Wednesday, October 15, 2008

Couple of Subprime Chain Letters

I work in a fairly conservative office and get forwarded all sorts of political emails that are total crap. I try to rebut them the best I can and then publish them to show what people are reading. Click the spam tag to see some of the ones I've gotten in the past.

Here's the first one forwarded to me:
So, tell me, who do you think is responsible for the current financial mess we are? I can tell you that the Democrats have at least an equal share in the blame. Contract [sic] to what Nobama wants you to believe, it is not all Bush and McCain’s fault.

Fannie Mae Eases Credit To Aid Mortgage Lending

Published: 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 [emphasis in original] 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.

Here's my response to that email:

Yes, Democrats had a role to play, but it's not just subprime mortgages that are going under. It's also prime mortgages. Sure, there was pressure by Clinton, but there were still regulations in place to keep Fannie and Freddie from taking unqualified mortgages. It's way too complicated to pin the blame on Clinton with 1 sentence from an 8 year old newspaper article to change that.

Here's the crux of the entire financial crisis: you own suprime mortgages. I own subprime mortgages. It's also failing prime mortgages. Those mortgages got bundled up into Mortgage-Backed Securities called Structured Investment Vehicles (SIV's). Those SIV's got bought and sold over and over and now everyone owns some. I'll bet you a dollar that somewhere in your 401(k) is a good chunk of mortgage-backed SIV's. Furthermore, because the SIV's dressed up and supposedly you could still get the real estate behind the vehicle if the mortgage failed, the investment vehicle was supposedly safe. They were rated as "safe" investment vehicles. Had they beed labeled as "speculative," all but a handful of investors would have shunned them and we wouldn't have gotten into this mess in the first place. THAT is the real cause of the financial crisis. Selling chiecken shit, but calling it chicken salad.

Also, if it were the fault of minorities not paying their mortgages, why are the hardest hit areas in Las Vegas suburbs, Cleveland, OH and Boca Raton, FL?

Guess when the most mortgage backed securites were sold? 2005. When did the housing market peak? 2005. Those are simple facts.

If you want to learn more, I'd recommend reading either Paul Krugman with the New York Times (very good at breaking complex problems into easy to understand components) or The Cunning Realist ( I think you'll like the Cunning Realist. He's a lifelong Republican, but he's a "Republican for Obama"-type. I think you'll like his style and all.

Here's the second email:
Click through this.
Attached is an excellent PowerPoint showing the history behind the current financial crisis and failure of Fannie Mae. Democrats continue to point to the Bush administration but there is a much deeper story.

Subject: Fannie Mae


During this political season let's be reminded of these wise words:

· You cannot help the poor by destroying the rich.

· You cannot strengthen the weak by weakening the strong.

· You cannot bring about prosperity by discouraging thrift.

· You cannot lift the wage earner up by pulling the wage payer down.

· You cannot further the brotherhood of man by inciting class hatred

· You cannot build character and courage by taking away people's initiative and independence.

· You cannot help people permanently by doing for them, what they could and should do for themselves.


Here is a quick look into 3 former Fannie Mae executives who have brought down
Wall Street.

Franklin Raines was a Chairman and Chief Executive Officer at Fannie Mae.
Raines was forced to retire from his position with Fannie Mae when auditing
discovered severe irregularities in Fannie Mae's accounting activities. At the
time of his departure The Wall Street Journal noted, " Raines, who long defended
the company's accounting despite mounting evidence that it wasn't proper, issued
a statement late Tuesday conceding that "mistakes were made" and saying he would
assume responsibility as he had earlier promised. News reports indicate the
company was under growing pressure from regulators to shake up its management in
the wake of findings that the company's books ran afoul of generally accepted
accounting principles for four years." Fannie Mae had to reduce its surplus by
$9 billion.

