SEC: Ex-Fannie And Freddie CEOs Misled Investors by Jim Zarroli
The only thing missing from this discussion is that the reason Fannie May and Freddie Mac got into the sub-prime mortgages, which was a social justice program by the Democratic Party called the Community Reinvestment Act that encouraged/required banks to make risky loans, which led to Fannie May and Freddie Mac guaranteeing these risky loans.
Many would like to blame Republicans and Capitalism for the Economic Disaster of 2008, but the facts confirm the problem was produced by Democrats and Socialism.
---------------------------------------
SEC: Ex-Fannie And Freddie CEOs Misled Investors by Jim Zarroli
http://www.npr.org/2011/12/17/143877335/sec-ex-fannie-and-freddie-ceos-mislead-investors?ps=cprs
December 17, 2011
Ever since Fannie Mae and Freddie Mac were taken over by the government in 2008, questions have swirled over who was responsible for the collapse. Friday, the Securities and Exchange Commission weighed in, filing fraud charges against former Fannie Mae CEO Daniel Mudd, Richard Syron — ex-chief executive at Freddie Mac — and four other former executives.
Federal officials say the companies lied to investors about the number of subprime loans they had on their books at the height of the credit boom. They also say the executives knew what was happening and even encouraged the deception.
The SEC says both companies loaded up their balance sheets with many billions of dollars in risky subprime mortgages. By 2007, investors were starting to ask questions, says Guy Cecala, publisher of Inside Mortgage Finance.
"If investors knew that Fannie Mae and Freddie Mac were effectively engaging in risky behavior, they would have theoretically reduced their holdings of their stock," he says.
So, the SEC says, both companies took pains to conceal their holdings from the public. SEC enforcement director Robert Khuzami said Freddie Mac reported in its 2006 annual report that its subprime holdings were not significant.
"In fact, the company had $141 billion of subprime exposure to loans it internally described as 'subprime' or 'subprime-like,' representing 10 percent of its single-family portfolio as of Dec. 31, 2006," Khuzami said.
He said Syron and his two colleagues at the company were well aware of how risky its portfolio was.
"Despite this knowledge, our complaint asserts that these three executives gave speeches and statements to the investing public that boasted of Freddie Mac's low-risk mortgage loan portfolio," Khuzami said.
The SEC says both companies were selective about what they revealed to investors. Fannie Mae allegedly acknowledged a small number of subprime loans, but failed to tell investors it also held risky Alternative-A mortgages, which require little or no documentation of a borrower's income. SEC officials suggest that these executives had an incentive to mislead investors.
"They're basically saying that the senior executives at Fannie Mae and Freddie Mac during this period consciously withheld this information [from] shareholders because it would hurt the value of the company's stock and hurt the compensation that these executives received," Cecala says.
Mudd and lawyers for Syron issued statements criticizing the SEC. They noted that during their tenure, the companies had repeatedly issued disclosure statements that government regulators had signed off on.
The charges are certain to revive the debate about Fannie Mae and Freddie Mac's future. Critics have long complained about the hybrid nature of the enterprises, which were chartered by the government as independent companies. Since 2008, the government has assumed control of the companies, and taxpayers have had to pay out more than $150 billion to prop them up.
Susan Wachter is a professor of financial management at the University of Pennsylvania's Wharton School.
"So this has to be solved going forward. I think there's a lot of controversy and discussion about different solutions and how best to resolve the problem," she says, "but the model as it was out there — this is another indicator of how shaky that model was."
Still, Fannie and Freddie continue to play a vital role in the housing market, providing liquidity that makes it easier for banks to issue mortgages. As long as the housing market remains so weak, no one wants to tamper with that model.
Saturday, December 17, 2011
Friday, July 29, 2011
Fannie/Freddie regulator sues UBS on $900 million loss
Fannie/Freddie regulator sues UBS on $900 million loss
Now this is interesting. The heart of the question is who lied first.
I still believe the problem was created by the Community Reinvestment Act, a piece of Social Justice legislation by Democrats that encouraged/forced banks to make sub prime loans.
Too often, people will let a lie stand, so long as they get a benefit from the lie. It takes a big man to expose a lie even if they do get a benefit from the lie.
Everyone was benefitting from the housing bubble, but now everyone is hurting from the housing market bubble.
---------------------------------------------------------
Fannie/Freddie regulator sues UBS on $900 million loss
ReutersBy Jonathan Stempel | Reuters – Wed, Jul 27, 2011
http://news.yahoo.com/ubs-sued-over-900-mln-fannie-freddie-loss-173400491.html
NEW YORK (Reuters) - The regulator for Fannie Mae and Freddie Mac sued UBS AG to recover more than $900 million of losses after the Swiss bank misled the housing agencies into buying $4.5 billion of risky mortgage debt.
In announcing Wednesday's lawsuit, the U.S. Federal Housing Finance Agency said it also plans more lawsuits to recover additional losses by Fannie Mae and Freddie Mac from investments in private-label debt.
Last July, the FHFA issued 64 subpoenas to banks, seeking details about subprime and other mortgage debt that Fannie Mae and Freddie Mac bought when the housing market was healthy.
The UBS case is part of a push by Washington to hold banks responsible for the nation's housing problems. It is also the latest effort to prop up the government-sponsored enterprises (GSEs), whose September 2008 federal seizure has so far cost taxpayers more than $135 billion.
"From the issuance of 64 subpoenas last year to the filing of this lawsuit and further actions to come, we continue to seek redress for the losses suffered," FHFA Acting Director Edward DeMarco said in a statement.
The GSEs remain crucial to the housing market, having in 2010 guaranteed 70 percent of single-family mortgage-backed securities that were issued, and provided $1.03 trillion of market liquidity, an FHFA report to Congress last month shows.
UBS spokesman Peter McKillop had no immediate comment. FHFA spokeswoman Corinne Russell declined further comment.
In May, the government filed a fraud lawsuit accusing Deutsche Bank AG of misleading the Federal Housing Administration into believing many low-quality mortgages issued by the German bank's MortgageIT unit qualified for insurance. Deutsche Bank is seeking to dismiss that case.
According to the UBS complaint, Fannie Mae and Freddie Mac lost more than 20 percent of their investment in over $4.5 billion of residential mortgage-backed securities that the bank sold in 16 securitizations from September 2005 to August 2007.
Filed in the U.S. District Court in Manhattan, the complaint also said UBS failed to do adequate due diligence, and hid or misstated the quality of the underlying loans and underwriting, as well as borrowers' ability to make payments.
Many of the loans were issued by lenders that later failed or went bankrupt, including American Home Mortgage Investment Corp, IndyMac Bancorp Inc and New Century Financial Corp.
According to the complaint, a review of 966 randomly chosen loans from two "triple-A" rated securitizations in 2006 and 2007 found that 78 percent were not underwritten properly.
By May 2011, the complaint said, these securitizations were rated "CCC" by Standard & Poor's and "Ca" by Moody's Investors Service, among the lowest junk grades.
"Fannie Mae and Freddie Mac did not know of the untruths and omissions," the complaint said. "If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE certificates."
The lawsuit seeks to recoup Fannie Mae's and Freddie Mac's losses and undo the purchases, among other remedies.
Other banks including Bank of America Corp and its Countrywide unit have faced lawsuits by investors who claim to have lost money on mortgage-backed debt.
Republican lawmakers in Washington have been trying to reduce taxpayer support for Fannie Mae and Freddie Mac and attract more private capital to the $10.6 trillion residential mortgage market. The Treasury Department pledged in December 2009 to provide unlimited aid to the GSEs through 2012.
The case is Federal Housing Finance Agency v. UBS Americas Inc et al, U.S. District Court, Southern District of New York, No. 11-05201.
(Reporting by Jonathan Stempel; Editing by Gerald E. McCormick, Richard Chang and Matthew Lewis)
Now this is interesting. The heart of the question is who lied first.
I still believe the problem was created by the Community Reinvestment Act, a piece of Social Justice legislation by Democrats that encouraged/forced banks to make sub prime loans.
Too often, people will let a lie stand, so long as they get a benefit from the lie. It takes a big man to expose a lie even if they do get a benefit from the lie.
Everyone was benefitting from the housing bubble, but now everyone is hurting from the housing market bubble.
---------------------------------------------------------
Fannie/Freddie regulator sues UBS on $900 million loss
ReutersBy Jonathan Stempel | Reuters – Wed, Jul 27, 2011
http://news.yahoo.com/ubs-sued-over-900-mln-fannie-freddie-loss-173400491.html
NEW YORK (Reuters) - The regulator for Fannie Mae and Freddie Mac sued UBS AG to recover more than $900 million of losses after the Swiss bank misled the housing agencies into buying $4.5 billion of risky mortgage debt.
In announcing Wednesday's lawsuit, the U.S. Federal Housing Finance Agency said it also plans more lawsuits to recover additional losses by Fannie Mae and Freddie Mac from investments in private-label debt.
Last July, the FHFA issued 64 subpoenas to banks, seeking details about subprime and other mortgage debt that Fannie Mae and Freddie Mac bought when the housing market was healthy.
The UBS case is part of a push by Washington to hold banks responsible for the nation's housing problems. It is also the latest effort to prop up the government-sponsored enterprises (GSEs), whose September 2008 federal seizure has so far cost taxpayers more than $135 billion.
"From the issuance of 64 subpoenas last year to the filing of this lawsuit and further actions to come, we continue to seek redress for the losses suffered," FHFA Acting Director Edward DeMarco said in a statement.
The GSEs remain crucial to the housing market, having in 2010 guaranteed 70 percent of single-family mortgage-backed securities that were issued, and provided $1.03 trillion of market liquidity, an FHFA report to Congress last month shows.
UBS spokesman Peter McKillop had no immediate comment. FHFA spokeswoman Corinne Russell declined further comment.
In May, the government filed a fraud lawsuit accusing Deutsche Bank AG of misleading the Federal Housing Administration into believing many low-quality mortgages issued by the German bank's MortgageIT unit qualified for insurance. Deutsche Bank is seeking to dismiss that case.
According to the UBS complaint, Fannie Mae and Freddie Mac lost more than 20 percent of their investment in over $4.5 billion of residential mortgage-backed securities that the bank sold in 16 securitizations from September 2005 to August 2007.
Filed in the U.S. District Court in Manhattan, the complaint also said UBS failed to do adequate due diligence, and hid or misstated the quality of the underlying loans and underwriting, as well as borrowers' ability to make payments.
Many of the loans were issued by lenders that later failed or went bankrupt, including American Home Mortgage Investment Corp, IndyMac Bancorp Inc and New Century Financial Corp.
According to the complaint, a review of 966 randomly chosen loans from two "triple-A" rated securitizations in 2006 and 2007 found that 78 percent were not underwritten properly.
By May 2011, the complaint said, these securitizations were rated "CCC" by Standard & Poor's and "Ca" by Moody's Investors Service, among the lowest junk grades.
"Fannie Mae and Freddie Mac did not know of the untruths and omissions," the complaint said. "If the GSEs would have known of those untruths and omissions, they would not have purchased the GSE certificates."
The lawsuit seeks to recoup Fannie Mae's and Freddie Mac's losses and undo the purchases, among other remedies.
Other banks including Bank of America Corp and its Countrywide unit have faced lawsuits by investors who claim to have lost money on mortgage-backed debt.
Republican lawmakers in Washington have been trying to reduce taxpayer support for Fannie Mae and Freddie Mac and attract more private capital to the $10.6 trillion residential mortgage market. The Treasury Department pledged in December 2009 to provide unlimited aid to the GSEs through 2012.
The case is Federal Housing Finance Agency v. UBS Americas Inc et al, U.S. District Court, Southern District of New York, No. 11-05201.
(Reporting by Jonathan Stempel; Editing by Gerald E. McCormick, Richard Chang and Matthew Lewis)
Wednesday, July 27, 2011
S&P involvement with Financial Disaster of 2008
The following statements are the first time I had seen S&P involvement in Financial Disaster of 2008. It would appear the whole financial industry was involved.
The threat of a downgrade has made Standard & Poor's a target for critics chafing at demands from a company that blessed the mortgage-backed securities that led to the financial crisis.
S&P Hill Critics
An April report by Senator Carl Levin, a Michigan Democrat, and Senator Tom Coburn, an Oklahoma Republican, concluded the credit agencies "weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom."
Stock Market is Really Just a Gambling Hall
A long time ago, I learned the stock market was just a legalized gambling hall, where the house (stock brokers) had the advantage.
I made a little money, but the big money was made by the stock brokerage companies.
The question is how to reduce the power of the investment organizations, but not kill the investment engine that creates prosperity. Obama tried to take on Wall Street and lost.
The problem is that Wall Street can manipulate both Democrats and Republicans so that Wall Street wins.
-----------------------------------------
U.S. Credit Rating Rides on S&P's London View of Politics on Capitol Hill
By Brian Faler - Jul 27, 2011 12:01 AM ET
http://www.bloomberg.com/news/2011-07-27/u-s-credit-rating-rests-on-s-p-s-london-view-of-washington.html
David Beers may be the most influential political commentator in the U.S. right now, even though he's hardly a household name, that isn't technically his job and he's only visiting.
As the London-based managing director of sovereign credit ratings at Standard & Poor's, Beers will help determine whether the U.S. government's credit rating will be downgraded as a result of the battle over raising the debt limit.
His company has gone beyond competing credit rating agencies to say that it isn't enough for lawmakers to agree to lift the government's $14.3 trillion debt ceiling. Congress and the White House also must agree to a deficit-reduction package to avoid a downgrade in the government's AAA credit rating.
In an interview this week at Union Station, just blocks from the U.S. Capitol, Beers said he views the debt limit fight as a test of lawmakers' willingness to tackle the deficit.
"For us, the issue is not the debt limit -- it's the underlying fiscal dynamics," said Beers, who has been rating governments for the company for 20 years. "It's not obvious to us that this political divide that is proving so difficult to bridge is going to be any more bridgeable three months from now or six months from now or a year from now."
He said he didn't know when an S&P committee would decide whether to cut the credit rating. "Depends on events," he said.
Downgrade Impact
A decision to cut the government's credit rating would likely increase Treasury rates by 60 to 70 basis points over the "medium term," raising the nation's borrowing costs by $100 billion a year, JPMorgan Chase & Co.'s Terry Belton said. It could also hurt the rest of the economy by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on treasuries.
Yesterday, the markets showed little debt ceiling concerns, as seen in 10-year Treasury note yields hovering around 3 percent, below the average of 4.05 percent over the last decade, and the average of 5.48 percent when the country was running budget surpluses between 1998 and 2001.
On Capitol Hill, House and Senate leaders were trying to advance deficit reduction packages that would clear the way for a vote on the debt ceiling increase that the Treasury Department says must come by Aug 2.
The threat of a downgrade has made Standard & Poor's a target for critics chafing at demands from a company that blessed the mortgage-backed securities that led to the financial crisis.
S&P Hill Critics
An April report by Senator Carl Levin, a Michigan Democrat, and Senator Tom Coburn, an Oklahoma Republican, concluded the credit agencies "weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom."
In an interview, Levin said he views those faults as conflicts of interest issues that are separate from the S&P's sovereign ratings work, which he declined to criticize. "My gut tells me that they're calling it as they see it and, hopefully, they're not impacted by their previous failures to call them as they should have seen it," Levin said.
Senate Majority Leader Harry Reid, a Nevada Democrat, took a different view. "I wish they had made a few demands when Wall Street was collapsing," said Reid. "They were silent then. Maybe they're trying to get more energized."
July Warning
At issue is a warning the company issued July 14 that there is a 50 percent chance S&P would downgrade the government's credit rating within three months if lawmakers didn't approve a "credible" deficit reduction package as part of a plan to raise the debt cap.
It was the latest in a series of demands from the company over the past year. In April, S&P said there was a one-in-three chance it would downgrade the government within two years; in October, it said lawmakers had as many as five years to address long-term deficits.
In its July report, the company said, "We believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years."
Critics say the company is misreading the political dynamics in Washington and that it shouldn't engage in political prognosticating at all.
"If we fail to increase the debt ceiling, they have every right to take the U.S. down as many notches as they want," said Jared Bernstein, former economic advisor to Vice President Joe Biden. "I don't look to S&P for political analysis" and "their job is not to try to do political crystal-ball gazing. Their job is to assess the reliability of U.S. debt."
U.S. Can Meet Obligations
Bernstein said, "Nothing fundamental has changed in the ability of the U.S. government to fully meet its debt obligations."
IHS Global Insight Chief Economist Nariman Behravesh said S&P has unrealistic demands because lawmakers are unlikely to agree to a major deficit reduction package until after next year's elections. "If they really think there is going to be a comprehensive solution before 2012, they are grossly mistaken," he said.
Where Beers sees ominous gridlock over the debt, Behravesh sees progress. "Think about where we were six months ago: We were talking about stimulus," he said. "The good news is U.S. politicians are talking" about trillion-dollar budget cuts.
He said S&P is "itching to pull the trigger" on a credit downgrade, saying "it's almost like they're overreacting in the other direction" in order "to make up for past errors."
Former Congressional Budget Office Director Doug Holtz- Eakin, who advised the 2010 Republican presidential campaign of John McCain, said S&P is right to question the political will in Congress to address the deficit because it's the central question surrounding the debt.
Political Wherewithal
"There is no question that the U.S. economy remains the largest, strongest on the globe and it has the financial wherewithal to pay its debts," he said. "The question is, is that financial wherewithal matched by political wherewithal? And that's what they're trying to find out."
Beers said critics of the company's record during the housing crisis "know nothing about our sovereign ratings, which have an excellent track record." He said it's impossible to assess a government's credit rating without making judgments about its politics.
