www.ft.comAs Wall Street and Washington come to terms with the torpedoed Tarp and the great Joe Six-Pack backlash gathers pace, it might be worth a reminder as to why sub-prime lending became so popular in the first place.
To the annals of the New York Times, to this day in nineteen ninety-nine:
"
Fannie Mae Eases Credit To Aid Mortgage Lending
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…"Earlier that summer, in July,
the Department of Housing and Urban Development proposed that by the year 2001,
50 per cent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers - up from 44 per cent at the time. The department was also investigating allegations of racism in the underwriting systems used by Fannie Mae and Freddie Mac to determine applicants’ credit-worthiness.
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.But even back then there was an understanding in some quarters that this politically-inspired plan could well end in disaster. The NYT quoted one Peter Wallison, a resident fellow at the American Enterprise Institute who last year also became an adviser to the SEC.
‘From the perspective of many people, including me, this is another thrift industry growing up around us… 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.’
