Brainfade Posted October 17, 2011 Posted October 17, 2011 It can be argued that the US economy was driven to the ground by the sub-prime lending crisis. At the very least, the downturn was precipitated by this dubious practice. Twelve years ago, the Clinton administration opened the doors to sub-prime lending and pushed Fannie Mae to underwrite these risky loans in the name of helping the underprivileged. As usual, government intervention into the free market turned gold into dust over the next 9 years. Read this. Not a conservative rag. It is THE New York Times. The bold-faced part is so prescient, it is chilling. http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html?pagewanted=print&src=pm Fannie Mae Eases Credit To Aid Mortgage Lending By STEVEN A. HOLMES 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.'' 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. As a side-comment, the OWS protestors would be better off protesting in front of Congress, the White House and various state legislatures and governor mansions rather than in front of the banks. If the corrupt politicians did not accept contributions from powerful corporate and union lobbyists, the lobbyists would stop having power. It starts at the top.
goose Posted October 17, 2011 Posted October 17, 2011 Interesting. Watch 'Inside Job'. Congress is Wall St.
Brainfade Posted October 17, 2011 Author Posted October 17, 2011 Interesting. Watch 'Inside Job'. Congress is Wall St. It is on my list ... not on Netflix online yet, and I'm too cheap to sign up for their DVD rentals. :-). Another thoroughly instructive NPR/PBS/Frontline documentary about the derivatives market. See link in this thread: http://www.indiancricketfans.com/showthread.php?t=267315&highlight=Frontline You watch this, and it is clear that the govt and big financial institutions are hand-in-glove. But, in my opinion, the OWS protesters are barking up the wrong tree. The issue is not CEO salary, and the solution is not to regulate executive bonuses or tax executives more or redistribute individual wealth. The issue is that these institutions grow too big to fail, and the feds keep bailing them out. It is up to the lawmakers to see the light and change the way they do things; why would Wall Street change? Watch the documentary - it is chilling how Greenspan, Summers and another guy whose name I forget placed all the wrong bets despite warnings from watchdog groups, and eventually brought everything crashing down.
akshayxyz Posted October 17, 2011 Posted October 17, 2011 This and I never liked the concept of Bail out - its like giving more money to a gambler, who just went bankrupt with his bad practices/business. In other words, putting money on a losing gambler.
yoda Posted October 17, 2011 Posted October 17, 2011 Bail outs were done to prevent a total financial collapse. It is not like the govt. gives free money every day to failing companies. Some argue that those companies should have been allowed to fail, what they don't say is what the consequences would have been if there was a dry up of credit markets which is what the US faced prior to the bail outs.
Ram Posted October 17, 2011 Posted October 17, 2011 This crisis was a decade in the making, It could take up to a decade to fix as well.
Brainfade Posted October 17, 2011 Author Posted October 17, 2011 Bail outs were done to prevent a total financial collapse. It is not like the govt. gives free money every day to failing companies. Some argue that those companies should have been allowed to fail' date=' what they don't say is what the consequences would have been if there was a dry up of credit markets which is what the US faced prior to the bail outs.[/quote'] The OP was about how the crisis could have been avoided in the first place, not about how we have had to band-aid it. The whole sub-prime crisis would probably not even have occurred had the government not interfered and tried to push the banks to make high-risk loans with FM/FM underwriting them. And this is not just hindsight. As the NYT article in the OP says, there was precedence for this sort of govt intervention followed by a bailout. But politicians never learn - be it Clinton or Bush or Obama. People should blame them and the guys who work for them, not Wall Street CEO salaries, for our current woes. Guys, I urge you to watch the Frontline documentary. It is long, but it is balanced, detailed and educational. Not the kind of tripe that Michael Moore or FoxNews might put together.
Ram Posted October 17, 2011 Posted October 17, 2011 The OP was about how the crisis could have been avoided in the first place, not about how we have had to band-aid it. The whole sub-prime crisis would probably not even have occurred had the government not interfered and tried to push the banks to make high-risk loans with FM/FM underwriting them. And this is not just hindsight. As the NYT article in the OP says, there was precedence for this sort of govt intervention followed by a bailout. But politicians never learn - be it Clinton or Bush or Obama. People should blame them and the guys who work for them, not Wall Street CEO salaries, for our current woes. Guys, I urge you to watch the Frontline documentary. It is long, but it is balanced, detailed and educational. Not the kind of tripe that Michael Moore or FoxNews might put together. Hard not to miss the irony in your post, CA. You encourage posters to watch the Frontline documentary, praising it to be balanced and objective, literally seconds after putting all the blame on our current woes on the Policy makers and completely absolving the corporation of any culpability. That to me, is an extremely one-sided perspective of things. To say that the mess that we find ourselves today was purely caused by corrupt law-makers is not anywhere close to being an accurate reflection of reality. Sure, they didnÃÕ help with their dubious fund-raining practices and lax regulation, but Wall Street executives had a HUGE role to play in causing the current crisis. Consider this Even while his company was taking on unreasonable risk, commoditizing junk and risky instruments, the CEO of Lehmann Brother took nearly $330 mn in bonuses, in the decade prior to its collapse. Did any Congressman or Senator ask him to do so? Fact of the matter is in the years leading up to the bust in 2008, senseless financial instruments that had little to no regard for underlying risk were created and monetized. A lot of people got very rich, very quickly, based on these instruments. When the inevitable bust eventually happened, all the liability was taken over you The taxpayer.