"Economic policy is part of a political process," he said. "Every government has to make choices, and it has to do it in some political context, and we have to look at that and decide how plausible that is."
‘Sheer Difficulty'
The gridlock over the debt limit "highlights the sheer difficulty" lawmakers are having coming to agreement, he said, which has prompted S&P to shorten the timeframe over which it wants to see major cuts. He is skeptical that next year's election will be "that decisive on this issue."
U.S. lawmakers are lagging behind other similarly rated governments that have also faced debt challenges, he said, pointing to countries such as Britain that are implementing plans to tighten budgets.
"This whole issue of finding common ground has been on the table since March and it's not as if people aren't trying," he said. "You have to make judgments about these sorts of things."
To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net
The following statements are the first time I had seen S&P involvement in Financial Disaster of 2008. It would appear the whole financial industry was involved.
The threat of a downgrade has made Standard & Poor's a target for critics chafing at demands from a company that blessed the mortgage-backed securities that led to the financial crisis.
S&P Hill Critics
An April report by Senator Carl Levin, a Michigan Democrat, and Senator Tom Coburn, an Oklahoma Republican, concluded the credit agencies "weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom."
Stock Market is Really Just a Gambling Hall
A long time ago, I learned the stock market was just a legalized gambling hall, where the house (stock brokers) had the advantage.
I made a little money, but the big money was made by the stock brokerage companies.
The question is how to reduce the power of the investment organizations, but not kill the investment engine that creates prosperity. Obama tried to take on Wall Street and lost.
The problem is that Wall Street can manipulate both Democrats and Republicans so that Wall Street wins.
-----------------------------------------
U.S. Credit Rating Rides on S&P's London View of Politics on Capitol Hill
By Brian Faler - Jul 27, 2011 12:01 AM ET
http://www.bloomberg.com/news/2011-07-27/u-s-credit-rating-rests-on-s-p-s-london-view-of-washington.html
David Beers may be the most influential political commentator in the U.S. right now, even though he's hardly a household name, that isn't technically his job and he's only visiting.
As the London-based managing director of sovereign credit ratings at Standard & Poor's, Beers will help determine whether the U.S. government's credit rating will be downgraded as a result of the battle over raising the debt limit.
His company has gone beyond competing credit rating agencies to say that it isn't enough for lawmakers to agree to lift the government's $14.3 trillion debt ceiling. Congress and the White House also must agree to a deficit-reduction package to avoid a downgrade in the government's AAA credit rating.
In an interview this week at Union Station, just blocks from the U.S. Capitol, Beers said he views the debt limit fight as a test of lawmakers' willingness to tackle the deficit.
"For us, the issue is not the debt limit -- it's the underlying fiscal dynamics," said Beers, who has been rating governments for the company for 20 years. "It's not obvious to us that this political divide that is proving so difficult to bridge is going to be any more bridgeable three months from now or six months from now or a year from now."
He said he didn't know when an S&P committee would decide whether to cut the credit rating. "Depends on events," he said.
Downgrade Impact
A decision to cut the government's credit rating would likely increase Treasury rates by 60 to 70 basis points over the "medium term," raising the nation's borrowing costs by $100 billion a year, JPMorgan Chase & Co.'s Terry Belton said. It could also hurt the rest of the economy by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on treasuries.
Yesterday, the markets showed little debt ceiling concerns, as seen in 10-year Treasury note yields hovering around 3 percent, below the average of 4.05 percent over the last decade, and the average of 5.48 percent when the country was running budget surpluses between 1998 and 2001.
On Capitol Hill, House and Senate leaders were trying to advance deficit reduction packages that would clear the way for a vote on the debt ceiling increase that the Treasury Department says must come by Aug 2.
The threat of a downgrade has made Standard & Poor's a target for critics chafing at demands from a company that blessed the mortgage-backed securities that led to the financial crisis.
S&P Hill Critics
An April report by Senator Carl Levin, a Michigan Democrat, and Senator Tom Coburn, an Oklahoma Republican, concluded the credit agencies "weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom."
In an interview, Levin said he views those faults as conflicts of interest issues that are separate from the S&P's sovereign ratings work, which he declined to criticize. "My gut tells me that they're calling it as they see it and, hopefully, they're not impacted by their previous failures to call them as they should have seen it," Levin said.
Senate Majority Leader Harry Reid, a Nevada Democrat, took a different view. "I wish they had made a few demands when Wall Street was collapsing," said Reid. "They were silent then. Maybe they're trying to get more energized."
July Warning
At issue is a warning the company issued July 14 that there is a 50 percent chance S&P would downgrade the government's credit rating within three months if lawmakers didn't approve a "credible" deficit reduction package as part of a plan to raise the debt cap.
It was the latest in a series of demands from the company over the past year. In April, S&P said there was a one-in-three chance it would downgrade the government within two years; in October, it said lawmakers had as many as five years to address long-term deficits.
In its July report, the company said, "We believe that an inability to reach an agreement now could indicate that an agreement will not be reached for several more years."
Critics say the company is misreading the political dynamics in Washington and that it shouldn't engage in political prognosticating at all.
"If we fail to increase the debt ceiling, they have every right to take the U.S. down as many notches as they want," said Jared Bernstein, former economic advisor to Vice President Joe Biden. "I don't look to S&P for political analysis" and "their job is not to try to do political crystal-ball gazing. Their job is to assess the reliability of U.S. debt."
U.S. Can Meet Obligations
Bernstein said, "Nothing fundamental has changed in the ability of the U.S. government to fully meet its debt obligations."
IHS Global Insight Chief Economist Nariman Behravesh said S&P has unrealistic demands because lawmakers are unlikely to agree to a major deficit reduction package until after next year's elections. "If they really think there is going to be a comprehensive solution before 2012, they are grossly mistaken," he said.
Where Beers sees ominous gridlock over the debt, Behravesh sees progress. "Think about where we were six months ago: We were talking about stimulus," he said. "The good news is U.S. politicians are talking" about trillion-dollar budget cuts.
He said S&P is "itching to pull the trigger" on a credit downgrade, saying "it's almost like they're overreacting in the other direction" in order "to make up for past errors."
Former Congressional Budget Office Director Doug Holtz- Eakin, who advised the 2010 Republican presidential campaign of John McCain, said S&P is right to question the political will in Congress to address the deficit because it's the central question surrounding the debt.
Political Wherewithal
"There is no question that the U.S. economy remains the largest, strongest on the globe and it has the financial wherewithal to pay its debts," he said. "The question is, is that financial wherewithal matched by political wherewithal? And that's what they're trying to find out."
Beers said critics of the company's record during the housing crisis "know nothing about our sovereign ratings, which have an excellent track record." He said it's impossible to assess a government's credit rating without making judgments about its politics.
"Economic policy is part of a political process," he said. "Every government has to make choices, and it has to do it in some political context, and we have to look at that and decide how plausible that is."
‘Sheer Difficulty'
The gridlock over the debt limit "highlights the sheer difficulty" lawmakers are having coming to agreement, he said, which has prompted S&P to shorten the timeframe over which it wants to see major cuts. He is skeptical that next year's election will be "that decisive on this issue."
U.S. lawmakers are lagging behind other similarly rated governments that have also faced debt challenges, he said, pointing to countries such as Britain that are implementing plans to tighten budgets.
"This whole issue of finding common ground has been on the table since March and it's not as if people aren't trying," he said. "You have to make judgments about these sorts of things."
To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net
Thursday, May 12, 2011
Discrimination on Basis of Ability to Pay is Just
Discrimination on Basis of Ability to Pay is Just
Discrimination of the bases of ability to pay back a loan should be legal. Democrats are dumber than dirt when they think hope people that do not quality for loans will pay back the loans.
This is not a Civil Rights issue but rather a economics issue.
Democrats loan money to people they hope will pay back the money and Republicans loan money to people they expect will pay back the money. Big Difference.
The Economic Disaster of 2008 was proof that sub prime loans are very very bad. The 1977 Community Reinvestment Act (CRA) started under the Carter Administration and was strengthened under the Clinton Administration. Every American has suffered because of this lousily piece of legislation that was created by democrats to buy black votes.
The Democrats can spin this issue as a discrimination issue, but they need to be called stupid and never ever be allowed to have control of the government.
------------------------------------
A Renewed Crackdown on Redlining
In the wake of the subprime implosion, the Obama Administration has stepped up its scrutiny of disadvantaged neighborhoods' credit access
By Clea Benson
BW Magazine
May 9, 2011
Community activists in St. Louis became concerned a couple of years ago that local banks weren't offering credit to the city's poor and African American residents. So they formed a group called the St. Louis Equal Housing and Community Reinvestment Alliance and began writing complaint letters to federal regulators.
Apparently, someone in Washington took notice. The Federal Reserve has cited one of the group's targets, Midwest BankCentre, a small bank that has been operating in St. Louis's predominantly white, middle-class suburbs for over a century, for failing to issue home mortgages or open branches in disadvantaged areas. Although executives at the bank say they don't discriminate, Midwest BankCentre's latest annual report says it is in the process of negotiating a settlement with the U.S. Justice Dept. over its lending practices.
The 1977 Community Reinvestment Act (CRA) requires banks to make loans in all the areas they serve, not just the wealthy ones. A Bloomberg analysis found the percentage of banks earning negative ratings from regulators on CRA exams has risen from 1.45 percent in 2007 to more than 6 percent in the first quarter of this year.
Discrimination of the bases of ability to pay back a loan should be legal. Democrats are dumber than dirt when they think hope people that do not quality for loans will pay back the loans.
This is not a Civil Rights issue but rather a economics issue.
Democrats loan money to people they hope will pay back the money and Republicans loan money to people they expect will pay back the money. Big Difference.
The Economic Disaster of 2008 was proof that sub prime loans are very very bad. The 1977 Community Reinvestment Act (CRA) started under the Carter Administration and was strengthened under the Clinton Administration. Every American has suffered because of this lousily piece of legislation that was created by democrats to buy black votes.
The Democrats can spin this issue as a discrimination issue, but they need to be called stupid and never ever be allowed to have control of the government.
------------------------------------
A Renewed Crackdown on Redlining
In the wake of the subprime implosion, the Obama Administration has stepped up its scrutiny of disadvantaged neighborhoods' credit access
By Clea Benson
BW Magazine
May 9, 2011
Community activists in St. Louis became concerned a couple of years ago that local banks weren't offering credit to the city's poor and African American residents. So they formed a group called the St. Louis Equal Housing and Community Reinvestment Alliance and began writing complaint letters to federal regulators.
Apparently, someone in Washington took notice. The Federal Reserve has cited one of the group's targets, Midwest BankCentre, a small bank that has been operating in St. Louis's predominantly white, middle-class suburbs for over a century, for failing to issue home mortgages or open branches in disadvantaged areas. Although executives at the bank say they don't discriminate, Midwest BankCentre's latest annual report says it is in the process of negotiating a settlement with the U.S. Justice Dept. over its lending practices.
The 1977 Community Reinvestment Act (CRA) requires banks to make loans in all the areas they serve, not just the wealthy ones. A Bloomberg analysis found the percentage of banks earning negative ratings from regulators on CRA exams has risen from 1.45 percent in 2007 to more than 6 percent in the first quarter of this year.
Saturday, October 9, 2010
Bush got the blame, but democrats did the dirt
Bush got the blame, but democrats did the dirt
Very interesting pieces of information about the Economic Disaster of 2008. Bush got the blame, but democrats did the dirt.
All paths lead back to actions in the Clinton Administration.
Barney Frank of Massachusetts has had too much involvement in economic policy and has been wrong too many times.
---------------------------
Lawrence Summers
http://en.wikipedia.org/wiki/Lawrence_Summers
Lawrence Henry Summers (born November 30, 1954) is an American economist and as of 2010 Director of the White House National Economic Council for President Barack Obama.[2] Summers is the Charles W. Eliot University Professor at Harvard University's Kennedy School of Government. He is the 1993 recipient of the John Bates Clark Medal for his work in several fields of economics and was Secretary of the Treasury from 1999 to 2001, during the Clinton Administration.
Summers' role in the deregulation of derivatives contracts
On May 7, 1998, the Commodity Futures Trading Commission (CFTC) issued a Concept Release soliciting input from regulators, academics, and practitioners to determine "how best to maintain adequate regulatory safeguards without impairing the ability of the OTC (Over-the-counter) derivatives market to grow and the ability of U.S. entities to remain competitive in the global financial marketplace." [18] On July 30, 1998, then-Deputy Secretary of the Treasury Summers testified before congress that "the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies." Summers, like Greenspan and Rubin who also opposed the concept release, offered no proof that the contracts would not be misused by financial institutions. Instead, Summers stated that "to date there has been no clear evidence of a need for additional regulation of the institutional OTC derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need." [19] This argument suggests that the default position in the disagreement was that Summers, Greenspan, and Rubin were right, and that anyone (i.e., Brooksley Born) who disagreed with them bore the burden of proving their position. In fact, subsequent events have proven that Summers, Rubin, and Greenspan misjudged the dangers posed by derivatives contracts.
The lack of regulation that allowed A.I.G. to sell hundreds of billions of dollars in credit default swaps on mortgage-backed securities was a direct result of efforts by the Treasury (first under Rubin and then under Summers), the Federal Reserve (under Greenspan), and the Securities and Exchange Commission (under Arthur Levitt) to deregulate the derivatives markets. The first response to the CFTC Concept Release was issued as a joint statement from Rubin, Greenspan, and Levitt who stated that they "have grave concerns about this action and its possible consequences." [20] Levitt and Greenspan have admitted that their views on this issue were mistaken. Levitt told WGBH in Boston that "I could have done much better. I could have made a difference." Greenspan told a congressional hearing that "I found a flaw ... in the model that I perceived is the critical functioning structure that defines how the world works." [21] [22] When George Stephanopoulos asked Summers about the financial crisis in an ABC interview on March 15, 2009, Summers replied that "there are a lot of terrible things that have happened in the last eighteen months, but what's happened at A.I.G. ... the way it was not regulated, the way no one was watching ... is outrageous."
At the 2005 Federal Reserve conference in Jackson Hole, Raghuram Rajan presented a paper called "Has Financial Development Made the World Riskier?" Rajan pointed to a number of potential problems with the financial developments of the past thirty years. [23] The problems that Rajan considers include skewed incentives of managers, herding behavior among traders, investment bankers, and hedge fund operators who suffer withdrawals if they under-perform the market. Rajan also discusses (on pp. 337–40) the problems associated with firms that "goose up returns" by taking risky positions that yield a "positive carry." This is how the infamous Joseph J. Cassano impressed his superiors at A.I.G. for a decade while sowing the destruction of the firm. [24] During the boom years of the housing market, the credit default swap contracts that A.I.G. Financial Products sold provided a stream of premium payments to the company with no expense stream. That's an example of what Rajan calls "goosing up returns" with latent risk. Rajan asks (on page 388) "If firms today implicitly are selling various kinds of default insurance to goose up returns, what happens if catastrophe strikes?" This is a fair question.
The flip side of the trade is equally problematic. Gregory Zuckerman in his book The Greatest Trade Ever about John Paulson's hedge fund recounts the difficulties that Paulson and others had holding on to their bets against the housing market. Even Paulson, whose timing couldn't have been better, spent a great deal of his time persuading investors to persist with the bet against the market. But month after month, millions of dollars were paid out on the credit default swap premia. The investors saw money spent and gone that could have been used to buy assets with rising prices, or at least held safely with a positive yield. As Rajan puts it (p. 338), "it takes a very brave investment manager with infinitely patient investors to fight the trend, even if the trend is a deviation from fundamental value."
Justin Lahart, writing in the Wall Street Journal in January 2009 about the response to Rajan's paper at the conference recounts that "former Treasury Secretary Lawrence Summers, famous among economists for his blistering attacks, told the audience he found 'the basic, slightly lead-eyed premise of [Mr. Rajan's] paper to be largely misguided.'"[25]
In a recent paper (on pages 285-87), Steven Gjerstad and Nobel laureate Vernon L. Smith describe more fully (1) the contribution of derivatives to the flow of mortgage funds that supported the housing bubble, (2) the concerns that Brooksley Born had raised about the dangers inherent in these contracts, (3) Summers' contribution to their deregulation, and (4) how these contracts precipitated the collapse of the financial system in 2007 and 2008. [26]
On April 18, 2010, in an interview on ABC's "This Week" program, Clinton said Summers was wrong in the advice he gave him not to regulate derivatives.[27]
-------------------------------
Fannie Mae
http://en.wikipedia.org/wiki/Fannie+mae
History
The Federal National Mortgage Association, colloquially known as Fannie Mae, was established in 1938 after the Great Depression to create a liquid secondary mortgage market and thereby free the loan originators to originate more loans, primarily by buying Federal Housing Administration (FHA) insured mortgages.[5] In 1968 Fannie Mae was converted into a private shareholder-owned corporation in order to remove its activity from the annual balance sheet of the federal budget.[6] Fannie Mae was split into the current Fannie Mae and the Government National Mortgage Association (GNMA), colloquially known as Ginnie Mae, to support the FHA-insured mortgages as well as Veterans Administration (VA) and Farmers Home Administration (FmHA) insured mortgages, with the full faith and credit of the United States government.[7] In 1970, the federal government authorized Fannie Mae to purchase private mortgages, i.e. those not insured by the FHA, VA, or FmHA, and created the Federal Home Loan Mortgage Corporation (FHLMC), colloquially known as Freddie Mac, to compete with Fannie Mae and thus facilitate a more robust and efficient secondary mortgage market. [7]
In 1977, the Carter Administration and the United States Congress passed and signed the Community Reinvestment Act of 1977, or CRA. The CRA provided that federally insured banks, as a quid pro quo for being covered in the FDIC agreed to "help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations." Essentially what the CRA was intended to do was to end the practice of redlining, where banks were willing to take deposits in certain areas but refuse lending in those same communities. That is to require banks to provide the same services to all who are equally situated and equally qualified in the communities in which they operate. Community Reinvestment Act of 1977 ("CRA"), 12 U.S.C. § 2901.
