Grab and Keel

 In the last blog I talked about a referred e-mail, distributed by Donald Wildmon, that I received from my friend. The email contained a referenced article of 1999 from the NYT entitled “Fannie Mae Eases Credit to Aid Mortgage Lending”.

The article appears to be fairly neutral and legitimate. The Author, Steven A Holmes, does not show up in any suspicious way on the web. In evaluating the article, however,  a few things are required. The first is historical context. To start, what are the origins of Fannie Mae? 

[History

Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt’s New Deal to provide liquidity to the mortgage market. For the next thirty years, Fannie Mae held a virtual monopoly on the secondary mortgage market in the United States.

In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, it was converted into a private corporation.[6] Fannie Mae ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae). In 1995, Fannie Mae began receiving affordable housing credit for buying subprime securities. In 1999, the Clinton administration and Fannie Mae shareholders encouraged the lender to increase the number of mortgage loans offered to those of low and moderate income, both to improve rates of home ownership among those groups and to increase profits.[7]

In 2000, due to a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.[8]

Fannie Mae was put under a conservatorship of the U.S. Federal government on September 7, 2008.[9]]

How does this article fit into the timeline we discussed previously? A lot of financial stuff happened in the years leading up to the NYT article.  During one notable event, the Tech bubble/stock market crash of 1987, a lot of discussion was being held over the solvency of Social Security, I remember standing in the driveway of my rental, telling my landlord, that I now knew I would not be retiring till I was seventy. I was in trouble for sure since, I didn’t have at least $100,000, already nested away, and would to pay in at least $3000 a month to my retirement for the next 20 years.

People were afraid that their stock market retirement fund would not be there. Pundits were selling purple books and going onto TV to show people how to get rich in real estate.  People signed up for classes, everywhere you turned another real estate school had sprung up. It wasn’t so much greed as fear for the future that spurred most people to purchase property.

Other things happened too that are not on the list:

Desert Storm, the break up  of the USSR, Anita Hill/Clarence Thomas, Noriega, Somalia, Iran Contra, Havel, World Trade Center, Waco, Ginsburg, NAFTA,  Rodney King, The Brady Bill, Sarajevo,  South Africa, Chechnya, IRA, Kerrigan, Ames, Clinton and Sex, OJ Simpson, Abortion Protests,  Mexico rescue, MIR and US,  Tokyo nerve gas, Rwanda,  Bosnia, and Croatia, France and Pacific nukes, West bank, Pope Paul, Million Man March, Mad Cow, Kurds, Taliban, Zaire, US Budget Crisis, resumption of  secret activities, Unabomber, Line Item Veto, late term abortion ban block, Valuejet, Welfare Reform, Albright, Jerusalem, Nazi loot frozen, Pol Pot Trial, Holocaust victim payment  EU, US Shuttle to MIR< Heavens Gate, CA ban on Affirmative Actions, McVeigh sentenced, Kosovo, N Ireland Peace, The euro, India and Pakistan Nuclear tests,  Iraq stops cooperating air strikes ensue, Kenya, Tanzania, Sudan, Afghanistan terrorism, Russia at collapse, Wye Mills, Clinton and sex, balanced budget,  Matthew Shepard, Clinton Impeachment, Yeltsin Impeachment, Mbeki, Operation Allied Force, Turkish earthquake, East Timor massacre, Y2K bug, James Byrd Jr., Littleton, and John and Carolyn lost at sea.

What other events occurred in the few years leading up to this article? Well, in  Baltimore 1999, a lawsuit was started, that eventually became a class action suit, involving Toyota sales deals back from 1990. The basis of it was that blacks were routinely charged an extra fee within a “dealer mark up”  on the auto loans. This mark up became a form of skin tax, because the dealer was able to increase it for discriminatory reasons.

Ideological fights were ongoing. The Ayn Rand Institute was pretending it was objective by simplifying fact and history.

In California, the drought was on and CA/Enron/Reliance energy scandal was about to happen in 2000.

In looking at this period from a later vantage point, Congressman Jesse Jackson Sr., in an outline for the 2005 Wall Street Project Conference, outlines some key points. Look back at the time line to 1980 regarding this comment:

[..The erosion of fair lending occurred in 1980 with the passage of the Depository Institution Deregulation and Monetary Control Act (DIDMCA) and in 1982 with the Alternative Mortgage Transaction Parity Act (AMTPA).  DIDMCA removed usury caps on state interest ceilings, while AMTPA removed states’ ability to limit terms on “alternative” mortgages, allowing  negative amortizations, variable rates, balloon payments and (until 2003) prepayment penalties…]

 AMTPA is not mentioned in the timeline. I wonder why would that be?

Congressman Jackson gives statistics on mortgages as of 2005.

