Zero-down mortgage initiative by Bush is hit

Boston Globe ^ | October 5, 2004 | Chris Reidy

[WilliamIII]

President Bush's weekend campaign promise that he will push legislation allowing for no money down on some federally insured mortgages could cost taxpayers as much as $500 million over four years because of a higher rate of defaults, according to the Congressional Budget Office.

The election-year idea may appeal to those who can't save as fast as home prices are rising. But some financial planners warn that increasingly common no- and low-down-payment programs can be ruinous for some consumers -- especially if home values decline.

If housing prices fall, consumers with little or no money of their own invested in the home are more vulnerable to ending up with mortgages larger than the value of the house.

[tcrlaf]

Seriously folks, ALL of you should listen to the words of the Democrats, saying NOTHING was wrong with Fannie, Freddie, and giving mortgages to people that didn’t qualify for them, and that they are only attacking Fannie and Franklin Raines, BECAUSE THEY ARE RACISTS!! (Meeks)

It’s good to have a clear reminder, sometimes, of how, and why, all this BS started.

[tcrlaf]

Seriously folks, ALL of you should listen to the words of the Democrats, saying NOTHING was wrong with Fannie, Freddie, and giving mortgages to people that didn’t qualify for them, and that they are only attacking Fannie and Franklin Raines, BECAUSE THEY ARE RACISTS!! (Meeks)

It’s good to have a clear reminder, sometimes, of how, and why, all this BS started.

http://www.youtube.com/watch?v=vELjMuCkmvc

[Pelham]

“IIRC, this started under Clinton with the “Community Reinvestment Act” (CRA).”

Yours is a widely shared opinion but it’s not accurate. The CRA was only a minor factor in the bubble. There’s a Lazard Investment study available on the net that examines what factors led to the bubble and one thing they learned is that CRA loans have performed better than the majority of loans issued during the bubble.

For one thing CRA only applied to depository firms, and it didn’t mandate that the loans covered by the act be mortgages. What the act did require is that a percentage of loans be made to the neighborhoods from which the bank was drawing its deposits.

By contrast the billions of dollars of subprime loans generated by pure mortgage lenders, by investment banks, by hedge funds were not covered by the CRA at all. Or any other act for that matter. There was no government requirement for any non-depository firm to make even a single risky loan. In fact these firms successfully lobbied Congress to keep their business completely unregulated culminating in the Commodities Futures Modernization Act of 2000.

If you want to look for the root of the bubble look at that act, at Graham-Leach-Bliley, at David X Li’s Gaussian copula function, to the Fed’s zero interest rate policy among other factors.

[jazusamo]

Excellent work, y'all!!! :o)

BUMP! Love that graphic. ;-)

[JoeRed]

“So, instead of addressing the issue, you’re shooting the messenger. I smell BushBot.”

So you’re just the messenger? For whom are you delivering this message? Judging by your use of the term “BushBot” I’m guessing you’re a paid troll working for the DNC.

[null and void]

[Persevero]

I’ll go even further than this, and state the government backed mortgages are the problem.

Our government should not be in the housing business, save for housing defense personnel on bases and ambassadors overseas.

[Pelham]

“Things really got out of hand when banks started giving loans and credit cards to illegals , without even a SS number.”

Those weren’t CRA loans. The NINJA, No Doc, 100% plus financing and similar loans were inventions of financial engineers, quants, working on Wall Street.

Investment banks and hedge funds wanted vast amounts of subprime paper to use as fodder for the creation of derivatives. Derivatives were where the big money was being made, since one mortgage could support many derivatives. The actual subprime loans themselves were of little interest other than as a necessary component. By the end of the bubble the derivative tail was wagging the subprime mortgage dog. This is described in detail in Yve Smith’s book “ECONned”.

“And you wonder WHY BofA has needed two huge government bailouts?”

BofA needed bailouts because they stupidly purchased Countrywide. It was like grabbing a live grenade.

[RegulatorCountry]

My inner tinfoil hatter has caused me to wonder from time to time if there isn’t some actual, strategic reason to have encouraged such apparent malinvestment. We are not alone in having grossly overbuilt, look to the so-called “ghost cities” of China. Some looming, known natural catastrophe perhaps.

I’m giving bureaucrats way too much credit, I know. It’s just so utterly stupid, what we’ve allowed to befall ourselves. I can’t help but look for some logical reason, and there aren’t any. This goes beyond simple greed.

[Bubba_Leroy]

[RegulatorCountry]

The understanding I’ve had is that BoA was not so gently encouraged to take them on, that there was little in the way of choice present in the matter.

[Kickass Conservative]

The Godfather:

Either your signature or your brains will be on that contract.

[Pelham]

“Banks lending money to people who didn’t meet this criteria and then selling the mortgage to Fannie Mae is one of the things that contributed to the housing fiasco. “

Fannie and Freddie purchased “conforming loans”. Conforming loans are the very sort that Starstruck applied for. They required a lot of documentation, and usually a substantial downpayment.