The Act requires that all loans be made with "safe and sound lending practices" and does not require a lowering of underwriting standards in making community based loans. The regulators for the CRA are the four federal bank-regulating agencies, FDIC, Federal Reserve Bank, Office of the Comptroller of Currency, and the Office of Thrift Supervision. The Act required participating banks to keep records and subjects them to periodic CRA examinations. That examination results in a performance rating for the bank or thrift, which must then be disclosed to the public. The enforcement mechanism is extremely light for a federal statute. Basically, if an institution fails to maintain a satisfactory rating, that rating comes into consideration when regulating authorities review applications for new deposit facilities or mergers. The act does not provide for administrative penalties, such as fines and cease and desist orders, or grant authority for the U.S. Department of Justice to sue under the Act. Community Reinvestment Act of 1977 ("CRA"), 12 U.S.C. § 2901.
In 1981 Fannie Mae issue its first mortgage passthrough and called it a mortgage-backed security.[8] Ginnie Mae had guaranteed the first mortgage passthrough security of an approved lender in 1968[9] and in 1971 Freddie Mac issued its first mortgage passthrough, called a participation certificate, composed primarily of private mortgages.[9]
In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977.[10] Because of the increased ratio requirements, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. Shareholders also pressured Fannie Mae to maintain its record profits.[10]
In 2000, because of a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.[11]
The intent was that Fannie Mae's enforcement of the underwriting standards they maintained for standard conforming mortgages would also provide safe and stable means of lending to buyers who did not have prime credit. As Daniel Mudd, then President and CEO of Fannie Mae, testified in 2007, instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: "We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families.
"Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates, interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors. "[12]
In 1999, The New York Times reported that with the corporation's move towards the subprime market "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 1980s."[13] Alex Berenson of The New York Times reported in 2003 that Fannie Mae's risk is much larger than is commonly held.[14] Nassim Taleb wrote in The Black Swan: "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events 'unlikely'".[15]
On September 10, 2003, the Bush Administration recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis. Under the plan, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae. The new agency would have the authority, which now rests with Congress, to set capital-reserve requirements for the company and to determine whether the company is adequately managing the risks of its portfolios. The New York Times reported that the plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac is broken. The Times also reported Democratic opposition to Bush's plan: "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." [16] Congress, controlled by Republicans during this period, did not introduce any legislation aimed at bringing this proposal into law until the Federal Housing Enterprise Regulatory Reform Act of 2005, which did not proceed out of committee to the Senate. [17]
On January 26, 2005, the Federal Housing Enterprise Regulatory Reform Act of 2005 (S.190) was first introduced in the Senate by Sen. Chuck Hagel.[18] The Senate legislation was an effort to reform the existing GSE regulatory structure in light of the recent accounting problems and questionable management actions leading to considerable income restatements by the GSE's. After being reported favorably by the Senate's Committee on Banking, Housing, and Urban Affairs in July 2005, the bill was never considered by the full Senate for a vote.[19] Sen. John McCain's decision to become a cosponsor of S.190 almost a year later in 2006 was the last action taken regarding Sen. Hagel's bill in spite of developments since clearing the Senate Committee. Sen. McCain pointed out that Fannie Mae's regulator reported that profits were "illusions deliberately and systematically created by the company's senior management" in his floor statement giving support to S.190.[20][21]
At the same time, the House also introduced similar legislation, the Federal Housing Finance Reform Act of 2005 (H.R. 1461), in the Spring of 2005. The House Financial Services Committee had crafted changes and produced a Committee Report by July 2005 to the legislation. It was passed by the House in October in spite of President Bush's statement of policy opposed to the House version.[22] The legislation met with opposition from both Democrats and Republicans at that point and the Senate never took up the House passed version for consideration after that.[23]
Very interesting pieces of information about the Economic Disaster of 2008. Bush got the blame, but democrats did the dirt.
All paths lead back to actions in the Clinton Administration.
Barney Frank of Massachusetts has had too much involvement in economic policy and has been wrong too many times.
---------------------------
Lawrence Summers
http://en.wikipedia.org/wiki/Lawrence_Summers
Lawrence Henry Summers (born November 30, 1954) is an American economist and as of 2010 Director of the White House National Economic Council for President Barack Obama.[2] Summers is the Charles W. Eliot University Professor at Harvard University's Kennedy School of Government. He is the 1993 recipient of the John Bates Clark Medal for his work in several fields of economics and was Secretary of the Treasury from 1999 to 2001, during the Clinton Administration.
Summers' role in the deregulation of derivatives contracts
On May 7, 1998, the Commodity Futures Trading Commission (CFTC) issued a Concept Release soliciting input from regulators, academics, and practitioners to determine "how best to maintain adequate regulatory safeguards without impairing the ability of the OTC (Over-the-counter) derivatives market to grow and the ability of U.S. entities to remain competitive in the global financial marketplace." [18] On July 30, 1998, then-Deputy Secretary of the Treasury Summers testified before congress that "the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies." Summers, like Greenspan and Rubin who also opposed the concept release, offered no proof that the contracts would not be misused by financial institutions. Instead, Summers stated that "to date there has been no clear evidence of a need for additional regulation of the institutional OTC derivatives market, and we would submit that proponents of such regulation must bear the burden of demonstrating that need." [19] This argument suggests that the default position in the disagreement was that Summers, Greenspan, and Rubin were right, and that anyone (i.e., Brooksley Born) who disagreed with them bore the burden of proving their position. In fact, subsequent events have proven that Summers, Rubin, and Greenspan misjudged the dangers posed by derivatives contracts.
The lack of regulation that allowed A.I.G. to sell hundreds of billions of dollars in credit default swaps on mortgage-backed securities was a direct result of efforts by the Treasury (first under Rubin and then under Summers), the Federal Reserve (under Greenspan), and the Securities and Exchange Commission (under Arthur Levitt) to deregulate the derivatives markets. The first response to the CFTC Concept Release was issued as a joint statement from Rubin, Greenspan, and Levitt who stated that they "have grave concerns about this action and its possible consequences." [20] Levitt and Greenspan have admitted that their views on this issue were mistaken. Levitt told WGBH in Boston that "I could have done much better. I could have made a difference." Greenspan told a congressional hearing that "I found a flaw ... in the model that I perceived is the critical functioning structure that defines how the world works." [21] [22] When George Stephanopoulos asked Summers about the financial crisis in an ABC interview on March 15, 2009, Summers replied that "there are a lot of terrible things that have happened in the last eighteen months, but what's happened at A.I.G. ... the way it was not regulated, the way no one was watching ... is outrageous."
At the 2005 Federal Reserve conference in Jackson Hole, Raghuram Rajan presented a paper called "Has Financial Development Made the World Riskier?" Rajan pointed to a number of potential problems with the financial developments of the past thirty years. [23] The problems that Rajan considers include skewed incentives of managers, herding behavior among traders, investment bankers, and hedge fund operators who suffer withdrawals if they under-perform the market. Rajan also discusses (on pp. 337–40) the problems associated with firms that "goose up returns" by taking risky positions that yield a "positive carry." This is how the infamous Joseph J. Cassano impressed his superiors at A.I.G. for a decade while sowing the destruction of the firm. [24] During the boom years of the housing market, the credit default swap contracts that A.I.G. Financial Products sold provided a stream of premium payments to the company with no expense stream. That's an example of what Rajan calls "goosing up returns" with latent risk. Rajan asks (on page 388) "If firms today implicitly are selling various kinds of default insurance to goose up returns, what happens if catastrophe strikes?" This is a fair question.
The flip side of the trade is equally problematic. Gregory Zuckerman in his book The Greatest Trade Ever about John Paulson's hedge fund recounts the difficulties that Paulson and others had holding on to their bets against the housing market. Even Paulson, whose timing couldn't have been better, spent a great deal of his time persuading investors to persist with the bet against the market. But month after month, millions of dollars were paid out on the credit default swap premia. The investors saw money spent and gone that could have been used to buy assets with rising prices, or at least held safely with a positive yield. As Rajan puts it (p. 338), "it takes a very brave investment manager with infinitely patient investors to fight the trend, even if the trend is a deviation from fundamental value."
Justin Lahart, writing in the Wall Street Journal in January 2009 about the response to Rajan's paper at the conference recounts that "former Treasury Secretary Lawrence Summers, famous among economists for his blistering attacks, told the audience he found 'the basic, slightly lead-eyed premise of [Mr. Rajan's] paper to be largely misguided.'"[25]
In a recent paper (on pages 285-87), Steven Gjerstad and Nobel laureate Vernon L. Smith describe more fully (1) the contribution of derivatives to the flow of mortgage funds that supported the housing bubble, (2) the concerns that Brooksley Born had raised about the dangers inherent in these contracts, (3) Summers' contribution to their deregulation, and (4) how these contracts precipitated the collapse of the financial system in 2007 and 2008. [26]
On April 18, 2010, in an interview on ABC's "This Week" program, Clinton said Summers was wrong in the advice he gave him not to regulate derivatives.[27]
-------------------------------
Fannie Mae
http://en.wikipedia.org/wiki/Fannie+mae
History
The Federal National Mortgage Association, colloquially known as Fannie Mae, was established in 1938 after the Great Depression to create a liquid secondary mortgage market and thereby free the loan originators to originate more loans, primarily by buying Federal Housing Administration (FHA) insured mortgages.[5] In 1968 Fannie Mae was converted into a private shareholder-owned corporation in order to remove its activity from the annual balance sheet of the federal budget.[6] Fannie Mae was split into the current Fannie Mae and the Government National Mortgage Association (GNMA), colloquially known as Ginnie Mae, to support the FHA-insured mortgages as well as Veterans Administration (VA) and Farmers Home Administration (FmHA) insured mortgages, with the full faith and credit of the United States government.[7] In 1970, the federal government authorized Fannie Mae to purchase private mortgages, i.e. those not insured by the FHA, VA, or FmHA, and created the Federal Home Loan Mortgage Corporation (FHLMC), colloquially known as Freddie Mac, to compete with Fannie Mae and thus facilitate a more robust and efficient secondary mortgage market. [7]
In 1977, the Carter Administration and the United States Congress passed and signed the Community Reinvestment Act of 1977, or CRA. The CRA provided that federally insured banks, as a quid pro quo for being covered in the FDIC agreed to "help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations." Essentially what the CRA was intended to do was to end the practice of redlining, where banks were willing to take deposits in certain areas but refuse lending in those same communities. That is to require banks to provide the same services to all who are equally situated and equally qualified in the communities in which they operate. Community Reinvestment Act of 1977 ("CRA"), 12 U.S.C. § 2901.
The Act requires that all loans be made with "safe and sound lending practices" and does not require a lowering of underwriting standards in making community based loans. The regulators for the CRA are the four federal bank-regulating agencies, FDIC, Federal Reserve Bank, Office of the Comptroller of Currency, and the Office of Thrift Supervision. The Act required participating banks to keep records and subjects them to periodic CRA examinations. That examination results in a performance rating for the bank or thrift, which must then be disclosed to the public. The enforcement mechanism is extremely light for a federal statute. Basically, if an institution fails to maintain a satisfactory rating, that rating comes into consideration when regulating authorities review applications for new deposit facilities or mergers. The act does not provide for administrative penalties, such as fines and cease and desist orders, or grant authority for the U.S. Department of Justice to sue under the Act. Community Reinvestment Act of 1977 ("CRA"), 12 U.S.C. § 2901.
In 1981 Fannie Mae issue its first mortgage passthrough and called it a mortgage-backed security.[8] Ginnie Mae had guaranteed the first mortgage passthrough security of an approved lender in 1968[9] and in 1971 Freddie Mac issued its first mortgage passthrough, called a participation certificate, composed primarily of private mortgages.[9]
In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977.[10] Because of the increased ratio requirements, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. Shareholders also pressured Fannie Mae to maintain its record profits.[10]
In 2000, because of a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.[11]
The intent was that Fannie Mae's enforcement of the underwriting standards they maintained for standard conforming mortgages would also provide safe and stable means of lending to buyers who did not have prime credit. As Daniel Mudd, then President and CEO of Fannie Mae, testified in 2007, instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: "We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families.
"Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates, interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors. "[12]
In 1999, The New York Times reported that with the corporation's move towards the subprime market "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 1980s."[13] Alex Berenson of The New York Times reported in 2003 that Fannie Mae's risk is much larger than is commonly held.[14] Nassim Taleb wrote in The Black Swan: "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events 'unlikely'".[15]
On September 10, 2003, the Bush Administration recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis. Under the plan, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae. The new agency would have the authority, which now rests with Congress, to set capital-reserve requirements for the company and to determine whether the company is adequately managing the risks of its portfolios. The New York Times reported that the plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac is broken. The Times also reported Democratic opposition to Bush's plan: "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." [16] Congress, controlled by Republicans during this period, did not introduce any legislation aimed at bringing this proposal into law until the Federal Housing Enterprise Regulatory Reform Act of 2005, which did not proceed out of committee to the Senate. [17]
On January 26, 2005, the Federal Housing Enterprise Regulatory Reform Act of 2005 (S.190) was first introduced in the Senate by Sen. Chuck Hagel.[18] The Senate legislation was an effort to reform the existing GSE regulatory structure in light of the recent accounting problems and questionable management actions leading to considerable income restatements by the GSE's. After being reported favorably by the Senate's Committee on Banking, Housing, and Urban Affairs in July 2005, the bill was never considered by the full Senate for a vote.[19] Sen. John McCain's decision to become a cosponsor of S.190 almost a year later in 2006 was the last action taken regarding Sen. Hagel's bill in spite of developments since clearing the Senate Committee. Sen. McCain pointed out that Fannie Mae's regulator reported that profits were "illusions deliberately and systematically created by the company's senior management" in his floor statement giving support to S.190.[20][21]
At the same time, the House also introduced similar legislation, the Federal Housing Finance Reform Act of 2005 (H.R. 1461), in the Spring of 2005. The House Financial Services Committee had crafted changes and produced a Committee Report by July 2005 to the legislation. It was passed by the House in October in spite of President Bush's statement of policy opposed to the House version.[22] The legislation met with opposition from both Democrats and Republicans at that point and the Senate never took up the House passed version for consideration after that.[23]
Wednesday, June 9, 2010
Sub-prime lending sparked the financial crisis
Sub-prime lending sparked the financial crisis
In the argument of Capitalism versus Socialism, it is good to see the admission that it was the Socialistic Sub-prime lending that produced the Financial Disaster of 2008.
If the news media had been honest, America would not have Obama as president.
"Canada also has much stricter mortgage sector rules than in the US, where sub-prime lending - offering mortgages to low income or high risk households - sparked the financial crisis."
---------------------------------------
Canada increases interest rates to 0.5%
http://news.bbc.co.uk/2/hi/business/10206931.stm
Bank of Canada The Bank said it remained cautious about the global economy
Canada has become the first member of the G7 group of industrialised nations to raise interest rates since the global financial crisis.
The Bank of Canada has increased its key lending rate by one quarter of a percentage point to 0.5%.
The increase comes after the Canadian economy has grown strongly since the start of the year.
Official figures showed that its economy grew at an annual rate of 6.1% in the first three months of the year.
This followed an annual growth rate of 5% during the last quarter of 2009.
Canada has been shielded from the worst of the global financial crisis, because its banks were much less exposed.
As a result, no major Canadian lender has needed to be bailed out by Canada's government.
Canada also has much stricter mortgage sector rules than in the US, where sub-prime lending - offering mortgages to low income or high risk households - sparked the financial crisis.
Looking ahead, the Canadian central bank said global economic risks remained.
It said it was cautious about "the possibility of renewed weakness in Europe" and an "increasingly uneven" worldwide economic recovery.
The other members of the G7 are the US, UK, France, Germany, Italy and Japan.
In the argument of Capitalism versus Socialism, it is good to see the admission that it was the Socialistic Sub-prime lending that produced the Financial Disaster of 2008.
If the news media had been honest, America would not have Obama as president.
"Canada also has much stricter mortgage sector rules than in the US, where sub-prime lending - offering mortgages to low income or high risk households - sparked the financial crisis."
---------------------------------------
Canada increases interest rates to 0.5%
http://news.bbc.co.uk/2/hi/business/10206931.stm
Bank of Canada The Bank said it remained cautious about the global economy
Canada has become the first member of the G7 group of industrialised nations to raise interest rates since the global financial crisis.
The Bank of Canada has increased its key lending rate by one quarter of a percentage point to 0.5%.
The increase comes after the Canadian economy has grown strongly since the start of the year.
Official figures showed that its economy grew at an annual rate of 6.1% in the first three months of the year.
This followed an annual growth rate of 5% during the last quarter of 2009.
Canada has been shielded from the worst of the global financial crisis, because its banks were much less exposed.
As a result, no major Canadian lender has needed to be bailed out by Canada's government.
Canada also has much stricter mortgage sector rules than in the US, where sub-prime lending - offering mortgages to low income or high risk households - sparked the financial crisis.
Looking ahead, the Canadian central bank said global economic risks remained.
It said it was cautious about "the possibility of renewed weakness in Europe" and an "increasingly uneven" worldwide economic recovery.
The other members of the G7 are the US, UK, France, Germany, Italy and Japan.
Thursday, February 18, 2010
Socially Responsible Criminal Behavior
Socially Responsible Criminal Behavior
Two things have greatly influenced my Christian life. One is science and the other is economics.
