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.
Thanks, Barney.
Dale says
http://www.businessandmedia.org/printer/2008/20080924145932.aspx
Curtis says
yipes.. glad to be Canadian. Although Canadian lending institutions will participate in riskier lending they will typically raise the rates to cover the risk or require much higher down payments and mortgage insurance.
Is this not done in the US?
Andrew Allemann says
Curtis, good question. If you put less than 20% down you technically need to pay private mortgage insurance (PMI). I’m not sure who collects this money and if those insurers are separate from the mortgage companies.
To get around PMI, a lot of people took out two mortgages; I think it was called 5/15/80 or something like that. You put down 5%, then got a mortgage for 15% and another mortgage for 80% of the total amount.
Steve M says
Andrew & Curtis, it was actually worse than that (I’m a long-time realty broker).
Lenders like Countrywide, WaMu, and Indymac were making loans with NOTHING down, on an 80/20 basis. They’d sell off the 80% 1st loan, keep the 20% 2nd for themselves (or sell that off to; to other idiot investors), and just keep the loan servicing for themselves.
…and for anyone w/”less than great” credit, they’d STILL make these 100% financing loans…but just charge higher rates for the increased risk.
…and that’s not even taking about all the refi’s … and home equity 2nds (and even 3rds) they made … many up to 90; even 100% of the (too-often-inflated) value.
Thankfully I had decided I wasn’t going to be involved in this, and so didn’t sell any homes to people who I thought couldn’t afford them. Cost me a lot of sales, but I slept well at night.
Rob Sequin says
I’m no great technical stock analyst but I used to do it quite a bit.
I think the Dow and S&P are now under all support levels.
I think the next support level for the Dow is around 3000.
Yep. 3000.
Any technical analysts out there with an opinion?
Tan Tran says
@Rob:
My take on the technical analysis is that the sh*t is about to hit the fan.
🙂
Tan
Andrew Allemann says
@ Tan – my technical analysis says who the heck cares anymore. I’ve lost most of my wealth anyway.
sip says
@tan,rob
I’m right there with you in wealthless-ness… is that even a word?.
Also, Barney Frank is a moron.