Mortgage debacle a doozie
Have you had enough of the mortgage and financial crisis yet? Me too. But unfortunately this whole distasteful financial position we're in is not only not over, but it's also going to change how we do business and how we finance homes in the future.
There's an interesting book published by the Princeton University Press called "Guaranteed To Fail, Fannie Mae Freddie Mac & The Debacle of Mortgage Finance" written by four professors of finance and economics. The book spells out the nucleus of our present financial situation starting with Fannie Mae & Freddie Mac and their lending guidelines.
Fannie Mae and Freddie Mac are government sponsored enterprises (GES) established to provide security and guarantees to banks allowing them to free up funds and make more loans. In return for this, the banks were required to follow Fannie and Freddie guidelines related to how many and which type of loans were to be made.
In 1999, Franklin Raines the then chief executive officer of Fannie Mae was quoted as follows, "Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements. 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."
As we all now know, the so-called subprime market turned out to be one of the most risky if not the most risky financial endeavor ever undertaken by a private company backed by public funds. Because of the nature in which these agencies were structured, private stockholder companies with government guarantees, they were setup for failure when the economy took a downturn.
The banks had zero risk and were happy and eager to follow Fannie & Freddie's lending guidelines, even when politicians on both side of the aisle pushed for more exotic mortgage products. Some of these loans include mortgages in excess of 100 percent of the value of the property to low income and marginal buyers. After all, the money was guaranteed by the American taxpayer.
Since the United States was addicted to home ownership and the government encouraged it through government backed mortgages and a variety of tax incentives, the system was unsustainable when the economy tanked. There was certainly plenty of blame to go around with large financial institutions also taking unheard risks with mortgage backed securities, but the easy lending environment established by Fannie and Freddie allowed it to flourish.
There has been a lot of talk about the Dodd-Frank Act changing the face of lending. The higher underwriting standards and reduction of predatory lending practices provided for in this act will reduce risk. However, it will almost certainly also reduce the availability of mortgage credit and also possibly increase the cost of lending. Unfortunately, some of the good aspects of nonconforming mortgages, like credit for self-employed borrowers or others who may fall outside the scope of conforming mortgages, could be eliminated. In addition, the Dodd-Frank Act will ultimately demand a smaller mortgage finance market, pushing potential homeowners towards the rental market instead, a choice that Americans have made for a century before we became an ownership society.
Since Fannie and Freddie are now totally owned by the United States government with little or no hope of them repaying any of the $148 billion extended by the American taxpayer, it will take a decade or more to unravel the intricate web we're in.
Quite a bit of this book can be found on the Internet if you want to further dive into the disaster. As debacles go, this was a doozie that is changing our lives in ways we don't even know yet.