Science says there are established rules of how things work, and if you do not follow the rules bad things happen.
Economics says there is Moral Hazard to bailing out/offering welfare, because there is no reason to stop bad behavior if there is a bailout or welfare.
Economics says Socially Responsible Criminal Behavior is still criminal behavior even if it is socially responsible.
A lot of people (mostly democrats) thought they were making very Socially Responsible decisions when they forced banks to make risky sub prime loans through the Community Reinvestment Act.
The banks knew they were violating good banking principles when they made loans to people who did not meet normal qualification requirements.
America is in a major recession/depression because of Socially Responsible Criminal Behavior.
Democrats like to think they are like Robin Hood, who robbed from the rich to give to the poor, but Robin Hood did have to rob the rich. I have always worried about how much really got to the poor with both Robin Hood and democrats.
This illogical thinking can lead to a priest saying it acceptable for a poor person to steal or can lead a person that calls them self a Christian to murder an abortion doctor.
The Bible has an established set of commandments/doctrines of what works for humans, and if you do not follow the commandments/doctrines bad things happen.
Accepting Jesus Christ as Lord/Savior and committing to following the commandments/doctrines of the Bible is the Christian Lifestyle that leads to the most environmentally friendly, socially responsible lifestyle that can exist on earth.
Two things have greatly influenced my Christian life. One is science and the other is economics.
Science says there are established rules of how things work, and if you do not follow the rules bad things happen.
Economics says there is Moral Hazard to bailing out/offering welfare, because there is no reason to stop bad behavior if there is a bailout or welfare.
Economics says Socially Responsible Criminal Behavior is still criminal behavior even if it is socially responsible.
A lot of people (mostly democrats) thought they were making very Socially Responsible decisions when they forced banks to make risky sub prime loans through the Community Reinvestment Act.
The banks knew they were violating good banking principles when they made loans to people who did not meet normal qualification requirements.
America is in a major recession/depression because of Socially Responsible Criminal Behavior.
Democrats like to think they are like Robin Hood, who robbed from the rich to give to the poor, but Robin Hood did have to rob the rich. I have always worried about how much really got to the poor with both Robin Hood and democrats.
This illogical thinking can lead to a priest saying it acceptable for a poor person to steal or can lead a person that calls them self a Christian to murder an abortion doctor.
The Bible has an established set of commandments/doctrines of what works for humans, and if you do not follow the commandments/doctrines bad things happen.
Accepting Jesus Christ as Lord/Savior and committing to following the commandments/doctrines of the Bible is the Christian Lifestyle that leads to the most environmentally friendly, socially responsible lifestyle that can exist on earth.
Monday, February 1, 2010
Obama Involvement in Economic Disaster of 2008
Obama Involvement in Economic Disaster of 2008
For those people that don't know what you meant about Obama making the mess:
"ACORN showed its colors again in 1991, by taking over the House Banking Committee room for two days to protest efforts to scale back the CRA. Obama represented ACORN in the Buycks-Roberson v. Citibank Fed. Sav. Bank, 1994 suit against redlining. Most significant of all, ACORN was the driving force behind a 1995 regulatory revision pushed through by the Clinton Administration that greatly expanded the CRA (Community Reinvestment Act) and laid the groundwork for the Fannie Mae, Freddie Mac borne financial crisis we now confront. Barack Obama was the attorney representing ACORN in this effort. With this new authority, ACORN used its subsidiary, ACORN Housing, to promote subprime loans more aggressively. "
http://www.democracyforums.com/showthread.php?t=19599
So smart investors KNOWING that the Govt. was as this document states:
Oct. 23 (Bloomberg) -- Fannie Mae and Freddie Mac have an ``effective'' federal guarantee, not the ``full faith and credit'' of the U.S. government, Federal Housing Finance Agency Director James Lockhart said.
There are no policy changes with regard to Fannie and Freddie's debt, Lockhart told reporters, backing away from remarks about an ``explicit'' guarantee that he made in a written copy of his testimony to the Senate Banking Committee in Washington that was distributed to the media today.
``What we did say is an effective guarantee because there's $100 billion backing their equity provided by the U.S. Treasury,'' Lockhart said after the hearing. ``That does give them effectively a guarantee of the U.S. government.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=ajIEoZCommlk
So the money trail to the ecomonic collapse is as follows:
1) Obama's lawsuit FORCED lenders to make unqualified, subprime loans.
2) Fully backed and guaranteed by Fannie/Freddie.
3) Investors seeing these securitized, fully guaranteed packages with HIGH yields??? Why not??
Yet "When warned about Fannie Mae in (House Financial Services Committee Chairman Barney Frank (D-MA), "these two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis.... The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." (New York Times, 9/11/03)
And then Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd also ignored the President's warnings and called on him to "immediately reconsider his ill-advised" position. Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis... (New York Times, 9/11/03.
President BUSH WAS IGNORED... TOLD TO RECONSIDER HIS POSITION!
The economic "inherited Mess" Obama whines about....comes FULL CIRCLE BACK TO HIS FEET!
For those people that don't know what you meant about Obama making the mess:
"ACORN showed its colors again in 1991, by taking over the House Banking Committee room for two days to protest efforts to scale back the CRA. Obama represented ACORN in the Buycks-Roberson v. Citibank Fed. Sav. Bank, 1994 suit against redlining. Most significant of all, ACORN was the driving force behind a 1995 regulatory revision pushed through by the Clinton Administration that greatly expanded the CRA (Community Reinvestment Act) and laid the groundwork for the Fannie Mae, Freddie Mac borne financial crisis we now confront. Barack Obama was the attorney representing ACORN in this effort. With this new authority, ACORN used its subsidiary, ACORN Housing, to promote subprime loans more aggressively. "
http://www.democracyforums.com/showthread.php?t=19599
So smart investors KNOWING that the Govt. was as this document states:
Oct. 23 (Bloomberg) -- Fannie Mae and Freddie Mac have an ``effective'' federal guarantee, not the ``full faith and credit'' of the U.S. government, Federal Housing Finance Agency Director James Lockhart said.
There are no policy changes with regard to Fannie and Freddie's debt, Lockhart told reporters, backing away from remarks about an ``explicit'' guarantee that he made in a written copy of his testimony to the Senate Banking Committee in Washington that was distributed to the media today.
``What we did say is an effective guarantee because there's $100 billion backing their equity provided by the U.S. Treasury,'' Lockhart said after the hearing. ``That does give them effectively a guarantee of the U.S. government.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=ajIEoZCommlk
So the money trail to the ecomonic collapse is as follows:
1) Obama's lawsuit FORCED lenders to make unqualified, subprime loans.
2) Fully backed and guaranteed by Fannie/Freddie.
3) Investors seeing these securitized, fully guaranteed packages with HIGH yields??? Why not??
Yet "When warned about Fannie Mae in (House Financial Services Committee Chairman Barney Frank (D-MA), "these two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis.... The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." (New York Times, 9/11/03)
And then Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd also ignored the President's warnings and called on him to "immediately reconsider his ill-advised" position. Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis... (New York Times, 9/11/03.
President BUSH WAS IGNORED... TOLD TO RECONSIDER HIS POSITION!
The economic "inherited Mess" Obama whines about....comes FULL CIRCLE BACK TO HIS FEET!
Sunday, December 6, 2009
Another Opinion
Quote from KnowOzymandias
I think everyone agrees the economy suffered greatly due to the linkage between home loans, credit default swaps and the financial community.
I would also ask consider that the primary cause for home loan problems were people that should have never been able to get a mortgage much less have several mortgages that they flipped.
How did these unqualified people get the loans that they couldn't make the payments?
Go back to the following as one of the contributing factors:
1) "ACORN showed its colors again in 1991, by taking over the House Banking Committee room for two days to protest efforts to scale back the CRA. Obama represented ACORN in the Buycks-Roberson v. Citibank Fed. Sav. Bank, 1994 suit against redlining. Most significant of all, ACORN was the driving force behind a 1995 regulatory revision pushed through by the Clinton Administration that greatly expanded the CRA (Community Reinvestment Act) and laid the groundwork for the Fannie Mae, Freddie Mac borne financial crisis we now confront.
Barack Obama was the attorney representing ACORN in this effort.
With this new authority, ACORN used its subsidiary, ACORN Housing, to promote subprime loans more aggressively." http://www.democracyforums.com/showthread.php?t=19599
2) the Gramm-Leach-Bliley Act repealing Glass-Steagall was wrong.
This allowed tremendous investment opportunities because Fannie/Freddie under the "full faith and credit" of the USA would guarantee there would be nothing to lose! Securitization of mortgage bundles that funded by margins less then 10%, became lucrative instruments to financial institutions!
3) "When warned about Fannie Mae in (House Financial Services Committee Chairman Barney Frank (D-MA) criticized the President [Bush] warning saying: "these two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis....
The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." (New York Times, 9/11/03)
And then Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd also ignored the President's warnings and called on him to "immediately reconsider his
ill-advised" position. . Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis... (New York Times, 9/11/03.
So loans made to unqualified people that were guaranteed by Fannie/Freddie would securitized and further leveraged much like commodity contracts created the economic crisis.
The blame is equally shared by Democrats/GOP alike but the fundamental objective was to get unqualified borrowers to become voters in the manner of the Motor Voter scam of the 1990s.
I think everyone agrees the economy suffered greatly due to the linkage between home loans, credit default swaps and the financial community.
I would also ask consider that the primary cause for home loan problems were people that should have never been able to get a mortgage much less have several mortgages that they flipped.
How did these unqualified people get the loans that they couldn't make the payments?
Go back to the following as one of the contributing factors:
1) "ACORN showed its colors again in 1991, by taking over the House Banking Committee room for two days to protest efforts to scale back the CRA. Obama represented ACORN in the Buycks-Roberson v. Citibank Fed. Sav. Bank, 1994 suit against redlining. Most significant of all, ACORN was the driving force behind a 1995 regulatory revision pushed through by the Clinton Administration that greatly expanded the CRA (Community Reinvestment Act) and laid the groundwork for the Fannie Mae, Freddie Mac borne financial crisis we now confront.
Barack Obama was the attorney representing ACORN in this effort.
With this new authority, ACORN used its subsidiary, ACORN Housing, to promote subprime loans more aggressively." http://www.democracyforums.com/showthread.php?t=19599
2) the Gramm-Leach-Bliley Act repealing Glass-Steagall was wrong.
This allowed tremendous investment opportunities because Fannie/Freddie under the "full faith and credit" of the USA would guarantee there would be nothing to lose! Securitization of mortgage bundles that funded by margins less then 10%, became lucrative instruments to financial institutions!
3) "When warned about Fannie Mae in (House Financial Services Committee Chairman Barney Frank (D-MA) criticized the President [Bush] warning saying: "these two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis....
The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." (New York Times, 9/11/03)
And then Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd also ignored the President's warnings and called on him to "immediately reconsider his
ill-advised" position. . Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis... (New York Times, 9/11/03.
So loans made to unqualified people that were guaranteed by Fannie/Freddie would securitized and further leveraged much like commodity contracts created the economic crisis.
The blame is equally shared by Democrats/GOP alike but the fundamental objective was to get unqualified borrowers to become voters in the manner of the Motor Voter scam of the 1990s.
Friday, August 7, 2009
Economic Disaster of 2008 - August 2009 Update
Economic Disaster of 2008 - August 2009 Update
Anytime there is a problem, both sides are wrong, one for not doing enough to stop the problem and the other for doing too much for supporting the problem.
I believe the Economic Disaster of 2008 was caused mostly by the Community Reinvestment Act, Fannie Mae, Freddie Mac, and the assumption that housing prices would always go up.
http://economicdisasterof2008.blogspot.com/
The Wikipedia discussion is very good, but soft on democrats like Carter and Clinton who did too much to promote lending to unqualified borrowers.
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
Democrats always support Socialistic programs that cost the government big money, but with the CRA, the democrats pushed the costs to banks by forcing the banks to make the loans.
Both democrats and Republicans liked the expanding economy produced by the increase in housing prices, so the Republicans did not do enough to stop the lending to unqualified borrowers.
Lending to unqualified borrowers was not a problem so long as housing prices continued to rise since the house could be resold even if the owner defaulted. Most financial institutions and most Americans had their total economic strategy based on increasing housing prices.
I believe the election of 2006 and 2008 killed the economy. Bush was keeping things together, until the democrats and the Atheistic Liberal News Media saw a bad economy as the way to win control of the government. The day the housing prices started down every American was affected.
What disturbs me most is that there does not seem to be a solution except inflation. 20% of mortgages are under water and that is expected to rise to 50% in 2011. That means people cannot sell a house unless they pay the bank $20,000 to $100,000. People are stuck in place with no options. Inflation would cause the value of homes to increase so there would be no out of pocket money, but then people on fixed income would need government assistance.
I believe the democrats have received a problem that they created, thus deserve the painful solutions that will be necessary. I think inflation is inevitable.
I oppose the health care/welfare of democrats, because it is another Socialistic program the will get the government involved in a huge expenses.
Socialism is an ugly path for any country because it lead to a reliance on the government and away from the self reliance of the Christian Religion.
When compared to perfection, Republicans did not look good, but when compared to democrats, Republicans look brilliant. Without the propaganda support of the Atheistic Liberal News Media the democrats would look ridicules.
Anytime there is a problem, both sides are wrong, one for not doing enough to stop the problem and the other for doing too much for supporting the problem.
I believe the Economic Disaster of 2008 was caused mostly by the Community Reinvestment Act, Fannie Mae, Freddie Mac, and the assumption that housing prices would always go up.
http://economicdisasterof2008.blogspot.com/
The Wikipedia discussion is very good, but soft on democrats like Carter and Clinton who did too much to promote lending to unqualified borrowers.
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
Democrats always support Socialistic programs that cost the government big money, but with the CRA, the democrats pushed the costs to banks by forcing the banks to make the loans.
Both democrats and Republicans liked the expanding economy produced by the increase in housing prices, so the Republicans did not do enough to stop the lending to unqualified borrowers.
Lending to unqualified borrowers was not a problem so long as housing prices continued to rise since the house could be resold even if the owner defaulted. Most financial institutions and most Americans had their total economic strategy based on increasing housing prices.
I believe the election of 2006 and 2008 killed the economy. Bush was keeping things together, until the democrats and the Atheistic Liberal News Media saw a bad economy as the way to win control of the government. The day the housing prices started down every American was affected.
What disturbs me most is that there does not seem to be a solution except inflation. 20% of mortgages are under water and that is expected to rise to 50% in 2011. That means people cannot sell a house unless they pay the bank $20,000 to $100,000. People are stuck in place with no options. Inflation would cause the value of homes to increase so there would be no out of pocket money, but then people on fixed income would need government assistance.
I believe the democrats have received a problem that they created, thus deserve the painful solutions that will be necessary. I think inflation is inevitable.
I oppose the health care/welfare of democrats, because it is another Socialistic program the will get the government involved in a huge expenses.
Socialism is an ugly path for any country because it lead to a reliance on the government and away from the self reliance of the Christian Religion.
When compared to perfection, Republicans did not look good, but when compared to democrats, Republicans look brilliant. Without the propaganda support of the Atheistic Liberal News Media the democrats would look ridicules.
Monday, June 15, 2009
More information on how the democrats created the Economic Collapse of 2008
More information on how the democrats created the Economic Collapse of 2008
Obama forced Citibank as a lawyer to make risky loans .
ACORN showed its colors again in 1991, by taking over the House Banking Committee room for two days to protest efforts to scale back the CRA. Obama represented ACORN in the Buycks-Roberson v. Citibank Fed. Sav. Bank, 1994 suit against redlining. Most significant of all, ACORN was the driving force behind a 1995 regulatory revision pushed through by the Clinton Administration that greatly expanded the CRA (Community Reinvestment Act) and laid the groundwork for the Fannie Mae, Freddie Mac borne financial crisis we now confront. Barack Obama was the attorney representing ACORN in this effort. With this new authority, ACORN used its subsidiary, ACORN Housing, to promote subprime loans more aggressively.
http://www.democracyforums.com/showthread.php?t=19599
Writer reveals truth behind boom, bust By WALTER WILLIAMS [by the way he's black!!!]
Wednesday, June 3, 2009
The root of the problem lies in Washington. The Community Reinvestment Act of 1977, later given teeth during the Bush and Clinton administrations, forced financial institutions to make risky mortgage loans they otherwise would not have made. President Bill Clinton's attorney general, Janet Reno, threatened legal action against lenders whose racial statistics raised her suspicions.
There were many other warnings of pending collapse, but Congress and the White House, in their push for politically popular "affordable housing," ignored them.
Congressman Barney Frank, who is now chairman of the House Committee on Financial Services, said critics "exaggerate a threat of safety" and "conjure up the possibility of serious financial losses to the Treasury, which I do not see."
Chairman Chris Dodd, of the Senate Banking Committee, called Fannie Mae and Freddie Mac
"one of the great success stories of all time" and urged "caution" in restricting their activities, out of fear of
"doing great damage to what has been one of the great engines of economic success in the last 30 or 40 years."
http://www.columbiatribune.com/news/2009/jun/03/writer-reveals-truth-behind-boom-bust/
b) mortgages created, packed, sold as Credit default swaps and again backed by "full faith and credit of US Govt!
Why wouldn't institutions buy them!
Yet two leading congressmen said nothing is wrong! The Feds are backing the CDSs. How could the buyers lose?
c) totally thwarted by Barney Franks, Chris Dodds, Franklin Raines CEO of $90 million bonuses fame,
encouraged more bogus loans because in the words of Frank/Dodds
1) "these two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis....
