Wednesday, October 12, 2011

Hard Numbers on the Mortgage Bust

Finally, some easy-to-read hard numbers on the mortgage fiasco.

...Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.

That's raising the risk very significantly.

...And thanks to rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served. 

Research by Edward Pinto, a former chief credit officer of Fannie Mae (now a colleague of mine at the American Enterprise Institute) has shown that 27 million loans—half of all mortgages in the U.S.—were subprime or otherwise weak by 2008. That is, the loans were made to borrowers with blemished credit, or were loans with no or low down payments, no documentation, or required only interest payments.
Of these, over 70% were held or guaranteed by Fannie and Freddie or some other government agency or government-regulated institution.

Despite the prima-facie risks here, things went reasonably well, because of  "the bubble" in RE prices.  When payments weren't made, the house sold for at least as much as the original price--so the lender came out OK, (and so did the borrower.)

Because of the very high returns and (apparently) little risk of principal, private investors got into the game, buying mortgage-backed securities (MBS).

By 2008, Mr. Pinto has shown, this market consisted of about 7.8 million subprime loans, somewhat less than one-third of the 27 million that were then outstanding.

Then things went to Hell.   Bush & Co. bailed out Bear, but let Lehman fail; when that happened, the markets literally froze, and TARP was initiated.

Yup.  It was Gummint--particularly Fan/Fred and FHA's purchase requirements, that touched off the mad stampede in housing.  Yup.  It was private investors who jumped in with both feet.

HT:  Esenberg


Jim said...

Just because a a family has an income below the median doesn't mean they aren't credit worthy. And loans to borrowers with blemished credit are not necessarily low income/CRA borrows.

The Financial Crisis Inquiry Commission concluded the CRA was not a significant factor in subprime lending or the crisis.

The Federal Reserve said, "We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis."

The Fed Chairman said, "The CRA Was Not "At The Root Of, Or Otherwise Contributed In Any Substantive Way To, The Current Mortgage Difficulties.""

I work for a lending institution. No CRA rules EVER compelled our company to lend to anyone using credit criteria lower than any other lending.

Blaming CRA for the mortgage mess is incorrect.

The mortgage mess was created because billions of dollars of loans were made by brokers and mortgage companies that assumed no risk in the transactions. The mortgages and the risks were bundle and passed onto financial markets that inevitably fell victim to the risk that wasn't priced into the original loans.

Dad29 said...

You will note that the article (and the excerpts I gave) did NOT 'blame' CRA. It points the finger at Fan/Fred and FHA.

CRA was a factor. And the brokers were even more a factor--but Fan/Fred are in rec'shp for a reason.