Wednesday, October 08, 2008

More Fannie
I was sent this fascinating New York Times article from 1999 in reference to my previous post. It describes Fannie Mae's pilot plan to relax underwriting standards to allow more subprime mortgages. Here are some interesting quotes:

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.

It is amazing the pressure Fannie was under to expand its loan programs. Here is an initial description of the loans Fannie was going to underwrite:
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.
I don't think these are loans that are exploding now. The article's author either makes the understatement of the past ten years or shows incredible prescience:
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 reading this article and seeing what happened in the housing market, the governement wanted to expand home ownership and banks and mortgage companies wanted more potential home owners. Many firms, in addition to Fannie and Freddie, stepped into this market. The loans got more creative and the lending standards got more lax. Non-subprime as well as subprime borrowers took full advantage of the easy credit boom. Fannie's no innocent, but they are not the lone scapegoat either.

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