Monday, March 2, 2009

Who says we can't predict the future?

I am not one to spend a lot of time on laying blame on anyone. But at some point you have to figure out "whodunnit"... so that we don't allow them to do it again!

When our government starts to impose quotas and minimums and maximums should that raise a red flag? A flag that flies in the face of making good business decisions?

This was sent to me by an alert reader.... NY Times excerpts NOTE the DATE 1999!

I made my notes and thoughts in white.... kind of like when you sat in class and wisecracked during a lecture...

September 30, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending


ln 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 ...

...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. Here is an example of how our society has turned into an "I want it now" beast that has abandoned the age old concept of save up your money if you want something. I refer to our parents when we told them we wanted a bike, they told us to save up our allowance, and after we've saved enough come back and see them. "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 sub-prime market." Demographic information on these borrowers is sketchy. But at least one study indicates that l8 percent of the loans in the sub-prime 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."


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. (makes sense... right? If you have bad credit you should still be able to get a loan!)

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. Unfortunately that approach is almost impossible to challenge these days, as one certainly stands to be labeled a racists or elitist.

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 57.2 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. But! That shouldn't make a difference!

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.

There was a time when loaning money was business procedure. The lender would analyze the process and try to determine if there would be enough of a return to make it worthwhile, and further, and maybe even more importantly, could the applicant satisfy the terms of the agreement. The banks would send the loan application to "the committee". The committee would review the application and either deny or accept. Their collective decision was based on many factors, but mostly on what the chances of getting their money back and making a profit would be. See, the banks used to make loans based on money they held on deposit. Then the government got into the act. Pretty soon the government was the best source of money. And banks were finding that they had more applications for money than their deposits could prudently support. So they became inclined to go to the Feds and ask for support. The Feds obliged, but, long story short, they determined that if they were going to back or supply loans, they had the right to impose conditions. In other words, tell you how to run your business and tell you who you would do business with. Does this sound like some of the movies you've seen where a struggling business owner gets a note from a caring and friendly source, who later comes in and tells them who they will buy from, and who they will sell to ?

No comments: