Little-Acorn
10-07-2008, 02:58 PM
PROLOGUE:
For a long time, banks decided who they would lend money to, by evaluating how likely the people were to pay it back as they had agreed. Some criteria were obvious: People with higher incomes were judged more likely to keep up their payments, than those with lower incomes. People with a record of always being on time with other loan payments, are more likely to keep up their payments, etc. etc. Their purpose, as in any normal business, was to earn money by lending money and charging interest, without losing the money they lent of course. They would protect themselves against failures to pay back, by taking possession of a delinquent house and selling it, thus getting back the money they had lent out.
To motivate risky buyers to keep up the payments for the money they had borrowed, banks wouldn't loan the entire purchase price, but would usually require the buyer to put down a large amount themselves. Thus the buyer would face the specter of losing a lot of money if the bank had to foreclose, and it became important for both the buyer and the lender to see the payments kept up and the loan paid off as promised.
TIMELINE:
In 1977, Congress passed a law, signed by Pres. Jimmy Carter, requiring banks etc. to lend more money to people who were less likely to pay it back. Under the liberal Carter administration, the idea that housing was a "right", was becoming more important than mundane details such as whether the buyer could pay for it. The title, "Community Reinvestment Act", concealed the riskiness of the lending it required.
In 1986, a bill was introduced in Congress to reform this. Republicans voted for it, Democrats against, it failed.
In 1988, after Democrats took control of both the House and Senate, more laws were passed, making it easier for people to sue landlords and lenders if they felt they had been discriminated against in housing. Many lenders started making even more loans to low-income and other credit risks, based on their race or ancestry, to avoid expensive lawsuits.
In 1993, Congress mandated that government-sponsored companies Fannie Mae and Freddie Mac increase their purchases of mortgages for low-income and medium-income borrowers.
In 1995, Bill Clinton ordered the Treasury Dept to rewrite its rules for making CRA loans, increasing quotas of blacks and other minorities getting loans. Since many of those groups who had previously failed to qualify, were still high-risk borrowers, F&F began buying more and more such high-risk mortgages from banks. Other rules changes between 1997 and 2001 by HUD Secretary Andrew Cuomo allowed F&F to hold a huge number of such mortgages in their portfolios, with a minimum amount of cash on hand to back them up, greatly increasing the risk if mortgages started defaulting .
Freddie and Fannie began buying up huge numbers of these risky loans, essentially guaranteeing to lenders that they could make all the risky loans they wanted, and be able to unload them to those two companies. So banks began pouring billions of dollars of loans into poor communities, often "no documentation" and "no income" loans that required no money down and no verification of income. Fannie Mae chief Franklin Raines received huge salary bonuses after employees faked some profit numbers to make it look like Fannie Mae had achieved various target goals. Raines later became a financial adviser to the Barack Obama campaign.
In 2001, George W. Bush's first proposed budget stated that Freddie Mac and Fannie Mae were becoming so large, and cornering so much of the mortgage market, that any problem with these companies could have huge impacts on the entire U.S. economy; and that their lending practices were pushing them toward just such problems.
In 2003, House Finance Committee chairman Barney Frank (D-MA) insisted that Freddie and Fannie were "not facing any kind of financial crisis", and that people were exaggerating the problems seen by the govt-sponsored companies. One month later, Fannie Mae disclosed a $1.2 billion accounting error. Still, Democrat Senator Thomas Carper (D-DE) refused to acknowledge any necessity for reform.
In 2005, The Bush budget again expressed grave concerns over the explosive growth of Freddie and Fannie, stating flatly that they could no longer meet their financial responsibilities. Barney Frank (D-MA) ignored the warnings, and accused the Bush administration of creating an "artificial issue". Senate Republicans introduced a strong reform bill designed to reduce the loans to high-risk borrowers. All Republicans voted for it, but Democrats filibustered and voted against bringing the bill to the Senate floor. Republicans were unable to get the 60% needed to get the bill voted on and passed, so it died in the Senate. Majority Leader Harry Reid (D-NV) announced "We cannot pass legislation that could limit Americans from owning homes." It was the Federal Housing Enterprise Regulatory Reform Act of 2005, co-sponsored by John McCain.
By 2007, Fannie Mae and Freddie Mac owned or guaranteed nearly half of the entire U.S. mortgage market. President Bush called emphatically for legislation to reform Freddie and Fannie, insisting that "Congress needs to get them reformed, and then I will consider other options." Senate Banking Committee chairman Christopher Dodd (D-CT) ignored the warnings and called on Bush to "immediately reconsider his ill-advised" position.
As late as September 2007, legislators including Barack Obama maintained that these high-risk loans were sound financial policy.
Finally, in July 2008, Congress heeded Republicans' call for reform, and passed reform legislation for Freddie Mac and Fannie Mae. But the companies were already crashing. Democrats forgot their previous almost-solid opposition to reforms, and Senator Dodd questioned, "Why weren't we doing more, why did we wait almost a year before there were any significant steps taken to try to deal with this problem? I have a lot of questions about where was the administration over the last eight years."
