subprime

Subprime Lenders Targeted Women

Armand Biroonak — Wed, 08 Oct 2008 21:00:00 -0700

Though women on average have higher credit scores than men do, women are 32 percent more likely than men to have subprime mortgages.

The Truth about the Community Reinvestment Act

Hillary Hampton — Mon, 29 Sep 2008 11:11:27 -0700

Conservative commentators in the Wall Street Journal and the National Review, and on YouTube are spreading the myth that the Community Reinvestment Act, a law designed to eliminate discriminatory banking practices, caused the current financial crisis. In the words of Fox News' Neil Cavuto, “Loaning to minorities and risky folks is a disaster.”

Conservatives have twisted the facts to substantiate their revisionist history. But don’t be fooled: the financial crisis was caused by conservative financial follies and bankers run amok and nothing more.

Myth: The Community Reinvestment Act forced banks to make loans to all low-income families and people with poor credit, fining banks that refused to comply.

Fact: The Community Reinvestment Act has encouraged banks to lend fairly and responsibly for over 30 years. The Community Reinvestment Act does not impose fines; it periodically examines FDIC-backed banks and issues them a CRA-compliance rating. [Community Reinvestment Act] To receive a high rating, banks must meet the financing needs of as many members of their community as possible and must not discriminate against racial and ethnic groups or certain neighborhoods. However, a bank cannot receive a high rating unless it is also maintaing “safe and sound banking practices.” [Community Reinvestment Act] In other words, the CRA requires banks to lend to working-class families and people of color, but only when those people have been deemed credit-worthy.

Myth: The housing bubble burst when too many people with home loans mandated by the Community Reinvestment Act failed to make their mortgage payments.

Fact: More than half of problematic sub-prime loans made in the last few years were issued by banks that are not regulated by the CRA. [U.S. House Committee on Financial Services] The CRA applies only to financial institutions that are insured by the FDIC, but not to independent mortgage companies such as Countrywide. In fact, non-CRA lenders were twice as likely as CRA lenders to issue excessively expensive subprime loans to vulnerable creditors. [Federal Reserve Bulletin] Responsible mortgages made by CRA lenders have a low rate of foreclosure similar to that of traditional mortgages. [Federal Reserve]

Myth: In 1995, Bill Clinton changed the Community Reinvestment Act to allow the securitization of CRA and subprime mortgages.

Fact: The 1995 revisions to the CRA changed only the way in which a bank’s CRA compliance is evaluated; they made no mention of mortgage securitization. [60 F.R. 22156] Under the 1995 rules, banks are rewarded only for making mortgages in their communities, not for re-selling mortgages as securities.

Myth: President Bush and Senator McCain tried to stop the subprime mortgage crisis, but Democrats blocked their efforts.

Fact: Bush and McCain supported the Federal Housing Enterprise Regulatory Reform Act of 2005, which would have created a new government agency to oversee Fannie Mae and Freddie Mac and other federal housing programs. However, the bill would have done nothing to stop the rash of subprime lending that preceded the housing bubble because it provided oversight for only Fannie and Freddie, not for the companies that issued subprime mortgages. [GovTrack]

Fannie and Freddie's Market Share

Armand Biroonak — Mon, 08 Sep 2008 21:00:00 -0700

Fannie and Freddie Mac own half of all mortgage debt in America; in the past 8 years an increasing share was subprime and othe risky mortgage products as they lowered lending standards.

The $821 Million Smile

Terrance Heath — Wed, 06 Aug 2008 08:43:35 -0700

Why is this man smiling?

His name is Richard Syron, CEO of mortgage giant Freddie Mac.

His company just posted an $821 million loss.

For the second quarter, McLean, Virginia-based Freddie Mac reported a loss of $821 million, or $1.63 cents per share, compared with a profit of $729 million, or 96 cents per share, a year earlier.

That included the first loss from its holdings of subprime and other risky loans, which formed a significant part of its $2.8 billion in realized and anticipated losses stemming from the steepest U.S. housing downturn since the Great Depression.

This, after the Freddie CEO ignored warnings that could have prevented some of those losses.

The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.

That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health.

