I read Stan Liebowitz's article on the subprime crisis. I loved this point:
That's from Fannie Mae in 2002. Then Liebowitz notes:
Liebowitz also goes over a Bear Stearn's sales pitch from 1998, which argues the change in underwriting standards would have no impact. There was a lot of reliance on the Community Reinvestment Act, and the Boston Fed Study that supposedly showed racial discrimination was at fault for excessive minority mortgage rejections. The implication was clearly that having a negative view of these changes was almost racist. As bear Stearns showed, at least they were sincere.
Fannie Mae announced: Spurred in part by the FHEFSSA mandate, Fannie Mae announced a trillion-dollar commitment. The result has been a wider variety of innovative mortgage products. The GSEs have introduced a new generation of affordable, flexible, and targeted mortgages, thereby fundamentally altering the terms upon which mortgage credit was offered in the United States from the 1960s through the 1980s. Moreover, these secondary-market innovations have proceeded in tandem with shifts in the primary markets: depository institutions, spurred by the threat of CRA challenges and the lure of significant profit potential in underserved markets, have pioneered flexible mortgage products. For years, depositories held these products in portfolios when their underwriting guidelines exceeded benchmarks set by the GSEs. Current shifts in government policy, GSE acquisition criteria, and the primary market have fostered greater integration of capital and lending markets.
These changes in lending herald what we refer to as mortgage innovation.
That's from Fannie Mae in 2002. Then Liebowitz notes:
One man’s innovation can be another man’s poison, in this case a poison that infected the entire industry. What you will not find, if you read the housing literature from 1990 until 2006, is any fear that perhaps these weaker lender standards that every government agency involved with housing tried to advance, that congress tried to advance, that the presidency tried to advance, that the GSEs tried to advance, and with which the penitent banks initially went along and eventually enthusiastically supported, might lead to high defaults, particularly if housing prices should stop rising.
Liebowitz also goes over a Bear Stearn's sales pitch from 1998, which argues the change in underwriting standards would have no impact. There was a lot of reliance on the Community Reinvestment Act, and the Boston Fed Study that supposedly showed racial discrimination was at fault for excessive minority mortgage rejections. The implication was clearly that having a negative view of these changes was almost racist. As bear Stearns showed, at least they were sincere.
2 comments:
Seriously, I'm confused. Weren't the private lenders the innovators in Sub-Prime?
Didn't Freddie/Fannie just follow their lead -- and later (2002 or so) when they were afraid of losing share?
Weren't the private lenders looking for more income and didn't care about policy? I thought they were expanding the credit card model: "higher interest rates to people with bad credit and higher risk of default".
Is this incorrect?
Anonymous - No, you are incorrect. Fannie and Freddie, along with our friends in the House and Senate Banking Committees, led the way and encouraged other lenders to do the same. In fact, F & F scooped up the "creative" loan paper from those other lenders almost immediately, relieving those lenders of much of the risk and placing a large majority of it, as it turns out, on us....the American Tax Payer. Mr. Stan Liebowitz policy paper entitled "Anatomy of a Train Wreck" explains and proves this about as well as I've seen. Check it out at The Independent Institute. You should also do your own research of HUD and OFHEO records and Congressional Banking Committee Hearings on this subject throughout the 90's and up through 2006. You will find the truth my friend.
Post a Comment