Lower Credit Standards :the root cause of the current wall street crisis

In Uncategorized on October 7, 2008 at 8:20 pm

September 30, 1999

Fannie Mae Eases Credit To Aid Mortgage Lending


In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is
easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional
loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
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

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.

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below
what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

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 the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and
bailed out the thrift industry.”

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.

Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur
banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings
than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990’s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies.
During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

Page 1 of 2 Fannie Mae Eases Credit To Aid Mortgage Lending – New York Times
10/2/2008 http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F95…

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

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  1. Thank you for posting this. I only wish the ‘mainstream’ media would be as fair as you are in posting the FACTS such as this. It clearly shows that the root of today’s problems were caused during the Clinton adminstration. Of course the liberal media refuses to ask Barak obama ANY REAL questions about his past…perhaps he can see this NY TIMES article and give us his comments as to how/why/what are HIS plans to fix the problem created by another Democrat.

  2. I am not that technologically gifted, but could someone lift the blurb on the public schools homepage about the elementary math plan for 2009-10 including public input? It also seems like a math program will be chosen and used across the board in all 5 schools. This is progress, is it not?

  3. They did not tell the agencies to make no income verification loans. They did not tell them to make loans to individuals with no down payment.

    The “cash Out” equity loans for travel and luxuries were advertised by the banks. They made the loan to individuals who had no way to make the payments once the introductory rates were reset. Banks loweres their standards and in many cases exercised no judgement in making these loans. Then they packaged them together for the Wall Street investment groups to sell. Wall Street did not show any dilligence in examining what they were selling to others. They never told the investors that the assets were a pipe dream. The house of cards fell.

  4. but what you seem to be missing is the fact. the ‘standards’ were lowered for minorities. Why is that a surprise? They have lower standards to get into college, lower standards to get govt or civil service jobs. Its never-ending PANDERING to these folk and now its going to cost ALL Of us a lot more. Just like building them houses after they burnt down their cities during the riots of the 1960s.. It never ever ends. Dont blame me. My ancestors arrived here from Europe long after these ‘underpriveleged’ folks were here. Dont expect my family to pay for something we did not create. When big liberal goverment creates a class of people who have received special treatment all their lives, it is a racist policy. Ask any minority who got a job on the basis of the CREDENTIALS, experience, or education. They are generally not in favor of these govt policies giving ‘preference’ for no reason other than one’s ethnic backround.

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