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That's a great way to get fines and sanctions against your bank for not giving loans to low income borrowers which are prevalently minorities.
Even if you SOLELY base your actions on credit ratings and income, under the "disparate impact" theory you can be deemed in the wrong and hit hard if they come in and see you are denying loans to minorities at a notably higher rate than others.
Again, no question some of the loans were absolutely abusive. I just think that when over 1/3 of the foreclosures were walkaways it's pretty hard to blame predatory loans when it was just another bubble.
What? No one remembers the dotcom bubble and daytrading? Same rush of greed.
The reason for legislation was banks located in poor neighborhoods redlining and excluding legitimate minority borrowers from those very same neighborhoods. Nothing in the legislation indicated that a bank should give a bad loan. The walkaways were pretty straight forward for the most part, the homes value which is yet another problem with unscrupulous appraisers, declined to a point where the borrowers had almost nothing to lose by walking away.
Denying minorities at a higher rate was not an issue if it could be defended, seems like the larger issue based on the settlements was predatory loans. Banks didn't seem to take issue with all their other illegal behavior.
The reason for legislation was banks located in poor neighborhoods redlining and excluding legitimate minority borrowers from those very same neighborhoods. Nothing in the legislation indicated that a bank should give a bad loan. The walkaways were pretty straight forward for the most part, the homes value which is yet another problem with unscrupulous appraisers, declined to a point where the borrowers had almost nothing to lose by walking away.
Denying minorities at a higher rate was not an issue if it could be defended, seems like the larger issue based on the settlements was predatory loans. Banks didn't seem to take issue with all their other illegal behavior.
Um no, under disparate impact denying minorities at a higher rate is an issue that can get you sued for discrimination.
Yes some borrowers had no credit history, I didn't indicate otherwise but the that does not excuse Countrywide from insuring that the borrowers could repay a loan
In fact, that does excuse Countrywide. The "no credit history" lending program was one of Fannie Mae's lending programs. Fannie Mae agreed to buy such loans. Fannie Mae then repackaged them as MBS which were then sold to investors without the disclosure that such loans were given to those who had no credit history. Did you not read the Fannie Mae publication I linked?
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The CEO of Countrywide should have done jail time.
The fact that he didn't should be TELLING you something ...
No fraud was committed by the loan originators (e.g. Mozilo at Countrywide). They were just functioning under their affordable housing agreements with HUD , etc. Where the fraud came in was when the GSEs bundled and sold the loans as MBS, not disclosing the "nontraditional" loan documentation and leaving the securities buyers thinking that the loans backing the MBS had met all traditional documentation requirements.
There has been no meaningful prosecutions of loan originators for fraud because the federal government agencies were themselves complicit in the fraud. And there will be no prosecution of the GSEs' nondisclosure of adverse loan conditions because, again, the government itself was complicit.
They sold them to the GSEs, which then repackaged them and sold them as MBS to investors.
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"Because it is not a federally insured depository, Countrywide is not subject to the federal regulation for fair housing performance, although HUD has the ability to examine any apparent fair lending violation that it might suspect. Instead, Countrywide is regulated in various states by state departments of real estate. The regulations are primarily financial, however, and do not usually address fair lending issues. Countrywide is required to report HMDA data, but is not covered under the CRA. Nonetheless, on a voluntary basis, Countrywide has pledged itself to be a leader in the affordable and fair lending arena (Van Dellen and Bielanski 1997).
In September 1994, Countrywide, in fact, became the first mortgage lender in the nation to sign with HUD a Declaration of Fair Lending Principles and Practices.
...Countrywide tends to follow the most flexible underwriting criteria permitted under GSE and FHA guidelines. Because Fannie Mae and Freddie Mac tend to give their best lenders access to the most flexible underwriting criteria, Countrywide benefits from its status as one of the largest originators of mortgage loans and one of the largest participants in the GSE programs. When necessary—in cases where applicants have no established credit history, for example—Countrywide uses nontraditional credit, a practice accepted by the GSEs."
"If, as [former Fannie Mae Chief Credit Officer] Pinto suggests, we add purposeful misrepresentation of underlying collateral to the mix three things become apparent:
First, absent some intervening criminal act by actors farther downstream (and we may yet find some), we have isolated absolutely the cause of all that followed.
Second, it becomes quite easy to construct a criminal case for literally millions of counts of accounting, securities, wire and mail fraud against the GSEs. To the extent executives at Fannie and Freddie signed off on financial statements disclosing the portion of their balance sheets that held "AAA" securities and these had been purposefully misidentified we should be exploring prosecution for violations under e.g., Sarbanes-Oxley. (Given, however, Rham Emanuel's involvement in Freddie and Fannie, we aren't holding our breath).
Third, given the presence of blatant government price fixing in more than a third of the entire economy, the United States hasn't been anything like a "free market" since before 2003.
It should shock you that literally a third of the U.S. economy should become a playground for the social experiments of any political group of any party affiliation.
It probably will not shock you (since you are reading Zero Hedge) to find what may be the largest example of securities fraud everdirectly connected to elected officials of the United States and their cronies."
