July 13, 2008

Treasury announces bailout plan for Fannie Mae and Freddie Mac

Normally, financial crises happen because really, really rich people screw up, because they're the ones who have most of the money. Yet, the mortgage meltdown is much more egalitarian in origins than the typical collapse. For instance, until a few months ago, mortgages backed by the now tottering Fannie Mae and Freddie Mac were capped at $417,000. Certainly not all, but some of the blame should rest on the bipartisan consensus to social engineer the home ownership rate above the 64 percent level, where it had been stuck since the 1960s.

Here are some excerpts from my June 22 article in Taki's Magazine on "The Diversity Recession:"

In 1992, Congress passed the Government Sponsored Enterprises bill, which set “targets” (i.e., quotas) for Fannie Mae and Freddie Mac, which are quasi-governmental publicly-traded for-profit thing-a-ma-bobs, to encourage “affordable” and “underserved” (more or less minority) home loans.

Both the Clinton and Bush departments of Housing and Urban Development raised the quotas repeatedly. For example, initially, the Clinton Administration required 21% of these quasi-governmental mortgages must go to ”underserved areas” (which are officially defined as “low-income census tracts or in low- or middle-income census tracts with high minority populations"), but the quota for 2008 established by the Bush Administration is 39 percent.

Reuters reported October 13, 1999:

"The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership in underserved groups. ‘We need to push into these underserved markets as much as we can,’ said David Glenn, president and chief operating officer of Freddie Mac. …

"In September, Freddie Mac launched a new lending program, based on research done in collaboration with five black colleges, to bring more African-Americans into the market.

"The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories.

"Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low-and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets."

Now, even the head of Freddie Mac has protested that the quotas have become “perverse.” On March 12, 2008, Bloomberg News reported:

"Freddie Mac Chief Executive Officer Richard Syron said he’s urging changes in federal rules that enabled too many low- and moderate-income Americans to buy houses they can’t afford. It’s ‘perverse’ that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, have been encouraged ‘to put people into homes that they end up losing,’ Syron said at a meeting with analysts and investors in New York."

Ironically, Syron helped get us into this mess when he was head of the Boston Fed. His Freddie Mac biography boasts, “Syron also was sponsor of a landmark study on racial discrimination in mortgage lending …”

… Straightforward tax-and-spend programs were out of favor in the 1990s, but lean-on-lenders for the benefit of your political constituents is always in season.

For instance, an article entitled “Fannie Mae Bending Financial System to Create Homeowners, Says Raines” reported in 2000:

"Yet home ownership is unevenly distributed in society, [Fannie Mae head Franklin] Raines said. He quoted the famous pronouncement by W.E.B. Du Bois, in The Souls of Black Folk in 1903, that the problem of the 20th century is the problem of the color line. Du Bois also observed that the size and arrangement of people’s homes is an index of their condition…

"In the early days of the movement, he said, there was a significant commitment of government funds. … Now, said Raines, more money is being invested in community development through private mechanisms, including Fannie Mae, which works through mainstream lenders to reach out to underserved communities.

"During the 1990s, Fannie Mae pledged $1 trillion in capital over seven years to boost home ownership among underserved populations. Last spring, said Raines, the commitment was completed ahead of schedule, and Fannie Mae pledged a further $2 trillion to assist 18 million families during the next decade." [More]

A trillion here, a trillion there, pretty soon you are talking about real money.

Bill Burnham explains how Fannie Mae and its supposed competitor Freddie Mac work here. Essentially, they figured out in the 1980s that they had a license to print money, as long as Congress didn't take it away:

Fannie Mae’s only significant problem thus became that the supply of mortgage securities would prove insufficient to fund its projected earnings growth (which was well above the projected growth in mortgage debt). As a result Fannie began a series of largely successful political campaigns to increase the volume of mortgage securities available to fund their habit. Theoretically, the easiest way to increase the supply of mortgage securities was to get the federal government to increase the size limit of mortgages that Fannie could buy and guarantee, but this was a very difficult political fight for Fannie to win because commercial and investment banks dominated the so-called “jumbo” mortgage market and, already smarting from Fannie’s dominance of the so-called “conforming” market, they had drawn a line in the sand in the jumbo market and committed most their lobbying resources to keeping Fannie’s size limit as low as possible.