Today, Freddie Mac and the nation’s other major mortgage finance company, Fannie Mae, are in such perilous condition that the federal government has readied a taxpayer-financed bailout that could cost billions. Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Mr. Syron heightened those perils by ignoring repeated recommendations.

But you'd smile, and maybe even ignore warnings too, if you knew you'd be bailed out at taxpayer expense. And bailed-out unconditionally. (Never mind that some of those taxpayers will struggle to heat their homes this winter, if they're lucky enough to still have homes. Never mind that the same Congress that bailed you out pretty much left them in the cold.)

The House dealt Fannie Mae (FNM) and Freddie Mac (FRE) a "Get Out of Jail Free" card on July 23, passing a bill that authorizes the Treasury Dept. to extend the mortgage-finance giants a lifeline without any of the conditions that the companies' critics had demanded. The bill now heads to the Senate, where passage is expected within days. President Bush earlier dropped his threat to veto the legislation, so it should be signed into law soon.

...The House accepted Treasury Secretary Henry Paulson's request to let his department extend unlimited amounts of credit to Fannie and Freddie if need be. It also authorized Treasury to buy shares in the companies to bolster their capital bases. Paulson had argued forcefully that making the line of credit unlimited and having authorization to buy their shares would discourage short sellers from mounting attacks on the companies. He likened it to a bazooka that scares off enemies even if it's never used.

You'd smile too if you could lose $821 million, and get bailed-out with no accountability.

Second, there should be full accountability. Those who are responsible for the mistakes – management, shareholders and bondholders – should all bear the consequences. Taxpayers should not be asked to pony up a penny while shareholders are being protected.

Finally, taxpayers should be compensated for the risks they face. The greater the risks, the greater the compensation.

All of these principles were violated in the Bear Stearns bail-out. Shareholders walked away with more than $1bn (€635m, £500m), while taxpayers still do not know the size of the risks they bear. From what can be seen, taxpayers are not receiving a cent for all this risk-bearing. Hidden in the Federal Reserve-collateralised loans to JPMorgan that enabled it to take over Bear Stearns were almost surely interest rate and credit options worth billions of dollars. It would have been easy to design a restructuring that was more transparent and protected taxpayers’ interests better, giving some compensation for their risk-bearing.

But the proposed bail-out of Fannie Mae and Freddie Mac makes that of Bear Stearns look like a model of good governance. It sets an example for other countries of what not to do. The same administration that failed to regulate, then seemed enthusiastic about the Bear Stearns bail-out, is now asking the American people to write a blank cheque. They say: “Trust us.” Yes, we can trust the administration – to give the taxpayers another raw deal.

You'd smile too if you could lose $821 million, and not only get bailed-out with no limits or accountability, but keep your job, and your enormous paycheck.

Syron made $10.6 million last year, according to Freddie Mac's latest report with the Securities and Exchange Commission. The company disclosed the information in a filing that clears the way for Freddie (FRE, Fortune 500) to raise $5.5 billion from investors to shore up its balance sheet.

...Syron made by far the biggest sum at the Reston, Va., company, pulling down a $1.2 million salary and a $3.45 million cash bonus, in addition to millions more in stock awards and other compensation for a total of $10.6 million.

Using a pay-disclosure measure that the SEC prefers, which treats the value of stock and options differently, Syron's pay for 2007 was $18.3 million, up 24% from a year ago.

If you were no smarter with your own finances than you are with your company's, you might have fewer reasons to smile if you didn't save some of that compensation package; several million less, if Congress'd had the temerity to ~~say~~ do anything about it.

But for now, you can just keep on smiling.

Wall Street Socialism

Robert Borosage — Wed, 16 Jul 2008 08:38:40 -0700

This weekend, Treasury Secretary Henry Paulson, former head of the Goldman Sachs investment house, provided us with a perfect demonstration of Wall Street socialism.

He announced that the Bush administration would seek congressional approval to bail out Fannie Mae and Freddie Mac, the government created but privately owned, profit-making housing finance companies that hold or guarantee nearly half of the U.S. mortgage market—some $5 trillion in debt. Paulson seeks and will get an unlimited line of credit to guarantee their debt, as well as authority to purchase their shares to supplement their capital base. The Federal Reserve announced it was ready to provide lending while waiting for Congress to act. Paulson said the new subsidies were designed to sustain the two institutions in "their current form."

