Elected officials who claimed repeatedly over the near and distant past that "the economy is fundamentally sound" now say we are really at the edge of a new depression.
I know how I feel about the deception because it is not so different from what I've felt about local elected officials-- at least the unreformable majority of our local legislatures-- , the kind of hay-seed, "aw shucks", and "you betcha's" Sarah Palin represents to me; whose insularity has been protected by the certainty of well-compensated lobbyists, free-wheeling cash flow of taxpayer dollars serving private profits: a hermetic sphere as durable and smooth as ceramic keeping the public out and special interests, in.
Given climate chaos, they talk about picking up litter. Given an energy crisis, they talk about drilling.
Warren Buffett called derivatives, "weapons of mass financial destruction". Just yesterday, he called the current financial crisis, "an economic Pearl Harbor".
He was right with the first metaphor and wrong on the second. With Pearl Harbor, we could fight our way out. With financial derivatives, fighting our way out means entrusting our economic futures to the same interests who pulverized the economy in the first place, mining fake financial events for personal wealth. It is a free-for-all.
Today, legal contracts are being re-written by lenders, banks, investors from thin air. Banks aren't waiting for Congressional action. They are not waiting for "the courts" or for $700 billion.
These are the facts behind our post yesterday on Shoma Homes in Homestead, Florida, and the public record of deed transfers and sales that demonstrate a frantic effort to stave off bankruptcy by developers and banks.
As readers of this blog know, we have been scathing toward the production home builders in South Florida who steamrollered the public interest as they deformed representative democracy in order to plow subdivisions into farmland and open space.
In its fundamental aspects, what the desperate scrambling by developers and speculators today shows (ie. re-zoning for Parkland and rock mining outside the Urban Development Boundary) is a determination to keep the pecking order in place, for the band to play on without any kind of reform or change.
It is still left to the blogs -- because the traditional media will not touch the subject-- to try and explain how the small gears of the machine, comprised of local bankers, local speculators, local elected officials charged with zoning and permitting all mesh with the big gears of Wall Street finance that is now in complete disarray.
I've said it again and again: the overdevelopment and sprawl that has wrecked South Florida is not "what the market wanted", it was what political insiders and speculators could finance with ficticious debt.
The cookie-cutter platted subdivisions now littered with foreclosures and cratering values were not designed because buyers like conformity and cultural sterility; the acres of barrel-tiled Mediterranean roofs visible from above or behind walls to the sidewalks no one walks on were not created to provide the best "value": these are all functions of the requirement of underlying debt-- ie. financial derivatives-- to be rated for risk. The more stuff all looks the same, the more it fits with demographic models used by insurers and rating agencies, for neat packages to be tied in figurative bows: hundreds and thousands of platted subdivisions all piled together in some toxic, fake debt product that was sold to European banks or Asian investors and much of it with the implicit guarantee of the US government, like Fannie Mae and Freddie Mac, that is now the explicit obligation of US taxpayers whether or not you voted for the elected officials or like the lobbyists or the Chamber of Commerce big-wigs or any of the crew of speculators with business-school manners and red velour smoking jackets who control ward politics in immigrant enclaves like Hialeah but live in gated estates in Coral Gables.
The $700 billion is a fig-leaf that scarcely begins to account for the trillions of dollars of financial products that are burning a hole in investors' pockets. The investors to be most concerned about are the ones who fund the US deficit. Why would anyone buy dollars when contractual obligations to repay debt are disappearing as though they never existed?
Reuters reported on Wednesday, "The U.S. Securities and Exchange Commission reminded financial services firms that they don't need to use fire sale prices when evaluating their hard to price assets." It's sort of like a massive FCAT for financial firms that can't meet the test of legitimate grades: we'll re-write the definitions of what constitute an education and give you all passes.
