Private sector loans, not Fannie or Freddie, triggered crisis

McClatchy Newspapers ^ | October 11, 2008 | By David Goldstein and Kevin G. Hall

[RushingWater]

Federal Reserve Board data show that:

_ More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

_ Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

_ Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

[TruthWillWin]

In 2000, as HUD revisited its affordable-housing goals, the housing market had shifted. With escalating home prices, subprime loans were more popular. Consumer advocates warned that lenders were trapping borrowers with low "teaser" interest rates and ignoring borrowers' qualifications.

HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower's ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans.

That year, Freddie bought $18.6 billion in subprime loans; Fannie did not disclose its number.

From what I've read Fannie had a much larger share of the market than Freddie. This is also the time that Franklin Raines was at the helm of Fannie.

[Roy Tucker]

Absolutely right. I decided to read comments before making my own comment. Fannie and Freddie didn’t make loans directly but they bought up to 60% of the mortgages in the secondary markets. That is to say, the banks knew if they complied with Fannie and Freddie’s dictums they would be able to unload this stuff. If Fannie and Freddie had not existed, the banks may have been able to package and sell these MBS in the market, but not as many, thus lessening the impact the sub-prime defaults would have on the financial sector.

The size and influence of Freddie and Fannie in the mortgage sector as well as their quasi-governmental status was absolutely the major reason this bubble could be perpetuated for as long as it did.

[April Lexington]

I'm not sure. Banks don't like to take individual mortgage risk (keeping it in the vault) Why buy Bank A's mortgage when bank B can make its own. Banks wanted bonds that pay mortgage rates of interest. Better yield than Treasuries and “almost as safe” because Americans, ah hm..., never default on their mortgages. The banks used these bond as excess reserves and just plain spread generators. SOMEBODY owns the mortgage note and has responsibility to act on a loan default.

I don't think its the banks. I think Freddie and Fannie hold these things and sold mortgage backed securities to finance the purchase. The other option is to slice up the mortgages in to little bits and sell them in tranches along with the bonds. But, then... who actually owns your mortgage note? Do you have thousands of note bit holders coming after you? If you as a bond holder only own 1/1000% of a mortgate, why bother even foreclosing? The service agent will go through the motions of foreclosure but, who will negotiate the settlement? Will the service agents buy the mortgage? Will they walk away?

[April Lexington]

Thanks for the info!

[airborne]

And 0bama didn’t give ACORN $800,000.00 .... directly.

[dennisw]

And yes Virginia, CRA caused many of these loans to be made in the first place.

That great Democrat Party institution called Fannie Mae was a gigantic vacuum cleaner busy vacuuming up these crummy loans and bundling them. Most of these lousy mortgages would not have been made if not for Fannie Mae buying them up, taking them off the hands of the mortgage makers. Who mostly knew these home loans were drek and did not want them to be on their books for more than ten minutes

[ex-Texan]

Thanks for the *Ping*! . . .

Yeah. I agree with the article. What happened is BIGGER than Fannie & Freddy. But F 'n F added billions into the mix.

[Enchante]

This article is blowing smoke — Fannie and Freddie provide the guarantees all those “private” lenders rely upon by buying up HALF of all mortgages in the USA. When the CRA required higher percentages of loans to be made to sub-prime applicants Fannie & Freddie were there to instantly buy up all those dubious loans so that the original private “lenders” could launder the loan paper immediately.

[RSmithOpt]

So, just where did the author get the info to come up with his conclusions? What a lying article. True, private companies may have originated the sub-prime loans, but, Fannie and Freddie bought at least $1.3 trillion of worthless loans.

[throwback]

Fannie and Freddie are the core of the problem. Read on the WSJ that the GSE’s were the biggest buyers of subprime loans in ‘03 to ‘07. In that time frame subprimes went from 8 to 20% of the mortgage market. You can go out and read HUD documents that they intended for the GSE’s to jump into subprimes in about 2002 to get better deals for low income folks. Whether they were actually helping low income borrowers or not, I think they went into the market with a vengeance. Also the GSE’s are a 900 lb gorrilla in the market. As they pulled off the less risky subprimes, they drove the private market to sell even riskier loans to maintain their profits. The entire market meltdown is due to distortions introduced by the GSE’s. They borrow their money at below market rates and they have a government guarantee, so most borrowers and lenders go through them. Subprimes were bad news before the GSE’s got involved, but the GSE’s made them toxic. This is the dims fault, and they know it.

http://online.wsj.com/article/SB122212948811465427.html
http://www.huduser.org/Publications/pdf/subprime.pdf
http://www.federalreserve.gov/newsevents/speech/Bernanke20070306a.htm

[Smokin' Joe]

Speaking of timelines, who were the guys who benefited from the S&L crash in ‘86? Any familliar names there?

[TenthAmendmentChampion]

Wow, what a blast from the past. I read a book about Ed Gray, the guy from the FSLIC who tried to stop some of the worst abuses of the broken system, but the individual names escape me now. It was probably 15 years ago I read that book.