Subprime Quicksand In Giant Government Created & Backed Banks
Placing the roots of the housing boom and bust in the free market and the solution in government is very convenient for politicians and for those who favor government interventions. But such explanations are inconsistent with facts, however impressive they might be as exercises in rhetoric.
Both the genesis of unaffordable housing in particular local areas and the responses with national policies to make buying a home easier were political in origin, and government regulation is what forced lenders to meet arbitrary quotas by eroding traditional mortgage-lending safeguards. [/] The facts could not be plainer.Market criteria had long required such things as substantial down payments, as well as income and credit histories that made continuing payments likely. But all that was brushed aside in the political crusade for "affordable housing" and bigger homeownership statistics. [/] Both the unrealistic nature of policies pursued in the name of "affordable housing" and the serious dangers that such policies posed to the entire economy provoked many warnings from economists and others. But these warnings were repeatedly brushed aside by political leaders, often by shifting the focus to the supposed benefits of creating more homeownership through "affordable housing." [My emphasis]
From a Investors [Business Daily [IBD]] .com excerpt from a book by Thomas Sowell, How Fannie Mae And Freddie Mac Sank In The Subprime Quicksand
, more below:
”An economic primer on the housing bubble, but more importantly, it is an examination of the ruling class's inability to leave well enough alone” – American Spectator on Sowell’s book
I report and link. You decide. - BJon
Some trust in chariots, and some in horses: but we will remember the name of the LORD our God. - Psalms 20:7
More from an Investors [Business Daily [IBD]] .com excerpt from a book by Thomas Sowell, How Fannie Mae And Freddie Mac Sank In The Subprime Quicksand
IBD EDITORIALS [/] How Fannie Mae And Freddie Mac Sank In The Subprime Quicksand [/] By THOMAS SOWELL [/] Posted 11/27/2009 06:48 PM ET
[…] Who, if not the taxpayers, would pay for these government subsidies — much less the defaults from making riskier loans — was not revealed.
For some homebuyers, the standards were relaxed to the point where there was no down payment at all required, contrary to a long-standing tradition that homebuyers should have some stake in the home, so as to reduce the risk of default on the mortgage. The reduction or elimination of traditional safeguards in mortgage lending entailed a rising riskiness of the mortgages acquired by Fannie Mae and Freddie Mac under the new and lower mortgage loan approval standards.
Under these political pressures, traditional mortgage loans with traditional safeguards began to decline and mortgage loans made under the "innovative" and "flexible" standards urged by government increased.
[…] What was crucial was that the Department of Housing and Urban Development, which was among the federal agencies pushing Fannie Mae and Freddie Mac to make more loans to people who would not normally be approved for loans — the "underserved" population, in the phrase often used — "allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing," according to the Washington Post.
In short, riskier loans were accepted as good loans by one of the key regulators of the housing markets.
Moreover, HUD was not just accepting subprime lending but pushing for more. After HUD became a regulator of Fannie Mae and Freddie Mac in 1992, these government-sponsored enterprises were set numerical goals — quotas — for what share of their lending was to be for "affordable housing" mortgages.
In practice, they were pushed to acquire more subprime mortgages.
This was important not only because of the risk to the assets of these two enterprises themselves but, because they are dominant forces in the housing market and major gigantic financial institutions, there were dangers to the whole financial market if things went wrong with Fannie Mae and Freddie Mac, whose securities were widely held by other financial institutions on Wall Street and beyond. [/] The importance of Fannie Mae and Freddie Mac in the housing markets is demonstrated by the magnitude of their mortgage guarantees, which total more than two trillion dollars. That is larger than the gross domestic product of all but four nations.
Ordinarily, financial markets would become less willing to invest in an enterprise with ever-growing risks. But, although Fannie Mae and Freddie Mac are officially private, profit-making enterprises, their size and the federal government's involvement in both their creation and their ongoing operations led many investors to assume that the federal government would never allow them to fail.
Which is to say, the increasing riskiness of the assets of these two mortgage market giants was an increasing riskiness for the taxpayers, whether the taxpayers knew it or not.
[…] Moreover, "creative" accounting within Fannie Mae and Freddie Mac themselves concealed the full extent of the risk until independent audits turned up discrepancies at both places, which led to the resignation of the heads of both institutions.[...] Next week: Alan Greenspan's concerns and how such concerns were dismissed by Rep. Barney Frank, Sen. Chris Dodd and others who resisted reform of Fannie and Freddie. [My ellipses and emphasis]
