delanceyplace.com 8/12/11 - the beginning of the financial crisis
In today's excerpt - given the turmoil in financial markets over the past week, it is interesting to note the not-so-subtle beginnings of the still-current financial crisis - namely subprime real estate. With all that has transpired since 2007, it is a problem that remains only partially addressed:
"On September 30, 1999, a New York Times reporter, Steven Holmes, published a piece titled "Fannie Mae Eases Credit to Aid Mortgage Lending." The crux of the story was that Fannie Mae was lowering its credit standards, which in turn would increase home ownership. Franklin Raines, chief executive officer (CEO) of Fannie Mae at the time, is quoted in the article:
Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements. Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.
"Consistent with sound journalism, the story analyzed the potential con-sequences of Fannie Mae's foray into riskier lending. Quite presciently, the author Steven Holmes sounded an alarm that Fannie Mae was taking on large amounts of new risk, which in good times would not cause problems but in a downturn could lead to a massive government bailout. The article also quotes Peter Wallison, an American Enterprise Institute scholar and frequent critic of the government-sponsored enterprises (GSEs), in particular, the two largest ones, Fannie Mae and Freddie Mac:
From the perspective of many people, including me, this is another thrift industry growing up around us .... If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.
"A decade later, we know how it all turned out: the worst financial crisis since the 1930s and bailouts so large that we no longer consider the savings and loan debacle to have been much of a financial crisis. This is not to argue that all of the blame should be placed on the doorstep of Fannie and Freddie. There is plenty of blame to go around at other large, complex financial institutions, including Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, Wachovia, and Citigroup.
"Nevertheless, Fannie and Freddie do deserve special attention. Currently, as of August 2010, the Treasury has injected a total of $148.2 billion into these entities. Yet it looks as if their financial health is not getting any better. Even putting aside all future foreclosures and portfolio losses, Fannie Mae and Freddie Mac are now sitting on more than 150,000 foreclosed homes. The Congressional Budget Office (CBO) projects that an additional $65 billion may be required to keep them afloat until 2019. The CBO has further estimated that the total taxpayer losses might ultimately reach the neighborhood of an astounding $350 billion.
"Yet Fannie and Freddie barely register as news. In the most sweeping financial legislation since the 1930s, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 barely mentions them, simply calling for a study of how to reform them. ...
"So where is the outrage?"
|Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh, Lawrence J. White|
|Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Financie|
|Princeton University Press|
|Copyright 2011 by Princeton University Press|