Looking Back With a Cracked Mirror at the Housing Bubble

Looking back at the Housing Bubble's beginning: Part 1 . . . the role Fannie Mae leaders, Fannie Mae investors, the Clinton Administration and HUD played.

Over the past two months, I've read some incredibly shallow treatises on what caused the Housing Bubble. The Housing Bubble has finally turned into the Housing Crash which many of us bloggers predicted on message boards at Motley Fool years before the Mainstream Media were admitting to a Housing Bubble.

The Housing Crash has further developed into one of the largest financial crisis this world has ever seen. What we need to do as a nation is to objectively look back at what caused the Bubble/Crash cycle so that we do not repeat these mistakes again.

Having written objectively about this subject for years, I am now seeing too many Johnny Come Lately bloggers lay the blame of this whole mess on either Democrats or Republicans. Rarely do you see any blogger admit there's plenty of blame to go around on both sides.

I have no stomach for partisan politics when it comes to History. Like Howard Zinn, I feel we should go back in time, view transcripts of legal proceedings, view old laws still on the books, read old news stories with eyewitness accounts, and always let people's words quoted for the ages tell the truth about what happened "back when."

When truth be known, both parties, Democrats and Republicans, can be held to blame for their government meddling in the free markets. Both parties are guilty of causing the Housing Bubble and now the Housing Crash which is leading to a financial crisis of the ages.

Today, I will reprint an article from a nine year old New York Times story entitled, "Fannie Mae Eases Credit To Aid Mortgage Lending" which was written by Steven A. Holmes and published on September 30, 1999.

After you read the article, I will publish the takeaway points in bullets of my own so that you may include them when you have discussions with loved ones and friends trying to understand such a hard subject as the financial crisis we are suffering through now.

Without further delay, here is the NY Times story. You may click here to print the entire story direct from the New York Times website. I am going to print just the first four paragraphs to entice you to read the whole thing. After those paragraphs, I will print takeway points from the entire article:

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.

Here are the points you can takeaway from this article:

• Fannie Mae was the largest "underwriter" of home mortgages back in late 1999. As an "underwriter", Fannie Mae purchased loans from banks and other lenders. This gave much needed capital back to banks and lenders so that these entities could go out and lend even more money to more needy borrowers.

• In 1999, the Clinton Administration "pressured" Fannie Mae to expand mortgage loans among low and moderate income people.

• Also, in 1999, stockholders in Fannie Mae were pressuring Fannie Mae executives to grow their profits at an even faster clip.

• Hence, Fannie Mae eased credit requirements on loans it would purchase from banks and lenders. This prompted these entities to make more loans to people with shaky credit histories who could not get conventional home loans in days gone by. Again, so that you understand, and as the article clearly states: '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's now fired CEO, Franklin Raines, showed his interest in pumping subprime loans when he said at the time of this story: ''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements, 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.''

• As a portent of what would begin the cascading downcall of subprime loans, Holmes in his 1999 NYT article planted what would become one of the first red flags warning investors in both Fannie Mae, and later, mortgage backed securities, why this social engineering plan to put every American into a home was a bad idea. As a resident American Enterprices Institue fellow so perfectly predicted in 1999: '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.'' '

• Because minorities lagged behind non-Hispanic white people in home ownership, the Clinton Administration, Fannie Mae's leadership, and HUD were all behind this new proposal to lower standards on using down payments as "collateral" for minorities. What these three wanted to do was up home ownership by minorities, eventhough through the 90s, minorities home purchases through Fannie had accelerated faster than non-white Hispanics. As the article stated '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.'
  


• The Department of Housng and Urban Development set a goal to up its purchase of shakier loans. As the article states, '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."

My Last Worlds on Fannie Mae's and the Government's stance back in 1999: guys, by bending over backwards to insure "all" Americans would become homeowners in the American Dream, you set in motion a Frankenstein Greedmonster which would, and did, devour every crappy loan sent its way. This Frankenstein, a Government Sanctioned Enterprise named Fannie Mae . . . once unleashed . . . could not stop binge eating until it exploded. If it quit eating the bad loans, vapor profits would evaporate and shareholders would complain. Bonuses for its executives would diminish. It had to continue to grow to satisfy all parties. And, if it continued to eat, it would explode.

In the beginning of the 21st Century, only prescient bloggers outside the mainstream media cheerleading section or smart investors such as Warren Buffet knew what the outcome would be. Bloggers who predicted the mess we are now in were touted as "doomsayers" and "Chicken Littles", but they knew their Shit from Shinola. The best Economics writers outside the mainstream media never believed the Goldilocks Economy crock from CNBC. They knew their turds from raisins. They didn't buy into Jim Cramer's view that America's FIRE Economy was too big to fail. They knew when the government pressured a Government Sanctioned Enterprise (a publicly traded corporation with "implicit" government backing) to buy more crapola from lenders, that the lenders would invent new crapola to sell.

And now here we are: Brave New World Disorder

Vanity, vanity, it's all vanity. Ashes to ashes, funk to funky, we know Major Tom's a junky.

As always, caveat emptor,

Rock Trueblood