Rajiv Posted October 17, 2011 Posted October 17, 2011 Interesting. Watch 'Inside Job'. Congress is Wall St. http://www.imdb.com/title/tt1742683/ Too Big to Fail
coffee_rules Posted October 17, 2011 Posted October 17, 2011 Pointing fingers at Clinton, some other article would do that the Sr. Bush Admin, whose policies were pursued by Clinton's admin. All American presidencies follow what the businesses and corporates lobby, they are all the same. - repubs, dems, ClintonBushObama.
Brainfade Posted October 17, 2011 Author Posted October 17, 2011 Hard not to miss the irony in your post, CA. You encourage posters to watch the Frontline documentary, praising it to be balanced and objective, literally seconds after putting all the blame on our current woes on the Policy makers and completely absolving the corporation of any culpability. That to me, is an extremely one-sided perspective of things. To say that the mess that we find ourselves today was purely caused by corrupt law-makers is not anywhere close to being an accurate reflection of reality. Sure, they didnÃÕ help with their dubious fund-raining practices and lax regulation, but Wall Street executives had a HUGE role to play in causing the current crisis. Consider this Even while his company was taking on unreasonable risk, commoditizing junk and risky instruments, the CEO of Lehmann Brother took nearly $330 mn in bonuses, in the decade prior to its collapse. Did any Congressman or Senator ask him to do so? Fact of the matter is in the years leading up to the bust in 2008, senseless financial instruments that had little to no regard for underlying risk were created and monetized. A lot of people got very rich, very quickly, based on these instruments. When the inevitable bust eventually happened, all the liability was taken over you The taxpayer. It is not Lehman Brothers' job to be socially just. It is their job to make money for their investors and shareholders. And if Lehman Brothers took people's money and made bad investments, it is their shareholders' and investors' job to stop the CEO from raking in 300mil in bonuses. Not yours or mine or Greenspan's ... just as it was not the govt's job to push banks to make risky subprime loans in the name of social justice, and then underwrite it with taxpayer $$. I am puzzled that you don't see the distinction between what a financial services company is responsible for and what the govt is responsible for. Here is a CNN article that addresses these much more articulately that I can: http://money.cnn.com/2011/10/17/markets/thebuzz/index.htm?iid=Popular
Brainfade Posted October 17, 2011 Author Posted October 17, 2011 Pointing fingers at Clinton' date=' some other article would do that the Sr. Bush Admin, whose policies were pursued by Clinton's admin. All American presidencies follow what the businesses and corporates lobby, they are all the same. - repubs, dems, ClintonBushObama.[/quote'] Not pointing fingers at Clinton. Just at government messing around in general.
kabira Posted October 22, 2011 Posted October 22, 2011 ^I could not download that. Do you have the copy?? It stopped at 99% LOL on Bittorrent.
dial_100 Posted October 22, 2011 Posted October 22, 2011 Well, there is certainly a big involvement of government in what turned out to be huge economic fisco because of the fraudulent practice. This no-control underwriting or rather fraudulent underwriting, went up the chain and was allowed. This cycle could have been broken earlier when the underwriting of these derivatives happened at the highest level where the huge sum of money was circulated back in the financial market and thats where it engulfed everyone. Of course the govt. was expected to bail out the big fishes.
goose Posted November 4, 2011 Posted November 4, 2011 Just watched Margin Call. Brilliant and authentic. As a trader of 14yrs, I have sat through a few crises and this film captures the mood perfectly. Irons and Spacey are magnificent!
MarkusB Posted August 20, 2012 Posted August 20, 2012 Bail outs were done to prevent a total financial collapse. It is not like the govt. gives free money every day to failing companies. Some argue that those companies should have been allowed to fail' date=' what they don't say is what the consequences would have been if there was a dry up of credit markets which is what the US faced prior to the bail outs.[/quote'] I agree with you yoda. That's why the federal finance watchdog, the Consumer Financial Protection Bureau, states it wants more transparency for property owners from providers of mortgage services. Read more here.
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