Friday, February 20, 2009

Original Sin

By Mr. Quarter

The origin of a lot of the economic issues today is that mortgage lending become increasingly politicized. According to a WSJ article published by Phil Gramm on February 20:

"The Community Reinvestment Act (CRA) requirements led regulators to foster looser underwriting and encouraged the making of more and more marginal loans. Looser underwriting standards spread beyond subprime to the whole housing market. The 1992 Housing Bill set quotas or "targets" that Fannie and Freddie were to achieve in meeting the housing needs of low- and moderate-income Americans. In 1995 HUD raised the primary quota for low- and moderate-income housing loans from the 30% set by Congress in 1992 to 40% in 1996 and to 42% in 1997. By the time the housing market collapsed, Fannie and Freddie faced three quotas. The first was for mortgages to individuals with below-average income, set at 56% of their overall mortgage holdings. The second targeted families with incomes at or below 60% of area median income, set at 27% of their holdings. The third targeted geographic areas deemed to be underserved, set at 35%. The results? In 1994, 4.5% of the mortgage market was subprime and 31% of those subprime loans were securitized. By 2006, 20.1% of the entire mortgage market was subprime and 81% of those loans were securitized. The Congressional Budget Office now estimates that GSE losses will cost $240 billion in fiscal year 2009. If this crisis proves nothing else, it proves you cannot help people by lending them more money than they can pay back (emphasis added)."

I think that about covers it. Enough said!


Anonymous said...

Mr. Quarter,

The dates you quote relative to the beginnings of the sub-prime problems would have one believe that Bill Clinton bears much of the responsibility for creating the environment that promoted poor lending practices. Why do we not see and hear more about Mr. Clinton, Mr. Franks, and Mr. Dodd regarding their roles in this crisis?

Mr. Quarter said...

Good of you to notice, however I cannot take any credit here as the bulk of the post was authored by Phil Gramm. Nevertheless, is there some suprise that Franks, Dodd and Clinton have a large responsibility and the MSM have not called them to task? That is why this blog exists.