marvin
Headphoneus Supremus
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- Feb 12, 2005
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Quote:
Under HUD's supervision, FMae/FMac were forced to constantly increase the portion of their business in "affordable housing" market. Read: They were required to service the LMI market (read: < 80% median income) and underserved areas to get affordable housing credit with HUD. That requirement peaked this year with a requirement that 56% of their loans go to LMI borrowers and 39% of their loans go to underserved areas. The idea that they would eventually run out of qualified LMI borrowers apparently did cross the government’s mind, but their solution was rather… counterproductive. In 1995, subprime loans to LMI borrowers became eligible for affordable housing credit.
To meet those goals in 2003-2007, FMae/FMac ended up dumping a lot of money into the subprime and Alt-A mortgage backed security market. Their involvement in the subprime security market peaked in percentage at 44% in 2004 and in value at $193 billion in 2005. They still hold about $200 billion or so in subprime securities. Most of the requirement was satisfied through the repurchase of Alt-A loans and FMae/FMac still hold around $500 billion in that market.
Now did the Feds force anyone to originate those loans? Not at all. They just forced FMae/FMac to dump a ton of capital into the market with little supervision and the market took over from there. Given market saturation at that point, it isn’t really surprising that lenders scraped the bottom of the borrower pool and repackaged the resulting mortgages to meet the additional demand FMae/FMac imposed on the market.
As far as the effects of CRA, it didn’t force banks to invest in the subprime market. It forced banks to invest in the LMI market, where CRA banks and affiliates have a ~ 28% share of the market. That’s a fairly sizable chunk of the market. Banks and thrifts did make more than a few subprime loans (~20% by some estimates), but most of the growth there was outside of the LMI market. How much better the CRA-regulated LMI mortgages are than the unregulated LMI subprime ones creating the current disaster is still an open question. CRA banks are not out of the woods yet as resets don’t peak on non-subprime loans until 2010/2011. Given that commercial banks have higher leverage ratio requirements though, they should be able to weather their upcoming crisis better than investment did theirs.
Repackaging mortgages as securities was never the problem. Mortgage backed securities have been around since 1938 with the creation of Fannie Mae with little fanfare before the current crisis. There wasn't very much that’s inherently risky about them until lower lending standards and blown risk evaluations turned them into time bombs.
| Originally Posted by VicAjax /img/forum/go_quote.gif what else did they use to "force" the banks to sell predatory loans to ignorant Americans and repackage the debt as investment products? |
Under HUD's supervision, FMae/FMac were forced to constantly increase the portion of their business in "affordable housing" market. Read: They were required to service the LMI market (read: < 80% median income) and underserved areas to get affordable housing credit with HUD. That requirement peaked this year with a requirement that 56% of their loans go to LMI borrowers and 39% of their loans go to underserved areas. The idea that they would eventually run out of qualified LMI borrowers apparently did cross the government’s mind, but their solution was rather… counterproductive. In 1995, subprime loans to LMI borrowers became eligible for affordable housing credit.
To meet those goals in 2003-2007, FMae/FMac ended up dumping a lot of money into the subprime and Alt-A mortgage backed security market. Their involvement in the subprime security market peaked in percentage at 44% in 2004 and in value at $193 billion in 2005. They still hold about $200 billion or so in subprime securities. Most of the requirement was satisfied through the repurchase of Alt-A loans and FMae/FMac still hold around $500 billion in that market.
Now did the Feds force anyone to originate those loans? Not at all. They just forced FMae/FMac to dump a ton of capital into the market with little supervision and the market took over from there. Given market saturation at that point, it isn’t really surprising that lenders scraped the bottom of the borrower pool and repackaged the resulting mortgages to meet the additional demand FMae/FMac imposed on the market.
As far as the effects of CRA, it didn’t force banks to invest in the subprime market. It forced banks to invest in the LMI market, where CRA banks and affiliates have a ~ 28% share of the market. That’s a fairly sizable chunk of the market. Banks and thrifts did make more than a few subprime loans (~20% by some estimates), but most of the growth there was outside of the LMI market. How much better the CRA-regulated LMI mortgages are than the unregulated LMI subprime ones creating the current disaster is still an open question. CRA banks are not out of the woods yet as resets don’t peak on non-subprime loans until 2010/2011. Given that commercial banks have higher leverage ratio requirements though, they should be able to weather their upcoming crisis better than investment did theirs.
Repackaging mortgages as securities was never the problem. Mortgage backed securities have been around since 1938 with the creation of Fannie Mae with little fanfare before the current crisis. There wasn't very much that’s inherently risky about them until lower lending standards and blown risk evaluations turned them into time bombs.