Let's try to make this simple: when you go to a bank for a mortgage, you have to prove (or should have) your net worth and income in order to give assurance that you can repay your debt. Banks and investment firms, whose business is borrowing too -- at a lower cost than lending-- also have to meet basic requirements of having enough capital to assure depositors or investors that they can repay.
The financial crisis was not triggered by the "news" that subprime borrowers had been dredged up from the last dregs of the housing boom and could no longer repay their mortgages. It was triggered by Wall Street executives making tens of millions of dollars a year based on ficticious values for what they were selling; a blizzard of fake financial products on which they took massive fees and commissions.
Once it started to become clear to bank and investment firm shareholders and to investors in US government debt that Wall Street had been engaged in a Ponzi scheme-- legal and allowed to proliferate because a White House and a majority in Congress for six of the past eight years that believed with near-religious fervor that markets are "self-regulating" and that regulations are to be fought with every tool possible-- that is when those weapons of mass financial destruction began to silently explode.
I would feel much better about the $700 billion if the underlying issue was addressed for taxpayers and voters: meaningful campaign finance reform to prohibit the influence of corporations and individuals whose business dealings with government created the most serious economic chasm since the 1920's. But you haven't heard that mentioned, have you?
The underlying issue of money in politics is what stopped Florida Hometown Democracy from placement on the November 2008 state-wide ballot. Here you have a movement by "community activists"-- of the kind belittled at the GOP Convention--that was systematically derailed by the same special interests that created the housing bubble in the first place. They use the rationale against overly burdensome regulation, that the matters are too sophisticated for ordinary people to understand; all the same reasons used against regulation of the financial sphere that created risky derivatives that are blowing up the entire economy.
It started as a slow-motion event that many could see coming years ago, a decade ago. It now has the force of a hurricane.
I am not convinced that the US financial system cannot survive without the $700 billion, but I am not confident either that it can. I am unwilling to trust the judgment of a White House that has cried "wolf" in such destructive ways. It is a terrible situation for voters and taxpayers that hopefully will be redressed at the November election. If you want to express your displeasure, don't forget to vote.
4 comments:
Gimleteye writes:
The following observations are from Harvard Business School professor William Sahlman
Comments from late on 9/29
I thought I would share a couple of thoughts about what is going on in the capital markets and in Washington as we speak. We are as close to the abyss as we have ever been. Credit is being sucked out of every corner in the global economy. Imagine a world in which everyone is called by the bank and told to pay off their credit card balance and their home equity line of credit. And, suppose they are also told that all of their deposits over $100K are frozen, not to mention the fact that the maximum allowable withdrawal from ATM machines is limited to $100. At the company level, imagine that every company refuses to ship on credit terms anymore and they demand immediate payment of all receivables. Every corporate board of directors is in the process of reviewing all capital and operating budgets. They are going to kill a number of projects and will put a freeze on hiring. Maybe they will start preemptive layoffs. All foreign trade will cease because there are no letters of credit.
At financial institutions, managers are scrambling to figure out where they have counter-party risk. They will cease doing business with certain firms that are undercapitalized – sadly, that is most firms. Also, as distress sales take place in the market, the accountants and regulators will insist on marking to market, thereby further damaging the perceived health of all financial institutions. A week ago a friend of mine bought a bond at $0.70 on the dollar, which paid off at par today – the first price reflected panic selling, the second the reality of the market if we don’t collapse. Fear of doing business with a failing firm causes all inter-bank business to grind to a halt with everyone asking simultaneously for immediate payment. Many financial institutions will make a run on the Federal Reserve. Remember that even a firm like Goldman Sachs has to raise over $70 billion every night to finance their assets. Margin calls after today will be omnipresent. Margin calls will precipitate further distress sales. Hedge funds will find investors clambering for the doors. Other than that, we're in good shape.
