New York Times articles seem to predict mortgage mess.
I know this is the second time I’ve gone off topic in just a few weeks. But with the Dow dropping below 7,000 this morning, I have to bring this up.
The origins of the housing bubble and mortgage mess are complicated but were preventable. You should blame politics in part.
There’s an e-mail making its rounds about a 1999 New York Times article about the relaxing of credit standards for home buyers. The extremely prescient article starts:
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 move was made under pressure from the Clinton administration:
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.
Where someone got the idea of putting people that can’t afford homes into a 30 year loan agreement is beyond me. But what’s scary were the warnings that this would eventually explode:
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.
Read that quote again. In 1999, the article said everything would be fine during flush times but may require a bailout during the next downturn. It was 100% accurate. More:
‘”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.’
For all its faults, the Bush administration actually sought to add more regulation to Fannie Mae when it saw the catastrophe in the making. In another New York Times article:
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
So what’s a democrat senator to do to keep getting votes? Deny the problem exists. Here’s my favorite house loudmouth, Barney Frank (aka “There will be plenty of rich people to tax to pay for our largess”):
These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.
As I write, the Dow is 6,858.63.