The more people exaggerate these problems, the more pressure there is on these companies,
the less we will see in terms of affordable housing." (New York Times, 9/11/03)
2) And then Dodd said this ...Senate Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd
also ignored the President's warnings and called on him to "immediately reconsider his ill-advised" position. .
Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis.... (New York Times, 9/11/03.
Obama forced Citibank as a lawyer to make risky loans .
ACORN showed its colors again in 1991, by taking over the House Banking Committee room for two days to protest efforts to scale back the CRA. Obama represented ACORN in the Buycks-Roberson v. Citibank Fed. Sav. Bank, 1994 suit against redlining. Most significant of all, ACORN was the driving force behind a 1995 regulatory revision pushed through by the Clinton Administration that greatly expanded the CRA (Community Reinvestment Act) and laid the groundwork for the Fannie Mae, Freddie Mac borne financial crisis we now confront. Barack Obama was the attorney representing ACORN in this effort. With this new authority, ACORN used its subsidiary, ACORN Housing, to promote subprime loans more aggressively.
http://www.democracyforums.com/showthread.php?t=19599
Writer reveals truth behind boom, bust By WALTER WILLIAMS [by the way he's black!!!]
Wednesday, June 3, 2009
The root of the problem lies in Washington. The Community Reinvestment Act of 1977, later given teeth during the Bush and Clinton administrations, forced financial institutions to make risky mortgage loans they otherwise would not have made. President Bill Clinton's attorney general, Janet Reno, threatened legal action against lenders whose racial statistics raised her suspicions.
There were many other warnings of pending collapse, but Congress and the White House, in their push for politically popular "affordable housing," ignored them.
Congressman Barney Frank, who is now chairman of the House Committee on Financial Services, said critics "exaggerate a threat of safety" and "conjure up the possibility of serious financial losses to the Treasury, which I do not see."
Chairman Chris Dodd, of the Senate Banking Committee, called Fannie Mae and Freddie Mac
"one of the great success stories of all time" and urged "caution" in restricting their activities, out of fear of
"doing great damage to what has been one of the great engines of economic success in the last 30 or 40 years."
http://www.columbiatribune.com/news/2009/jun/03/writer-reveals-truth-behind-boom-bust/
b) mortgages created, packed, sold as Credit default swaps and again backed by "full faith and credit of US Govt!
Why wouldn't institutions buy them!
Yet two leading congressmen said nothing is wrong! The Feds are backing the CDSs. How could the buyers lose?
c) totally thwarted by Barney Franks, Chris Dodds, Franklin Raines CEO of $90 million bonuses fame,
encouraged more bogus loans because in the words of Frank/Dodds
1) "these two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis....
The more people exaggerate these problems, the more pressure there is on these companies,
the less we will see in terms of affordable housing." (New York Times, 9/11/03)
2) And then Dodd said this ...Senate Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd
also ignored the President's warnings and called on him to "immediately reconsider his ill-advised" position. .
Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis.... (New York Times, 9/11/03.
Monday, May 18, 2009
Housing Bubble = CRA
Housing Bubble = CRA
Although not stated directly, the legislation that created the housing bubble was the Community Reinvestment Act that was black equality legislation intended to assure the vote of blacks for democrats.
Thomas Sowell: Regulators Started Housing Crisis
Sunday, May 17, 2009 5:18 PM
http://www.newsmax.com/newsfront/sowell_housing_crisis/2009/05/17/215234.html
Respected economist Dr. Thomas Sowell, author of the new book "The Housing Boom and Bust," tells Newsmax that the current housing crisis can be blamed on pressure from government officials seeking to remedy a "problem that didn't exist."
Dr. Sowell also said politicians' stated concern about that so-called problem — a lack of affordable housing — is "a farce."
Editor's Note: To see the full Thomas Sowell interview, Go Here Now.
Newsmax.TV's Kathleen Walter asked Sowell what caused the "house of cards" in the housing market to collapse.
"The most fundamental thing is that the money that was normally paid for monthly housing payments stopped coming in, or stopped coming in in the volumes that it had in the past," said Sowell, a senior fellow at the Hoover Institution at Stanford University.
"The question then is, why did that happen? And the reason that happened was that banks and other lending institutions began lending to people who did not meet the traditional standards for mortgage loans, but were given those loans under pressure from government regulators, and even in some cases under threats from the Department of Justice if their statistics didn't match what the Department of Justice thought they should be — for example, in terms of income levels, race, what communities they invested in, and so on."
Walter noted that Sowell asserts in his book that politicians in Washington were trying to solve a problem that didn't exist.
"The problem that didn't exist was a national problem of unaffordable housing," Sowell explained.
"The housing in particular areas, particularly coastal California and some other areas around the country, were just astronomically high. It was not uncommon for people to have to pay half of their family income just to put a roof over their head. So that was a very serious problem where it existed.
"But it existed in various coastal communities primarily and a couple of other places. Unfortunately, the elites whose strongholds are on the East and West Coasts don't seem to understand that there's a whole country in between, and in most of that country housing was quite affordable by all historical standards.
"So they set out to solve the problem by setting up a federal program to bring down the mortgage requirements, the 20 percent down payment and that sort of thing, and by forcing Fannie Mae and Freddie Mac to buy up those mortgages from the people who no longer had to meet the same requirements.
"The banks had no choice but to go along because the regulators controlled their fate. So the banks would simply sign up people, sell the mortgages to Fannie Mae and Freddie Mac. It now became Fannie Mae and Freddie Mac's problem. And that meant it became the taxpayers' problem."
Walter asked: "Who is really responsible for all this?"
"There are a lot of people who were irresponsible," Sowell responded.
"But the fundamental problem, the problem of reduced lending standards, with people buying houses even with no money down in some cases, that all came precisely from the regulators that people are now talking about as the salvation of the housing market.
"There's no such thing as regulation in the abstract. There are certain kinds of regulation that can have beneficial effects. Canada does not have the same problem that we have even though they have regulations. But their regulators are trying to make sure that the banks and other lending institutions are obeying clear-cut rules. Ours were trying to produce higher statistics on home ownership in general, and in particular trying to reduce the gap between low-income people and high-income people, blacks and whites, et cetera."
Walter asked what Americans can do to ensure that the housing boom and bust will not happen again.
"First and foremost the voters have to learn to be skeptical and to find out what the facts are," Sowell said.
"There is not the slightest incentive for a politician to behave better in the future. If voters don't understand that, it's going to happen again.
"This is the worst housing crisis we've had but it is not the first. This very same drive to increase home ownership occurred under the Republicans in the '20s. It occurred under the Democrats in the '30s, and it occurred under both parties in the '40s and '50s.
"There is not the slightest incentive for politicians to learn from their mistakes because they pay no price for it. And they'll never pay a price for it as long as the voters don't make an effort to find out what is going on."
Sowell added: "I see absolutely no reason why politicians should take charge of which way prices go. That's precisely what led to the current disaster. . .
"When you realize how long politicians have been talking about a need for affordable housing, you realize what a farce it is."
Although not stated directly, the legislation that created the housing bubble was the Community Reinvestment Act that was black equality legislation intended to assure the vote of blacks for democrats.
Thomas Sowell: Regulators Started Housing Crisis
Sunday, May 17, 2009 5:18 PM
http://www.newsmax.com/newsfront/sowell_housing_crisis/2009/05/17/215234.html
Respected economist Dr. Thomas Sowell, author of the new book "The Housing Boom and Bust," tells Newsmax that the current housing crisis can be blamed on pressure from government officials seeking to remedy a "problem that didn't exist."
Dr. Sowell also said politicians' stated concern about that so-called problem — a lack of affordable housing — is "a farce."
Editor's Note: To see the full Thomas Sowell interview, Go Here Now.
Newsmax.TV's Kathleen Walter asked Sowell what caused the "house of cards" in the housing market to collapse.
"The most fundamental thing is that the money that was normally paid for monthly housing payments stopped coming in, or stopped coming in in the volumes that it had in the past," said Sowell, a senior fellow at the Hoover Institution at Stanford University.
"The question then is, why did that happen? And the reason that happened was that banks and other lending institutions began lending to people who did not meet the traditional standards for mortgage loans, but were given those loans under pressure from government regulators, and even in some cases under threats from the Department of Justice if their statistics didn't match what the Department of Justice thought they should be — for example, in terms of income levels, race, what communities they invested in, and so on."
Walter noted that Sowell asserts in his book that politicians in Washington were trying to solve a problem that didn't exist.
"The problem that didn't exist was a national problem of unaffordable housing," Sowell explained.
"The housing in particular areas, particularly coastal California and some other areas around the country, were just astronomically high. It was not uncommon for people to have to pay half of their family income just to put a roof over their head. So that was a very serious problem where it existed.
"But it existed in various coastal communities primarily and a couple of other places. Unfortunately, the elites whose strongholds are on the East and West Coasts don't seem to understand that there's a whole country in between, and in most of that country housing was quite affordable by all historical standards.
"So they set out to solve the problem by setting up a federal program to bring down the mortgage requirements, the 20 percent down payment and that sort of thing, and by forcing Fannie Mae and Freddie Mac to buy up those mortgages from the people who no longer had to meet the same requirements.
"The banks had no choice but to go along because the regulators controlled their fate. So the banks would simply sign up people, sell the mortgages to Fannie Mae and Freddie Mac. It now became Fannie Mae and Freddie Mac's problem. And that meant it became the taxpayers' problem."
Walter asked: "Who is really responsible for all this?"
"There are a lot of people who were irresponsible," Sowell responded.
"But the fundamental problem, the problem of reduced lending standards, with people buying houses even with no money down in some cases, that all came precisely from the regulators that people are now talking about as the salvation of the housing market.
"There's no such thing as regulation in the abstract. There are certain kinds of regulation that can have beneficial effects. Canada does not have the same problem that we have even though they have regulations. But their regulators are trying to make sure that the banks and other lending institutions are obeying clear-cut rules. Ours were trying to produce higher statistics on home ownership in general, and in particular trying to reduce the gap between low-income people and high-income people, blacks and whites, et cetera."
Walter asked what Americans can do to ensure that the housing boom and bust will not happen again.
"First and foremost the voters have to learn to be skeptical and to find out what the facts are," Sowell said.
"There is not the slightest incentive for a politician to behave better in the future. If voters don't understand that, it's going to happen again.
"This is the worst housing crisis we've had but it is not the first. This very same drive to increase home ownership occurred under the Republicans in the '20s. It occurred under the Democrats in the '30s, and it occurred under both parties in the '40s and '50s.
"There is not the slightest incentive for politicians to learn from their mistakes because they pay no price for it. And they'll never pay a price for it as long as the voters don't make an effort to find out what is going on."
Sowell added: "I see absolutely no reason why politicians should take charge of which way prices go. That's precisely what led to the current disaster. . .
"When you realize how long politicians have been talking about a need for affordable housing, you realize what a farce it is."
Saturday, March 28, 2009
Scape Goating the AIG Bonuses
Scape Goating the AIG Bonuses
The Obama Administration has a short term victory with the AIG Bonus scape goating, but now it seems to have backfired.
People now know the Obama Administration, particularly Dodd and Geikner knew all about the bonuses, long before they were to be paid.
The Obama Administration needs a scape goat because they need to draw attention away from the CRA, a socialistic program that was started by democrats as part of the many failed black equality programs that democrats have started.
The banks, Fannie Mae, Freedie Mac, financial institutions and insurance companies were over extended with too much credit on the books, the same as most Americas were over extended on credit card debt, but nothing would have happened if there had not been defaults on the sub prime mortgages that were created by the Community Reinvestment Act.
The Obama Administration needs a scape goat to draw attention away from black equality programs because the health care (Universal Healthcare)/welfare programs that are being advocated are just more black equality programs that will also fail.
Now I ask you which is worse, the few at AIG that stole a lot, or the many sub prime loans that stole a little each.
The Obama Administration has a short term victory with the AIG Bonus scape goating, but now it seems to have backfired.
People now know the Obama Administration, particularly Dodd and Geikner knew all about the bonuses, long before they were to be paid.
The Obama Administration needs a scape goat because they need to draw attention away from the CRA, a socialistic program that was started by democrats as part of the many failed black equality programs that democrats have started.
The banks, Fannie Mae, Freedie Mac, financial institutions and insurance companies were over extended with too much credit on the books, the same as most Americas were over extended on credit card debt, but nothing would have happened if there had not been defaults on the sub prime mortgages that were created by the Community Reinvestment Act.
The Obama Administration needs a scape goat to draw attention away from black equality programs because the health care (Universal Healthcare)/welfare programs that are being advocated are just more black equality programs that will also fail.
Now I ask you which is worse, the few at AIG that stole a lot, or the many sub prime loans that stole a little each.
Wednesday, March 18, 2009
CRA Caused the Financial Disaster of 2008
CRA Caused the Financial Disaster of 2008
Some say the CRA was not at the heart of the Financial Disaster of 2008, but the following shows what is being done even now.
-----------------------------------
FDIC Criticizes Massachusetts Bank With No Bad Loans for Being Too Cautious
Tuesday, March 17, 2009
http://www.foxnews.com/story/0,2933,509584,00.html
A Massachusetts bank that has defied the odds and remained free of bad loans amid the economic crisis is now being criticized by the Federal Deposit Insurance Corp. for the cautious business practices that caused its rare success.
The secret behind East Bridgewater Savings Bank's accomplishments is the careful approach of 62-year-old chief executive Joseph Petrucelli.
"We're paranoid about credit quality," he told the Boston Business Journal.
That paranoia has allowed East Bridgewater Savings Bank to stand out among a flurry a failing banks, with no delinquent loans or foreclosures on its books, the Journal reported. East Bridgewater Savings didn't even need to set aside in money in 2008 for anticipated loan losses.
But rather than reward Petrucelli's tactics, the FDIC recently criticized his bank for not lending enough, slapping it with a "needs to improve" rating under the Community Reinvestment Act, the Journal reported.
The problem, according to FDIC data, was that from late 2003 through mid-2008, East Bridgewater Savings made an average of 28 cents in loans for every dollar in deposit — a sharp contrast to the 90 percent average loan-to-deposit ratio among similar banks, the paper reported.
"There are no apparent financial or legal impediments that would limit the bank's ability to help meet the credit needs of its assessment area," the FDIC wrote in the CRA evaluation.
The agency also faulted the bank, which does not have a Web site, for not promoting its loan products enough, the Journal reported.
Considering his bank is doing well in tanking industry and even the FDIC's deposit insurance fund is in trouble after paying for an upswing in bank failures, Petrucelli told the Boston Business Journal that the negative rating caught him by surprise.
East Bridgewater Savings ended 2008 with $135 million in assets, deposits of $84 million, $87,000 in profit, and a Tier 1 risk-based capital ratio of 31.6 percent — more than three times higher than many community banks in Massachusetts, the Journal reported.
Its net loans and leases equaled 21 percent of assets, compared with 72 percent among 385 similar banks across the country.
Some say the CRA was not at the heart of the Financial Disaster of 2008, but the following shows what is being done even now.
-----------------------------------
FDIC Criticizes Massachusetts Bank With No Bad Loans for Being Too Cautious
Tuesday, March 17, 2009
http://www.foxnews.com/story/0,2933,509584,00.html
A Massachusetts bank that has defied the odds and remained free of bad loans amid the economic crisis is now being criticized by the Federal Deposit Insurance Corp. for the cautious business practices that caused its rare success.
The secret behind East Bridgewater Savings Bank's accomplishments is the careful approach of 62-year-old chief executive Joseph Petrucelli.
"We're paranoid about credit quality," he told the Boston Business Journal.
That paranoia has allowed East Bridgewater Savings Bank to stand out among a flurry a failing banks, with no delinquent loans or foreclosures on its books, the Journal reported. East Bridgewater Savings didn't even need to set aside in money in 2008 for anticipated loan losses.
But rather than reward Petrucelli's tactics, the FDIC recently criticized his bank for not lending enough, slapping it with a "needs to improve" rating under the Community Reinvestment Act, the Journal reported.
The problem, according to FDIC data, was that from late 2003 through mid-2008, East Bridgewater Savings made an average of 28 cents in loans for every dollar in deposit — a sharp contrast to the 90 percent average loan-to-deposit ratio among similar banks, the paper reported.
"There are no apparent financial or legal impediments that would limit the bank's ability to help meet the credit needs of its assessment area," the FDIC wrote in the CRA evaluation.
The agency also faulted the bank, which does not have a Web site, for not promoting its loan products enough, the Journal reported.
Considering his bank is doing well in tanking industry and even the FDIC's deposit insurance fund is in trouble after paying for an upswing in bank failures, Petrucelli told the Boston Business Journal that the negative rating caught him by surprise.
East Bridgewater Savings ended 2008 with $135 million in assets, deposits of $84 million, $87,000 in profit, and a Tier 1 risk-based capital ratio of 31.6 percent — more than three times higher than many community banks in Massachusetts, the Journal reported.
Its net loans and leases equaled 21 percent of assets, compared with 72 percent among 385 similar banks across the country.
Tuesday, March 17, 2009
Credit Rating Effect on Financial Disaster of 2008
Credit Rating Effect on Financial Disaster of 2008
The following is one of the better articles I have seen and brings in the effect of the credit rating agencies. Why the credit rating agencies ever allowed the sub prime mortgages to be given a AAA rating when they were mixed with other mortgages is not explained.
With all the other government involvement, one wonders if the government forced the credit rating agencies to give the mixed mortgages a AAA rating.
------------------------------------
Why Did Subprime Loans Become Such a Big Deal?