Fannie and Freddie actually lost market share during the bubble for the very reason that they required conforming loans. Their new private market rivals didn’t. Private market lenders developed the exotic loans that exploded onto the market in 2003 and kept the real estate bull market going for another three years. And then those exotic loans themselves began to explode along with the derivatives built on top of them.

[Jeff Chandler]

I’ll probably get banned for posting this, but WilliamIII was already getting flamed pretty good for his post. Did his actions really deserve banishment from the forum? I mean, it’s not as if he were promoting Romney or anything.

[smoothsailing]

BUMP!

Don't ya just love a story with a happy ending! ;o)

[donna]

All I can say it this. I new something terrible was going to happen and I was just a little mortgage loan servicing manager in some bank.

President Bush's problem was his foolish elite view of what he was supposed to do as President. His “compassion” was really just a cover for “biggest government”. Biggest government always collapses.

I guess he didn't learn that when he got his Harvard Business School Masters of Business Administration (brainwashed).

[Pelham]

“My inner tinfoil hatter has caused me to wonder from time to time if there isn’t some actual, strategic reason to have encouraged such apparent malinvestment.”

I think it’s better explained by epidemic bad judgement on Wall Street. The mortgage and derivatives market began generating huge returns for financial firms, and they ignored warnings from their risk managers because the money was too good.

And more than that, the CEOs barely understood what their traders were doing to generate that profit. It was built on a lot of complex mathematics developed by the quants that they employed. To make matters worse they all began relying on the same misapplied formula, David X Li’s Gaussian copula function, which led the entire industry to think that they had passed off risk when they hadn’t:

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

[Noob1999]

.................Governments aided and abetted above and beyond CRA because they were profiting too, from Freddie and Fannie right on down to counties and municipalities..................

And don’t forget that Frank Reines and Jamie Gorelick, among many others had multi millions of bonuses tried to growing Fanny Mae by sucking up as much paper as they could so they could meet their “profit targets” to unleash huge personal bonuses.

[rollo tomasi]

Without the illusion from institutions like the Lazard Investment backed (Just research all their lobyists and connections with F&F, Franklin Raines, lol) Fannie and Freddie, the "derivatives" would not have existed in the first place. ROTFLMAO at the first paragraph

This is what Lazard tries to ignore back in 2002 and before.

To understand the importance of Fannie Mae and Freddie Mac, one must understand the rudiments of the housing financing market. To buy a home, a prospective purchaser must have the financial means: Either the purchaser is wealthy enough to buy the home in cash, or—in most cases—the purchaser takes out a mortgage loan. Commercial banks, and savings and loan associations are the financial institutions most likely to originate a mortgage loan. The primary mortgage-lending institution can hold that loan until maturity—30 years, for example—collecting, during this time, interest and principal payments.

However, the primary mortgage-lending institution can exercise a second option: After originating the mortgage loan, it can sell it off. Two of the leading corporations that could buy the mortgage from the primary institution—known as secondary market corporations—are Fannie Mae and Freddie Mac. As a result of Fannie Mae and/or Freddie Mac buying the mortgage from the primary lending institution, that primary institution now has cash, which it can use to originate a new mortgage.

This process can be, and is, repeated several times during the course of the year, for each primary-mortgage lending institution in America. Thus, Fannie Mae and Freddie Mac act as a spigot pouring liquidity into the U.S. mortgage market.

There is another step to this process. When a primary mortgage lending institution offers to sell a mortgage loan it has originated, Fannie Mae or Freddie Mac can do one of two things. They can, as described, buy the mortgage loan outright and hold onto it (Fannie and Freddie issue bonds in their own names, and use the proceeds from the bond sale to buy mortgage loans). Or, they can pool several mortgage loans together, into a derivatives-like instrument, called a Mortgage-Backed Security (MBS); put a guarantee on it; and sell it to a third party—such as a mutual fund, a pension fund, or an insurance company. In the latter case, the pension fund or mutual fund end up owning the MBS, which gives them a claim to the underlying principal and interest stream of the mortgage. Thus, it is the cash from the pension fund, or mutual fund, etc., which is going into the housing market, having been drawn into that market by Fannie Mae and Freddie Mac as issuers of securities.

Even the LeRouche cult has a moment of clarity

The deregulation bogeymen were not the only ones at fault. Lazard backed F&F drove the car carrying the clowns off the cliff.

[Pelham]

“All I can say it this. I new something terrible was going to happen and I was just a little mortgage loan servicing manager in some bank.”

Actually you were probably in the best position to see exactly what was happening.

We had friends who had long experience as loan officers- during the bubble their firm was acquired by one of the subprime outfits. All of the experienced loan officers were then let go, because they knew too much about what made a good loan. The subprime outfit replaced them with new hires who knew nothing about good lending practices. They wanted loan officers who would try to lend to anybody.

“President Bush’s problem was his foolish elite view of what he was supposed to do as President.”

Quite right. Bush’s “Compassionate Conservatism” was just rebranded liberalism. His American Dream Downpayment Initiative was just another liberal insult to everyone who had to work to raise a downpayment, as well as being the sort of minority-pandering that appeals to liberal elitists.