No Credit? No Stable Income? No Down Payment? No Problem! Let’s Do It Again Suckers!

Copyright 2008 Uppity Woman. All Rights Reserved.

As you shudder at the thought that you and your next generation are about to pay for a Trillion Dollar Rescue package, please read  Anatomy of A Trainwreck: Causes of the Mortgage Meltdown, so that you know that if Fannie Mae and Freddie Mac’s lending criteria are not regulated  immediately, this bailout will be repeated again. And again.

We keep hearing that the Root Cause of our financial problems in America is the “Housing Crises”. But if we don’t look at what CAUSED the Housing Crises, then we are not getting at the true root cause of our problem that is about to cost us 1 Trillion Dollars. If we don’t dig to the true Root Cause, we are doomed to repeat ourselves.

There are some historical things about Fannie, Freddie, and rather stealth organizations such as **ACORN and LaRaza that you have a right to know with respect to this Meltdown–especially considering that certain congressional members are attempting to give organizations like ACORN and LaRaza a huge chunk of the bailout trillion. Larry at No Quarter has also provided a copy of the bailout Agreement of Principles draft, which says,

“Directs a certain percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs.”

Larry goes on to say,

In the proposed bailout agreement, Sen. Christopher Dodd, the Senate Banking Committee and other Democrats desire to pre-direct that future funds (profits) not be returned to the taxpayers via the treasury but that they be used to underwrite potential questionable (maybe even illegal activities) of certain nonprofits which have had a hand in promoting and expanding access to “no money down” loans for minorities, illegal voter registrations and extensive lobbying activities.

In short, there are members of congress who want to put the same people in charge who brought down Fannie and Freddie to begin with. A reload of the original Trainwreck! A redistribution of wealth right from the middle class  taxpayers’ pockets. Again.

It appears that this is what is holding up the passing of the bailout bill. Now I will tell you why.

Here’s a little history of how this Meltdown mess came to be.

When Fannie Mae and Freddie Mac encouraged heavily weakened criteria regarding who could get mortgages, the train wreck was pre-ordained  for those organizations — and a number of members of Congress made sure there were no obstacles in the way of this travesty as it unfolded.

Surprisingly, research done by economists a decade ago in 1998, particularly by Professors Ted Day and Stan Liebowitz at the University of Texas at Dallas, predicted the current problems and tried to warn people of a different cause. Starting during the early 1990s, mortgage-underwriting standards have been consistently weakened. Many of the names involved in the forefront of those changes, Freddie Mac and Fannie Mae as well as Countrywide and Bear Stearns, have been the most prominent financial entities to become insolvent.

Without going into pages of historical details, I’ll just say that The Federal Reserve of Boston drew up a Fair Lending Document for mortgage lenders, which was heavily criticized by experts as a derivative of a flawed study–but the objections were ignored. The document stated that: “discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower–income minority applicants.”

The new criteria made it essentially “discrimination” to reject obviously unqualified low income or no income people when providing mortgages. This included people on welfare as well as people who didn’t have a penny as a down payment for a home–or even a job. In short, the new rules declared the old rules “Outdated” and lenders were warned that not following new rules would constitute discrimination.

So under the new rules, what were the criteria that qualified someone to get a mortgage which Fannie Mae and Freddie Mac would embrace and heavily encourage? I hope you are sitting down:

Credit History: Lack of credit history should not be seen as a negative factor…. In reviewing past credit problems, lenders should be willing to consider extenuating circumstances. For lower–income applicants in particular, unforeseen expenses can have a disproportionate effect on an otherwise positive credit record. In these instances, paying off past bad debts or establishing a regular repayment schedule with creditors may demonstrate a willingness and ability to resolve debts….

Down Payment and Closing Costs:Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower-income applicants. Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit organizations, or municipal agencies to cover part of these costs. . . .

Sources of Income: In addition to primary employment income, Fannie Mae and Freddie Mac will accept the following as valid income sources: overtime and part–time work, second jobs (including seasonal work), retirement and Social Security income, alimony, child support, Veterans Administration (VA) benefits, welfare payments, and unemployment benefits.

I just want to ask you if you would loan a couple of hundred thousand dollars to somebody based on the above criteria.

The changes in underwriting standards were pushed to accomplish what many called a “noble goal” — an increase in home ownership among poor and minority Americans — but the changes created a time bomb that was set off as soon as property values began to decline. The new rules involved eliminating verification of income or assets, little assurance of the ability to pay the mortgage, and virtually eliminating down payments.

Making it possible for otherwise unqualified people to buy homes increased demand and increased the price of houses. As long as housing prices rose, the problems inherent in not requiring down payments or relaxing other standards were hidden. While prices rose, no one had to default. Instead, if someone was unable to pay the mortgage, the obvious option was to sell the house at a profit. As long as prices continued to rise, people could accurately claim that the new standards did not have an appreciably different default rate than the old standards.

The federal government gives all sorts of subsidies to encourage home ownership. The mortgage deductibility in the income tax is a big subsidy, but that is not the only one. The Federal Housing Administration guarantees mortgages against default. Subsidies given to Fannie Mae and Freddie Mac allow them to charge less in repackaging private mortgages that are then sold to financial institutions.

These new rules made it essentially illegal to refuse a loan to a person any sensible lender would recognize as someone who clearly could not pay for a mortgage. I’m sure ACORN and possibly LaRaza were very busy making sure everybody understood this. And so, the odds of default were huge. At the same time, Of course, lenders saw an opening with variable rates and outrageous risks as well. I mean what the heck. Why not be greedy pigs? They had Fannie and Freddie’s blessings, right?  Half the blame goes to greedy commisson mortgage lenders. The OTHER half belongs to Fannie and Freddie and Equal Credit Opportunity Act. You give loans to people who are not qualified to pay and the rest becomes OBVIOUS.

