Freddie Mac hit the Brakes, on the Easy Credit Party

great collection of data, again, by jamess. Originally posted 2008-10-10 13:58:16 -bumped, cho

These guys were perfectly happy to get you into that New Home, "No Matter what it takes," during the hay-days of the Ownership Society.


Federal Reserve Bank of New York Staff Reports, no. 318 (pdf)


These Banks were happy to write you an "Easy" ARM Mortgage (Adjustable Rate Mortgage) as long as the Housing Market continued to soar, or as long as they could "unload" those Subprime Mortgages on some other Underwriter of last resort (like Freddie or Fannie).

But when the main underwriter, back in Feb 2007, stood up and said "No More", well that Party of "Easy Profits for Bankers" came to a screeching halt ... and Economic chaos has ensued ...

--------

Too bad that pounding hangover from that Credit Party is due to continue, for years to come, as all those ARMs continue to reset (ratchet up the interest rates) for the immediate future.

Notice the caption on that Mortgage Corporation Powerpoint Graphic: "Opportunities will continue" starting around 2008 and beyond.

What were they banking on?

All those Easy ARM Mortgages automatically resetting upward by as much as 2% percentage points annually, starting at the 2, 3, 5, 7, or 10 year mark in the Loan --

Easy Money for the Banks!

That or those Subprime ARM-holders would re-finance to a "30-year fixed" Mortgage, using the Equity they acquired in their Homes, through monthly payments, and from Home Price Appreciation

More Easy Money for the Banks!



Deregulation let these new-fangled Balloon-type Loans flourished over the last decade. The Balloons here however, were spread out to each year, once the reset period starts, instead of at the end of the Loan in the original Balloon Loans scams, (preceding the 30's Depression).

The business plan behind those ARMs, depended on the Price of the Home going up ... forever. (Economics 001 apparently!)

What they failed to take into account was all those Rising Home Prices, were being fueled by all the "average people" flocking to the snap up those "Easy Mortgages" -- including mobs of get-rich Real Estate Speculators too (ie. the flippers)


CNNMoney.com
When bad loans get worse
A whole class of adjustable rate mortgage borrowers could take a bath when rates reset this year.
By Les Christie, June 21 2007

More than $1 trillion worth of adjustable rate mortgages (ARMs) will be hit with higher reset rates this year, and that could add up to big trouble for many homeowners.
...
The end of the housing boom changed the math when it comes to ARMs. Not only are mortgage rates higher, but 1ower home prices in many markets means borrowers have fewer options than they had before home prices dropped.
...
Credit-damaged home buyers could obtain a 2/28 hybrid ARM with affordable fixed-rate (teaser-rate) payments for two years before they reset at higher, floating rates.

At the end of two years, borrowers would ideally have made regular payments, demonstrated their credit-worthiness and raised their credit scores. They could then easily then refinance into an affordable fixed-rate loan.

Another kind of ARM borrower is the prosperous, low credit risk and financial savvy customer who chose the low initial interest rates on hybrid ARMs to free up cash for other purposes. When rates reset, they have the financial wherewithal to pay off loans or refinance into a fixed rate or another bargain-rate ARM.

But there is a third class of ARM users whose numbers grew during the most recent boom. They're the ones who chose ARMs because they couldn't finance their purchases any other way, and they gambled that soaring prices would make the deals work.

(Emphasis Added)
http://money.cnn.com/2007/06/20/real_estate/when_ARMs_reset/



Well, Physics tells us, all Bubbles will eventually Burst -- No matter what, the underlying "force of expansion".

The Housing Bubble was NO exception.

All that "Assumed Equity" underpinning all those Subprime Investments began rapidly evaporating, in 2006. Soon many Home Owners were finding themselves "upside down" on their Mortgages -- owing more than the Home is now worth.

The Banks wanted out of these suddenly risky investments, but Freddie Mac had closed the door -- No More Underwriter of Last Resort -- for you!

(Ironically, Henry Paulson, and GWB, saw another "Last Resort" they could tap, to pick up that Subprime tab. Afterall all those Banks are TOO Important to fail ... the hard-working American People -- apparently NOT so Much!)


ConsumerAffairs.com
Subprime Lending Out Of Favor At Freddie Mac
February 27, 2007

Freddie Mac, one of the nation's largest buyers of home mortgages, has taken the first step to distance itself from subprime lending, as are other lenders large and small. Shutting off the mortgage spigot is likely to further cool the already chilly housing market.