Raines left with a "golden parachute valued at $240 Million in benefits. The
Government filed suit against Raines when the depth of the accounting scandal
became clear. . The Government
noted, "The 101 charges reveal how the individuals improperly manipulated
earnings to maximize their bonuses, while knowingly neglecting accounting
systems and internal controls, misapplying over twenty accounting principles and
misleading the regulator and the public. The Notice explains how they submitted
six years of misleading and inaccurate accounting statements and inaccurate
capital reports that enabled them to grow Fannie Mae in an unsafe and unsound
manner." These charges were made in 2006. The Court ordered Raines to return
$50 Million Dollars he received in bonuses based on the miss-stated Fannie Mae

Tim Howard - Was the Chief Financial Officer of Fannie Mae. Howard "was a
strong internal proponent of using accounting strategies that would ensure a
"stable pattern of earnings" at Fannie. In everyday English - he was cooking the
books. The Government Investigation determined that, "Chief Financial Officer,
Tim Howard, failed to provide adequate oversight to key control and reporting
functions within Fannie Mae,"

On June 16, 2006, Rep. Richard Baker, R-La., asked the Justice Department to
investigate his allegations that two former Fannie Mae executives lied to
Congress in October 2004 when they denied manipulating the mortgage-finance
giant's income statement to achieve management pay bonuses. Investigations by
federal regulators and the company's board of directors since concluded that
management did manipulate 1998 earnings to trigger bonuses. Raines and Howard
resigned under pressure in late 2004.

Howard's Golden Parachute was estimated at $20 Million!

Jim Johnson - A former executive at Lehman Brothers and who was later forced
from his position as Fannie Mae CEO. A look at the Office of Federal Housing
Enterprise Oversight's May 2006 report on mismanagement and corruption inside
Fannie Mae, and you'll see some interesting things about Johnson. Investigators
found that Fannie Mae had hidden a substantial amount of Johnson's 1998
compensation from the public, reporting that it was between $6 million and $7
million when it fact it was $21 million." Johnson is currently under
investigation for taking illegal loans from Countrywide while serving as CEO of
Fannie Mae.

Johnson's Golden Parachute was estimated at $28 Million.


FRANKLIN RAINES? Raines works for the Obama Campaign as Chief Economic Advisor

TIM HOWARD? Howard is also a Chief Economic Advisor to Obama

JIM JOHNSON? Johnson hired as a Senior Obama Finance Advisor and was selected
to run Obama's Vice Presidential Search Committee

MADE THE MESS IN THE FIRST PLACE. Would you trust the men who tore Wall Street
down to build the New Wall Street ?

McCain or Obama? Stay updated on coverage of the Presidential race while you browse - Download Now!

Note- I'll get around to uploading the attached Powerpoint later.

Here's my response to that email:
First off, Lincoln never said one word of that. Those quotes ("The 10 Cannots") are by Rev. William John Henry Boetcker.

As far as the 3 individuals you claim are Obama "advisors," well, that's also false:

One of them was briefly on the VP search team before resigning. The other two have no known link to the Obama Campaign.

If you want a list of "who to blame" here's a start:

Don't get too hung up on subprime mortgages. They are only a small slice of the mortgage-backed securities going under. Remember that a subprime mortgage was one that DIDN'T qualify to be purchased by Fannie/Freddie. The areas that are hardest hit by the mortgage crisis (Las Vegas, Boca Raton, Cleveland) were NEVER hotbeds of subprime loans. Also, AIG's failure was a result of financial derivatives, not mortages. There's more to this.

The reason Republicans get blamed is simple: they were in power when the bubble burst. The most mortgage-backed securities were sold in 2005. Housing prices started to fall in 2005. In 2005, Republicans controlled majorities in the House, the Senate, 6 out of 9 Supreme Court appointments, and, of course, the Presidency. Those are all basic facts that we can all agree on. Had it been Democrats holding at least some of those offices, it would be a different story. Why does that matter? The Chairman of the Federal Reserve is appointed by the President and confirmed by Congress. Same with the head of the Securities and Exchange Commission. Congress is in charge of overseeing the management of Freddie and Fannie, along with the FHA (Executive Branch). The courts review shareholder lawsuits. All of these organziations have 1 basic job: make sure that Wall Street doesn't sell chicken shit and calling it chicken salad. They can sell risky investments, but they have to call it risky investments. Had the risks of mortgage-backed securities been properly labeled, none of this would have happened.

