Credit Crisis

[R. Richard]

We're in the middle of a credit crisis. Why are we in the middle of a credit crisis? This is an article I ripped off from a 1999 NYT story. Read it and peep.

[Franklin D. Raines: White House budget director under President Bill Clinton.]

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES
Published: September 30, 1999

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 profits.

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.

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.

 

[sr71plt]

Ripped is right. A copyright violation.

 

[jjgoo]

Nothing to worry about, Monday Night Football is on.

 

[xssve]

The big laugh here is that there has been virtually no low income housing built in this country in the last thirty years - I'd love to see some of these homes built by spec builders, and labeled "subprime" - I'd be suprised if any of them were less than 3000 sqft, or cost less than 200K.

By comparison, low income housing is typically 1500 sqft or less, "starter homes" I know only one builder here locally who will even touch anything under 2500 sqft.

If it's much over 2000 sqft, it aint subprime, it's spec.

 

[R. Richard]

I live in a not very upscale area in the western US. In the past few years there have been built locally several subdivisions where the homes were all under 2,000 square feet and the prices at or under $200K. Even before the housing price collapse there were decent houses available in the low 100K range.

 

[xssve]

Really, you should post pictures - low income housing around here is spelled t r a i l e r p a r k.

 

[xssve]

Abstract This article analyzes mortgage terminations using a national individual loan data set for the 1986–1992 period. The standard option-choice-theoretic framework is supplemented with variables to proxy for non-option-related termination determinants. Separate multinominal logit models are estimated for three mortgage types: 30-year FRMs, 15-year FRMs, and 30-year ARMs. The results indicate substantial differences in the response of the mortgage types to variables included in the model. FRM15 prepayments are the most responsive to prepayment option values; FRM30 prepayments are less responsive to option values and are dirven by local area housing market and economic conditions; ARM prepayment rates are higher but default rates are lower relative to the FRMs. A noteworthy finding is that teaser discounts reduce the likelihood of ARM defaults.

Now this means basically means that the sort of subprime loans being made actually have historically lower default rates.

These are older statistics, from the 1986-92 period, but there is no reason to suggest this changed by increasing the number of loans - presumably, these were made by people with the ability to pay, I mean what kind of idiot would make a home loan to someone who cannot pay just to get better rating?

What changed dramatically here were home values - and there is only one reason that real estate values ever fall, and that's overbuilding, i.e., more homes than there are buyers.

Dramatic currency deflation is also a possibility, but we have experienced no significant currency deflation that I'm aware of.

No, I'm afraid it's simple: overbuilding of spec houses, coupled with slow to no job growth over the last Eight years combined to take their toll - these reflect economic decisions made by the Fed, the Bush administration, the pro-globalization corporate community, and major banks - you're trying to tell me that all those fucking MBA's and high dollar statisticians from MIT couldn't see this coming? That a buncha Black folks managed to crash the entire global finance system?

Here's a hint, they weren't the ones who smuggled all that crack across the border back in the Eighties either.

FNMA is being used to clean up the mess, and it looks like Raines was encouraged to spread the risk, i.e., provide Federal insurance, for loan packages way outside the low income housing envelope, this is all to back up the banks overextended on derivatives, and here's another thing that might surprise you even though it probably shouldn't - it isn't the first time, and it won't be the last - Greenspan was convicted of price fixing in Swiss court back in the Nineties - convicted, I said, of fixing gold prices, and this is the Swiss, not exactly a liberal stronghold - guess what sort of derivatives banks were overextended on then?

 

[R. Richard]

Really, you should post pictures - low income housing around here is spelled t r a i l e r p a r k.

I don't know where you live. I did searches with Yahoo home finder, specifying $50K to $100K, single family homes with 2+ bedrooms. I searched Denver, Phoenix, Salt Lake City and The Meadows, NV, all major cities. In each city I found several homes listed for $100K or less. Try it, most of them have pictures.

 

[R. Richard]

These are older statistics, from the 1986-92 period, but there is no reason to suggest this changed by increasing the number of loans - presumably, these were made by people with the ability to pay, I mean what kind of idiot would make a home loan to someone who cannot pay just to get better rating?