Moral Hazard vs. Mo’ Money
While Fannie still fought to increase its size limits, it quickly found another, much more politically palatable, way to increase the pool of mortgages it could buy: it dropped underwriting standards under the guise of increasing “home ownership” and “affordability”. Traditionally, Fannie had required the mortgages it purchased to be so-called 80/20 mortgages wherein the borrower puts at least a 20% down payment on the mortgage. This was a requirement because residential mortgages in the US are a “no-recourse” loan in which the borrow can generally “walk away” from the loan with no recourse to the lender other than seizing the house and reporting the default to a credit agency. A 20% down payment was generally thought to be enough to dramatically limit the moral hazard of borrowers “walking away” because housing values would have to decline 20%+ for the borrower to be underwater and even then the borrower would still face the prospect of losing their own sunk capital which makes walking away even more difficult from a psychological perspective

The problem with a 20% down payment is for many people it was very hard to come up with that big a down payment and thus it limited the total size of the mortgage market which in turn limited the volume of mortgage securities that Fannie Mae could purchase for its golden goose. While the obvious solution to this problem is just to lower the down payment requirement, Fannie couldn’t do this unilaterally because the government unit that regulated it would see such cuts as needlessly raising Fannie Mae’s risk profile. Far more politically astute that that, Fannie Mae began a campaign to increase “home ownership” and “affordability”. It created a home ownership “foundation” which opened offices in almost every congressional district and promptly set about mobilizing all the local advocates for “affordable” housing to put pressure on their elected representatives to let Fannie Mae offer “affordable housing programs”. Of course, “affordable housing problems” was just a euphemism for allowing Fannie Mae to lower its underwriting standards so that more mortgages could be created and the golden goose could thus kick out more golden eggs.

This proved to be a highly effective political coalition for Fannie Mae. Not only did they build a huge network of grass roots political supporters through their “foundation”, but politicians saw political advantages in supporting the programs because it cast them in the role of trying to help families buy a new home (as opposed to lowering underwriting standards to help a giant corporation keep up its earnings growth by taking a free ride on the US government’s guarantee). Even commercial banks and investment banks signed on to the program because it at least resulted in higher origination fees and an expanded credit market, even if most of the assets ultimately went to Fannie Mae and Freddie Mac.

Fannie Mae's "grassroots" allies are all over the political spectrum, including the far left. Barack Obama's friends at ACORN are in deep with Fannie Mae.

Paul Jackson at Housing Wire writes:

It wasn’t that long ago, after all, that nearly everyone was swept up in “the Ownership Society” — with the White House issuing press release after press release challenging lenders to loosen their credit standards and make riskier loans to minorities in the name of “expanding homeownership.” Consumer groups often even partnered with lenders to make riskier loans to the very minority groups they’re now indignantly suing lenders for lending to.

Let’s take a trip down memory lane, shall we? Consider this press release from Citigroup in September of 2004, which finds ACORN and Citi happily holding hands and pushing “the goals of both organizations to promote homeownership in low- and moderate-income neighborhoods, especially in immigrant communities.”

From the press statement:

“With this agreement, ACORN will be able to expand our mission of strengthening communities by helping low- and moderate-income families, including new immigrants to this country, become homeowners,” said Maude Hurd, National President of ACORN.

It’s not as if Citi and ACORN were the only ones jumping deep into subprime lending together, either. Economic policy research at the time centered on how lenders were denying loans to those with poor credit, often minorities; consider the following conclusion from a September 1999 study:

The Urban Institute report issued today says that “not all Americans enjoy equal access to the benefits of homeownership, in part because of unequal access to capital.”

“Fair lending” essentially became synonymous with a universal lowering of credit standards — and as lenders loosened credit standards, community groups cheered, and the White House lauded the commitment to “expanding homeownership.”

Legislatively, President Bush went so far as to propose eliminating down payment requirements altogether. In a September 2004 press statement, administration officials touted a so-called “Zero-Downpayment Initiative” that would eliminate the statutory requirement of a minimum three percent down payment for FHA-insured single-family mortgages for first-time homebuyers.

Even when we had clear data suggesting that lending to people who couldn’t afford their loans would likely end up badly, we ignored it. Consider this story from April 2004, which noted a Fannie Mae study that found that 49 percent of English-language Hispanics, 46 percent of Spanish-language Hispanics, and 42 percent of African Americans cited “credit concerns” as the primary reason they had not yet bought a home.

Instead of realizing that borrowers’ concerns over their credit and finances might actually be valid, we — and that means everyone, from lenders to legislators, to community and consumer groups — decided to convince them otherwise, out of the belief that being part of the “Ownership Society” trumped small-minded credit concerns. There was a bigger experiment in social progress at stake, after all.

We unfortunately now know all too well how well pursuing “greater access to credit and capital” turned out, not only for ACORN and Citi, but for nearly every lender and consumer group out there that bought into the strange and wonderful ethic of “the Ownership Society.” None more than Countrywide Financial.

My published articles are archived at iSteve.com -- Steve Sailer

23 comments:

Anonymous said...

I kept tripping over the word 'underserved', it's so easy to take it to be 'undeserved'.

Anonymous said...

Surrising that this angle hasn't been covered by the NY Times yet.

Anonymous said...