Part of the reason the market is now partially recovering is Republicans have abandoned their "government is always the problem, the private sector is always right"mentality. I'm not saying the opposite is true, but there are cetain things (roads, bridges, schools, police, the military, consumer protection, Wall Street regulation) that are necessary funcions of any government.

Newsweek had an in-depth article about the questionable housing deals by both candidates:

From Keating and McCain to Obama and Rezko, Americans of all walks of life tried to get rich off the housing bubble with money borrowed from the Chinese.

If you want to know more about what really caused this mess, start reading either The Cunning Realist (a lifelong Republican blogger) or Paul Krugman (who won a Nobel Prize in Economics yesterday).



jeffrey said...

Menckles gets a lot of these email forwards from her father. When motivated to respond at all, she usually refers him to Snopes. Recently, however, he has decided that Snopes is part of the "liberal internet" and we're back to square one.

JohnnyB said...


Hate to burst your bubble but if I were one of your co-workers I'd refer you to a right wing website called wikipedia (subprime mortgage crisis), which states that 43% of all foreclosures are subprime loans, despite making up on 6.8% of all loans. Further, you fail to take into account that the lowering of lending standards caused by the expansion of CRA in 1999 inflated the value of all homes, perpetuating the upward push of prices until their inevitable collapse. I have as little sympathy for the banks as you do, in fact I think the bailout was a big mistake, but consider this analogy. You buy a new car and it is a lemon. Do you blame the manufacturer or the salesman? I blame the manufacturer, because their job is to build cars, the salesman is secondary. Government has the power through coercion to make banks lower lending standards, and banks will inevitably try to find a way to profit from the new rules. This is the first time in our history we have had a housing bubble and you are blaming the secondary actors here because you're afraid to criticize Democrats. Open your eyes bro.

Oh, the Becker Posner blog also boasts of a Nobel winner, and unlike Krugman, Becker is still considered a serious writer by his contemporaries.

So when are you going to report more crime data? Best,

Clay said...

First off, I'm not trying to hide the subprime loans' influence on the crisis. I've been referring to it as a "the subprime mess" as a term of convenience, but it's bigger than that. Look at A.I.G., which had negligible connections to mortgage-backed securities.

There were several loosenings of lending standards, most recently in 2004. Also, remember that remember that it was Republicans that controlled congress back in 1999.

Democrats definitely helped make this bed (as evidenced in that Newsweek piece), but the worst excesses happened under a Republican Congress, Republican Supreme Court, and Republican White House. Yes, I don't talk about Democrats' responsibility enough, but I want to spend my time on the most responsible.

As far as the crime data goes, I loved doing that, but it was INCREDIBLY time consuming and I just don't have as much as I used to (see the '62 Chevy tag for one reason why). Because there's no reliable central database, everything had to be done manually. I'd love to do it again (and I might someday), but I just don't have the time anymore. Brian Denzer runs the best site out there right now ( I met him at the Sound Cafe one time. He knows his stuff. He helped set up CompStat for Pennington.

Clay said...

Also, Krugman readily admits to being an "ambulance-chasing economist," but the primary reason I read him is has both a good understanding of what goes on in the markets and has the writing ability to explain it clearly and concisely. That last part is key. When I find someone else who can match him on that front, I'll happily read them to.

I'll check out Becker-Posner.

JohnnyB said...

Here's a good read

Krugman's best columns are his Thanksgiving columns, I wonder what he will give thanks for this year. Hopefully not an Obama administration.

Professor Zero said...

Clay - good for you for answering those mails.