Perfect. The two institutions have always been more fowl than fish. Created by the government in the 1930s to help lubricate the U.S. mortgage market by buying mortgages from the banks so they would have the cash to make more mortgages, Fannie and Freddie were able to borrow money at a discount because of a widely shared assumption that the government would stand behind their debts if push came to shove. Their operations were regulated, limited by laws detailing what mortgages they could assume. (They were essentially prohibited from diving directly into the subprime muck.)

But as they grew and profited, their executives pocketed lavish salaries and bonuses—giving them an incentive to grow even more (and as we discovered earlier this decade, to cook the books). Last year, for example, the Chair of Freddie Mac took home a cool $18,289,575. Fannie Mae CEO Daniel Mudd reaped a 7 percent rise in pay to $13.4 million in 2007 while the company lost $2.1 billion and its shares fell 33 percent. Nice work if you can get it.

Now with the bursting of the housing bubble, push surely has come to shove. Foreclosures are soaring, the two institutions have sustained billions in losses, their shares have plummeted, and, according to former St. Louis Federal Reserve President William Poole, one and possibly both would be bankrupt if their assets were marked down to their current market value.

So now the Bush administration proposes to make the federal guarantee explicit and even to offer taxpayer money to help recapitalize the two banks if needed. Everything has been nationalized—except the profits and the pay scales of the bank's executives.

That's right. If the guarantees work, private speculators, having driven the stock down, will clean up on the upside. And the bank's CEOs will continue to pocket the multimillion dollar salaries that are de rigueur on Wall Street. Call it Wall Street socialism. Their losses are socialized; their profits are pocketed. You and I will pay for their failures. And if conservatives have their way, their families will pocket their successes, without even having to pay a tax for the transfer of the estates we've helped to create.

These enterprises are operating on our tab now—completely. Why not just nationalize them, as even that font of economic convention, Sabastian Mallaby suggested yesterday in The Washington Post? Sure, we'd have to add the $5 trillion in debt to the federal balance sheet, but we could add the assets also. And after Paulson's announcement, global investors are already toting up their debts onto the federal balance sheet.

Why pay dividends to shareholders when they are essentially playing with our money? Why pay managers of public enterprises the bloated pay packages of Wall Street speculators? Why allow them to finance lobbyists to shield them from accountability? The fiction of their separate existence has been exploded; let's save the dough and run them efficiently.

The bailout of Fannie Mae and Freddie Mac is only the most recent and extreme version of Wall Street socialism. The Bush administration has done essentially the same for private providers of college loans. The Federal Reserve has made taxpayers the guarantor not simply of the banks that it regulates, but the shadow banking system of hedge funds and investment houses that it doesn't regulate. After the bailout of Bear Sterns, they basically are gambling with our money. The Federal Reserve has now traded more than $500 billion in federal bonds for the toxic paper of private banks and investment houses, some $200 billion of it in mortgage-backed securities, worth dimes on the dollar. This massive subsidy—justified as necessary to keep the banking system afloat—is not accompanied by limits on what gambles the speculators can make, how much debt they can take on, what rewards they can pocket. They are playing with house money—not exactly an incentive for prudence.

Republicans seem ideologically committed to these kinds of arrangements. In Medicare for example, conservatives have demanded that the government subsidize private insurance companies to compete with public Medicare, even though Medicare provides health care much less expensively. When Bush and the Tom DeLay Congress drove through the prescription drug bill, they included a provision that prohibits Medicare from negotiating cheaper prices for drugs, effectively turning the bill from a benefit to seniors to a multibillion-dollar subsidy to private drug companies (not surprisingly, after Wall Street, the drug companies finance one of the most lavish and powerful lobbies in Washington).

Now it makes sense to me for the government to subsidize housing mortgages and college loans. Encouraging home ownership and higher education are central to sustaining the broad middle class that is America's triumph. But I can't imagine why we need to let bankers and investors pocket the upside, when they are playing with our money and we're covering their losses. Public enterprise may be staid and bureaucratic, but it's a lot cheaper and more efficient than the perils of Wall Street socialism.