Here's a rare example of an analysis of the mortgage meltdown that deals with both coerced preferential lending to "minorities" and ACORN.

Viewpoint: Mortgage Mess Generates War of Entitlement
Short, succinct, and I wonder if this guy is one of your readers. Definitely RTWT.

Anonymous said...

This may be the next Federal agency in crisis -- FHA. Last week my wife sold the house she has been trying to unload for fourteen months. We reduced the price three times and only then received an offer. The buyers -- an unmarried college couple who needed us to chip in $5K to buy points on their FHA loan which has a first year rate of 3.8%, moving to 7.8% in the third year. And they had to take second mortgage to make their down payment. My wife and I were stunned that the Govt is still underwriting loans like this.

Anonymous said...

halfbreed said...

Surprising that this angle hasn't been covered by the NY Times yet.

Yeah, they're hacking out something as we read, for sure. They just have to find that typical NYT angle again. Even though it’s so obvious you would walk into it if you were looking the other way, trust the NYT to create an unexpected angle on it. Probably something to do with those pesky white racists.

Anonymous said...

Why does Krugman say this?

"Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

"So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

"In that case, however, how did they end up in trouble?

"Part of the answer is the sheer scale of the housing bubble, and the size of the price declines taking place now that the bubble has burst. In Los Angeles, Miami and other places, anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point, even if he or she originally put 20 percent down. The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines."


I have also read that this is all the Republicans' fault because they are the sorts who push for "less red tape" and less regulation of mortgage lenders.

It's confusing to follow these complicated issues because people just seem to say whatever they want.

Anonymous said...

Combining this with the earlier story about black crime spreading to the suburbs, we get a possible back story for my anecdote. I got a starter house in a starter North Florida neighborhood in 99. Over the next two years, as my first neighbors flipped upward and onward, an amazing cohort moved in. Section 8 types replaced my money-conscious but peaceful and notable-for-their-probity former neighbors. Motorcycles, loud hip-hop, gangs of urchins playing in the street and refusing to move aside for cars, my wife's morning walks curtailed because of dangerous dirty looks from ghetto types...In short, there goes the neighborhood. No place to raise a child. I sold just in time ('03). Oy, wonder who has their houses now? Thanks, Freddie and Fannie!

kurt9 said...

You hear all the time how this problem is impacting the Hispanic and African-American communities. However, one does not hear a peep about how this is affecting the Asian-American or Asian immigrant communities.

Has anyone else here noticed this difference? I'm certain that is is most politically incorrect to point this out.

Anonymous said...

Damn.

That's so evil, it's a thing of (repugnant) beauty. Make a bunch of money by convincing poor people to screw themselves out of what savings and credit they have. And then, leave a hell of a mess for the taxpayers to clean up.

Wow. How the hell are we ever going to find enough tar and feathers to clean up this mess?

Anonymous said...

Part of the answer is the sheer scale of the housing bubble, and the size of the price declines taking place now that the bubble has burst

One can imagine the lump forming in Krugman's throat as he pictures his heroic government regulators confronted by the sheer scale of this bubble and the size of the price declines. Oh the humanity...

Where then did this bubble come from? What forces could possibly drive prices up a curve with no rational basis? As somebody might say, it's a mystery, a conundrum, a puzzlement ... If even the brilliant Krugman cannot figure it out, then we should just leave these questions be.

--Senor Doug

Anonymous said...

Perhaps it would make for a shorter article to list who wasn't part of this mess.

Maybe seniors, children, and the homeless?

Anonymous said...

Too bad Steve didn't cite money manager Marc Faber (Swiss national educated in Switzerland) and his comments from the Barron's round table discussions earlier this year.

He said that never before in history has someone been able to get 100% financing with no credit check, but with just a signature on a loan application.

I know this as I used to work in the mortgage business. In order to rent an apartment you must have one month's worth of rent for the deposit, plus the first month's rent in advance. During the home ownership boom you could get 100% financing; in some cases it was as high as 100+%!

This boom and subsequent bust will rank up there with tulipmania and the South Sea Bubble.

Anonymous said...

Steve, shut the fuck up about the Bubble.

YOU DO NOT UNDERSTAND THIS TOPIC.

You are so far off the mark, its not even worth trying to point out where you are wrong.

Go talk about "Big Men" or something.

Unknown said...

Steve,

I understand that there is a gigantic bubble in England also. Is there a similar "lending to minorities" cause there?

I hear there is a bubble in Spain also. There there are also lots of immigrants from Mexico and South. And lots from North Africa. So that may be the same cause there.

Anonymous said...

How this for a hard luck real estate story? In 1916 Vladimir Nabokov inherited this estate from his uncle, only to lose it in the Russian Revolution the next year. He never owned property again.

