Chris Whalen: Mortgage crisis caused by gov't

http://www.rcwhalen.com/pdf/OriginsoftheSubprimeCollapse.pdf

Despite the considerable media attention given to the
collapse of the market for complex structured assets
that contain subprime mortgages, there has been
precious little discussion of why this crisis occurred.
Such a discussion, which is the primary goal of this
article, will hopefully lead members of the risk community
to consider how the market for structured assets should
change and evolve in future.

The second factor that helped foment the subprime debacle,
strangely enough, is not the monetary policy followed by the
Fed earlier in this decade, but rather bank regulatory policy.
During the past two decades, the proliferation of offexchange-
traded derivatives and the use of off-balance-sheet
entities (à la Enron) have been actively encouraged by the
Congress, the Federal Reserve Board staff in Washington and
other global regulators. The combination of OTC derivatives,
risk-based capital requirements authorized by Congress in
19915 and favorable accounting rules blessed by the SEC and
the FASB enabled Wall Street to create a de facto assembly
line for purchasing, packaging and selling unregistered securities,
such as subprime collateralized debt obligations (CDOs),
to a wide variety of institutional investors.
The private market for complex structured assets, particularly
the $1 trillion or so of face amount that contained
subprime mortgages at the start of 2008, arguably can trace
its origins to the market for agency debt, particularly paper
issued by government-sponsored entities (GSEs) such as
Fannie Mae and Freddie Mac. The collapse of the subprime

And a reason banks engaged in bad underwriting....

Banks, for their part, saw the affordable housing push as
a way to placate politicians and also to meet visibly CRA
requirements for making credit available to minorities. By
the early part of the 21st century, nearly every mortgage
lender in the US incorporated the twin messages of “affordable
housing” and “creative financing” into marketing,
credit approval and product development efforts.

That's exactly right, Riversider. For years, liberal politicans claimed banks were "redlining" - refusing to lend to african - americans to keep them out of certain neighborhoods. So the Bawney Fwanks of the world pushed and pushed and pushed for more liberal lending policies. George W. Bush, who had a fundamental belief in home ownership, facilitated them.

Shortly after the crisis, I saw Charlie Rangel on one of the Sunday news shows claiming "Most of the bad loans were given to African Americans...Why, these banks have been making loans to African Americans that they never should have made...THEY'VE BEEN REDLINING". So the phrase "redlining", which had always meant NOT lending to minorities, now meant LENDING to these same groups. Talk about bastardizing a phrase! The banks should - and alternatively should not - lend to people who can't afford it. Now you know why so many women vote Democrap: Liberals have the same grasp on logic that women do. Gotta love 'em!

HOW IT ALL BEGAN....

http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html?sec=&spon=&pagewanted=1

WASHINGTON, Sept. 29— 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.

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.

Barney Frank loves subprime(this never passed)

http://www.govtrack.us/congress/bill.xpd?bill=h110-3838&tab=summary

10/16/2007--Introduced.
Requires the Director of the Office of Federal Housing Enterprise Oversight (OFHEO) of the Department of Housing and Urban Development to terminate, suspend, modify, or otherwise lift: (1) the limitation on growth provision set forth in the Fannie Mae Consent Decree (the OFHEO order dated May 23, 2006, in the matter of the Federal National Mortgage Association (Fannie Mae)); and (2) the voluntary temporary growth limitation described in the Freddie Mac Letter (dated July 31, 2006, from the Chairman and Chief Executive Officer of the Federal Home Loan Mortgage Corporation (Freddie Mac) to the OFHEO Director). Requires: (1) the Director to increase the mortgage portfolio limitations of both enterprises by at least 10%; and (2) to use of 85% of such increase for refinancing subprime mortgages at risk of foreclosure.

> Mortgage crisis caused by gov't

No sh*t.