For a long time, banks decided who they would lend money to, by evaluating how likely the people were to pay it back as they had agreed. Some criteria were obvious: People with higher incomes were judged more likely to keep up their payments, than those with lower incomes. People with a record of always being on time with other loan payments, are more likely to keep up their payments, etc. etc. Their purpose, as in any normal business, was to earn money by lending money and charging interest, without losing the money they lent of course. They would protect themselves against failures to pay back, by taking possession of a delinquent house and selling it, thus getting back the money they had lent out.
To motivate risky buyers to keep up the payments for the money they had borrowed, banks wouldn't loan the entire purchase price, but would usually require the buyer to put down a large amount themselves. Thus the buyer would face the specter of losing a lot of money if the bank had to foreclose, and it became important for both the buyer and the lender to see the payments kept up and the loan paid off as promised.
TIMELINE:
In 1977, Congress passed a law, signed by Pres. Jimmy Carter, requiring banks etc. to lend more money to people who were less likely to pay it back. Under the liberal Carter administration, the idea that housing was a "right", was becoming more important than mundane details such as whether the buyer could pay for it. The title, "Community Reinvestment Act", concealed the riskiness of the lending it required.
In 1986, a bill was introduced in Congress to reform this. Republicans voted for it, Democrats against, it failed.
In 1988, after Democrats took control of both the House and Senate, more laws were passed, making it easier for people to sue landlords and lenders if they felt they had been discriminated against in housing. Many lenders started making even more loans to low-income and other credit risks, based on their race or ancestry, to avoid expensive lawsuits.
In 1993, Congress mandated that government-sponsored companies Fannie Mae and Freddie Mac increase their purchases of mortgages for low-income and medium-income borrowers.
In 1995, Bill Clinton ordered the Treasury Dept to rewrite its rules for making CRA loans, increasing quotas of blacks and other minorities getting loans. Since many of those groups who had previously failed to qualify, were still high-risk borrowers, F&F began buying more and more such high-risk mortgages from banks. Other rules changes between 1997 and 2001 by HUD Secretary Andrew Cuomo allowed F&F to hold a huge number of such mortgages in their portfolios, with a minimum amount of cash on hand to back them up, greatly increasing the risk if mortgages started defaulting .
Freddie and Fannie began buying up huge numbers of these risky loans, essentially guaranteeing to lenders that they could make all the risky loans they wanted, and be able to unload them to those two companies. So banks began pouring billions of dollars of loans into poor communities, often "no documentation" and "no income" loans that required no money down and no verification of income. Fannie Mae chief Franklin Raines received huge salary bonuses after employees faked some profit numbers to make it look like Fannie Mae had achieved various target goals. Raines later became a financial adviser to the Barack Obama campaign.
In 2001, George W. Bush's first proposed budget stated that Freddie Mac and Fannie Mae were becoming so large, and cornering so much of the mortgage market, that any problem with these companies could have huge impacts on the entire U.S. economy; and that their lending practices were pushing them toward just such problems.
In 2003, House Finance Committee chairman Barney Frank (D-MA) insisted that Freddie and Fannie were "not facing any kind of financial crisis", and that people were exaggerating the problems seen by the govt-sponsored companies. One month later, Fannie Mae disclosed a $1.2 billion accounting error. Still, Democrat Senator Thomas Carper (D-DE) refused to acknowledge any necessity for reform.
In 2005, The Bush budget again expressed grave concerns over the explosive growth of Freddie and Fannie, stating flatly that they could no longer meet their financial responsibilities. Barney Frank (D-MA) ignored the warnings, and accused the Bush administration of creating an "artificial issue". Senate Republicans introduced a strong reform bill designed to reduce the loans to high-risk borrowers. All Republicans voted for it, but Democrats filibustered and voted against bringing the bill to the Senate floor. Republicans were unable to get the 60% needed to get the bill voted on and passed, so it died in the Senate. Majority Leader Harry Reid (D-NV) announced "We cannot pass legislation that could limit Americans from owning homes." It was the Federal Housing Enterprise Regulatory Reform Act of 2005, co-sponsored by John McCain.
By 2007, Fannie Mae and Freddie Mac owned or guaranteed nearly half of the entire U.S. mortgage market. President Bush called emphatically for legislation to reform Freddie and Fannie, insisting that "Congress needs to get them reformed, and then I will consider other options." Senate Banking Committee chairman Christopher Dodd (D-CT) ignored the warnings and called on Bush to "immediately reconsider his ill-advised" position.
As late as September 2007, legislators including Barack Obama maintained that these high-risk loans were sound financial policy.
Finally, in July 2008, Congress heeded Republicans' call for reform, and passed reform legislation for Freddie Mac and Fannie Mae. But the companies were already crashing. Democrats forgot their previous almost-solid opposition to reforms, and Senator Dodd questioned, "Why weren't we doing more, why did we wait almost a year before there were any significant steps taken to try to deal with this problem? I have a lot of questions about where was the administration over the last eight years."