09
Oct
08

Pointing Fingers

Everyone wants to pin the blame on someone for the huge banking crisis, economic slowdown and Dow tumble our nation is experiencing. So whose fault is it? There are a lot of opinions – my guess is there are plenty of people who carry some degree of responsibility. With everyone pointing fingers, it is certainly difficult to figure out what exactly has happened and why.

But I did come across an interesting article from the NY Times published nearly a decade ago.  For what it’s worth, it provides some history and background to the situation.

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.

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.

”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.”

[to read more click here ]

So was Peter Wallison a prophet or just a sharp economist with enough common sense to know that if you loan money people can’t afford to pay back—there may ultimately be a price to pay?  Now all Americans will shoulder the consequences of a huge bailout approved by our government leaders.  Will this actually help? I have no idea.

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2 Responses to “Pointing Fingers”


  1. 1 Geoff
    October 10, 2008 at 1:55 pm

    Seems like this guy had it right, too bad the feel warm fuzzy feelings overrode common sense business practices. Good intention/bad plan.

  2. 2 Geoff
    October 10, 2008 at 2:04 pm

    Looks like this guy had it right. Good intention + no/ill thought out plan = failure.


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re: the random-ness

Husband. Father. Senior Pastor of Parkview Community Church in Glen Ellyn, IL.

Ok...so you've located the place where I put down my random thoughts. The key word here is random: music, sports, art, food, books, news, spiritual musings, weird stories, etc. I'm especially interested in how everyday experiences of life intersect with the ancient stories of Scripture. Thanks for reading.
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