Published by Abraham Park, PhD, Practitioner Faculty of Finance on May 5, 2008
http://gbr.pepperdine.edu/blog/index.php/2008/05/05/29/
Abraham Park, PhD Intelligent people, including my wife, have been asking me questions about the subprime mortgage crisis. The point that seems to stump them is why a relatively small percentage of subprime mortgage defaults has led to a spiraling national credit crisis, how it happened, and where do we go from here. They were good questions, and if you are wondering the same thing, read on…
So what's the deal with the subprime mortgage meltdown?
Well, imagine that the markets involved are analogous to a house with three stories. Each of the floors represent an industry related to the housing market and each of the upper stories are dependent on the one right below it.
The first floor represents the primary mortgage market (homeowners and their banks or mortgage lenders)
The second level represents the secondary mortgage market (where government-enabled agencies and private lenders by bundled bank mortgages)
The third represents the credit derivatives market (where securities created in the secondary mortgage market are pooled again with other debts and with various risk preferences)
The primary mortgage market is huge, but the second and third levels are just as huge. It makes for a pretty big meltdown when it all starts to unravel.
When did they start lowering standards for homebuyers?
A lot of changes happened about twenty years ago, when the Tax Reform Act of 1986 introduced interest deductions on mortgages for homes, making mortgage debt cheaper than consumer debt for many homeowners. In addition, there was a concerted effort in economic policy to increase the share of homeownership in America. As a result, since 1986, the housing market has experienced 20 years of continued price increases. Even through the recession of 2001, while labor and stock markets weakened, the housing market continued to thrive with high volumes and steady price increases.
And along with the housing boom came the growth of the mortgage lending industry. Subprime lending was made possible because of laws such as the Depository Institutions Deregulation and Monetary Control Act (1980) and the Alternative Mortgage Transaction Parity Act (1982), which gave lenders the ability to charge high rates and fees, as well as variable interest rates and balloon payments.
However, it wasn't until 1994, when an increase in interest rates caused a drop in prime mortgages, that brokers and mortgage companies turned to the subprime market to maintain the volume. During these times, subprime mortgages were relatively new and the long-term performances of these loans were unknown. In 1995, the size of the subprime loan market was estimated around $65 billion, but by 2007, subprime mortgages accounted for $1.3 trillion out of a total of $10 trillion in outstanding mortgages.
But how could so many lenders originate such huge volumes of mortgages? Where do they get their money?
From the secondary market, or the second floor of our imaginary house analogy. Mortgages, if you think of them as a consumer good, can actually be bundled and sold. And the government (and some private companies) bought them. After the savings and loan crisis of the 1980s, with the infamous "maturity mismatch" problem of lenders using short-term deposits to fund long-term mortgages, mortgages became tougher to acquire. So the government enabled agencies like Ginnie Mae, Fannie Mae, and Freddie Mac, to buy bank mortgages in the secondary mortgage market, which gave mortgage lenders a way to replenish their funds so that they could in turn originate more mortgages.
These government agencies (and some private companies also) then turned around and issued securities based on these mortgage debts as collaterals. And global investors, who wanted to participate in the U.S. housing market, bought a lot of these types of securities. And since 1980, the volume of government-sponsored mortgage-backed securities has risen from $200 billion to over $4 trillion. In addition, private mortgage insurers and mortgage pools (which include nonconforming loans) account for approximately $2 trillion.
The secondary market was an incentive, then, for banks to issue more loans?
Precisely. With the securitization of loans, banks and mortgage lenders effectively became mortgage originating and servicing business, which meant that mortgage lenders profits were based on the volume of mortgage originations. Since there was a huge growing secondary market willing to buy repackaged mortgage products that were ultimately based on these mortgages, the effective size of the mortgage market became much bigger than the size of the mortgage originations.
Then why would the secondary market buy the subprime loans? Don't they have standards?
From the mid 1990s, the growth in securitization (10% of mortgages securitized in 1980 while 60% securitized now) led to dramatic growth in subprime lending as well, and by 2007, 75% of all subprime mortgages were securitized.
Now, the reason why subprime loans were able to be repackaged and sold in the secondary market , was entirely due to the existence of credit ratings agencies, such as Moody's and Standard & Poors. Although they provide no guarantees, there is an overwhelming and even reckless reliance by investors on these agencies to give accurate ratings.
Rating agencies measure the credit risk, which is also referred to as default risk. Professional credit risk managers spend theirs careers developing credit risk models, but most models are based on two fundamental concepts: default probability and recovery rate. Together, the default probability and recovery rate give a good measurement of a debt's quality and are often referred as credit spread. Combining these factors with a measurement of how much the creditor would lose if the counterparty defaulted (credit exposure) on a given debt, companies can calculate the expected loss of any given obligation. Now when the credit rating agency gives a stamp of approval, the tendency is for investors to not look at the quality of the underlying mortgages.
If we go back to our 3-story house, the credit ratings agencies are like the columns that are holding up the building; the foundation on which the columns are grounded are the assumption, based on historical figures, that house prices will continue to rise as they have since 1986. So when the house prices fell….
Then the second floor came crashing down? What a mess!
But the second floor is nothing compared to the third floor. The third floor represents the credit derivatives market, in which securities created in the secondary mortgage market are in turn pooled again with other debts and sold as slices (known as tranches) with various risk preferences. Banks, securities houses, hedge funds, and insurance companies buy these credit derivative instruments, called structured finance products.
Everyone benefited from credit derivatives:
1. Banks could transfer the credit risk of loans through these derivative products, while keeping the loan on its books
2. Investors could enhance the credit risk of obligations by isolating the credit risk, pricing it, and transferring it to other investors; and
3. Investors could diversify their risk with credit derivatives such as collateralized debt obligations (CDOs) or mortgages obligations (CMOs), which bundled together different types of credit risk and sold them as a portfolio product.
The frightening thing is that this third floor, though a relatively new development, is HUGE.
The credit derivatives market has had explosive growth only since the late 1990s. From $170 billion in 1997, currently the global credit derivatives market stands at estimated $20 trillion, surpassing the equity derivatives market and the corporate bond market. The CDO market alone is roughly $3 trillion—CDOs are useful because they can be used to dispose of high risk loans. Japanese banks used CDOs to clear up their loan books in the 1990s, as did Germany's Dresdner Bank in 2003.
But who is holding this market together? You guessed it – the credit rating agency. It's practically impossible for the investors in this market to understand or know the credit risk of the underlying securities when the underlying loans are pooled together from many different sources and are repackaged multiple times. So everyone just trusted the credit rating agencies to assign the appropriate risk rating.
How could they put so much trust in the rating agencies?
That is the biggest problem. Investors are interested in high returns, but only if they can trust the risk rating. Much of the global money has shifted away from the US stock market and into the real estate market since 2000 when the internet bubble burst. In the finance world, it's all about risk-adjusted returns, and people don't, or can't, invest if risk can't be accurately assessed.
So that is why the subprime debacle is a deeper problem than just these mortgages. It has revealed that the risk-pricing system by credit agencies is deeply suspect, which in turn has brought into suspicion not only subprime evaluations, but all other risk-based evaluations in the financial market.
Going back to the 3-story house analogy, imagine if the investors in the third floor realized that the columns have cracks in them (thus, risk of their investments were much higher than once believed). Not only would they want to shut down the third floor, they would want to exercise buyback provisions that permit investors to sell back loans that go bad within a specified period of time.
That's how you get a case like Bear Sterns. Once everyone realizes that your underlying collateral is worth much less than expected because of the adjustments in credit ratings, the issuer is stuck with bad mortgages and the huge second and third floor activities suddenly freeze.
So what happens next? Are we going to buy a house this summer or not?
The problem was caused by credit rating agencies basing the credit risk of mortgages on the faulty assumption that the housing prices would continue to go up. So when house prices fell against expectations, all those industries we talked about suddenly found themselves on shaky foundations. Consequently, the secondary mortgage market participants are reducing mortgage purchases from the mortgage lenders, which means the mortgage lenders are stuck with bad mortgages. With liquidity dried up, mortgage lenders now have to tighten borrowing standards, which in turn causes house prices to fall even further. Potential disaster can be alleviated if the house prices start to go back up soon again. But I wouldn't expect the house prices to turn up again any time soon, even though interest rates remain low.
The first order of priority, before expecting the house prices to rise, would be for the government and financial market participants to reevaluate the credit rating agencies, credit risk pricing models, and structured finance products in general. There is also the whole potential legal mess involving the mortgage insurers. It's going to be a long road back.
As to buying a house, let's wait.
Related in the Graziadio Business Report
Will the Sub-Prime Meltdown Burst the Housing Bubble? by Peggy J. Crawford, PhD, and Terry Young, PhD
Is the Real Estate Market a House of Cards? by Peggy J. Crawford, PhD, and Terry Young, PhD
The Book Corner Recommends: The Foreclosures.Com Guide to Making Huge Profits Investing in Preforeclosures without Selling Your Soul by Michael Kinsman, CPA, PhD
The following is one of the better articles I have seen and brings in the effect of the credit rating agencies. Why the credit rating agencies ever allowed the sub prime mortgages to be given a AAA rating when they were mixed with other mortgages is not explained.
With all the other government involvement, one wonders if the government forced the credit rating agencies to give the mixed mortgages a AAA rating.
------------------------------------
Why Did Subprime Loans Become Such a Big Deal?
Published by Abraham Park, PhD, Practitioner Faculty of Finance on May 5, 2008
http://gbr.pepperdine.edu/blog/index.php/2008/05/05/29/
Abraham Park, PhD Intelligent people, including my wife, have been asking me questions about the subprime mortgage crisis. The point that seems to stump them is why a relatively small percentage of subprime mortgage defaults has led to a spiraling national credit crisis, how it happened, and where do we go from here. They were good questions, and if you are wondering the same thing, read on…
So what's the deal with the subprime mortgage meltdown?
Well, imagine that the markets involved are analogous to a house with three stories. Each of the floors represent an industry related to the housing market and each of the upper stories are dependent on the one right below it.
The first floor represents the primary mortgage market (homeowners and their banks or mortgage lenders)
The second level represents the secondary mortgage market (where government-enabled agencies and private lenders by bundled bank mortgages)
The third represents the credit derivatives market (where securities created in the secondary mortgage market are pooled again with other debts and with various risk preferences)
The primary mortgage market is huge, but the second and third levels are just as huge. It makes for a pretty big meltdown when it all starts to unravel.
When did they start lowering standards for homebuyers?
A lot of changes happened about twenty years ago, when the Tax Reform Act of 1986 introduced interest deductions on mortgages for homes, making mortgage debt cheaper than consumer debt for many homeowners. In addition, there was a concerted effort in economic policy to increase the share of homeownership in America. As a result, since 1986, the housing market has experienced 20 years of continued price increases. Even through the recession of 2001, while labor and stock markets weakened, the housing market continued to thrive with high volumes and steady price increases.
And along with the housing boom came the growth of the mortgage lending industry. Subprime lending was made possible because of laws such as the Depository Institutions Deregulation and Monetary Control Act (1980) and the Alternative Mortgage Transaction Parity Act (1982), which gave lenders the ability to charge high rates and fees, as well as variable interest rates and balloon payments.
However, it wasn't until 1994, when an increase in interest rates caused a drop in prime mortgages, that brokers and mortgage companies turned to the subprime market to maintain the volume. During these times, subprime mortgages were relatively new and the long-term performances of these loans were unknown. In 1995, the size of the subprime loan market was estimated around $65 billion, but by 2007, subprime mortgages accounted for $1.3 trillion out of a total of $10 trillion in outstanding mortgages.
But how could so many lenders originate such huge volumes of mortgages? Where do they get their money?
From the secondary market, or the second floor of our imaginary house analogy. Mortgages, if you think of them as a consumer good, can actually be bundled and sold. And the government (and some private companies) bought them. After the savings and loan crisis of the 1980s, with the infamous "maturity mismatch" problem of lenders using short-term deposits to fund long-term mortgages, mortgages became tougher to acquire. So the government enabled agencies like Ginnie Mae, Fannie Mae, and Freddie Mac, to buy bank mortgages in the secondary mortgage market, which gave mortgage lenders a way to replenish their funds so that they could in turn originate more mortgages.
These government agencies (and some private companies also) then turned around and issued securities based on these mortgage debts as collaterals. And global investors, who wanted to participate in the U.S. housing market, bought a lot of these types of securities. And since 1980, the volume of government-sponsored mortgage-backed securities has risen from $200 billion to over $4 trillion. In addition, private mortgage insurers and mortgage pools (which include nonconforming loans) account for approximately $2 trillion.
The secondary market was an incentive, then, for banks to issue more loans?
Precisely. With the securitization of loans, banks and mortgage lenders effectively became mortgage originating and servicing business, which meant that mortgage lenders profits were based on the volume of mortgage originations. Since there was a huge growing secondary market willing to buy repackaged mortgage products that were ultimately based on these mortgages, the effective size of the mortgage market became much bigger than the size of the mortgage originations.
Then why would the secondary market buy the subprime loans? Don't they have standards?
From the mid 1990s, the growth in securitization (10% of mortgages securitized in 1980 while 60% securitized now) led to dramatic growth in subprime lending as well, and by 2007, 75% of all subprime mortgages were securitized.
Now, the reason why subprime loans were able to be repackaged and sold in the secondary market , was entirely due to the existence of credit ratings agencies, such as Moody's and Standard & Poors. Although they provide no guarantees, there is an overwhelming and even reckless reliance by investors on these agencies to give accurate ratings.
Rating agencies measure the credit risk, which is also referred to as default risk. Professional credit risk managers spend theirs careers developing credit risk models, but most models are based on two fundamental concepts: default probability and recovery rate. Together, the default probability and recovery rate give a good measurement of a debt's quality and are often referred as credit spread. Combining these factors with a measurement of how much the creditor would lose if the counterparty defaulted (credit exposure) on a given debt, companies can calculate the expected loss of any given obligation. Now when the credit rating agency gives a stamp of approval, the tendency is for investors to not look at the quality of the underlying mortgages.
If we go back to our 3-story house, the credit ratings agencies are like the columns that are holding up the building; the foundation on which the columns are grounded are the assumption, based on historical figures, that house prices will continue to rise as they have since 1986. So when the house prices fell….
Then the second floor came crashing down? What a mess!
But the second floor is nothing compared to the third floor. The third floor represents the credit derivatives market, in which securities created in the secondary mortgage market are in turn pooled again with other debts and sold as slices (known as tranches) with various risk preferences. Banks, securities houses, hedge funds, and insurance companies buy these credit derivative instruments, called structured finance products.
Everyone benefited from credit derivatives:
1. Banks could transfer the credit risk of loans through these derivative products, while keeping the loan on its books
2. Investors could enhance the credit risk of obligations by isolating the credit risk, pricing it, and transferring it to other investors; and
3. Investors could diversify their risk with credit derivatives such as collateralized debt obligations (CDOs) or mortgages obligations (CMOs), which bundled together different types of credit risk and sold them as a portfolio product.
The frightening thing is that this third floor, though a relatively new development, is HUGE.
The credit derivatives market has had explosive growth only since the late 1990s. From $170 billion in 1997, currently the global credit derivatives market stands at estimated $20 trillion, surpassing the equity derivatives market and the corporate bond market. The CDO market alone is roughly $3 trillion—CDOs are useful because they can be used to dispose of high risk loans. Japanese banks used CDOs to clear up their loan books in the 1990s, as did Germany's Dresdner Bank in 2003.
But who is holding this market together? You guessed it – the credit rating agency. It's practically impossible for the investors in this market to understand or know the credit risk of the underlying securities when the underlying loans are pooled together from many different sources and are repackaged multiple times. So everyone just trusted the credit rating agencies to assign the appropriate risk rating.
How could they put so much trust in the rating agencies?
That is the biggest problem. Investors are interested in high returns, but only if they can trust the risk rating. Much of the global money has shifted away from the US stock market and into the real estate market since 2000 when the internet bubble burst. In the finance world, it's all about risk-adjusted returns, and people don't, or can't, invest if risk can't be accurately assessed.
So that is why the subprime debacle is a deeper problem than just these mortgages. It has revealed that the risk-pricing system by credit agencies is deeply suspect, which in turn has brought into suspicion not only subprime evaluations, but all other risk-based evaluations in the financial market.
Going back to the 3-story house analogy, imagine if the investors in the third floor realized that the columns have cracks in them (thus, risk of their investments were much higher than once believed). Not only would they want to shut down the third floor, they would want to exercise buyback provisions that permit investors to sell back loans that go bad within a specified period of time.
That's how you get a case like Bear Sterns. Once everyone realizes that your underlying collateral is worth much less than expected because of the adjustments in credit ratings, the issuer is stuck with bad mortgages and the huge second and third floor activities suddenly freeze.
So what happens next? Are we going to buy a house this summer or not?
The problem was caused by credit rating agencies basing the credit risk of mortgages on the faulty assumption that the housing prices would continue to go up. So when house prices fell against expectations, all those industries we talked about suddenly found themselves on shaky foundations. Consequently, the secondary mortgage market participants are reducing mortgage purchases from the mortgage lenders, which means the mortgage lenders are stuck with bad mortgages. With liquidity dried up, mortgage lenders now have to tighten borrowing standards, which in turn causes house prices to fall even further. Potential disaster can be alleviated if the house prices start to go back up soon again. But I wouldn't expect the house prices to turn up again any time soon, even though interest rates remain low.
The first order of priority, before expecting the house prices to rise, would be for the government and financial market participants to reevaluate the credit rating agencies, credit risk pricing models, and structured finance products in general. There is also the whole potential legal mess involving the mortgage insurers. It's going to be a long road back.
As to buying a house, let's wait.