That’s a sad but realistic picture of where we are this afternoon after the failure of the bill in Congress. Legislators have no clue that this is all going on. Some in Congress believe that this is the defining philosophical battle of all time and that they are prepared to suffer short-term pain to win the battle of ideas. That is a noble stance, particularly for people who will still get paid tomorrow and still have a great health insurance plan to boot. Their behavior is reprehensible. That is not a political judgment; it’s an economic one. The short-term pain will turn out to be excruciating long-term pain.
There are myriad examples of incompetence at all levels of business and government. Obviously, the business community has been guilty of gross incompetence with evidence of outright fraud in a few cases. Greed played an important role but anyone who believes we can eliminate greed is sadly mistaken. We must take greed as a given (see Gordon Gecko) and identify ways to create the right incentives, culture and control systems based on a thorough understanding of how greed will manifest itself. That was our challenge before and we failed. That remains our challenge looking forward.
At the level of Secretary Paulson, he bears a disproportionate share of the blame for several aspects of the crisis, not the starting of it but the handling of it. First, he has only presented a plan to deal with half the problem. The real issue is the value of the collateral underpinning all of these exotic securities. Why would anyone want to buy pools of mortgage securities if house prices have another 15% to fall? Secretary Paulson needed to talk about how Treasury was going to ameliorate that issue to gain political support for solving the liquidity crisis in the financial markets. Think about the framing of the issue – The $700 Billion Wall Street Bailout Plan.” Every element of that framing is wrong. The cost is not $700 billion. Wall Street is not being bailed out – every citizen is helped by stopping the complete failure of the financial system, and by implication, the real economy. Secretary Paulson needed to introduce “The Plan to Preserve American Values,” a plan that would address housing prices and liquidity at the same time. Yes, he was under the gun to do something quickly but that is only because he had chosen to handle problems serially, as they came up. He was always waiting for the other shoe to drop (e.g., bear Stearns, then Lehman, then AIG, then Wachovia, ad infinitum) only to discover he was facing a centipede, or perhaps even a millipede, with many more dropping shoes to handle.
As one of my colleagues suggested, this is a crisis in leadership as much as a crisis in economics. The only person everyone seems to trust is Warren Buffett. We snatched defeat from the jaws of victory when we weren’t able to capitalize on his vote of confidence in Goldman Sachs and the financial system. George Bush shouldn’t speak again for the rest of his tenure in office. John McCain’s descent into the mess in Washington exacerbated it. Barack Obama did only slightly better. Neither has a clue about the depth of the problem. Nancy Pelosi, Barney Frank and others are eager to frame this as a political issue – they want people to blame and they want differential credit for passing legislation. They will only have themselves to blame if they can’t leave politics out of the equation. This is Pearl Harbor, not the battle over universal healthcare. The Republicans who have de-railed the plan, as flawed as it might be, are playing Russian roulette with the global economy. They don’t know that, or, if they do, they should be run out of town.
What we need is for our leaders to all get together on national TV and say simultaneously, "this is not a partisan problem, it's an American problem. " We all bear some responsibility for the mess we're in. There will be plenty of time to assess what went wrong and what we should do in the future. But, today, we have no choice but to take bold action to preserve American jobs. We unanimously support the ......"
I don’t see much common sense in the commentary on the current situation. Take a simple example like “protecting the taxpayers.” Both sides are united in their attempt to say that they will protect the little people. In reality, rich people pay all the taxes. The people who benefited most from Wall Street excesses will end up paying a disproportionately high share of the cost, as it should be. We should really say that we are trying to protect people who were prudent, who had high integrity, who cared about the unintended consequences of their decisions. They deserve protection. Nothing we are doing today differentiates between the deserving and the non-deserving.
Or, even consider the reality that we have lived way beyond our means for the past few years. Many people viewed their houses as ATMs and leveraged up to gills with home equity loans or re-financing proceeds. In reality, the economy was not doing as well as the reported data suggested. Real GDP growth was lower than reported because we weren’t taking into account the building liability for the subprime mess or other elements of the financial crisis today. That was true in the Clinton era when unsustainable investment in technology yielded rapid economic growth and high tax revenues that later evaporated. In truth, that was fictional growth and prosperity and became problematic when everyone operated on the assumption it would continue forever.
