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Authored by: Ian Al on Sunday, October 07 2012 @ 04:32 AM EDT |
They were not the perpetrators, but they were sucked in. I have taken the
liberty of a large quote from Wikipedia,
to show how the original Federal organisation was progressively privatised and
repurposed (by government) such that they became vulnerable to the sub-prime
scam.The Federal National Mortgage Association (FNMA), colloquially
known as Fannie Mae, was established in 1938 by amendments to the National
Housing Act after the Great Depression as part of Franklin Delano Roosevelt's
New Deal. Fannie Mae was established to provide local banks with federal money
to finance home mortgages in an attempt to raise levels of home ownership and
the availability of affordable housing. Fannie Mae created a liquid secondary
mortgage market and thereby made it possible for banks and other loan
originators to issue more housing loans, primarily by buying Federal Housing
Administration (FHA) insured mortgages. For the first thirty years following its
inception, Fannie Mae held a monopoly over the secondary mortgage
market.
It was acquired by the Housing and Home Finance Agency from the
Federal Loan Agency as a constituent unit in 1950. In 1954, an amendment known
as the Federal National Mortgage Association Charter Act made Fannie Mae into
"mixed-ownership corporation" meaning that federal government held the preferred
stock while private investors held the common stock; in 1968 it converted to a
privately held corporation, to remove its activity and debt from the federal
budget. In the 1968 change, arising from the Housing and Urban Development Act
of 1968, Fannie Mae's predecessor (also called Fannie Mae) was split into the
current Fannie Mae and the Government National Mortgage Association ("Ginnie
Mae").
Ginnie Mae, which remained a government organization, supports
FHA-insured mortgages as well as Veterans Administration (VA) and Farmers Home
Administration (FmHA) insured mortgages. As such Ginnie Mae is the only
home-loan agency explicitly backed by the full faith and credit of the United
States government.
In 1970, the federal government authorized Fannie
Mae to purchase private mortgages, i.e. those not insured by the FHA, VA, or
FmHA, and created the Federal Home Loan Mortgage Corporation (FHLMC),
colloquially known as Freddie Mac, to compete with Fannie Mae and thus
facilitate a more robust and efficient secondary mortgage market.
In
1981, Fannie Mae issued its first mortgage passthrough and called it a
mortgage-backed security. The Fannie Mae laws did not require the Banks to hand
out subprime loans in any way. Ginnie Mae had guaranteed the first mortgage
passthrough security of an approved lender in 1968 and in 1971 Freddie Mac
issued its first mortgage passthrough, called a participation certificate,
composed primarily of private mortgages...
In 1992, President George
H.W. Bush signed the Housing and Community Development Act of 1992. The Act
amended the charter of Fannie Mae and Freddie Mac to reflect Congress' view that
the GSEs "... have an affirmative obligation to facilitate the financing of
affordable housing for low- and moderate-income families in a manner consistent
with their overall public purposes, while maintaining a strong financial
condition and a reasonable economic return;" For the first time, the GSEs were
required to meet "affordable housing goals" set annually by the Department of
Housing and Urban Development (HUD) and approved by Congress. The initial annual
goal for low-income and moderate-income mortgage purchases for each GSE was 30%
of the total number of dwelling units financed by mortgage purchases and
increased to 55% by 2007.
In 1999, Fannie Mae came under pressure from
the Clinton administration to expand mortgage loans to low and moderate income
borrowers by increasing the ratios of their loan portfolios in distressed inner
city areas designated in the CRA of 1977. Additionally, institutions in the
primary mortgage market pressed Fannie Mae to ease credit requirements on the
mortgages it was willing to purchase, enabling them to make loans to subprime
borrowers at interest rates higher than conventional loans.
In 1999,
The New York Times reported that with the corporation's move towards the
subprime market "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 1980s."
Alex Berenson of The New York Times reported in 2003 that Fannie Mae's risk is
much larger than is commonly held...
In his 2006 book, America's
Financial Apocalypse, Mike Stathis also warned about the risk of Fannie Mae
helping to trigger the financial crisis: “With close to $2 trillion in debt
between Freddie Mac and Fannie Mae alone, as well as several trillion held by
commercial banks, failure of just one GSE or related entity could create a huge
disaster that would easily eclipse the Savings & Loan Crisis of the late
1980s. This would certainly devastate the stock, bond and real estate markets.
Most likely, there would also be an even bigger mess in the derivatives market,
leading to a global sell-off in the capital markets. Not only would investors
get crushed, but taxpayers would have to bail them out since the GSEs are backed
by the government. Everyone would feel the effects.”...
Thus, the shift
away from GSE securitization to private-label securitization (PLS) also
corresponded with a shift in mortgage product type, from traditional,
amortizing, fixed-rate mortgages (FRM's) to nontraditional, structurally
riskier, nonamortizing, adjustable-rate mortgages (ARM's), and in the start of a
sharp deterioration in mortgage underwriting standards. The growth of PLS,
however, forced the GSEs to lower their underwriting standards in an attempt to
reclaim lost market share to please their private shareholders. Shareholder
pressure pushed the GSEs into competition with PLS for market share, and the
GSEs loosened their guarantee business underwriting standards in order to
compete. In contrast, the wholly public FHA/Ginnie Mae maintained their
underwriting standards and instead ceded market share.
Once Fannie
Mae was split into Fannie Mae, with private shareholders demanding financial
performance, and Ginnie Mae, driven to financial rectitude, Fannie Mae and
Freddie Mac were both forced by competitive pressure from the PLS to take a
major share in the ill-found, sub-prime market with ever loosening financial
standards. The whiter than white Federal Ginnie Mae was marginalised by the same
market pressure.
If government had not split Ginnie and Fannie Mae,
they would both have been marginalised and all the problems would have stayed in
the PLS sector which would have bombed in exactly the same
way.--- Regards
Ian Al
Software Patents: It's the disclosed functions in the patent, stupid! [ Reply to This | Parent | # ]
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- Yes, Fannie Mae - Authored by: Anonymous on Sunday, October 07 2012 @ 03:22 PM EDT
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