Top McCain Aide Implies Gramm Partly To Blame for the Economy

Isaiah J. Poole — Thu, 10 Jul 2008 15:21:16 -0700

Homeowners at Risk

Anita Chariw2 — Tue, 08 Apr 2008 07:18:52 -0700

Nationwide, 1.5 million subprime adjustable-rate mortgages will reset to higher interest rates this year, putting many of those homeowners at risk of falling behind on their payments and losing their homes.

More Evidence of the Squandering of America

Isaiah J. Poole — Mon, 17 Mar 2008 14:12:59 -0700

Robert Kuttner, editor at The American Prospect, critiques the Bush administration's bailout of Bear Stearns, saying that it is a prime example of the hazards of deregulated financial markets under the current conservative regime. In this interview with OurFuture.org, he says that Congress must respond with a bold agenda for reining in financial markets.

No Half-Stepping Stimulus

Isaiah J. Poole — Wed, 16 Jan 2008 16:41:09 -0800

Democratic leaders in the House are currently sketching out the details of an economic stimulus package designed to soften the blow later this year of the now-apparent recession.

But Robert Kuttner, founding co-editor of The American Prospect and the author of “The Squandering of America,” is warning that the Democrats should seize the opportunity – and take the political risk – of offering a bold and robust plan to not only stimulate the economy in the short run but reform the economy in the long run.

“I fear that the politics of the stimulus package risks identifying Democrats as well as Republicans with small-scale remedies” that will not be adequate to address the crisis, he told about 100 Capitol Hill staffers at an economic town hall meeting co-sponsored by the Congressional Progressive Caucus and the Campaign for America’s Future.

And how big is that crisis? Bigger, Kuttner says, than what is being reflected in the current mainstream political debate. Don’t think the downturn that followed 9/11, or the early 1990s. Think the 1930s.

That’s apt, Kuttner argues, because the same kind of freewheeling and ultimately irresponsible corporate behavior of the Bush era finds it parallel in the corporate schemes that set the stage for the 1929 stock market crash and the Depression.

“If you look at subprime and all its glory, it recapitulates all of the abuses of the 1920s in all their glory,” he said at the town meeting. When all of the parallels are drawn, as he does in “The Squandering of America,” he concludes that “we should be very alarmed.”

David Smith, chief economist for Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, said that Democrats are discussing the details of a stimulus package that would be “north of $100 billion.” The elements are likely to include some form of tax rebate that can get into taxpayers’ pockets quickly, money to states to help them with Medicare and Medicaid expenses, and additional funding for such programs as unemployment insurance and food stamps.

That’s a start, but only a start. Kuttner suggested that an adequate stimulus package should perhaps be three or four times that size, given the size of the economy and the severity of the ripple effects of the housing market implosion on the rest of the economy. Plus, none of the remedies most prominently on the table would address investment in public infrastructure, which would create a broad range of jobs, or seed the growth of urgently needed green-energy technologies — to name just two of the suggestions for stimulus raised during the town hall meeting.

More importantly, Kuttner said, they would not address the fundamental need to, as he put it, “re-regulate financial capital,” tax it appropriately, and use the proceeds efficiently to meet national and human needs.

To hear the conservatives tell it, the American economy was in a Dark Ages of high taxes and stagnation before Ronald Reagan rode in on his white horse in the 1980s, slashed taxes and regulation and ushered in Morning in America.

Of course, that’s a lie. Some of the most spectacular growth of the American economy, and particularly the middle class, took place in the 1950s and 1960s, helped by progressive taxation, market regulation and spending policies.

The challenge, as the national debate heats up over how to address the looming recession, is to draw the right lessons from history — and from the present — and be bold about both the nature of the problem and the right solutions.

“Ordinary people know that the economy is not serving them,” Kuttner said. “They need leadership to connect the dots. They need leadership to take the political risks. … It is important that the politics of economic stimulus not be conflated with a vision of the transformative reforms that we need.”

Amen to that.

Home Sales Expected to Bottom in '08

OurFuture.org Staff — Tue, 15 Jan 2008 08:47:36 -0800

The current credit crisis, subprime slump, and stricter lending practices may lead to an 11-year low in sales of previously owned homes this year.