Subprime Mortgage Primer

[free4now]

A fun easy to follow expletive filled really informative guide to how we got into this mess:

The Subprime Mortgage Primer

 

[donheff]

Nice summary. But it reminded me that what the bailout is actually buying is the stinkiest of the stinky paper. We better not pay top dollar for these ugly ducklings.

 

[simple girl]

That was entertaining and educational at the same time. Thanks for posting!

 

[al_bundy]

bit critical of Clinton, but there are some facts in here

what is missing is that the GSE's were about to be put on the sidelines a few years ago when most of the really crazy loans were made by wall street.

Investor's Business Daily: How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable

How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable

By TERRY JONES

One of the most frequently asked questions about the subprime market meltdown and housing crisis is: How did the government get so deeply involved in the housing market?
The answer is: President Clinton wanted it that way.
Fannie Mae (FNM)and Freddie Mac, (FRE)even into the early 1990s, weren't the juggernauts they'd later be.
While President Carter in 1977 signed the Community Reinvestment Act, which pushed Fannie and Freddie to aggressively lend to minority communities, it was Clinton who supercharged the process. After entering office in 1993, he extensively rewrote Fannie's and Freddie's rules.
In so doing, he turned the two quasi-private, mortgage-funding firms into a semi-nationalized monopoly that dispensed cash to markets, made loans to large Democratic voting blocs and handed favors, jobs and money to political allies. This potent mix led inevitably to corruption and the Fannie-Freddie collapse.
Despite warnings of trouble at Fannie and Freddie, in 1994 Clinton unveiled his National Homeownership Strategy, which broadened the CRA in ways Congress never intended.
Addressing the National Association of Realtors that year, Clinton bluntly told the group that "more Americans should own their own homes." He meant it.
Clinton saw homeownership as a way to open the door for blacks and other minorities to enter the middle class.
Though well-intended, the problem was that Congress was about to change hands, from the Democrats to the Republicans. Rather than submit legislation that the GOP-led Congress was almost sure to reject, Clinton ordered Robert Rubin's Treasury Department to rewrite the rules in 1995.
The rewrite, as City Journal noted back in 2000, "made getting a satisfactory CRA rating harder." Banks were given strict new numerical quotas and measures for the level of "diversity" in their loan portfolios. Getting a good CRA rating was key for a bank that wanted to expand or merge with another.
Loans started being made on the basis of race, and often little else.
"Bank examiners would use federal home-loan data, broken down by neighborhood, income group and race, to rate banks on performance," wrote Howard Husock, a scholar at the Manhattan Institute.
But those rules weren't enough.
Clinton got the Department of Housing and Urban Development to double-team the issue. That would later prove disastrous.
Clinton's HUD secretary, Andrew Cuomo, "made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis," the liberal Village Voice noted. Among those decisions were changes that let Fannie and Freddie get into subprime loan markets in a big way.
Other rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks.
Since they could borrow at lower rates than banks due to implicit government guarantees for their debt, the government-sponsored enterprises boomed.
With incentives in place, banks poured billions of dollars of loans into poor communities, often "no doc" and "no income" loans that required no money down and no verification of income.
By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market — a staggering exposure.
Worse still was the cronyism.
Fannie and Freddie became home to out-of-work politicians, mostly Clinton Democrats. An informal survey of their top officials shows a roughly 2-to-1 dominance of Democrats over Republicans.
Then there were the campaign donations. From 1989 to 2008, some 384 politicians got their tip jars filled by Fannie and Freddie.
Over that time, the two GSEs spent $200 million on lobbying and political activities. Their charitable foundations dropped millions more on think tanks and radical community groups.
Did it work? Well, if measured by the goal of putting more poor people into homes, the answer would have to be yes.
From 1995 to 2005, a Harvard study shows, minorities made up 49% of the 12.5 million new homeowners.
The problem is that many of those loans have now gone bad, and minority homeownership rates are shrinking fast.
Fannie and Freddie, with their massive loan portfolios stuffed with securitized mortgage-backed paper created from subprime loans, are a failed legacy of the Clinton era.

 

[Gardnr]

The terribly ironic (and tragic) thing is that this has been out there for a long time now. I don't remember when I saw it but it's been quite some time (maybe 2-3 years or so, I'm not sure). It is very funny and stomach turning at the same time, isn't it?

There are many blogs that have been sounding the alarms on this whole housing bubble and credit fiasco for years. But our leadership didn't do anything because the American public at large would have run them out of office for spoiling the party.

We've been propping this economy up on debt for so long and lying to ourselves about how it's somehow sustainable in the long run. Nonsense. (And I'm not referring to most if not all of us here on this forum as we're in the minority as LBYMers and prudent savers, etc.)

 

[aenlighten]

Not so sure about the public

though I am sure most were happy to see prices rise, I think many felt things were getting out of hand. Of course conservatives always look for someone else to blame for their failings; irresponsibility is a way of life for them. Now financial innovations like qualifying borrowers on low initial rates, stated income loans, and large leverage were disasters waiting to happen, but the critical period was 2003. By not requiring sound lending, the reserve failed to do its job of controlling money and credit. The crackdown on the GSEs then likely compounded the problem by driving lending into even less regulated areas.

 

[eridanus]

"The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade"

Fact Sheet: America's Ownership Society: Expanding Opportunities

2004!


"Under his leadership, the overall U.S. homeownership rate in the second quarter of 2004 was at an all time high of 69.2 percent. Minority homeownership set a new record of 51 percent in the second quarter, up 0.2 percentage point from the first quarter and up 2.1 percentage points from a year ago."


So if, under his leadership, minority homeownership expanded, does that mean that, under his leadership, many of those loans went bad?

 

[ladelfina]

eridanus, it gets better. Don't want to get into it here, but see also my post on Davis over at the Soap Box if you like:
http://www.early-retirement.org/forums/showpost.php?p=720463&postcount=22

 

[socca]

Great summary.

Business Pundit should add slides at the end showing who wins and who loses when American taxpayers step in to 'clean up the mess'.