Gov't role in lending boom
The federal government encouraged Fannie Mae and Freddie Mac to buy more than $400 billion in subprime mortgage loans between 2004 and 2006, helping to fuel the boom in risky lending, the Washington Post reports.
The story underscores an important issue: The federal government didn't just fail to prevent the subprime lending explosion. Rather, it encouraged, abetted and participated in the subprime lending explosion.
Fannie and Freddie were created by the government to buy loans from lenders -- basically, to repay loans upfront and then collect the money from the borrower -- so lenders could make more loans more quickly.
The two companies literally defined the prime loan market. Loans they were willing to buy were defined as prime. Everything else was not.
How did they wander into the subprime lending business? The Post reports that the federal government in 1992 started requiring the companies to purchase a certain number of loans to lower-income families. Basically, the companies bought huge numbers of those loans without effective quality controls.
They failed to make sure the loans were affordable to the borrowers.
You know how the story ends, or at least where it stands now.
Though this was without a doubt poor policy, I still put most of the blame on the people who borrowed money they couldn't afford to pay back, so they could pay far more than what the house was worth.
I don't think the govt went out and forced anyone at gunpoint to commit acts of financial stupidity. At some point personal responsibility needs to come in, or our society will fail.
I know that is vaguely heretical in Massachusetts. Which is why we have the town budget problems and taxes that we do.
Funny, I don't recall any subprime crisis in 1996.
Who knew all those hedge funds who purchased subprime tranches were so interested in social justice?
This spin is just a followup to the failed attempt to pin the subprime mess on the Community Reinvestment Act, after people noticed that the Act doesn't even apply to mortgage brokers or companies unless they're regular depository banks.
This is only part of the story of government involvement. In 2003 and 2004 Congress pressured the GSEs with a goal of 70% homeownership. At 67% -68% everyone in the industry knew that the pool of creditworthy buyers had been tapped. Freddie has to make prime loans to keep its securities' ratings up. Consequently, i.e as a direct result of pressure from Congress, definitions of creditworthy, prime borrowers were pushed to edge of the envelope and dubious products evolved to encourage creative financing for homeownership.
The problem that everyone forgets is that all these loans were profitable up until a short while ago. The booms and bust cycle always went along as they do in the Real Estate / Mortgage Business; and the Mortgage Companies made money, Freddie and Fannie made money for their investors. The country progressed.
Prices decline and everyone is losing money and the world cries foul. We got ahead of ourselves as an industry and the world is upset. The important thing is that over time the Mortgage Business made money for investors. I cannot wait for these securities to bottom out, and start to increase in value. I would laugh if someone cried fould because UBS, Citibank, Merril has a record quarter when all these losses turn to profits. The terrible thing is all those write ups will go to the foreign investors that have lent the $$$ billions to our investment banks and commercial banks that are in trouble.
This blogger might want to review your comment before posting it.
Recent Posts
browse this blog
by categoryINside Boston.com