The history of this crisis. An important read

[stone_seeker]

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1

This LINK to an article from 1999 explains in detail how the Clinton administration along with House democrats pushed Fannie and Freddie into areas they didnt want to go. How about this forecast from that article:

"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. "

Ever wonder why the democrats seem so eager to pass this legislation? Also why in only 3 years Obama managed to get to the #2 spot of Fannie and Freddie lobby money? He and Chris Dodd blocked legislation to reform these entities. Trying to not be partisan but these are the facts that are worth thinking about as Barack and other Dems try to rewrite history and blame Bush et al for this situation.

 

[stone_seeker]

Here is article since link may not work:

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.

 

[tradergirl]

Not the whole story, however. This is a particular interest of mine. I''ve been writing about it since 2004. We stayed far away from the housing market because anyone who wasn''t financially interested in keeping the scam going could see that it was unsustainable. What''s funny is there are still people who think this will all turn on a dime and the happy daze will be here again. Nope. Maybe in 10-15 years when prices finally trough and a new generation of people who didn''t live through this come into the market.

http://bigpicture.typepad.com/comments/2008/10/misunderstandin.html

 

[strmrdr]

That set the path to the problem but the majority of the loans in the worthless securities are good mortgages.
The cause was Wall Street getting into the banking business.
Mainly because of greed, crooks, and low interest return rates on other investments.

The real cause of this mess comes back to the high dollar and low interest rates combined with the ever increasing supply of dollars.
The proposed solution makes that worse! and provides no real chance of rebuilding.
The solution is to go back to producing real wealth by rebuilding our base.

What this bill does is perform cpr on a patient who is bleeding to death from a cut artery instead of stopping the bleeding first.

 

[tradergirl]

Strmdr: the market agrees with you. I covered my long term index, technology and retail shorts on Monday because you''d have to be crazy not to, but I am looking for a chance to remount them and any rally when the House passes this foolishness will be that chance. I expect to see the lows of 2002 at least equalled and perhaps exclipsed on the next leg down.

 

[stone_seeker]

Date: 10/2/2008 9:13:20 AM
Author: tradergirl
Strmdr: the market agrees with you. I covered my long term index, technology and retail shorts on Monday because you''d have to be crazy not to, but I am looking for a chance to remount them and any rally when the House passes this foolishness will be that chance. I expect to see the lows of 2002 at least equalled and perhaps exclipsed on the next leg down.

Agree. can easily fade any overreaction bounce based on this bill. Once this passes, the recession and lower earnings will start to take center stage

 

[Dancing Fire]

Date: 10/2/2008 9:13:20 AM
Author: tradergirl
Strmdr: the market agrees with you. I covered my long term index, technology and retail shorts on Monday because you''d have to be crazy not to, but I am looking for a chance to remount them and any rally when the House passes this foolishness will be that chance. I expect to see the lows of 2002 at least equalled and perhaps exclipsed on the next leg down.

sooo....we''ll see Nasdaq 1200 again ?

 

[Beacon]

It is very true that Fannie and Freddie lowered their lending standards at the behest of the government. This certainly allowed less qualified buyers to buy properties that they otherwise would not have. That is not the whole problem though, the problem has many legs for sure.

In simplest terms, the loan underwriting process became much less about the borrowers ability to pay and all about the originator's ability to sell that loan to someone else. That someone else took that loan and performed some financial procedures upon it to create a whole host of other securities. THe appetite was huge for this and so many loans got made that never should have. The follow on securities failed along with the faulty underlying loans.

I do believe we are in a big time recession, bail out or no bailout. Without the bailout we are in full on disaster mode, with the baiout we'll just have some bad times.

It's hard to pick levels, but we can go plenty lower from here.

 

[stone_seeker]

I think around 1070 on the S&P is a good downside target. its about 30% off of the highs and 33% is the average total decline peak to trough for bear markets since 1957.

 

[Beacon]

Yes true. However if you think this one is worse than average, and I do, we can look like 40% lower. Either way, many of the heavy industry stocks are already at remarkably low levels, e.g MT from 100 to 40, X from 198 - 62ish. The only reason we look even as good as we do is the defensive stocks which though not cheap, haven't come down so much.

Looking at the prices crossing the tape yesterday I was utterly amazed.