A Mortgage Mess History Lesson

A New York Times article from ten years ago gives us some insight into the genesis of the government created mortgage mess that has brought the world's economy to its knees:

"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.

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."

Remember, Fannie and Freddie were privately owned, Government controlled companies. That meant private profits with public risk. The moral hazard started there with politically motivated business decisions that risked other people's money.

"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."

Of course lenders were pressuring them. They were being coerced and intimidated by HUD, The Justice Dept., Congress, ACORN and others to underwrite loans that made no sense. There is an axiom in business: Risk is commensurate with reward. But the government wanted lenders to make high risk loans with low interest rates. Well, who's going to invest in that? Once Fannie and Freddie started buying this garbage, the green light was given to Wall Street investors to start buying it as well. And they did in a big way.

''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.''

Ah, yes. Franklin Raines. The guy who made hundreds of millions while sinking his company on the taxpayer dime. Hey! Let's not have any standards at all! Or at least none that require any real effort to meet. This is like saying that the driver with ten speeding tickets and five accidents should pay the same insurance rates as the driver with a clean record. What do you think would happen? Why is anyone surprised now?

"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."

Gee! Ya think? This article was written ten years ago, mind you. Plenty of people were sounding the alarm, but were ignored or vilified. A lot were intimidated into silence lest they be labelled as heartless racists or worse if they questioned this insanity. Unfortunately, the laws of economics don't bend to accommodate self-reverential demagogues. Watch the video below for more of the historical record.