Gov’t Mortgage Policy – so, if your memory failed you….

There are times that we need Government and we need it to work well when we need it. However, it must be in those areas in which we, as individuals or as groups, cannot accomplish what needs to be done (e.g., at the local level, my neighborhood could not build or maintain its own streets, at the County level – court system [although that could be done at the State level), and at the Federal level, our military prowess).

Social Engineering – in some areas as well – a "yes" is needed (e.g., getting rid of Jim Crow). But in economics, it has proven woefully bad. The Great Society and the rise of its massive welfare state was a failure (and was repealed under the Clinton Administration under pressure from the new Republican majorities in the House and the Senate). And for those that have failed to acknowledge any role in Government in this fiscal fiasco bailout bill, I give you this bit of history from 1999 – from the NYT to boot!

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES
Published: September 30, 1999

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.

Step 1 – lower standards. After all, social engineering and political correctness demands that we all be all inclusive – whether it is truly needed or wanted or desired. In this case, it sent a signal to the financial market that money would be easy.

Now, if the world were filled with only people of honesty, integrity,and truthfulness, this might have worked. Maybe, but since it is not, and there is such a large percentage that are not, the conditions were ripe for plucking and abuse.

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.

Step 2 – take a social idea and try to marry it to an economic truth. Like King Canute attempting to control the sea, in hindsight, this turned to be a bad deal. Face it, when Government does some "encouragement" to the private sector, it often is more of the stick than the carrot.

Further, it would not be a small pilot over an extended amount of time to judge whether it was effective or not (e.g., not that it got people into houses but whether they would stay in them AND what was the effect on the market long term). Instead, take an idea and run without regardless of whether it made sense.

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.

And not to just go after Government – where profit can be made, it will be made. And they will push to go get it too!

”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.”

Again, easy money has such a gleam to the eyes – it simply calls to some.

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.

Such a prescient prediction…

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Easy money is often cheap money. However, those of us that have been around for a while have learned that cheap is not inexpensive. Seemingly, the leaders of Fannie Mae and Freddie Mack, and the politicians pushing them (among them, Barney Frank (D-MA) and Chris Dodd (D-CT)) did not learn from the S & L fiasco.

Once again, social engineering have been given an elevated priority over common sense (not to say, fiscal sense as well). But hey, the Liberals know better than the rest of us – those towering titans of intellectual bravado. Too bad, like Barney Frank on O’Reilly the other nite, they have not the courage of their convictions when things go bad.

Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

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.

And given that Fannie was a GSE (Government Sponsored Entity), most people assumed that if they bet wrong, the Government would fill the breach. And filled the breach they did, but as the Government has no money of its own (only that which is taxed or fee’d or borrowed), it was, ultimately, taxpayers that filled that government policy gap.

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.

A situation, and a percentage, that would lead us to ruin. For the sake of Liberal policy, they have put the entire world’s financial system on the brink.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.