Related in the Graziadio Business Report
Will the Sub-Prime Meltdown Burst the Housing Bubble? by Peggy J. Crawford, PhD, and Terry Young, PhD
Is the Real Estate Market a House of Cards? by Peggy J. Crawford, PhD, and Terry Young, PhD
The Book Corner Recommends: The Foreclosures.Com Guide to Making Huge Profits Investing in Preforeclosures without Selling Your Soul by Michael Kinsman, CPA, PhD
Thursday, March 12, 2009
Mortgage Loan Standards
Mortgage Loan Standards
The following article shows how reduced mortgage loan standards produced the sub prime loan problem. This all started with the CRA which was a socialistic program that was another attempt in a long line of programs to create black equality in America.
The reduced loan standards produced by Fannie and Freddie got risky loans into the financial system. The risky loans were not held by Fannie and Freddie but were bundled with good loans and sold all over the world. The people buying the bundled loans thought they were buying good quality securities because the securities had been given an excellent securities rating.
When the increase in home prices stopped, sub prime loan payments stopped, and the value of the securities became questionable. No new securities were sold. Everything froze in place and the person holding the securities was in trouble. The security could not be sold and part of the loan payment was not being made.
Since credit default swap deals had been cut the insurance companies were now on the hook to pay for the decrease in value of the securities.
The securities market is still frozen because no one knows the value of the securities because part the security is good and part bad.
Some people are willing to pay a very very low price for the security, but the holders of the security want a value equal to the loan payments on the good loans.
February 18, 2009
Feds Re-Impose Loan Standards They Helped Undermine
By Steven Malanga
http://www.realclearmarkets.com/articles/2009/02/feds_reimpose_loan_standards_t.html
When President Obama announces Washington's new plan to help troubled mortgage-holders today, the betting is that the program will include a loan-modification effort that reduces the size of a besieged homeowner's debt. One goal would be to cut the size of loans and perhaps also their interest rate so that a mortgage holder's monthly payment would equal no more than 31 percent of his pre-tax income. Fannie Mae and Freddie Mac have already been experimenting with an income-to-payment ratio of 38 percent in their loan modification efforts, but Washington wants to go further, indeed probably needs to go further, if it is to stem the tide of defaults.
There is a great irony that Washington will now lead the way in imposing new, stricter standards, including a tougher income-to-payment ratio, because it was Washington, prodded by affordable housing advocates, which pushed mortgage lenders to dilute their traditional underwriting values in the first place. Federal regulators attacked those established standards as being "unintentionally biased" against low and moderate income borrowers and used a variety of laws and regulatory bodies to push often resistant lenders into programs based on these lower standards. The government and those who backed its actions assured lenders these lower standards were safer than they thought, even though there was little research to support that contention. Now that a huge chunk of the market based on these debased standards has melted down, the government is going full circle.
The movement to water down underwriting standards grew out of claims of some housing advocates and elected officials that mortgage lenders were ‘redlining,' or avoiding, certain urban neighborhoods, and that these credit-starved areas were decaying from a lack of capital. When bankers countered that they received few credit-worthy applications based on their traditional underwriting criteria in many of these neighborhoods, regulators and housing advocates began to argue that there must be something wrong with the lending criteria, which needed to change.
One group that led the way was the Association of Community Organizations for Reform Now, or ACORN, which began protesting bank mergers and expansion requests in the mid-1980s under the Community Reinvestment Act. In 1986, ACORN threatened to oppose an acquisition by a Southern bank, Louisiana Bancshares, until the financial institution agreed to new "flexible credit and underwriting standards" for low-income borrowers, including agreeing to take into account on mortgage applications such income as public assistance and food stamps. ACORN also led a coalition of community groups that demanded industry-wide changes in lending standards for urban residents, including watering down minimum down-payment requirements. The community groups also attacked Fannie Mae as part of the problem with bank lending in certain areas because the giant, quasi government agency's underwriters were "strictly by-the-book interpreters" of standards who turned down purchases of unconventional loans, which sent a message to banks that these loans were unsafe.
Under pressure from Washington, Fannie Mae and Freddie Mac agreed to begin purchasing mortgages under new, looser guidelines. Freddie Mac, for instance, made 28 changes to its underwriting standards, including approving low-income buyers without credit histories or with bad credit as long as they were current on rent and utilities payments--even though research had concluded that such buyers are more likely to default. Freddie Mac also said it would count income from seasonal jobs and public assistance toward income minimums, although such income (particularly seasonal work) was by definition not steady.
The giant agencies began several experimental lending programs based on watered-down standards. Freddie Mac began a program with Sears Mortgage Corporation to make mortgages to borrowers with an income-to-monthly payment ratio of 50 percent, at a time when most private mortgage companies aimed for a 28-to-33 percent ratio. The program also allowed borrowers with bad credit to win mortgage approval if they took credit counseling classes administered by local nonprofits like ACORN, although research would show that credit counseling classes have little impact on default rates.
These efforts gained the endorsement of some of our most authoritative federal institutions. Shortly after producing a controversial study in 1992 which asserted there was some evidence that lenders were intentionally avoiding minority neighborhoods, the Federal Reserve Bank of Boston produced a "guide" to equal opportunity lending in which it told mortgage makers that conventional underwriting standards were "unintentionally biased" because they didn't take into account "the economic culture of urban, lower-income and nontraditional customers." Among other things, the Boston Fed told lenders they should consider junking the industry's traditional "obligation ratios," including the 28 percent income-to-payments ratio. The Fed noted in its guide that the "secondary market," that is, those that purchased mortgages from banks, was willing to buy loans with higher ratios, thereby implying that others thought these loans a good bet, too. But at this point the secondary market for such loans consisted of Fannie Mae and Freddie Mac, which had both been cajoled into buying them by Washington.
Under pressure, these institutions accepted these new standards even though there were plenty of early warning signs as well as several decades worth of research which suggested that when banks departed too far from traditional underwriting criteria delinquencies and foreclosures rose sharply. For instance, a minority loan program put together by banks in Atlanta after a newspaper series accused local financial institutions of redlining quickly ran into predictable trouble. The program allowed loans with payments that were up to 50 percent of an applicant's monthly income, and within a year, 10 percent of the loans were delinquent. Even worse, those who took out the loans fell deeper into other kinds of debt, defaulted on credit card payments and had goods they'd purchased on credit repossessed.
Meanwhile, a Freddie Mac program called Affordable Gold, which purchased loans from banks under looser underwriting standards, including loans which allowed a borrower to make a down payment with funds contributed from a third party like a government assistance program or a nonprofit, showed sharply higher default rates, up to four times higher than traditional underwriting standards.
Despite such evidence, over time these programs moved from the experimental stage to a large part of the marketplace because politicians in both parties made expanding the number of home owners in America a high priority, and the only way to keep doing that was to lend to people with increasingly riskier credit. Fannie Mae announced a $1 trillion commitment to purchase affordable housing loans in 1992, then in 1999 under pressure from the Clinton administration announced a new program to buy loans made to "borrowers with slightly impaired credit." In 2005 Fannie Mae and Freddie Mac committed to another $1 trillion in affordable housing lending.
And as their loan pools grew, their credit standards deteriorated. In a recent Forbes article Peter Wallison of the American Enterprise Institute and Edward Pinto, former chief credit officer of Fannie Mae, point out that by 2001, 18 percent of Fannie Mae's portfolio consisted of loans to people with credit scores below 680—the traditional definition of a loan to someone with riskier credit, who is also someone more likely to default.
Of course, with two huge federal agencies willing to purchase such loans, mortgage makers couldn't churn them out fast enough, and private investors also began snapping up the loans in competition with Fannie and Freddie. Prof. Stan Liebowitz of the University of Texas uncovered a 1998 sales pitches by Bear Stearns, the leading private packager of mortgage-backed securities, in which a managing director of the firm assures banks in language remarkably similar to that used by government regulators that these loans were safer than traditionally thought and that investors were ready to buy them, if only banks would make more of them. "Do we automatically exclude or severely discount …loans with [poor credit scores]? Absolutely not," the eager investment banker tells his audience. Bear Stearns, of course, was eventually sunk by such loans.
Today, housing advocates and ex-government regulators say federal programs were not the problem because many of the worst loans portfolios were created by non-bank lenders which are not even subject to the Community Reinvestment Act. But that's an argument that ignores the much broader role that government played in watering down standards, including using pressure to force players across the industry to participate.
The Department of Housing and Urban Development under President Clinton, for instance, threatened to introduce legislation to make non-bank lenders, that is, mortgage finance companies, subject to CRA if these firms didn't sign on to affordable lending goals. HUD even crafted an agreement with the Mortgage Bankers Association, the industry trade group, which pledged that the group's members would aid in affordable housing goals. One of the first members of the MBA to take up the pledge was Countrywide, which pledged to introduce low-down payment loans with high income-to-payment ratios for low-income borrowers. Countrywide and its co-founder, Angelo Mozilo, ultimately became infamous as one of the first major mortgage lenders to melt down under the weight of its bad lending, but before it was notorious Countrywide was celebrated for its low-income efforts.
Today, the Obama administration acknowledges through its bailout program that those standards were unsafe. It's a backhanded acknowledgement that comes only because bailout efforts up until now have largely failed except in cases where borrowers are given new mortgages written to reflect former underwriting standards, which in many cases can only be accomplished by simply forgiving a big chunk of the borrower's debt. I suppose that's about as far as we can expect government to go in admitting the mess it helped to make.
The following article shows how reduced mortgage loan standards produced the sub prime loan problem. This all started with the CRA which was a socialistic program that was another attempt in a long line of programs to create black equality in America.
The reduced loan standards produced by Fannie and Freddie got risky loans into the financial system. The risky loans were not held by Fannie and Freddie but were bundled with good loans and sold all over the world. The people buying the bundled loans thought they were buying good quality securities because the securities had been given an excellent securities rating.
When the increase in home prices stopped, sub prime loan payments stopped, and the value of the securities became questionable. No new securities were sold. Everything froze in place and the person holding the securities was in trouble. The security could not be sold and part of the loan payment was not being made.
Since credit default swap deals had been cut the insurance companies were now on the hook to pay for the decrease in value of the securities.
The securities market is still frozen because no one knows the value of the securities because part the security is good and part bad.
Some people are willing to pay a very very low price for the security, but the holders of the security want a value equal to the loan payments on the good loans.
February 18, 2009
Feds Re-Impose Loan Standards They Helped Undermine
By Steven Malanga
http://www.realclearmarkets.com/articles/2009/02/feds_reimpose_loan_standards_t.html
When President Obama announces Washington's new plan to help troubled mortgage-holders today, the betting is that the program will include a loan-modification effort that reduces the size of a besieged homeowner's debt. One goal would be to cut the size of loans and perhaps also their interest rate so that a mortgage holder's monthly payment would equal no more than 31 percent of his pre-tax income. Fannie Mae and Freddie Mac have already been experimenting with an income-to-payment ratio of 38 percent in their loan modification efforts, but Washington wants to go further, indeed probably needs to go further, if it is to stem the tide of defaults.
There is a great irony that Washington will now lead the way in imposing new, stricter standards, including a tougher income-to-payment ratio, because it was Washington, prodded by affordable housing advocates, which pushed mortgage lenders to dilute their traditional underwriting values in the first place. Federal regulators attacked those established standards as being "unintentionally biased" against low and moderate income borrowers and used a variety of laws and regulatory bodies to push often resistant lenders into programs based on these lower standards. The government and those who backed its actions assured lenders these lower standards were safer than they thought, even though there was little research to support that contention. Now that a huge chunk of the market based on these debased standards has melted down, the government is going full circle.
The movement to water down underwriting standards grew out of claims of some housing advocates and elected officials that mortgage lenders were ‘redlining,' or avoiding, certain urban neighborhoods, and that these credit-starved areas were decaying from a lack of capital. When bankers countered that they received few credit-worthy applications based on their traditional underwriting criteria in many of these neighborhoods, regulators and housing advocates began to argue that there must be something wrong with the lending criteria, which needed to change.
One group that led the way was the Association of Community Organizations for Reform Now, or ACORN, which began protesting bank mergers and expansion requests in the mid-1980s under the Community Reinvestment Act. In 1986, ACORN threatened to oppose an acquisition by a Southern bank, Louisiana Bancshares, until the financial institution agreed to new "flexible credit and underwriting standards" for low-income borrowers, including agreeing to take into account on mortgage applications such income as public assistance and food stamps. ACORN also led a coalition of community groups that demanded industry-wide changes in lending standards for urban residents, including watering down minimum down-payment requirements. The community groups also attacked Fannie Mae as part of the problem with bank lending in certain areas because the giant, quasi government agency's underwriters were "strictly by-the-book interpreters" of standards who turned down purchases of unconventional loans, which sent a message to banks that these loans were unsafe.
Under pressure from Washington, Fannie Mae and Freddie Mac agreed to begin purchasing mortgages under new, looser guidelines. Freddie Mac, for instance, made 28 changes to its underwriting standards, including approving low-income buyers without credit histories or with bad credit as long as they were current on rent and utilities payments--even though research had concluded that such buyers are more likely to default. Freddie Mac also said it would count income from seasonal jobs and public assistance toward income minimums, although such income (particularly seasonal work) was by definition not steady.
The giant agencies began several experimental lending programs based on watered-down standards. Freddie Mac began a program with Sears Mortgage Corporation to make mortgages to borrowers with an income-to-monthly payment ratio of 50 percent, at a time when most private mortgage companies aimed for a 28-to-33 percent ratio. The program also allowed borrowers with bad credit to win mortgage approval if they took credit counseling classes administered by local nonprofits like ACORN, although research would show that credit counseling classes have little impact on default rates.
These efforts gained the endorsement of some of our most authoritative federal institutions. Shortly after producing a controversial study in 1992 which asserted there was some evidence that lenders were intentionally avoiding minority neighborhoods, the Federal Reserve Bank of Boston produced a "guide" to equal opportunity lending in which it told mortgage makers that conventional underwriting standards were "unintentionally biased" because they didn't take into account "the economic culture of urban, lower-income and nontraditional customers." Among other things, the Boston Fed told lenders they should consider junking the industry's traditional "obligation ratios," including the 28 percent income-to-payments ratio. The Fed noted in its guide that the "secondary market," that is, those that purchased mortgages from banks, was willing to buy loans with higher ratios, thereby implying that others thought these loans a good bet, too. But at this point the secondary market for such loans consisted of Fannie Mae and Freddie Mac, which had both been cajoled into buying them by Washington.
Under pressure, these institutions accepted these new standards even though there were plenty of early warning signs as well as several decades worth of research which suggested that when banks departed too far from traditional underwriting criteria delinquencies and foreclosures rose sharply. For instance, a minority loan program put together by banks in Atlanta after a newspaper series accused local financial institutions of redlining quickly ran into predictable trouble. The program allowed loans with payments that were up to 50 percent of an applicant's monthly income, and within a year, 10 percent of the loans were delinquent. Even worse, those who took out the loans fell deeper into other kinds of debt, defaulted on credit card payments and had goods they'd purchased on credit repossessed.
Meanwhile, a Freddie Mac program called Affordable Gold, which purchased loans from banks under looser underwriting standards, including loans which allowed a borrower to make a down payment with funds contributed from a third party like a government assistance program or a nonprofit, showed sharply higher default rates, up to four times higher than traditional underwriting standards.
Despite such evidence, over time these programs moved from the experimental stage to a large part of the marketplace because politicians in both parties made expanding the number of home owners in America a high priority, and the only way to keep doing that was to lend to people with increasingly riskier credit. Fannie Mae announced a $1 trillion commitment to purchase affordable housing loans in 1992, then in 1999 under pressure from the Clinton administration announced a new program to buy loans made to "borrowers with slightly impaired credit." In 2005 Fannie Mae and Freddie Mac committed to another $1 trillion in affordable housing lending.
And as their loan pools grew, their credit standards deteriorated. In a recent Forbes article Peter Wallison of the American Enterprise Institute and Edward Pinto, former chief credit officer of Fannie Mae, point out that by 2001, 18 percent of Fannie Mae's portfolio consisted of loans to people with credit scores below 680—the traditional definition of a loan to someone with riskier credit, who is also someone more likely to default.
Of course, with two huge federal agencies willing to purchase such loans, mortgage makers couldn't churn them out fast enough, and private investors also began snapping up the loans in competition with Fannie and Freddie. Prof. Stan Liebowitz of the University of Texas uncovered a 1998 sales pitches by Bear Stearns, the leading private packager of mortgage-backed securities, in which a managing director of the firm assures banks in language remarkably similar to that used by government regulators that these loans were safer than traditionally thought and that investors were ready to buy them, if only banks would make more of them. "Do we automatically exclude or severely discount …loans with [poor credit scores]? Absolutely not," the eager investment banker tells his audience. Bear Stearns, of course, was eventually sunk by such loans.
Today, housing advocates and ex-government regulators say federal programs were not the problem because many of the worst loans portfolios were created by non-bank lenders which are not even subject to the Community Reinvestment Act. But that's an argument that ignores the much broader role that government played in watering down standards, including using pressure to force players across the industry to participate.
The Department of Housing and Urban Development under President Clinton, for instance, threatened to introduce legislation to make non-bank lenders, that is, mortgage finance companies, subject to CRA if these firms didn't sign on to affordable lending goals. HUD even crafted an agreement with the Mortgage Bankers Association, the industry trade group, which pledged that the group's members would aid in affordable housing goals. One of the first members of the MBA to take up the pledge was Countrywide, which pledged to introduce low-down payment loans with high income-to-payment ratios for low-income borrowers. Countrywide and its co-founder, Angelo Mozilo, ultimately became infamous as one of the first major mortgage lenders to melt down under the weight of its bad lending, but before it was notorious Countrywide was celebrated for its low-income efforts.
