Posted on 09/21/2008 2:53:35 PM PDT by Renkluaf
Much of this has been discussed or published here or in other publications. I wanted to put it together in one place.
In commenting upon underwriting standards as they apply to the minority community it notes that processes or mechanisms used in the past may, “contain arbitrary or unreasonable measures of creditworthiness.” Furthermore it notes that, “Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower–income, and non-traditional consumers.”
Items being cited as possibly being arbitrary or unreasonable include minor points like credit and employment histories. The pamphlet suggests alternatives that should be considered in place of such “traditional” benchmarks. However, what it fails to address is whether the alternatives carry any predictive value in addressing who is or is not likely to default on a loan as well as the statistical evidence supporting such a claim.
Apparently, US tax payers were at the bottom of list of Mr. Raines concerns. Mr. Raines and his friends were being “incentivized” at Fannie with bonus packages tied to Fannie’s earnings. While that’s great in the private sector, this is a GSE and he’s playing with tax payer money.
In September 2004, the Office of Federal Housing Enterprise Oversight (OFHEO) made public a report alleging improper accounting and the lack of internal controls at Fannie. Mr. Raines survived for several more months but as documented in this Washington Post article, his resignation was accepted quite reluctantly by the Board of Directors. OFHEO subsequently filed suite against Mr. Raines et al but just to give you an idea of the audacityof this individual he counter-sues OFHEO “arguing that regulators have no authority to delay his receipt of a $3.9 million stock award” as noted in this Washington Post article. The respective parties settled out of court in April 2008 with OFHEO issuing this consent order and Mr. Raines issued the following statement. “While I long ago accepted managerial accountability for any errors committed by subordinates while I was CEO, it is a very different matter to suggest that I was legally culpable in any way, I was not. This settlement is not an acknowledgment of wrongdoing on my part, because I did not break any laws or rules while leading Fannie Mae. At most, this is an agreement to disagree." I guess Sarbanes-Oxley only applies to the other guy.
President Bush also made an attempt in 2003 as noted by the New York Times. Naturally, anything a Republican proposes must be opposed by a Democrat. Consequently, the article quotes Rep. Barney Frank, the ranking Democrat on the Financial Services Committee saying, “'These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
And has been widely noted on this site an many others, Sen. John McCain co-sponsored S. 190 [109th]: Federal Housing Enterprise Regulatory Reform Act of 2005 in January 2005. While the bill was introduced, it went no where and was subsequently wiped from the books. In 2007 its initial sponsor, Sen. Chuck Hagel introduced a new version, but it too is DOA.
But rather than concern themselves with oversight responsibilities, our minions in the House were promoting their social engineering agenda as recently as last October. None other than Rep. Barney Frank brought us the H.R. 2895: National Affordable Housing Trust Fund Act of 2007. In a statement, Rep. Frank said, "The growing shortage of affordable housing is one of the most serious social and economic problems facing our country.“ After its passage through the House the Senate has yet to vote on it. However, OMB said, "The [Bush] administration strongly opposes the establishment of an affordable housing trust fund financed by diverting Federal Housing Administration (FHA) receipts and housing-related Government Sponsored Enterprises (GSEs) revenues. Accordingly, if HR 2895 were presented to the president, his senior advisors would recommend that he veto the bill."
What are regulator friends failed to anticipate was the velocity with which any security or a MBS in particular could change. And in the highly regulated financial services industry, entities are required to maintain specific ratios of invested capital to assets. If your assets plummet over a matter of days, you’re scrambling around for a capital infusion or your bankrupt.
So what does all this mean? Simple, banks and mortgage companies were coerced into making mortgages available to many who were not able to handle the debt. I have no doubt there were some unscrupulous mortgage lenders because every industry has those who abuse the rules.
When interest rates rose the default rates accelerated because of the high percentage of questionable mortgages. With high and accelerating foreclosure rates the market value of the MBS plummeted until there was essentially no market for them. The result, a bankrupt system.
bttb
Nothing to see here folks, please move along.. everything is SNAFU, as usual.
bttt
While I agree with your summary insofar as Government action is concerned, I think you place far too little blame on the huge financial houses, who were more than happy to operate in the environment that the government created. You make it sound like a matter of, "yeah, there were a few bad apples, but..." But the incredible magnitude of the failures in question make it pretty clear that there were a whole LOT of bad apples, making a whole lot of really stinky deals.
Lehman Brothers, Countrywide, and all those others were not forced by the government to get in so incredibly deep as they did. They were busy making (illusory) big bucks on shady deals, and eventually the false basis of their financial arrangements came home to roost.
FWIW, I think you probably need to add another contributing factor; namely, the changes in banking regulations allowing multi-state mergers, letting banks deal in securities, and so on.
One of the major reasons why this crisis is so huge, is because of the significant concentration of assets within a quite small number of financial institutions that have been created over the years by bank mergers and acquisitions. Once those huge banks began engaging in the highly questionable financial arrangements that have now crashed, it was only a matter of time before a too-huge-to-allow type of failure occurred.
Because money turns a blind eye to otherwise repulsive men.
I’ve been reading all day about this .......the Glass-Steagall Act which Clinton killed in 1999. Comments sought.
http://www.investopedia.com/articles/03/071603.asp
The fundamental problem was that Freddie/Fannie did not have to uphold any standards to maintain their AAA credit rating. If they weren’t viewed as being government-backed, they would not have engaged in the sort of games they did since the resulting drop in credit rating would have hurt them severely in the marketplace.
Stellar post. Thank you. Bump.
"Now that the United States Department of Justice has taken to enforcing the doctrine of "disparate impact," no lender of sound mind can allow a person's character to enter into a credit decision. Such a judgment could never be defended in any statistical analysis of a bank's loan files."
Excellent, and thank you so much!!
bookMarc
As for the commercial banks and investment banks, they did what they've done for decades - put the safest, most liquid securities onto their balance sheets - i.e. mortgage backed securities. You can argue that the leverage ratios should not have been allowed to increase (i.e. $1 of assets supporting "X" amount of borrowing). However, the point of the collapse is that, due to the high concentration of sub-prime mortgages and the accelerating default rates, what was a very safe, highly liquid security now has no value and no market.
And yet the mortgage market cratered under the load of a large number of bad loans. Either those few bad apples worked really hard, or there were a lot more than a few of them.
However, the point of the collapse is that, due to the high concentration of sub-prime mortgages and the accelerating default rates, what was a very safe, highly liquid security now has no value and no market.
This contradicts what you said before. Clearly the basis for those "safe, liquid securities" was false to begin with -- as shown by the '99 NYT article that JimRob posted the other day. It was obvious even then that the "safety" of those investments was illusory: "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."
LOL! Yeah, I recall it from last year, and saw it again today.
As to the second point, the MBS market HAD BEEN for many decades the safest and most liquid of markets. What the buyers of those MBS did not know was the underlying changes taking place in the quality of the mortgages functioning as collateral for those securities.
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