Am I optimistic that we can get out of the mess? I must say that today has been the darkest day I have ever experienced. At the same time, the world has an excess supply of investable funds. Total financial assets are over $140 trillion. That may seem paradoxical in a liquidity crisis but reflects the fact that lots of other countries have accumulated excess savings. If people get confidence in the system, they will start to bottom-fish as Warren Buffett did. That will stabilize prices and give hope. Indeed, what I like about Secretary Paulson’s plan is that it would begin to establish a floor for prices at a time when $0 seems the only market-clearing price. What we need is to get money moving again and we are fortunate that there is lots of money out there. That money will stay on the sidelines until we have more confidence and trust in our leaders. That is the biggest deficit of all.
Follow-up – 10/1/08
The crisis we have is one of trust and confidence – that is a bigger problem than the actual “real” difficulties confronting our major financial institutions. When politicians say that they are swallowing hard to back legislation, they undermine the only thing they actually need to worry about. The plan put forward is a plan to put a floor under asset values and to exchange cash for illiquid assets. It is not a cost – it is an investment. If done properly, it can have a modest total cost to the U.S. Budget. Even if we end up losing $50 billion on the investments, that is a trivial investment to stop the “run on the bank.” All of the hand wringing about issues like CEO pay and getting equity in financial institutions that avail themselves of the Treasury’s investment is peripheral to the main issue – finding a floor for prices and restoring confidence.
I assert that the legislation only addresses half the issue from an economic and psychological perspective. I have appended a picture of house prices that was published yesterday. House prices are falling because supply greatly exceeds demand and people with money are not yet convinced they should bottom-fish yet. We need to think about ways to shore up house prices. One idea is to make sure that lenders and borrowers can negotiate to preclude foreclosure. We might do that by buying pools of mortgages, figuring out who the borrowers are and negotiating directly with them to change loan terms and obviate the need for foreclosure. We don’t have to pay above-market prices for the mortgage pools – that is, we don’t have to transfer wealth from the government to the financial institutions in the process. Yesterday, I talked to a friend who is buying these pools at prices that reflect a further 30-50% decline in house values. He will make a huge profit if house prices only go down another 15%, as expected. My point is that we could structure a program that allowed for purchase of mortgage-backed securities and could begin to intervene in the highly destructive foreclosure process.
The other comment is that buying crappy assets from troubled financial institutions will not solve the liquidity crisis alone. Banks and other players may not start to lend again. Or, they may use the money to meet new debt repayment schedules. Apparently, auto finance companies can’t raise money in the market today and will have to pay down debts coming due. There will be no auto loans, even though these are quite safe loans. That will cause a further implosion in the automobile industry, putting even more jobs at risk. We need to think about ways to encourage continued lending for cars and homes and other reasonable purchases in the economy. As I say, we’ve not figured that side out yet either.
So, I would pass the existing legislation immediately to buy time to do other things we need to do. I would get the major players – the candidates and the leaders in Congress – to hold hands and announce that they have saved the world and are optimistic about the future. I would push for a unanimous vote. Even if we end up with exactly the same legislation being passed, the damage we did on Monday to trust and confidence was enormous.
In the end, we should have been more aggressive earlier. We should have taken over Lehman or done what we did with Bear Stearns and AIG. We introduced uncertainty about the financial health of all our firms, the best evidence of which was the run on Goldman and Morgan Stanley.
One final note: there is another dark force in the liquidity crisis that warrants attention - the ratings agencies. Previously, they rated securities based on historical default rates – they basically used the rear-view mirror to make assessments. Now that those ratings have turned out to be dreadfully wrong, they are switching to market based ratings – they look at the price of credit default swaps, decide the company must be in trouble, then downgrade the securities. That causes further deterioration, reinforcing the downward spiral, just one of many examples of a rocket booster on the downside, as it was on the upside.
