Monday, October 13, 2008

Federal Data Disproves Conservative Spin On Minority Lending Cause Of Mortgage Meltdown

updated Tuesday Oct 14 1:30PM
Federal Data Disproves Conservative Slams On Fannie Mae, Freddie Mac
McClatchy Newspapers
By DAVID GOLDSTEIN and KEVIN G. HALL - October 12, 2008

WASHINGTON — - As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data indicate that the charges aren't true, and that the private sector [that was large deregulated by Republicans, including John McCain] not the government or government-backed companies, was behind the soaring sub-prime lending at the core of the crisis.

Sub-prime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Sub-prime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:
  • More than 84 percent of the sub-prime mortgages in 2006 were issued by private lending institutions.
  • Private firms made nearly 83 percent of the sub-prime loans to low- and moderate-income borrowers that year.
  • Only one of the top 25 sub-prime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.
The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards [Republican pushed deregulation legislation and no enforcement of the few remaining regulations by the Bush Administration] for U.S. sub-prime mortgages. . .

. . .Between 2004 and 2006, when sub-prime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the sub-prime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication.

One reason is that Fannie and Freddie were subject to tougher standards [regulations] than many of the deregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the [problem sub-prime] mortgage loans that were packaged and sold into the secondary mortgage market.

In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

Read the full story
Some background on why the regulations that the Republicans eliminated might have prevented this financial mess.
For the last eight years, the Bush Administration and John McCain have been systematically against any form of appropriate regulation and supervision of the financial system. The ideology was laissez faire, free markets, reliance on self-regulation, which means no regulation.

Regulators' absence was just part of the cause of the housing bubble. The most important catalyst behind the bubble may have been the Federal Reserve's move to keep interest rates near all-time lows for three years, which acted as a clearance sale for lenders and mortgage backed securities packagers, which the banking system deregulation enabled.

The Fed cut its target short-term interest rate for overnight loans to banks, the federal funds rate, from 6.5 percent in 2000 to 1 percent by 2003. Loans for cars, homes and houses were on sale, almost 85 percent off. Cheap credit spurred cheap loans, which increased activity in the housing sector and that fueled the rise in housing prices. The Bush Administration viewed the cheap credit chain of events as fuel for the economy after the burst tech bubble and the Sept. 11 attacks of 2001. Bush dub'ed this the "ownership society" during his 2004 reelection campaign.

Variable rate mortgages, tied to the funds rate, were dirt cheap during the period when the Fed kept its target short-term interest rate at 1 percent. These were the easiest and fastest and most profitable type of loans for lenders and home builders to promote to borrowers.

Banks, home builders and mortgage companies were pushing the dirt cheap "sub-prime type" adjustable or variable rate mortgages to both existing home owners and new home buyers. The faster that each of these entities could get borrowers through the loan process, the faster they could make a profit and "sub-prime type" loans were fast to close.

A variable or adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on the Fed Funds Rate or perhaps other index. The monthly loan payments typically start low and remain lower than regular fixed rate prime loans for two, or so, years. After two years monthly loan payment typically balloon far above the typically payment of a regular prime loan. A certain variation of this type of loan is typically the only kind of loan that sub-prime borrows can get because their credit score disqualifies them from getting a regular prime loan.

The legitimate sub-prime mortgage market makes mortgages (and home ownership) available to a segment of the population that otherwise is shut out of the market. Sub-prime type mortgages are not for the correct loan for everyone. Only those borrowers with some credit problem should ever consider taking a sub-prime, for a well planned short period of time, as part of a plan to repair their credit score.

One of the things that rapidly inflated the sub-prime mortgage bubble (a more accurate term than "housing bubble") is that many borrowers, who were eligible for normal mainstream loans from mainstream lenders were "steered" (fast talked with a slick marketing pitch) into the sub-prime market - The majority of sub-prime borrowers had credit scores good enough that they could have, and should have, been advised to apply for a regular or prime fixed rate mortgage, but they were sold or "steered" into sub-prime type loans.

Prime borrowers were steered to sub-prime type loans because they were easiest and fastest and most profitable for the mortgage lenders, not because they were the best and most suitable loan for borrowers. Most of these commercial mortgage brokers, who heavily pushed these sub-prime type loans, quickly bundled the loans as "mortgage backed securities" and sold them to investors. Selling these bundled loans increased the mortgage brokers' profits and eliminated all their risk, and future responsibility, on the loan paper.

One of the main reason so many borrowers, both prime loan qualified and sub-prime loan restricted, ended up with sub-prime type loans is that borrowers were actively solicited by unscrupulous sub-prime lenders who pitched sub-prime deals that turned out to be "to good to be true."

Sub-prime lenders aggressively marketed to existing home-owners, who already had regular mortgages, and new home buyers alike. Remember all the TV Ads; They pitched that home-owners could take cash out of their properties through a cash-out mortgage refinance to pay off credit cards or home-owners could dramatically lower their monthly payments. New home buyers were allowed make "no down payment" loans or make loans over the true home value, through some slight of hand, and pocket the cash difference.

