is unfair that I got help from my parents to buy my first house and you didn't. Just like the bank gives extra $ to people who bring in new money but pay your savings much less. The attempt of the CRA was to make it possible for people who, for whatever reason, were good credit risks but insufficiently capitalized to make a large down payment. For a variety of reasons, that was thought to be a good idea, by politicians, economists and sociologists alike. (For one thing, as I mentioned, increased home ownership, as opposed to renting, makes for better towns in general.) This is the part I meant when I said it worked well for a time.
But nothing is so good that it can't be corrupted, often with the best of intentions. So, politicians wanted pork, bankers wanted to make loans, democrats wanted people to vote for hem, republicans ditto, and the thing swelled. But that's not the only reason why we're in the shits now.
The essential issue is that banks wanted to lower their exposure (i.e. pay less insurance to companies that insure banks if the loans go bad), and Fannie and Freddie were only to happy to help them find a way to do this. So, instead of F&F being a check and balance on the number and type of loans, they were pushing for increases, and pointing out new financial instruments that would help banks lower their exposure. First up, CDOs - Collateralized Loan obligations. Essentially a set of stocks that are based on the total return and risk of a large number of loans (mixed types, not just sub-prime), the initial idea (again!) wasn't bad. But quickly the Wall St types figured out that they could slice and dice up the bundle of loans and sell different levels of risk and therefore return (higher risk gets higher return, if you get to keep it. Lower risk gets lower return.) and then, another wrinkle: categorize the loans as low-risk because so many of the underlying loans were FNMA or FMC, and therefor "almost government secured".
This caused the market in CDOs to take off like a rocket, dragging everything in it's wake. And, since there were now more $ chasing after the same amount of real estate, the price went up. Which made the CDOs more valuable (since fewer would default, therefore lower risk, but returns locked in), which generated more $, which pushed prices up, which created more demand for CDOs etc.
BUT all good things must come to an end. In 2007, the "teaser"interest rates that banks and investment houses had used to "qualify" loans under F&F, started to reset, and since real wages have not changed since 2001, we reached a point where people simply could not re-finance again, and began defaulting. Combined with another fancy insurance scheme called "credit default swaps" which are simply ways to make it look like you aren't really risking anything while you bet the bank. Now, as banks/investment houses/brokerages/hedge funds began to have to cover their bets, other banks began to get nervous, and demand higher reserves (like a margin call on a brokerage account.) When Lehman couldn't get extra short-term loans to increase their reserves, OTHER banks began demanding repayment under the terms of their contracts (Remember, Lehman was leveraged up the wazoo, meaning they had borrowed lotsa bucks). And eventually, bye-bye Lehman. And then everyone started to panic, and demand additional $ for reserves, and that's how we ended up here.

So, no, it's not fair. But it's not as unfair as you have been led to believe. And the blame gets spread around, but to my mind, it mostly gets put on the feet of the bank CEOs, AIG's CEO, Chris Cox at SEC, Fuld @ Lehman, and the folks at F&F whose JOB it was to stop this shit from starting. I know many of these people and I am persona non grata at their houses because of my beliefs.
Once again, I apologize to LD for taking over his blog comments. (My email is having problems, so if you have tried to contact me, I didn't get it.)

Anonymous said...

9% is an AVERAGE. Can you not read the word 'approximately?'
You have a problem with an information superiority complex, it seems. However, what you chose to ignore, while attempting to prove that superiority is that 1) I might be as well-informed as you claim to be, and 2)I don't CARE about the social status of the defaulters, the numbers of them, their financial difficulties, or passing the buck. Tied up in one little neat package is that the entire tax-and-bill-paying, honest, hard-working people of the USA are catching it in the neck.
Therein lies the crux of the matter; not in abstract facts and figures and people of whom the average American has never heard, but in the undeserved financial hardships put upon us by, once more, the government's something-for-nothing mindset.
By the way, why don't you get your own blog?

John said...
This comment has been removed by the author.
John said...

Look, Anon, if you want to believe that the government did this to you, I can't stop you. I wanted to point out that, from my point of view, that's not a rational reading of the situation. I tried to show that there was more to the story than that. If you see that as having an information superiority complex, OK. At this point I've gone as far as I care to go.

FWIW, I don't have a blog because I don't want to. I enjoy LD's blog, and at first my thought was to contribute a little to the discussion, and then to clarify what I had said and responses to that.

Anonymous said...

I am with Richard- I am pissed. Have worked my ass off in hard jobs fishing, logging, construction, woodworking etc my whole life, no retirement plans, no medical insurance, now I am self employed with a successful but very small biz I have built from scratch - and am now expected to pay for the profligate shiftless ones AND the greedy swindlers both? I do not think, really, the idiot politicians have assessed their marks very carefully here- some of them are prone to biting back.