Today, the Obama administration acknowledges through its bailout program that those standards were unsafe. It's a backhanded acknowledgement that comes only because bailout efforts up until now have largely failed except in cases where borrowers are given new mortgages written to reflect former underwriting standards, which in many cases can only be accomplished by simply forgiving a big chunk of the borrower's debt. I suppose that's about as far as we can expect government to go in admitting the mess it helped to make.
Friday, March 6, 2009
Order of Authority
Order of Authority
There is a statement that I believe tells the whole story about the difference between Capitalism and Socialism.
Capitalism produces unequal prosperity, but Socialism produces equal poverty.
Please don't say we need a little of both because we are in an economic disaster because we forced the CRA socialist program on Capitalism. The choice is only one or the other, the same thing you do when you go into a voting booth, or when you make a decision to accept Jesus Christ or the reject Jesus Christ.
Both Capitalism and Socialism have problems. Capitalism can lead to a few stealing a lot of money, but Socialism can lead to many stealing a little money, which probably balances out.
I believe there is an order of authority that will work.
Capitalism needs government regulation
Government needs Christian Principles
Christians need to follow the commandments/doctrines of the Bible and quit making excuses for those that are neither Christians nor following the commandments/doctrines of the Bible.
I Corinthians 11:3 states, "But I would have you know, that the head of every man is Christ; and the head of the woman is the man; and the head of Christ is God."
Many will say that this did not work nor will not work. The reason this order of authority is not working is because the rise of Atheism produced the removal of Christian Principles from government.
One of the first things was government allowed the teaching of evolution which says there is no God, then the government removed prayer, then the government removed the Ten Commandments. The judicial system part of the government legalized pornography, abortion and homosexuality, which are all contrary to the Bible, which tells people the Bible is foolish.
Throughout this whole time, the Atheistic Liberal News and Entertainment Industry was aiding the Atheists and democrats by destroying any Christian or Republican.
The Church failed to vigorously oppose the removal of Christian Principles from the government under the assumption Christians would not participate in evil, but would not criticize.
I have asked, "Would you rather your son be a preacher or a politician". The answer is always a preacher. Until Christians regain control of the Atheistic Liberal News and Entertainment Industry and the government, things are just going to continue to get worse.
The disease, death and destruction of the Atheistic Lifestyle cannot be sustained by any government. There are two million deaths per year due to AIDS and an enormous health care/welfare cost of keeping AIDS people alive. There is a 30% illegitimacy rate that is an enormous health care/welfare burden.
Capitalism is harsh on needy people, but at least there is some money to trickle down. With Socialism there is no money anywhere except if the government prints money, which becomes worthless by inflation.
I believe in Democracy, Christianity and Capitalism. The boat we are in is Democracy, the sail is Capitalism and the rudder is Christianity (or it should be). Without a rudder the ship will crash on the rocks. Without a sail the ship will set and rot.
Christians need to get control of the rudder and host the sails. Then maybe there will be something available to trickle down to the needy.
Either I am wrong or Obama and the democrats are wrong.
There is a statement that I believe tells the whole story about the difference between Capitalism and Socialism.
Capitalism produces unequal prosperity, but Socialism produces equal poverty.
Please don't say we need a little of both because we are in an economic disaster because we forced the CRA socialist program on Capitalism. The choice is only one or the other, the same thing you do when you go into a voting booth, or when you make a decision to accept Jesus Christ or the reject Jesus Christ.
Both Capitalism and Socialism have problems. Capitalism can lead to a few stealing a lot of money, but Socialism can lead to many stealing a little money, which probably balances out.
I believe there is an order of authority that will work.
Capitalism needs government regulation
Government needs Christian Principles
Christians need to follow the commandments/doctrines of the Bible and quit making excuses for those that are neither Christians nor following the commandments/doctrines of the Bible.
I Corinthians 11:3 states, "But I would have you know, that the head of every man is Christ; and the head of the woman is the man; and the head of Christ is God."
Many will say that this did not work nor will not work. The reason this order of authority is not working is because the rise of Atheism produced the removal of Christian Principles from government.
One of the first things was government allowed the teaching of evolution which says there is no God, then the government removed prayer, then the government removed the Ten Commandments. The judicial system part of the government legalized pornography, abortion and homosexuality, which are all contrary to the Bible, which tells people the Bible is foolish.
Throughout this whole time, the Atheistic Liberal News and Entertainment Industry was aiding the Atheists and democrats by destroying any Christian or Republican.
The Church failed to vigorously oppose the removal of Christian Principles from the government under the assumption Christians would not participate in evil, but would not criticize.
I have asked, "Would you rather your son be a preacher or a politician". The answer is always a preacher. Until Christians regain control of the Atheistic Liberal News and Entertainment Industry and the government, things are just going to continue to get worse.
The disease, death and destruction of the Atheistic Lifestyle cannot be sustained by any government. There are two million deaths per year due to AIDS and an enormous health care/welfare cost of keeping AIDS people alive. There is a 30% illegitimacy rate that is an enormous health care/welfare burden.
Capitalism is harsh on needy people, but at least there is some money to trickle down. With Socialism there is no money anywhere except if the government prints money, which becomes worthless by inflation.
I believe in Democracy, Christianity and Capitalism. The boat we are in is Democracy, the sail is Capitalism and the rudder is Christianity (or it should be). Without a rudder the ship will crash on the rocks. Without a sail the ship will set and rot.
Christians need to get control of the rudder and host the sails. Then maybe there will be something available to trickle down to the needy.
Either I am wrong or Obama and the democrats are wrong.
Thursday, March 5, 2009
Order of Events for the Economic Disaster of 2008
Order of Events for the Economic Disaster of 2008
Everything was fine until the price of houses started to decrease (saturated market). The order of events that I see were:
1) House prices start to drop.
2) Drop in house prices triggers Sub Prime loan defaults. With rising house prices, even Sub Prime defaults did not mean much since the house could be resold, but when the house could not be resold, the mortgage payment stopped.
3) Sub Prime defaults causes Investment Companies, Fannie and Freddie to go bankrupt (government takeover) because potential loses where greater than assets.
4) Dropping house prices dried up capital so people stopped spending.
5) Reduced spending caused the stock market to drop.
6) Drop in Stock Market triggers the credit default swap crisis where AIG may owe an infinite amount of money on the insurance policies for stock price drops. A lot of people are expecting AIG to come up with the money to cover the stock loses so there is another shoe to fall when AIG cannot pay.
Now both the real estate market and the stock market are worthless.
Now, no one will purchase anything because the price could drop more or they just do not have any cash. No one will lend money because the only people wanting loans are those that have a poor credit rating.
The concept of government spending their way out of this mess, will probably cause the worst inflation that has ever existed.
The two major mistakes were:
1) House prices will always rise.
2) The stock market will never drop more than about 20%
There is an old saying, "The road to hell is paved with good intentions". The CRA was intended for good, but it was based on hope and not reality.
Democrats tend to base policies too much on hope and Republicans tend to base policies too much on reality. I believe President Bush made the most honest attempt by any president to bring hope and reality together, but that caused both the democrats and Republicans to hate him.
I believe the CRA was one of the many programs that have been attempted to bring equality to blacks in America. I believe the black inequality problem is not economics but rather the Village Family Concept that is totally opposite to the Christian Family Concept of a man, woman and children family where the man provides the resources for the family and the woman natures the family. The Village Family Concept accepts illegitimate children that means instant poverty for the mother/child and places the burden of heath care/welfare on the whole nation.
Everything was fine until the price of houses started to decrease (saturated market). The order of events that I see were:
1) House prices start to drop.
2) Drop in house prices triggers Sub Prime loan defaults. With rising house prices, even Sub Prime defaults did not mean much since the house could be resold, but when the house could not be resold, the mortgage payment stopped.
3) Sub Prime defaults causes Investment Companies, Fannie and Freddie to go bankrupt (government takeover) because potential loses where greater than assets.
4) Dropping house prices dried up capital so people stopped spending.
5) Reduced spending caused the stock market to drop.
6) Drop in Stock Market triggers the credit default swap crisis where AIG may owe an infinite amount of money on the insurance policies for stock price drops. A lot of people are expecting AIG to come up with the money to cover the stock loses so there is another shoe to fall when AIG cannot pay.
Now both the real estate market and the stock market are worthless.
Now, no one will purchase anything because the price could drop more or they just do not have any cash. No one will lend money because the only people wanting loans are those that have a poor credit rating.
The concept of government spending their way out of this mess, will probably cause the worst inflation that has ever existed.
The two major mistakes were:
1) House prices will always rise.
2) The stock market will never drop more than about 20%
There is an old saying, "The road to hell is paved with good intentions". The CRA was intended for good, but it was based on hope and not reality.
Democrats tend to base policies too much on hope and Republicans tend to base policies too much on reality. I believe President Bush made the most honest attempt by any president to bring hope and reality together, but that caused both the democrats and Republicans to hate him.
I believe the CRA was one of the many programs that have been attempted to bring equality to blacks in America. I believe the black inequality problem is not economics but rather the Village Family Concept that is totally opposite to the Christian Family Concept of a man, woman and children family where the man provides the resources for the family and the woman natures the family. The Village Family Concept accepts illegitimate children that means instant poverty for the mother/child and places the burden of heath care/welfare on the whole nation.
Thursday, February 26, 2009
Capitalism versus Socialism
Capitalism versus Socialism
I have always advocated Democracy, Christianity and Capitalism as the government for America. I have always been afraid of Democracy, Atheism and Socialism.
I have always known that Capitalism was dangerous, but thought Christian Principles could control the harsh nature of Capitalism. Unfortunately, Christian Principles no longer have any control over Capitalism because Christianity has been effectively removed from American Society. When you eliminate the Ten Commandments, you basically authorize lying, cheating and stealing. Isn't everyone doing it?
When the Economic Disaster of 2008 unfolded, I wanted to know what went wrong with Capitalism and wanted to know if I was wrong in what I advocated. What became apparent was that the root cause of the Economic Disaster of 2008 was the Community Reinvestment Act, Fannie Mae and Freddie Mac. The CRA was a socialistic program that forced banks to make risky sub prime loans. Banks resisted the risky sub prime loans till Fannie and Freddie were created to provide a guarantee for the sub prime loans. The guarantees gave sub prime loans an implied "AAA" rating so every crooked organization got into the sub prime business.
I knew Obama was a socialist, but I had no idea how effective he would be in making Capitalism the scapegoat for the Economic Disaster of 2008. I never thought so much money would be spent on implementing Socialism so fast.
I believe America is in for a world of misery as there is an attempt to implement Socialism.
In the long run, I believe it will be proven Capitalism is better than Socialism, but the question is whether America can recover from the Socialism.
Capitalism is loaning money to people you expect will pay it back.
Socialism is loaning money to people you hope sill pay it back.
Capitalism produces unequal prosperity, but Socialism produces equal proverty.
The following are my concerns about the Socialism being implemented by the Obama Administration.
Inflation
The democrats are spending money like a bunch of horny sailors on leave. democrats are asking for 600 billion for health care, 100 billion for education, 200 billion for the Iraq/Afghanistan war, etc. Inflation is sure to follow when the government starts printing money. Hillary Clinton would not mention human rights to China because the Obama Administration needs China to buy American debt. Why would China buy American debt at a 2 of 3% interest rate, when China can see an inflation rate of 10 to 20% in America?
Price Controls
When inflation starts, price controls will be implemented. Right now doctors, hospitals and medical insurance companies are looking at the massive health care/welfare spending as a pot of gold, but as sure as inflation starts, there will be price and wage controls on doctors and hospitals. There won't even be a need for insurance companies.
Wars
Socialists are usually pacificist, so they will not fight an enemy. They spend money on defense, but defense is useless in a siege situation. Just one time that the defense fails and it is all over. Capitalists know they will make mistakes in offensive wars, but it is better to make a mistake and kill the enemy instead of making a mistake and killing your own people. The appeasement policy of the Clinton Administration caused 3000 Americans to be killed on 9/11. A failure to have a strong military is always an invitation to an enemy.
Christians
Socialists are usually Atheists, so they will try to eliminate Christianity. The "Hate Crime" legislation is a sure sign of the way things can go. A lot of money is going to spent on education, but "diversity training" may be the main part of the education. For information on what is happening in Massachusetts go to www.massresistance.org
Free Speech and Freedom of the Press
The Atheistic Liberal News and Entertainment Industry has always been biased for democrats, but if the news media begins to turn on the Obama Administration, the government will take over control of the news media. The "Fairness Doctrine" is a sure sign of the way things can go.
I have always advocated Democracy, Christianity and Capitalism as the government for America. I have always been afraid of Democracy, Atheism and Socialism.
I have always known that Capitalism was dangerous, but thought Christian Principles could control the harsh nature of Capitalism. Unfortunately, Christian Principles no longer have any control over Capitalism because Christianity has been effectively removed from American Society. When you eliminate the Ten Commandments, you basically authorize lying, cheating and stealing. Isn't everyone doing it?
When the Economic Disaster of 2008 unfolded, I wanted to know what went wrong with Capitalism and wanted to know if I was wrong in what I advocated. What became apparent was that the root cause of the Economic Disaster of 2008 was the Community Reinvestment Act, Fannie Mae and Freddie Mac. The CRA was a socialistic program that forced banks to make risky sub prime loans. Banks resisted the risky sub prime loans till Fannie and Freddie were created to provide a guarantee for the sub prime loans. The guarantees gave sub prime loans an implied "AAA" rating so every crooked organization got into the sub prime business.
I knew Obama was a socialist, but I had no idea how effective he would be in making Capitalism the scapegoat for the Economic Disaster of 2008. I never thought so much money would be spent on implementing Socialism so fast.
I believe America is in for a world of misery as there is an attempt to implement Socialism.
In the long run, I believe it will be proven Capitalism is better than Socialism, but the question is whether America can recover from the Socialism.
Capitalism is loaning money to people you expect will pay it back.
Socialism is loaning money to people you hope sill pay it back.
Capitalism produces unequal prosperity, but Socialism produces equal proverty.
The following are my concerns about the Socialism being implemented by the Obama Administration.
Inflation
The democrats are spending money like a bunch of horny sailors on leave. democrats are asking for 600 billion for health care, 100 billion for education, 200 billion for the Iraq/Afghanistan war, etc. Inflation is sure to follow when the government starts printing money. Hillary Clinton would not mention human rights to China because the Obama Administration needs China to buy American debt. Why would China buy American debt at a 2 of 3% interest rate, when China can see an inflation rate of 10 to 20% in America?
Price Controls
When inflation starts, price controls will be implemented. Right now doctors, hospitals and medical insurance companies are looking at the massive health care/welfare spending as a pot of gold, but as sure as inflation starts, there will be price and wage controls on doctors and hospitals. There won't even be a need for insurance companies.
Wars
Socialists are usually pacificist, so they will not fight an enemy. They spend money on defense, but defense is useless in a siege situation. Just one time that the defense fails and it is all over. Capitalists know they will make mistakes in offensive wars, but it is better to make a mistake and kill the enemy instead of making a mistake and killing your own people. The appeasement policy of the Clinton Administration caused 3000 Americans to be killed on 9/11. A failure to have a strong military is always an invitation to an enemy.
Christians
Socialists are usually Atheists, so they will try to eliminate Christianity. The "Hate Crime" legislation is a sure sign of the way things can go. A lot of money is going to spent on education, but "diversity training" may be the main part of the education. For information on what is happening in Massachusetts go to www.massresistance.org
Free Speech and Freedom of the Press
The Atheistic Liberal News and Entertainment Industry has always been biased for democrats, but if the news media begins to turn on the Obama Administration, the government will take over control of the news media. The "Fairness Doctrine" is a sure sign of the way things can go.
Wednesday, February 25, 2009
Correction
Correction
In the original post I stated the following.
I did not realize how bad this situation is till I saw a statement that said that the problem in Europe was a 40 trillion dollar problem. It is hard to believe numbers that big, but 200 hundred million people in America with an average family size of 3 yields about 70 million homes. Assuming the average house has dropped at least 20,000 dollars, that means the housing bubble represents a 20,000 dollars times 70 million homes or 1.4 zillion dollar problem. Even if Fannie Mae and Freedie Mac are on the hook for only one third of the problem, that is still 40 trillion dollars.
This was incorrect and should read.
I did not realize how bad this situation is till I saw a statement that said that the problem in Europe was a 40 trillion dollar problem. It is hard to believe numbers that big, but 200 hundred million people in America with an average family size of 3 yields about 70 million homes. Assuming the average house has dropped at least 20,000 dollars, that means the housing bubble represents a 20,000 dollars times 70 million homes or 1.4 trillion dollar problem. Even if Fannie Mae and Freddie Mac are on the hook for only one third of the problem, that is still 467 billion dollars.
In the original post I stated the following.
I did not realize how bad this situation is till I saw a statement that said that the problem in Europe was a 40 trillion dollar problem. It is hard to believe numbers that big, but 200 hundred million people in America with an average family size of 3 yields about 70 million homes. Assuming the average house has dropped at least 20,000 dollars, that means the housing bubble represents a 20,000 dollars times 70 million homes or 1.4 zillion dollar problem. Even if Fannie Mae and Freedie Mac are on the hook for only one third of the problem, that is still 40 trillion dollars.
This was incorrect and should read.
I did not realize how bad this situation is till I saw a statement that said that the problem in Europe was a 40 trillion dollar problem. It is hard to believe numbers that big, but 200 hundred million people in America with an average family size of 3 yields about 70 million homes. Assuming the average house has dropped at least 20,000 dollars, that means the housing bubble represents a 20,000 dollars times 70 million homes or 1.4 trillion dollar problem. Even if Fannie Mae and Freddie Mac are on the hook for only one third of the problem, that is still 467 billion dollars.
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