Selasa, 27 November 2012

2.1.1. Politicians Assisted in Creating the Subprime Monster





Fannie Mae and Freddie Mac are the biggest underwriters of home mortgages

in the US. These entities do not lend money directly to consumers but instead, they

purchase loans from banks on the so called secondary market. The names of Fannie

Mae and Freddie

Mac are based on their corporate acronyms; FNMA (Federal

 

National

Mortgage Association) and FHLC

(Federal

Home Loan Corporation). Fannie

Mae was

founded in 1938, during the Great Depression, when millions of families

could not become homeowners

or faced losing their homes. In 1968 Fannie

 

Mae

was

partially privatized, and in 1970 Freddie

Mac was

created as a wholly pri-

vate company to improve competition. Since then, both are privately owned by

shareholders but regulated by the US Congress. They are also often referred to as

Government Sponsored Enterprises (GSEs), due to the fact that they have been created

to serve

a public aim and are exempt

from state and local taxes.

In addition their securities generally benefit from a state guarantee. Therefore

the GSEs are able to borrow money more cheaply than other banks. The state guarantee

plus the tax advantage are an indirect federal subsidy.

This

advantage is estimated

to be worth

about 6.5 billion USD p.a. In return, the GSEs were

expected

to

serve

‘public purposes’, including helping to make

home buying more affordable.

For many years there was significant political influence on this two major US

mortgage banks to provide cheap refinancing of mortgages to other banks by purchasing

so-called ‘affordable

loans’ to the lower

middle class. By expanding

the

type

of loans they

would

buy,

both were

hoping to spur banks to provide

more

loans

to people with less-than-stellar credit ratings.

In 1992 – under the Clinton Administration – the Department of Housing and

Urban Development (HUD) became the responsible regulator of Fannie Mae and

Freddie Mac. The Clinton Administration had a clear political agenda to put more

low-income and minority families into their own homes. In 1995 the HUD agreed

to let Fannie Mae and Freddie Mac purchase affordable-housing credit which included

loans to low-income

borrowers.

The

idea was

that this would

spur granting

of

loans and increased lending would

benefit many borrowers

who did not qualify

for

conventional

loans. The

agency therefore required Fannie

Mae and Freddie

Mac

to

purchase far more ‘affordable

loans’ made to these borrowers.

Since then the

GSEs

have

been supposed to buy a certain portion of ‘affordable’

mortgages each

year

made to underserved

borrowers.

 

In the 1990s the GSEs had already expanded homeownership for millions of

families by reducing the requirements for down-payments. Nevertheless, in 1999

Fanny Mae was facing increasing pressure from the Clinton Administration to further

expand

mortgage lending to low-

and moderate-income people and felt pressure

from stockholders to maintain its phenomenal profit growth.

For

example,

 

the

HUD requested that by 2001 50% of the GSEs portfolio should be made up

of

loans to low

and moderate-income borrowers.

At the same time HUD was

investigating

allegations of racial discrimination in the automated underwriting systems

used by the GSEs to determine the credit-worthiness

of credit applicants. In

addition,

banks, thrift institutions and mortgage companies had been pressing Fannie

Mae to help them grant more loans to subprime borrowers,

whose incomes,

credit

ratings and savings

were

not good enough to qualify for conventional

loans.

 

Source : Perguruan Tinggi Kedinasan

 



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