[…A.                 Mortgage Lending (sources: National Consumer Law Center, Center for Responsible

Lending & Africana.com)

a.       Since the passage of DIDMCA and AMTPA, nationally there has been a 3.6% increase in homeownership and a startling 335.6% increase in foreclosures.

b.      Subprime mortgage-backed securities grew from over $18 billion issued in 1995 to more than $134 billion issued in 2002 – this was done by capital from Wall Street.

c.       48% of African Americans own their own homes, 47% of Hispanics own their own homes while 75% of White Americans have realized the American Dream.

d.      Statistics have shown that African Americans are 4.1 times more likely while Hispanics are 2.5 times more likely victimized by predatory lending.

e.       African Americans are five times more likely to get a loan from a sub-prime lender also known as legal extortion.

f.        Subprime loans are: three times more likely in low-income neighborhoods; five times more likely in African American neighborhoods; and two to four times more likely in Latino/Hispanic neighborhoods….]

Predatory Lending is defined as charging excessive interest rates and fees and the imposition of single premium credit life insurance and prepayment penalties that provide no countervailing benefit to the borrower….]

http://www.minorityprofessionalnetwork.com/articles/JesseJackson-WallStProject2005.htm

Note above what Jackson called predatory lending.

Generally loans, depending or risk are labeled, prime, Alt-A, and subprime.  Alt-A loans are “ the instrument of choice for investment properties.”  

Additionally, Jumbo and Super Jumbo loans were much used in CA because the cost of housing was so high.

Clinton promulgated the idea of a Fannie Mae market in which the borrower was “one notch below” prime. He did not intend that the whole of the subprime market be folded into Fannie Mae. He did not recommend all the other bad facets that can occur in subprime lending. He did not recommend mortgage predators.

If I remember, the median Bay Area price in CA 2 years ago was somewhere around $516,000. In my 50’s starter neighborhood, my neighbor got a combined  loan on his 900 sqf, home, for somewhere around $349,00. Comparable homes that I saw in other states were at most $75,000 and more likely below $35,000.  Jumbo loans, therefore, were close to a necessity for many first time would-be buyers working outside the lowest choices. Even then, monthly payments likely to be no more than rental costs. With payments in excess of 30% of the monthly income, a great number of Californians have been “House Poor” for quite a while, because wages, though high relative to other states, are not in parity. These is why Sperling’s BestPlaces, rated the cost of living in some many towns in CA  at around 154% of 100%.

My white neighbor, never lost his income, bought a second house with part of the equity money from the first, and started the process to put the first house on the market.  He had investment help from “experts”, and the bank who lent him the money. However, he was too late. His first home is now worth around 140-147,000; a truer value. Why did the bank experts lend this amount of money so late in the game?

Why does California matter when the world is hurting? California floats back a forth as being the 5th to 10th largest economy in the world. It is a state above countries in GDP.

It pays more into the federal system, than it receives in direct monetary benefits. More than 12 percent of all USAns live there. It currently has the highest state unemployment with near 8% and the largest minority population in the USA, at around 57% of the total. You might  think therefore, that it should also have the highest foreclosures. It is true that some locations have ranked at the top of the foreclose mess. In 2007, the following ranking occurred:

http://money.cnn.com/2007/08/14/real_estate/California_cities_lead_foreclosure/index.htm

Stockton was listed highest. in 2000, a minority population of around 57% was recorded. Workers who could afford to buy homes, mostly drove many yearly miles in bumper-to-bumper traffic  back to the Bay Area to work. In 2006, the median homes were 347,200. Since the that time the median price has declined 5.29%

[…Over the past decade, Stockton and the nearby cities of Tracy and Manteca have experienced a population boom. This is largely due to thousands of people settling in the area to escape the relatively high cost of living of the San Francisco Bay Area. This influx of new residents, however, resulted in a sharp increase in the cost of living of Stockton, although it is still significantly lower than any Bay Area city of comparable size…]

Currently the unemployment rate is 9.3% higher than the rest of the state. The property tax is $9.45 Right now, it is not a Best Place.

Yet in Charleston, SC, a city with a minority population of around 40%, the unemployment rate is around 4%, incomes are comparable, median price for a home is $387,000 and has only lost .77%. The property tax rate is $7.05. Certainly it is a better place to be as a homeowner right now.

So to summerize, the NYT article has information that is probably true, but not the way it was intended by the e-mailer.Clearly something more is at work than the loaning of money to minorities and low-income groups. Putting letters like the NYT article into historical context can The mixing of all subprime mortgages into one catchall makes for easy blaming but does not address the force of other market factors. 

For something that might make you feel better, read THIS.

I Own My Vote, PUMA, The Denver Group, Just Say No Deal