Replies

“Fannie and Freddie were already buying 42 percent of their mortgage loans to benefit low- and moderate-income families, but under Cuomo’s new rules, that requirement would rise to 50 percent.”

You appear to believe that loans to low and moderate income buyers equates to subprime, which is hardly the case. In fact the Fed study reported by Randall Kroszner found that 60% of subprime lending went to middle and higher income neighborhoods. Kroszner was a member of Dubya’s Council of Economic Advisors.

“Our analysis of the loan data found that about 60 percent of higher-priced loan originations went to middle- or higher-income borrowers or neighborhoods. Such borrowers are not the populations targeted by the CRA. In addition, more than 20 percent of the higher-priced loans were extended to lower-income borrowers or borrowers in lower-income areas by independent nonbank institutions—that is, institutions not covered by the CRA.6”

http://www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm#fn6

“...By 2008, some $1.6 trillion of toxic mortgages, or almost half of those that were written, were purchased or guaranteed by Fannie and Freddie.”

For decades F&F had a virtual monopoly on the secondary mortgage market. They were created in the first place to provide a secondary mortgage market.

In 2000 the GSEs held 48% of mortgage loans outstanding. But around 2000 F&F ran into serious competition from private securitizers and by 2006 the GSE’s share of outstanding mortgages had fallen to 40%.

This information is included in Lazard Asset Management’s research paper on the rise and fall of the mortgage bubble, which notably failed to identify the GSEs or the CRA as the cause of all the trouble:

http://www.lazardnet.com/LAM/us/tpd/pdfs/Inv_Research_Mortgage_Crisis.pdf

What was that old saying about sometimes being too close to the trees to see the forest? The information you present is interesting and enlightening, but it does not change the fact that, in spite of Obama’s constant whining about the “failed policies of the last administration” causing the economic mess we have today, it was the policies and practices of Democrats/liberals over the past thirty years which have been the primary factors in bringing on that mess. No one has claimed the CRA was the only driving force in the meltdown (although my reference to “those lousy loans” should have probably more properly referred to all the crappy lending the government was encouraging), but it was an early and significant attempt by the feds to directly control the lending practices of private institutions by giving them “report cards” and threatening sanctions if they failed to meet standards imposed by the government. Of course much of the damage was eventually done by the agents you cite, but they never would have had to opportunity to create the mischief they did had not the government led the way by weakening standards and practices for effective lending and by enabling those agencts by providing markets early on for the toxic loans they were inducing banks to create. Your figures on who owned what level of mortgage when and where are interesting, but the real issue is that those mortgages as a group were becoming riskier and riskier by the year as the government pushed to lower standards and provide loans to borrowers with vanishing credit-worthiness.

I‘m sticking with what Charles Gasparino, certainly a competent economic analyst, had to say in “The Sellout”:
HUD secretary Cisneros believed…eradicating poverty through home ownership would take big government, working with the banking business and mandating laws to force banks to lend to those most in need and with the least ability to pay. Clinton agreed.
…In 1995, Cisneros began his first major effort to influence Fannie and Freddie to dedicate more of their resources to providing mortgages for low-income families. His new measure directed the GSEs to set aside 42 percent of all their mortgage guarantees to serve what the government classified as low- to moderate-income borrowers.
When Andrew Cuomo succeeded Cisneros as HUD secretary in 1997, he increased that number to 50 percent and began to pressure the GSEs to buy up mortgages of people classified as “very low income”.
If this move was an important step toward the democratization of the housing market, it was also an important step toward the expansion of risk in the financial markets. For the first time it opened the GSEs to the part of the housing market that dealt with so-called sub-prime borrowers.
Sub-prime loans are the riskiest of the risky mortgages. They were initially limited to people with spotty credit ratings – maybe a missed credit card payment or two – but were actually dependable borrowers when given limited amounts of credit. Later, as the housing market picked up steam, the definition expanded and the pool of subprime borrowers now included people with little or no credit history, some who couldn’t document their incomes, many others who didn’t even have a job.
Of course, giving low-income families and minorities that had been shut out of the housing market assistance to purchase their own home is a laudable goal, though it totally ignored the fact that the surge in lending to the poor would push housing prices up beyond what average people could afford without government help or gimmicky adjustable-rate mortgages.
…Wall Street could not complain about…the enormous amount of money it made from the bubble Fannie and Freddie were helping to create.