Accepting these new criteria was hardly voluntary. The Fed warned the banks:

“Did You Know? Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions.”

That’s right folks. Give that loan or face a  huge losing lawsuit.

Some of those lenders, whose recent Bailout names we recognize, received accolades from Fannie Mae for their marvelous adherence to the Equal Credit Opportunity lending practices.

One lender singled out by Fannie Mae for special praise for following these new criteria was the recently sunk Countrywide:

“Countrywide tends to follow the most flexible underwriting criteria permitted under [Government Sponsored Enterprises] and FHA guidelines. Because Fannie Mae and Freddie Mac tend to give their best lenders access to the most flexible underwriting criteria, Countrywide benefits from its status as one of the largest originators of mortgage loans and one of the largest participants in the [Government Sponsored Enterprises] programs. When necessary — in cases where applicants have no established credit history, for example — Countrywide uses nontraditional credit, a practice now accepted by the [Government Sponsored Enterprises].”

And here’s what the recently sunk Bear Stearns  was doing in 1998 in order to accomodate the new Federal criteria:

Credit scores. While credit scores can be an analytical tool with conforming loans, their effectiveness is limited with [Community Reinvestment Act] loans. Unfortunately, [Community Reinvestment Act] loans do not fit neatly into the standard credit score framework… Do we automatically exclude or severely discount … loans [with poor credit scores]? Absolutely not.

Given these lending practices which were encouraged by Fannie Mae and Freddie Mac and their resulting effect, the financial problems for  institutions such as Countrywide and Bear Stearns are, at least in part,  not too surprising.

Liebowitz told FOX News that “such reckless behavior by [Fannie Mae and Freddie Mac] has lead to their financial meltdown and to the financial problems for the whole country. During Franklin Raines’ chairmanship of Fannie Mae, they were a major proponent of relaxing standards.”

As you can see, criteria for qualifying for a home mortgage weren’t just “relaxed”. They were just about removed.

And it’s not as if congress wasn’t warned and urged to place oversight in place to regulate Fannie and Freddie. They were asked to pass the Federal Housing Enterprise Regulatory Reform Act of 2005.  John McCain was a Co-Sponsor of the bill, which was tabled. At that time, McCain said,

 If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

But that wasn’t even the first time the alarm was sounded and ignored.  Congress was warned in 2003 that Fannie and Freddie were out of control. And what was their response? Crickets.

Here’s the Wall Street Journal, referring to “Fannie Pack” - November 11, 2003:

With an election year coming, most public officials prefer to make nice with just about everyone. So give White House chief economist N. Gregory Mankiw full marks for daring to tell the truth about Fannie Mae and Freddie Mac last week. The mortgage giants were not amused, which means we’re getting somewhere.

Mr. Mankiw did taxpayers a service by wading into the debate over how to monitor these companies that have become repositories of enormous financial risk. Fannie in particular has marshaled its political troops to stop a bill in Congress that would transfer its regulation to the Treasury Department from a feckless unit of HUD. Fannie prefers feckless.

…snip…

 Fannie responded with its usual huffing and puffing, and by (cheekily) citing a new study by Mr. Mankiw’s White House predecessor, Glenn Hubbard, that it claims shows there is no “systemic risk.” But all Mr. Hubbard studied was the narrow area of “liquidity risk.” And Mr. Hubbard’s post-White House work only underscores how powerful Fannie and Freddie are. They throw around so much money that they have been able to make themselves immune from serious political accountability.

Their kept politicians on Capitol Hill are bipartisan. But especially notable is the support for Fannie and Freddie from liberals who normally detest corporate welfare. In this case, Congressman Barney Frank criticized Mr. Mankiw because he is worried about the tiny little matter of safety and soundness rather than “concern about housing.” But as Mr. Mankiw pointed out, most of the federal subsidy for the companies goes to enrich private investors and executives, not poor home-owners.

One weakness of democracy is that it tends to ignore problems before they erupt into crises. The risk portfolios of Fannie Mae and Freddie Mac are a classic example. We’d prefer to see both privatized. But short of that, the least U.S. taxpayers deserve is the assurance that companies that profit from their subsidy are subject to a complete financial entrail reading by the U.S. Treasury.

At this point, now that we are about to pay a TRILLION dollars for what Barney called a “Tiny little matter,” does anybody here besides me think we have a right to know that, if we are going to pay out a Trillion dollars, are we still going to be opening up credit under the same lax rules above? Shouldn’t this worry us with respect to patching up today’s mess while living with the potential of repeating history?  Is this “Tiny little matter” part of that trillion dollars? How much of that trillion dollars will be given to ACORN?

We should not bail out greedy wall street honchos. Nobody denies that. But that’s only half the formula. Without the other half, this bailout is doomed to be repeated.

We have a right to know what is going on here, and this bill should be stopped unless this ACORN type of bleeding of Middle Class American taxpayers is not part of the deal either.

What has happened to my Democratic Party? Where did it go? How can they sell this entire country out for Socialism? When did we become The Union of Socialist States of America! I implore what once was a good party to STOP THIS MADNESS NOW!

***ACORN is the same ACORN that is being currently investigated for voter registration fraud this year in what I am told is now 17 states.

And here is a video about Fannie Mae, Freddie Mac, the mortgage meltdown and  how efforts to put stop this financial disaster were blocked repeatedly.

More links to this problem:

Crises in Washington Emergency Room

The ACORN Poison Pill

Voter Fraud and Mortgage Scams On Your Dime

Time To Crack Obama’s ACORN

The Link Between Obama, ACORN, Woods Fund, Earmarks and The Morgage Crises

What’s ACORN Up To? Voter Fraud As Usual