The kind of idiot who's being forced by the feds to make loans to 'po folk.' Initially, the banks try to find 'po folk' who can actually qualify and mostly fail. Then, the hot money shops set up and they 'take the load off the banks.' Applications are made where the income is faked and the bank buys into the situation. because of the political pressure to 'help the po folk.'

By the way, your abstract contains spelling errors, which tend to lower its credibility.

 

[xssve]

I don't know where you live. I did searches with Yahoo home finder, specifying $50K to $100K, single family homes with 2+ bedrooms. I searched Denver, Phoenix, Salt Lake City and The Meadows, NV, all major cities. In each city I found several homes listed for $100K or less. Try it, most of them have pictures.

Quote "several" unquote. First, I have to ask, did any of them look new? Second, you are aware that the bottom has dropped completely out of the market? You can pick up brand new Million dollar+ condos in Fla for 200K?

Look, most of the defaults are in clusters, huge clusters in CA, CO, Texas, Florida, etc. These are spec homes, trust me.

 

[xssve]

The kind of idiot who's being forced by the feds to make loans to 'po folk.' Initially, the banks try to find 'po folk' who can actually qualify and mostly fail. Then, the hot money shops set up and they 'take the load off the banks.' Applications are made where the income is faked and the bank buys into the situation. because of the political pressure to 'help the po folk.'

Bullshit. No fucking bank is going to loan money to somebody they know is going to default, for any fucking reason. If they do, they deserve to die.

 

[DesertPirate]

Bullshit. No fucking bank is going to loan money to somebody they know is going to default, for any fucking reason. If they do, they deserve to die.

Ah, but if that bank just bought the mortgage?
Banks buy and sell loans all day long.
Are you making a mortgage payment to the bank you got the original loan from?
I'm not, I got a mortgage from Wachovia and they sold it to Citi.
It's much easier to pass bad loans when the original paerwork is not included.

 

[xssve]

You might also consider even if CRA compliance was a significant factor at all, it's highly likely that the mass deportations of Mexican immigrants is a major factor: those mortgages would be delinquent if the people that made the loans aren't even in the country anymore, not paying taxes, and not making their mortgage payments on houses they can no longer return to in any event.

Guess maybe you shoulda thought of that, no?

Then there are the Gulf coast residents, unlikely to pay mortgages on houses that no longer even exist, assuming they even had the means to pay.

 

[xssve]

This interesting - I added the bold section:

As discussed in the previous section, the explanatory variables in our model can be grouped into four general categories of variables: household characteristics, area shocks, loan characteristics, and time effects. The time effects, state fixed effects, and error terms in the equation capture unobserved factors such as lender behavior and differences in borrower characteristics across states. We have included one state level variable that captures an aspect of the cross-state variation in household characteristics that could contribute to differences in delinquency rates. That variable is the share of borrowers with credit scores of less than 700, with a three-year lag. This variable was constructed from TransUnion’s Trendata product, and we expected that higher values would correspond to higher default rates: if a state’s share of borrowers with marginal credit quality is higher, the share of homeowners with marginal credit may be greater too, and this could lead to higher mortgage default rates. Because credit scores are affected by borrower delinquency, we included this variable with a lag to capture the underlying credit quality in the state that is not a function of the contemporaneous delinquency rates. The results in Table 1 for this variable did not turn out like we expected. In both regressions, a larger share of lower credit quality borrowers implies lower delinquency rates, not higher rates. Although the coefficient is not significant in the prime regression, it is in the subprime regression. It is possible this share of borrowers with lower credit scores is correlated with unobserved factors that matter for delinquency in ways we did not expect. At present, we do not have a good interpretation for this result. As we continue to develop this model, we will explore if a different construction of a credit quality indicator - e.g. one that could express the share of “deep subprime” vs. “near prime” borrowers - would be feasible or helpful in the subprime regression.

The Geography of Mortgage Delinquency Ellen A. Merry and Michael D. Wilson, Federal Reserve Board of Governors (PDF)

The major geographical areas of both Prime and subprime defaults and delinquencies appear to overlap in a swath from the deep South up through the the Midwest, though this study is only up through 2006 - I'll be looking for more on this, trying to get a handle on just who defaulted on what, when, and where - you can't take anybodies word for it, it's all very vague, and it's pretty funny to see you wingnuts quoting from the NYT, lol.