The GSEs then bundled and sold those loans as AAA-rated MBS without disclosing the fact that they contained loans given to high-risk borrowers who didn't even have any credit history.
Why do you think Congress backstopped GSE-issued MBS during the financial crisis even though their prospectuses specifically stated there was no U.S. Government guarantee of GSE-issued MBS, implicit or otherwise?
"The certificates and payments of principal and interest on the certificates are not guaranteed by the United States, and do not constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae."
Oh boy....
HUD/FHA has allowed lenders to use non traditional credit scoring for people without traditional scores for decades. They still do in some programs.
HUD called the shots at FNMA and FHLMC. HUD assigned annual quotas for affordable housing loans to FNMA/FHLMC.
FNMA/FHLMC had emergency borrowing privileges at the FRB.
Stated income loans were also allowed for decades and were popular with those who were self- employed.
The GSE spin was nothing more than a balance sheet maneuver to get the liabilities off government's books. If it quacks like the government....
Despite the disclosures made by FNMA and FHLMC, it was understood by Wall Street and institutional investors that Government would back the GSE's should it ever become necessary to do so.
And no surprise, they did.
And again, what killed FNMA/FHLMC was the investment of their own capital into private label investment grade junk bonds and that all there eggs were in housing.
And for the umpteenth time, FNMA/FHLMC market share substantially declined as the bubble inflated because the real junk were non-conforming loans, sold directly to Wall Street for repackaging as private label derivatives guaranteed by the issuers, like Bear Stearns and Lehman. FNMA/FHLMC, like many conservative institutional investors gorged on them because of the ROI. That was swell, till the rating agencies realized they were junk and downgraded them. That's when it all began to hit the fan.
Ratings agencies can only rate on what's reported to them. Again, Fannie and Freddie didn't disclose the riskiness of many of their loans to investors.
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"By mid-2008 Fannie and Freddie (the "GSEs") had a combined $5.4 trillion in securities outstanding, all of which were backed by the GSEs' full faith and credit. These securities financed 45% of all the residential mortgage debt in the U.S. GSE securities were viewed as having the implicit guaranty of the U.S government and were aggressively marketed to investors worldwide.
Investors in GSE securities were led to believe that the vast majority of the loans backing these securities were low risk. Thanks to the SEC's investigation, the GSEs have, for the first time, acknowledged the magnitude of their efforts to mislead investors with regard the true nature of their exposure to subprime and Alt-A loans.Instead of $600 billion in subprime and Alt-A loans, the GSEs' credit guaranty portfolios contained $1.6 trillion."
There is a lot more info in the article that ties a lot of the pieces together.
I am familiar with the article and the comments posted to it.
The common thread seems to be anti-securitization, a facility that has been around for centuries and by no means is limited to mortgages.
HUD was created in 1965 as a cabinet level agency of the government.
FNMA was spun off as a GSE in the late 60's as a balance sheet maneuver.
GNMA was created in 1968 as a wholly-owned government corporation within HUD with a mandate to facilitate affordable housing.
FHLMC was created as a GSE in 1970 to compete with FNMA.
GNMA was the first of the sisters to pool and securitize FHA and VA mortgages in 1970 and sold them to Wall Street who then sold them to investors. FHA and VA loans are in effect sub prime because without FHA and VA insurance, the borrowers would likely not qualify for a mortgage under the same terms.
Because of the government insurance, they were deemed investment grade even though the increased risk of default was not baked in.
As a curiosity, guess who was Secretary of HUD during these monumental transitions and became the most outspoken advocate for affordable fair housing against all odds, at that time? Here's a clue. His son was the GOP nominee in the 2012 presidential election.
HUD imposed annual affordable housing quotas on FNMA and FHLMC and to meet those goals, HUD, increasingly relaxed criteria for mortgages, over the years. Deregulation in the 80's created all sorts of alternative lending programs. These programs weathered some serious storms during regional housing bubbles/busts. The most significant difference was that in prior busts, people generally did not get up and walk away, just because they could, when they owed more than their homes were worth.
It is impossible to hold one person, or party or piece of legislation responsible for all that happened. It's the culture of greed.
I am familiar with the article and the comments posted to it.
The common thread seems to be anti-securitization, a facility that has been around for centuries and by no means is limited to mortgages.
No. The common thread was the GSEs imposing affordable housing goals, loosening lending standards for far too many loans, and then misrepresenting the amount in risky loans they had acquired to both ratings agencies and investors.
I already posted the Fannie Mae document that touted Countrywide as the first lender to sign a Fair Lending Best Practices agreement with HUD in 1994.
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It is impossible to hold one person, or party or piece of legislation responsible for all that happened. It's the culture of greed.
No, it's the culture of extremely ill-advised social engineering that created monumental moral hazard, mostly involving the GSEs.
Timothy Geithner testifying to the Financial Crisis Inquiry Commission, in 2009: "Moral hazard is everywhere in the financial systems--it’s endemic. Of course, what we had in the crisis makes it bigger going forward. The biggest moral hazard was Fannie and Freddie. The GSEs were entirely moral hazard." http://www.acuma.org/uploads/ACUMA_J...1_Pipeline.pdf
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