From the New York Times:
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.
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.”
When was this piece of sage advice from the libertarian American Enterprise Institute given? 2009? 2008, 2007? Try September 30, 1999.
Read the entire article. Especially, this bit:
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.
And there you have the genesis of the entire crisis in a nutshell. In an effort to help minorities attain homes they could not afford in the free market, Fannie Mae (and Freddie Mac as well) lowered the standards it required for all the mortgages it purchased!
Minority borrowers didn’t cause the subprime debacle. Instead, politicians trying to get them houses they couldn’t afford created the bubble by shifting the standards of the two entities that together purchased over 40% of the mortgages issued. The changes propagated throughout the industry as other secondary purchasers followed suit to remain competitive. Changes intended to give minority borrowers in Mississippi a boost ended up giving a boost to rich white people buying gold-plated bungalows in California’s overheated real estate market.
Strangely, defenders of Fannie Mae and Freddie Mac never seem to acknowledge that they were created solely as a mechanism to induces lenders to make loans the free market judged to risky. The only reason they existed was to distort the market.
Now we’re paying the price for our attempt to get a free lunch.