The recent WSJ announcement of the loosening of credit standards at Fannie and Freddie leaves me stunned. Seems as if the government doesn’t learn from experience. It is déjà vu all over again!
It was reckless government policies that started the financial meltdown to begin with. This loosening of credit standards and allowing folks to buy a home with only 3% down may send us tail spinning back into the quagmire we are just recently crawling out from.
It was actions like these that precipitated the last financial crisis. And while Wall Street greed contributed greatly to the financial debacle, we conveniently forget that the issues started with those who aided and developed the federal government’s housing policies for their own best interests.
It was Fannie and Freddie buying loans from lenders, repackaging the loans and giving guarantees to investors if borrowers did not repay that got us into hot water, with Wall Street abuses further deepening the crisis and which eventually cost me my job when I tried to stop it.
The Fannie-Freddie story goes way back to 1992. At that time, the federal government required them to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income for their community. The original legislative quota was 30%, but in 2000 the Department of Housing and Urban Development (HUD), received the authority to hike it to 50% and in 2007 it allowed them yet another raise to 55%.
Eventually more than half the mortgages Fannie and Freddie were required to buy were for borrowers with less than median income and they had to significantly lower their underwriting standards.
It didn’t stop there.
FHA was competing with Fannie and Freddie for the same loans, and as a result of the Community Reinvestment Act, regulated banks and savings and loans were also required to grant a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served.
Research shows that eventually about half of the mortgages granted to borrowers in the US were subprime or weak, given to borrowers who had blemished credit, and had put little to nothing down or were interest only loans . Over 70% of these same loans were guaranteed or held by Fannie-Freddie, government agencies or other government-regulated institutions.
Owning a home is the American dream and more Americans were in fact able to own homes. This weakening led to the housing bubble and created a huge private market for mortgage backed securities. This resulted in more lenders joining in, further abusing the subprime game and fraudulently securitizing many defective mortgages.
Bubbles do burst. Eventually many of these mortgages went into default, housing prices cratered and Freddie and Fannie were insolvent. What should have been foreseen was not: investors fled, banks and investors had to write down the value of their mortgage–backed assets, the market for buyers shrunk and several of our better known financial institutions were caught with their hands in the cookie jar, worrying if they’d wake up insolvent.
I’m all for home ownership and the American dream – but at what price!??
Is the government prepared to rescue lenders once again? Are we giving permission to financial institutions to repeat their mistakes, with the expectation that government once again will be their safety net and not allow them to fail? Are we emphasizing that yes, the big banks are too big to fail and encouraging the federal government to go to Las Vegas and gamble, with our money?
Will their playing fast and loose freeze our now more stable – well to some degree – credit markets and cause another financial debacle? This time around there may not be a cushion to fall back on, and the odds are we’ll head into another financial crisis.
Except this time there may not be anyone to bail us out.
Isn’t it time we said “I’m mad as hell and I’m not going to take it anymore!”?
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
