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[A] conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.
Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.
Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.
...
To be sure, encouraging lower-income Americans to become homeowners gave unsophisticated borrowers and unscrupulous lenders and mortgage brokers more chances to turn dreams of homeownership in nightmares.
But these loans, and those to low- and moderate-income families represent a small portion of overall lending.
And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.
Say it isn't so. You mean we can't blame this crisis on the poor and disadvantaged who struggle from paycheck to paycheck to pay their bills, while in their spare time plot to bring down Wall Street?
Fannie and Freddie actually helped save the "Street". After considerable scrutiny and restructuring of poor accounting principles, there were right on time to bail out the street.
Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else. They purchase loans from the private lenders who actually underwrite the loans.
It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.
Say it isn't so. You mean we can't blame this crisis on the poor and disadvantaged who struggle from paycheck to paycheck to pay their bills, while in their spare time plot to bring down Wall Street?
Let me get this straight. Investment banks and insurance companies run by centimillionaires blow up, and it's the fault of Jimmy Carter, Bill Clinton, and poor minorities?
These arguments are generally made by people who read the editorial page of the Wall Street Journal and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice. Let's be honest. Fannie and Freddie, which didn't make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem. But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd....
Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE's role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.
These memes have become a rallying cry -- cognitive dissonance writ large -- of those folks who have been pushing for greater and greater deregulation, and are now attempting to disown the results of their handiwork.
I feel compelled to set the record straight about this pseudo-intellectual detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess.
Fannie and Freddie actually helped save the "Street". After considerable scrutiny and restructuring of poor accounting principles, there were right on time to bail out the street.
Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else. They purchase loans from the private lenders who actually underwrite the loans.
It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.
The issue is when private banks stop loaning money out, unless they know Mae/Mac will buy them down the road, then it becomes a dual prong issue. 1) a private banking issue because banks stopped loaning money out for properties unless they can flip that note to Mae/Mac, and 2) Mae/Mac getting flipped all of the properties that the banks did not want to hold.
The government created this problem, they enticed banks to loan out to individuals who did not meet minimum requirements, because the banks did not care, they were flipping the notes.
Think of this attitude, if you were a banker, would you care that you were loaning $100,000 to someone who had zero or poor credit, lack of income qualifications, lack of identification, knowing that Mae/Mac was going to rebuy that note from you, (giving you a small profit of course).
Bankers were allowed to keep the loans they wanted, flipped the ones they didnt to the Government..
The issue is when private banks stop loaning money out, unless they know Mae/Mac will buy them down the road, then it becomes a dual prong issue. 1) a private banking issue because banks stopped loaning money out for properties unless they can flip that note to Mae/Mac, and 2) Mae/Mac getting flipped all of the properties that the banks did not want to hold.
The government created this problem, they enticed banks to loan out to individuals who did not meet minimum requirements, because the banks did not care, they were flipping the notes.
Bank write the underwriting guidelines which allow individuals to qualify for the loans. Loan products insured by FHA, did not suffer from many of these problems because the folks being blamed could not qualify for their products - which is why they went to the brokers who used products from banks. Fannie and Freddie are not the only package/bundler's, they just had the implied Government guarantee, and were probably much more attractive/stable in the game of risk v. reward. When one considers the leverage that was asserted the issue becomes clearer.
Robert Samuelson offers some insight
"Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.
Leverage can create huge windfalls. Suppose you buy a stock for $100. It goes to $110. You made 10 percent, a decent return. Now suppose you borrowed $90 of the $100. If the price rises to $101, you've made 10 percent on your $10 investment. (Technically, the price has to exceed $101 slightly to cover interest payments.) If it goes to $110, you've doubled your money. Wow.
Once assembled, these components created a manic machine for gambling. Traders and money managers had huge incentives to do whatever would increase short-term profits. Dubious mortgages were packaged into bonds, sold and traded. Investment houses had huge incentives to increase leverage. While the boom continued, government remained aloof. Congress resisted tougher regulation for Fannie and Freddie and permitted them to run leverage ratios that, by plausible calculations, exceeded 60 to 1.
It wasn't that Wall Street's leaders deceived customers or lenders into taking risks that were known to be hazardous. Instead, they concluded that risks were low or nonexistent. They fooled themselves, because the short-term rewards blinded them to the long-term dangers. Inevitably, these surfaced. Mortgages went bad. The powerful logic of high leverage went into reverse. Losses eroded firms' tiny capital bases, raising doubts about their survival. This year, Lehman lost nearly $8 billion in "principal transactions." Otherwise, it was profitable."
Wow.
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