He set much of his novel Lolita in hotels rather than homes to suggest, I think, our rootlessness, displacement and, ultimately, our vulnerability.

Anonymous said...

One subtle point of clarification: the bubble and aftermath was not directly and exclusively from affirmative action lending. Rather, like grade inflation at the Ivy's it was from lowering the standard for purposes of AA, and then using the lowered standard across the board.

And this touches on the under-lying point Steve has made many times: if we as a society could be honest about race and IQ we could debate whether we want to maintain the two sets of standards AA practically requires. Instead we lower a standard across the board, then are shocked, shocked! when it gets gamed.

Again, blacks are 13% of the population. Doubling the home-ownership rate among that small cohert in and of itself would not have created the bubble of epic proportions we now see popping. It took a confluence of many factors. Lowered underwriting standards for AA lending seem the start of the snowball, but by the bottom of the hill, there was alot more snow on the ball.

Steve Sailer said...

Nabokov was also the heir to his mother's bachelor brother, who had an even vaster estate. (Plus they had townhouses in St. Petersburg.)

Besides being driven out of Russia, the Nabokovs were driven out of Germany in 1936 and France in 1940.

He never wanted to buy any property after that because he feared it would interfere with his memories of his childhood homes. So, when he taught at Cornell, he and his wife house-sat each year in the home of a professor on sabbatical.

Mrs. Nabokov must have been a saint. She put up with this kind of lifestyle for decades, confident that her husband was a genius. Finally, in 1958, when he was 59 years old, the world agreed.

Anonymous said...

"I understand that there is a gigantic bubble in England also. Is there a similar "lending to minorities" cause there?"

Probably not, our minorities usually live in subsidized slums and we have less of them. I would suggest the overvaluation of housing stock is the result of certain economic policies (money supply, planning permission, capital gains tax) that encourage investment in these particular assets.

We do have our sharp practises mind, brokers suggesting that borrowers should invent a second income and such.

Anonymous said...

Interesting how "truth" is AWOL on these boards where the storyline is so obvious even he cannot fiegn it without looking like an ass.

Anonymous said...

Fannie and Freddie were hijacked by Congress for political purposes and crashed into the ground. The pilots were Barney Frank, Chris Dodd, Chuck Schumer and the Congressional Black Caucus. This has happened before. Congressional incompetence caused the last economic debacle in the S&L crisis when over a thousand banks failed in the early 1990's.

Anonymous said...

Anonymous said...
Why does Krugman say this?

Over at Heritage, they ask Who Does Paul Krugman Think He’s Fooling?

Where to begin? First let’s stipulate that Fannie and Freddie never did “any subprime lending” … but not for the reason Krugman states. Freddie and Fannie never do any lending: They buy mortgages from lenders only, so that those lenders have more cash to make other loans (like subprime ones). But Krugman is either lying or being intentionally obtuse when he says “Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.” The Washington Post reports: ... In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion — 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals.

Let’s review that last paragraph again. Krugman is trying to convince his readers that Freddie and Fannie are only innocent bystanders in the housing bubble. Fannie and Freddie purchased 44 percent of the subprime securities in 2004. Does that sound like the behavior of an innocent bystander to you?

Truth said...

"Interesting how "truth" is AWOL on these boards where the storyline is so obvious even he cannot fiegn it without looking like an ass."

Youuuu Rannnngg?

Actually, headache, there's where you're wrong; even when I will look like an ass, I have no problem faking it.

Being requested by name does make a ni... all misty inside though.

Actually my friend, here's some asprin for you:

http://www.overseaspropertymall.
com/trends/the-big-global-bubble-
has-burst/

This is an article about how the housing bubble is a GLOBAL phenomenon. Here are a few excerpts:

"An Irish couple bought their one bedroom apartment in Dublin in 2006 at the peak of the local market for $575,00. This very same apartment is now worth around $100,000 less than then."

But how can this be, headache, there is practically no black population in Ireland, and what is there came from Africa five years ago, ergo; not qualifying for home loans.

Another excerpt:

"World real estate bubbles are showing cracks right now everywhere we look. The NY Times posted the ugly truth the other day on how the U.S housing market collapse is slowly but surely affecting worldwide markets such as Spain, Britain, Ireland, China, Hong Kong, as well as in eastern Europe."

Hummmmm; the black gang bangers in Hong Kong, Shanghai, Barcelona, Bratislava, and Wausau must have had a field day throwing hip-hop in those medieval castles and pagadodas.

So, it looks like you're going to have to increase the horsepower on that Caddy Eldorado, Boss Hogg, or else Luke and I will keep running circles around you and Roscoe in t he General Lee every week. Of course at the end of the hour you are guaranteed to end up with your face, and your pretty white suit, in a pile of shit.

Truth said...
This comment has been removed by the author.