Most of these sub-prime lenders targeted every demographic group, but some sub-prime lenders did target lower-income neighborhoods where people often need some extra money just to make ends meet. Many occupants of such neighborhoods, who were left out of work when their former employers move were jobs to cheap labor off-shore locations, were very receptive to both the extra cash pitch and the lower monthly mortgage payment pitch.

No one was making it clear to these borrowers that when the Fed, sooner or later, started to raise its funds rates from 1 percent to 5+ percent, the month payments on those "sub-prime" variable mortgages would increase by thousands of dollars. It was the Republican caveat ēmptor (buyer beware) rule of business where government had no role to play to define the rules of the game or referee the game to make sure everyone was playing a fair, transparent and honest game.

After sub-prime home loans were written by mortgage broker lenders, they packaged as "mortgage backed investment securities" and sold to investors. The sub-prime lenders therefore had no reason to care whether the borrowers would or could ever pay on the loans once the rates and monthly payments started to go up - it was immediately someone else's, the investors', problem and risk. Again, it was the Republican caveat ēmptor (buyer beware) rule of business for the securities investors too.

This is where some well enforced government oversight and regulation would have nipped the problem in the bud. The "Truth In Lending" regulation that Conservative Republicans eliminated, with John McCain leading the way, in particular, would have forced the sub-prime lenders to fully explain how the "too good to be true" sub-prime loans really worked.

Other regulations that Conservative Republicans eliminated would not have allowed sub-prime lenders to make loans to people who clearly could not make the monthly loan payments once the interest and payment rates inevitable started to adjust up and up and up when the Fed started raising its Funds Rate. The discarded regulations also would not have allowed commercial mortgage brokers to bundled the "ticking time bomb" loans as mortgage backed securities and sell them to unsuspecting investors.

During the 2003 to 2005 period when the Fed dropped its Funds Rate to 1 percent, the Republican controlled congress could have passed one simple regulatory law to head off the financial melt down. That one simple regulation could have restricted variable or adjustable rate loans from indexing the variable interest rate to the 1 percent funds rate. Everyone knew the 1 percent funds rate would head back toward 6 percent sooner rather later. The Funds rate was going back up, it was inevitable, everyone knew it! The, then the Republican controlled, congress should have, at the very least, mandated an indexed adjustable loan interest rate floor index of 5 percent.

As the sub-prime mortgage bubble rapidly inflated from 2003 through most of 2006, the Republican controlled Congress, blindly following its ideology of free market self-regulation, did nothing to stop or control adjustable rate sub-prime type lending or control what amounted to predatory lending behavior practiced by some mortgage brokers.

Texas Conservatives like Republican incumbent for the U.S. 3rd Texas Congressional District, Sam Johnson, age 78, Republican incumbent for the U.S. 4th Texas Congressional District, Ralph Hall, age 85, and Republican incumbent Senator John Cornyn all supported Senator John McCain's philosophy of deregulation and all voted to eliminate Banking, Securities Trading and Home Mortgage Loan regulations.

The Bush Administration did not even use the few remaining regulatory levers, that Conservative Republicans had not yet legislatively eliminated, to control the problem.

As the Fed raised its Fed Funds Rate from 1 percent in June 2003 back up to 5.25 percent in June 2006 all those variable rate mortgages started resetting to higher and higher interest rates. By early 2007 the higher Fed Funds Rate was starting to ripple through the system and the sub-prime mortgage bubble was starting to burst.

The now 15-month old turmoil began when home buyers with inadequate income to make their constantly increasing "adjustable" monthly mortgage payments began to default on their mortgages. By the summer of 2007 adjustable rate mortgages were resetting at levels that the chain reaction mortgage defaults and home foreclosures became national news.

Even then, the Bush Administration, following its ideology of free markets self-regulation, did nothing to get ahead of the problem even as foreclosures steadily increased from mid-2007 and then soared for most of 2008. Even as home-owners increasingly faced foreclosures, John McCain and other Conservative Republican deregulators actively blocked action by congress through filibuster threat and other minority party procedural maneuvering.

Texas Conservatives, including U.S. Congressmen Sam Johnson and Ralph Hall, and U.S. Senator John Cornyn, have all supported John McCain's and President Bush's call to actively resisted every move that Democratic Legislators have attempted to restore regulatory oversight and get ahead the disaster that has now fallen upon the country and the rest of the world.

(See Republican National Convention video just below showing that further deregulation was a main topic discussion less than two months ago. )

Now, the problems have spread to the entire economy and todays American taxpayer and their children, tomorrows taxpayers, are is stuck paying the price tag to fix the problem.

Related Postings:
  1. McCain’s Conservative "Hooverism"
  2. Republican Deregulation To Cost Taxpayers $1.5 Trillion in Wall Street Bailouts

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