Follow-up – 10/2/08 – 5:00pm
I must say, however, that they – folks in Congress - still have no sense of how dire the situation is. As you probably have been doing, I have been talking to lots of folks in the private equity industry who have been talking to their portfolio companies. The situation out there is grim. One company called JP Morgan to get $5 million transferred for their payroll account and were told they could only get $1 million in that time frame. And, that’s JP Morgan, one of the three remaining solvent financial institutions. People are engaged in panic selling. They are pulling cash out of bank accounts. They have halted investment. The damage that has already been done is so substantial that I have started panic selling myself. No one wants to be the last guy out of the door.
People don’t seem to understand that the Internet has changed everything. Everyone gets information all the time. Right now, the media is so misguided that the quality of the information is horrendous. So people are acting on bad information.
Meanwhile, Congress fiddles while Rome burns. Passing this legislation can’t wait until Friday. It can’t squeak by. Or, we will once again snatch defeat from the jaws of victory.
Follow-up – 10/2/08 – 10:00pm
I'm scared ..... not about whether Speaker Pelosi gets it or not. I'm scared because I talked to five business executives today who are describing a meltdown in business. Retail sales are down in all sorts of stores. The Common Fund, which serves college endowments, is unable to meet requests for liquidity. Companies are cutting back on hiring and expenses - even Harvard and Harvard Business School. Every one of my employees - all 90 of them - is frightened. They are not going to spend, they are going to cut back. I predict that if the House fails to support the bill with a considerable margin, the market will fall 3,000 points. That affects you and me directly, but everyone in the long run. The United States is like a gunshot victim at the emergency room, bleeding out at a rapid rate. The surgeons are having a philosophical debate about healthcare. The administrators are having a debate about who will pay. The nurses are arguing about who is at fault. The patient is dying. So, I encourage all of us to get on the phone and tell people about the fire in the street. I have worked both sides and the media. They don't get it. Look at the Bill they have written. The Bill is a Christmas tree of crap. These people make Ahmadinajahd attractive.
I too have been unable to decide if we really need the bailout. I know that no matter what is said the creeps who got us into this situation will come out smelling like roses while the majority of people will still suffer. Of course the only way out is to get rid of the crooked politicians. Of course that is impossible. Even if we elected only honest people, within a year the lobbyists will buy them and we will be right back where we started. Our only way out is to find a way to stop all contributions, gifts, etc. to elected politicians and then they will no longer have an incentive to do for private interests. Oh yes some will still find a way around that, but it will not be as bad.
To counter what Anon posted...another point of view which CNN has been doing a good job in exposing is what Ron Paul has been stating all along. He predicted this mess a long time ago...something neither canidates saw coming....untill it was too late.
Im still against the bail out...I rather go through this pain now that delaying the inevitable.
"(CNN) -- Two days after the House rejected the $700 billion bailout bill, the Senate is set to vote on the rescue plan for financial institutions.
Rep. Ron Paul said he believes the $700 bailout bill will not solve the financial crisis.
The vote is scheduled for after sundown Wednesday.
Republican presidential nominee Sen. John McCain, Democratic nominee Sen. Barack Obama, and Obama's running mate, Sen. Joe Biden, all said they would be present for the vote.
Speaking to CNN's John Roberts on Wednesday, House Financial Services Committee member and former Republican presidential candidate Rep. Ron Paul discussed why he thinks the bailout bill is the wrong solution to the economic problem and what he would do to secure financial security.
John Roberts: Congressman, great to see you. I was browsing around on your Web site, Campaign for Liberty. And right there on the very front page, you are appealing to your supporters -- and there are tens of thousands of them -- to get in touch with key senators to tell them to vote this bill down when it comes to a vote in the Senate at sundown tonight.
Why do you want them to vote it down?
