We don’t claim to be smart enough to know if the bailout bill before the House is the right answer to this nation’s subprime mortgage mess. We can grasp the concept that the government could purchase these illiquid assets and gradually sell them back into the market over time to possibly even generate a profit, or at least recoup a big portion of the $700 billion price tag.
Our discomfort in the proposal is that we are talking about the federal government doing this. Has government ever done anything efficiently? If Warren Buffett was in charge, that’d be a totally different ballgame. The devil, as it’s said, is in the details, which we don’t claim to know.
If anyone is paying attention beyond the screaming headlines about Wall Street greed, Congress is the one who set this all in motion with the ill-conceived Fannie Mae and Freddie Mac. There’s plenty of video of Congressman Barney Frank and Sen. Chris Dodd blasting regulators who brought to light the firm’s cooked books and the mounting problems back in 2004. Fannie Mae and Freddie Mac kicked out big contributions to their friends and guardians in Congress to keep the regulators away.
How intertwined is Washington’s power elite with this? Former Fannie Mae CEO Franklin Raines, who made off with a reported $90 million while running the company into the ground is now one of Barack Obama’s chief economic advisors. Tim Howard, the former chief financial officer of Fannie Mae, who was essentially cooking the books and lying to Congress about the firm’s financial health in 2004, is also now one of Obama’s financial advisors. And then there’s Jim Johnson, who is under investigation for his time as Fannie Mae’s CEO, who is Obama’s senior finance advisor and headed up his vice president search.
These are the guys who wrecked our economy and now we find them either forging the corrective policies, or soon to be in charge of them. Count us unimpressed.
What we can tell you is that Texas is in better shape than most states with oil and gas activity staying strong.
Locally our community banks are not tied up in this national mess. The message that Beeville’s bankers gave in Wednesday’s edition is that our institutions here were not making the shaky kinds of investments that are at the heart of this problem. Community banks are a completely different animal from the Lehman Brothers and Washington Mutuals. Our community banks here still have money to loan despite the national cry of credit drying up.
That doesn’t mean we won’t feel the ripples from Wall Street and Washington, D.C., but we’re in a far better place than many. We should count our blessings and hope for $2.99 a gallon soon.
September 30, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
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 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.
“A regulatory structure set up for banks in the 1930s needed to change because the nature of business had changed,” the Illinois senator running for president said in a New York economic speech. “But by the time [it] was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.”
Gramm’s role in the swift and dramatic recent restructuring of the nation’s investment houses and practices didn’t stop there.
A year after the Gramm-Leach-Bliley Act repealed the old regulations, Swiss Bank UBS gobbled up brokerage house Paine Weber. Two years later, Gramm settled in as a vice chairman of UBS’s new investment banking arm.
Later, he became a major player in its government affairs operation. According to federal lobbying disclosure records, Gramm lobbied Congress, the Federal Reserve and the Treasury Department about banking and mortgage issues in 2005 and 2006.
During those years, the mortgage industry pressed Congress to roll back strong state rules that sought to stem the rise of predatory tactics used by lenders and brokers to place homeowners in high-cost mortgages.
For his work, Gramm and two other lobbyists collected $750,000 in fees from UBS’s American subsidiary. In the past year, UBS has written down more than $18 billion in exposure to subprime loans and other risky securities and is considering cutting as many as 8,000 jobs.
Gramm did not respond to an e-mail and was unavailable for comment, according to a UBS spokesman. The bank has no official position on the subprime crisis, the spokesman said, but is a member of the Financial Services Roundtable and other industry groups that are actively lobbying Congress on the issue.
Now, some housing experts and economists see Gramm’s thinking in the recent housing proposal from McCain, the Republican Party’s presumed presidential nominee. Gramm is often a surrogate for the Arizona senator, particularly in meetings focused on the economy. And McCain has hinted he’d consider the former Texas senator for Treasury secretary in a McCain administration.
McCain delivered an economic speech Tuesday that had Gramm's input, but it was written by domestic policy adviser Douglas Holtz-Eakin.
“Sen. Gramm was one of dozens of folks whom Sen. McCain has consulted on the housing issue, including Carly Fiorina and Meg Whitman from eBay," said McCain campaign spokesman Brian Rogers. "They've been friends for years, and he values Sen. Gramm's advice."
In the speech, McCain rejected the type of aggressive government intervention in the economic meltdown that has been embraced by his Democratic opponents — and even some Bush advisers.
“I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers,” McCain said. “Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.”
McCain’s campaign later clarified that he would support programs for “deserving” homeowners and reforms that would improve transparency and accountability in capital markets.
Andrew Jakabovics, a housing expert at the liberal Center for American Progress, said McCain’s interpretation of the crisis puts little blame on investment banks for their role in packaging the subprime loans into dangerously complex and ultimately hard-to-value financial instruments.
“I’d characterize this as the deux ex machina theory of financial products,” Jakabovics said. “He views this as a market problem that manifests at the local level as housing, meaning he’s more likely to argue in favor of these guys when they argue for deregulation.”
Wall Street firms are increasingly under scrutiny for contributing to the economic downturn by packaging and selling risky mortgage securities. When the home loans tied to the mortgages defaulted, investors and the banks lost billions, contributing to a widespread credit crunch.
“I think [McCain’s] attitude is the market can basically handle this and government doesn’t need to be heavily involved,” said David Wyss, chief economist at Standard and Poor’s.
McCain and Gramm have a long political history. The two became close when they worked together as senators to defeat Hillary Rodham Clinton’s 1993 health care plan, holding meetings at hospitals and clinics across the country.
In 1996, McCain was national chairman of Gramm's unsuccessful presidential bid.
In 2000, the duo had a rare parting when Gramm backed his home-state governor, George W. Bush, for president instead of McCain. But they’ve reunited in this presidential race.
Gramm stood by his former Senate colleague in his worst days last summer when his campaign went broke and his candidacy was all but written off by political observers.
Gramm, who had joined the campaign in March as a domestic policy adviser, was among those who helped cut staff and shrink the budgets. He traveled with McCain in Iowa, New Hampshire and South Carolina and stumped for him in Georgia.
Staff writer Victoria McGrane contributed to this story.