Posted on 09/20/2008 4:12:48 PM PDT by Jim Robinson
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.
Fannie and Freddie have long since ceased to be relevant to the needs of lenders and borrowers, having succumbed to the daily pressure from Congress and the media to become agents of social change. They were set up before the term "political correctness" was coined, but they have to be two of the most politically correct "corporations" in this country. With the government take-over of last week, expect our leftist politicians to demand ever more "social justice" from them even as the house of cards collapses.
Reform is no longer an option; dissolution is what will happen, and the sooner the better.
Thanks so much for your post. I’m WI voter who was going to vote for McCain, but I got so depressed by this news I was just going to sit it out. By having that information I’m back on track.
Thanks for posting. I've been looking for this link.
Jim - the Democrats are definitely to blame. However, the goons on Wall Street should be blamed too. Their greed and desire to make impossible loans based on leveraged funds is the primary cause of this socialist mess on Wall Street.
NOT true. If someone presents with stellar credit and proper collateral, and the lender is satisfied with it, there is no reason to have government force them to require a major down payment on any sort of loan. The contract between borrower and lender should not be regulated to such a degree.
Of course with all the socialist, unconstitutional mess going through, my vision of what I think should be common sense is looking more and more like a pipe dream.. but it’s still the truth.
Ping
Not now. The default of most major securities guaranteers would make 50 trillion of securities worthless. The MBS are small potatoes and have mostly been written off by most banks. The CDS and other derivatives cannot be written off without destroying the financial portion of the economy.
Sorry Jim, but that won't work now. There are at least 50 trillion in securities relying on credit default insurance and probably a good portion of the 500 trillion in credit derivatives would go down with that. The financial part of the economy would be destroyed, most pensions, most insurance and insurance annuities, all equity in financial companies, most equity in other companies.
The fault lies squarely with Greenspan and all his credit bubble shills. The financial companies simply took advantage of that to create this mess:
http://www.financialsense.com/fsu/editorials/amerman/2008/0917.html and now we can only let the Fed and Treasury try to unravel it slowly and steadily. It will cost far more than the 700B, that's just a downpayment.
Yeah, well, I don’t think I want to make a $700 billion down payment on something that no one knows what the total cost will be, or the strokes, or the ultimate value to the taxpayer (assuming there is a value). A trillion or two now and $25 trillion later when social security goes bust in less than a decade and pretty soon we’ll be talking big money.
And that’s not including the trillions that the Marxist Democrats will force on the taxpayers should they take control of all three branches and force universal healthcare and the rest of their socialist agenda down our throats. Why pour good money down the drain endlessly chasing bad deals? If we’re going to go bankrupt anyway, lets cut the crap, cut the losses, get the socialists and their socialist programs out once and for all, and rebuild from the ground up.
I hope the vaunted Wall Street financial institutions are stronger than that. If not, they deserve to die.
I will agree only if you agree that we take a careful approach to killing them off (i.e. taxpayer money will be necessary up front to unwind this mess).
We don’t need to kill them off. And we don’t need to prop them up with taxpayer money. Just get government out of the way and as the weaker companies go bust the stronger ones will gobble them up. Let it happen and I guarantee you the sharpest players on Wall Street will scramble to action. There are plenty of winners in every shakeout on Wall Street.
This one is a government caused mess. We cannot rely on government to get us out of a mess their incompetence got them into in the first place.
The insurance industry (e.g. AIG) literally went insane by selling insurance against the default of securities. The default action is exactly what you desired when you wanted the stronger firms to win. Now with security insurance that no longer happens. But the worst part is that if some of these insurers go bankrupt, the claims ripple through the rest of the banks causing the loss of all of their equity, then the loss of a lot of nonfinancial company equity, and then a major loss of the money for productive investments.
I would like to try your approach if I could see a way to start over from scratch, but I don't see it.
Rippling through is better than plunging all in. Capitalism is always better than socialism. Let the big dogs on Wall Street loose! You can’t run with the big dogs if you pee like a pup.
We can thank Bill Clinton and his cronies for two things: not corraling Bin-Laden when he had the chance, and unleashing an almost fatal virus into the nation’s financial system. Formerly I was ready to give Clinton a pass on the economy because of the stock market growth and the capital gains tax cut (which was what balanced the budget). Now I can’t even give him credit (ha, ha) for that. Clinton now ranks in the bottom tier of worst presidents in history.
The administration's proposal, which was endorsed in large part today [September 11, 2003] by Fannie Mae and Freddie Mac, would not repeal the significant government subsidies granted to the two companies. And it does not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enables them to issue debt at significantly lower rates than their competitors.
If Bush had any guts, he would have made the threat posed by the Clinton/Gore Administration's new liberal federally-backed lending rules a major campaign issue in 2000. Instead, he gave us his typical wimpy Bush cheerleader stuff and tried to push the whole mess into the future (when he hoped he'd be safely back on the ranch.
Carl Icahn (see www.icahnreport.com) says that American corporations are rapidly losing gound to overseas operations because our corporate laws encourage back slapping fraternity President types like Bush to rise to the top and the prevailing (Delaware) coporate laws make it hard for shareholders to replace them.
Sarah Palin seems to have good instincts on economic matters, so I hope McCain listens to her and the libertarians and not the quick buck country clubbers who have dominated the Republican Party for far too long.
Interesting, I have not been hearing anything on this in the news. The Dems spin on the problem is that it was the result of deregulation???
Did Rush even mention this today?
That one is still up in the air. What I do know is we damned anyway it goes at this point. We can vote to nationalize the market system in congress or just wait until the voters do it after the crash. The funny thing is we are only talking about what 5 to 10 % of mortgages going south? I truly think we can survive without a bail out.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.