Rep. Ron Paul: I think it's a bad bill. I think it's bad for the taxpayers. I think it's doing more of the same thing. The same policy that we're following now with this bill is exactly how we got into that trouble.
And you know, I really don't have that much clout in Washington, D.C. And I recognize it. But there are a couple people outside of Washington that care about what I'm thinking and care about free market ... economics. And they will respond. And I think we did help generate a little bit of mail to the House members.
So you go where you can have the influence. And I think that people -- the grassroots -- understand this a lot better than members of Congress give them credit for.
Roberts: So, instead of the bills that are currently before the Senate, the one that may be before the House as early as Thursday, what would you do?
Paul: Well, we need to do a lot, but a lot differently. We have to recognize how we got into this problem. We have too much debt. We have too much malinvestment.
Roberts: OK, OK. So we recognize all of the things that got us here. But, right now, today, what would you do, if not this bill?
Paul: You have to liquidate those mistakes. Those mistakes were made due to monetary policy. So you have to allow the market to adjust prices downward. And that's what we're not allowing to do.
If there are too many houses and the prices are too high, the sooner we get the prices down to the market level, as soon as we quit trying to encourage more housing -- this is what we're doing. They're trying to stimulate houses and keep prices high. It's exactly opposite of what we should do.
So, we should get out of the way and not buy up bad debt. There's illiquid assets, but most of those are probably worthless. They're mostly derivatives. And we're sticking those with the taxpayer. So we have to recognize that the liquidation of debt is crucial. And if we did that, we would have tough times, there's no doubt about it, for a year. But if we keep propping a system up that's not viable, we're going to have a problem for decades, just like we did in the Depression. That's what we're on the verge of doing.
Roberts: Congressman Paul, what do you think of this idea that's being floated -- this process called mark to market, which would, they would modify the rules so that the, right now, paper that a lot of these institutions are holding, which is worth nothing, they would actually be able to assign some sort of value to it.
Some people are saying that that would just hide the problem. Other people are wondering if maybe that might create some sort of voodoo accounting that would allow widespread abuse in the system.
What do you think?
Paul: It demonstrates the problem. You know, when they prevented them from marking them down, this was an SEC [Securities and Exchange Commission] regulation. Shows how regulations backfire.
If you had a market economy and then if you had a market-adjusted FDIC, where insurance was based on the strength of the bank, this would have happened on a daily basis. But instead, we insure everybody, no matter what the bank is doing, and we do it, either we overkill -- we give you too much credit on bad investments -- and then we make changes all of a sudden, and they're drastic, to what they have done.
So, it's impossible. It's either too little or too much. And what you need is insurance of, FDIC type of insurance, has to be driven by the marketplace to measure the viability of a bank.
Roberts: So what do you think?
Paul: This adds to all the moral hazard that we have in the system.
Roberts: So what do you then think of this idea of raising the limit on [FDIC] insurance to $250,000, from its current cap of $100,000?
Paul: Well, on the short run it will calm the markets. People will feel better. I might even personally feel better for a week or two.
But I know that long term, it's the wrong thing to do. I opposed this in the early '80s when they went from 30 [thousand dollars] to 100 [thousand dollars], saying it would lead to more problems like this with malinvestment. It would cover over the mistakes. And the same thing will happen.
But if we raise it to 250 [thousand dollars], people are going to feel better, then it will keep the bubble going for a little while longer and putting more pressure on the dollar. If the dollar lasts longer, then finally the world will give up on the dollar -- and then we will have a big problem that nobody has even really begun to think about.
Roberts: A lot of people might hope that you're wrong with your projection.
Paul: I do too. I hope I'm wrong.
Roberts: You tend to be right on these things on occasion, though. Dr. Paul, it's good to talk to you. Appreciate it.
FANNIE MAE EASES CREDIT TO AID MORTGAGE LENDING
By STEVEN A. HOLMES
Published in the New York Times on September 30, 1999.
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''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.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, 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 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''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.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.
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