The company has announced a series of tough new standards for the loans it purchases, and makes it clear it plans to pass on a number of riskier types of loans that have been linked to increased default rates.
...
Freddie Mac said it will also limit the use of low-documentation underwriting for these types of mortgages to help ensure that future borrowers have the income necessary to afford their homes.

Consumer advocates reacted positively. Martin Eakes, CEO of the Center for Responsible Lending, said Freddie Mac was "leading the way toward better underwriting practices in the subprime market."

(Emphasis Added)
http://www.consumeraffairs.com/news04/2007/02/freddie_mac_subprime.html



Freddie Mac could see the "writing on the wall". They told Banks they would have to start meeting "Freddie's New Regulations" (Someone had to set some rules!)

Well you can imagine the Reaction of those high-stake Bankers -- in a word:

PANIC!

and ultimately Bank Failures, left and right.


Mortgage Lenders had believed the GWB hype back in 2002, about the Ownership Society, and the growth opportunities possible because of SubPrime Loans:

Bush Speech 2002



Mortgage Lenders had believed The Federal Reserve Board, Governor Edward M. Gramlich in 2004, when he challenged the key Mortgage Market Players:

should lenders seek new possibilities for extending prime and subprime mortgage credit? If lenders do make new loans, can conditions be designed to prevent new delinquencies and foreclosures?
...
Fannie Mae and Freddie Mac should be continually testing their restrictions to find a set of rules that adequately protect borrowers without unduly constricting lenders.
...
Federal regulators face challenges as well. The Federal Reserve Board has already revised HMDA to ask for rate information on subprime mortgage loans so that subprime mortgage markets can be better analyzed and understood. Using its authority to regulate high-cost loans under the Home Ownership and Equity Protection Act, the Fed has also made several changes to protect consumers with high-cost mortgages.
...
There are challenges for everybody. Rising to these challenges will ensure that continued subprime mortgage lending growth will generate even more social benefits than it seems to have already generated.

(Emphasis Added)
http://www.federalreserve.gov/boarddocs/speeches/2004/20040521/default.htm


SO the Banking Lenders obliged ...

They set up a System of Credit Scores to "nationalize" the no-fault Creditworthiness of everyone:


VantageScore, by Gary Kearns, President, Experian-Scorex (pdf)



You only got FICO Score of 660 or lower? --

"No Problem, Have we got a Deal for you! We can put you in a No-Nonsense ARM -- No Problem. What's your Time Horizon, by the way? ... How long will you be in the Home, 2, 3, 5 years or more? ..."

Too bad for those Banking Opportunists, "Freddie Mac's New Regulations" in early 2007, put a screeching halt all those "get rich" schemes ...

That and the inevitable puncturing of the Market Bubble, that the "forces of the Free Market" worked feverishly to over-inflate.




Looks like that Hangover may last a while. (That return trip, looks kind of a scary.)

Who's steering this Economic Ship anyways? Who's responsible for promoting, and then chasing all those "Ownership Society dreams"?

And what's the Ship's ultimate destination, now?

A thriving and growing middle class --

Or a limitless fund for that Members-only Party, that only the Top 1% is invited to --
as always?

Any guesses anyone, which direction our Economic Ship has been on?
and is now headed to?

Looks like uncharted waters to me!


NEW WORLD ORDER? (as George H. Bush promised?)

Hardly! More like the Old World Chaos
of peasants and kings ...

It's time to put some Grown-ups back at the Economic Helm.

It's time for Common Sense and Accountability, back in Government!

Enough!

Enough of the Party of Free-loaders and Greed!

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Comments

Do you read Barry Ritholtz blog, The Big Picture?

Little of the ponzi scheme would have been possible without Alan Greenspan holding rates too low for over a year. Mortgages got cheap. Securitization of those mortgages encouraged lending to anyone who could fog a mirror because the lenders were turning around and selling them. They didn't hold the risk. The mortgages got made into mortgage backed securities. Which were then sold and repackaged again. Everyone was so busy collecting fees and commissions and passing the buck on responsibility that even now, no one really has a good handle on whose holding the risk.

Fannie Mae and the Financial Crisis
October 5, 2008

A Memo Found on Wall Street
September 27, 2008

yes I remember Greenspan being one of the main Cheerleaders (and Enablers) for the SubPrime Mortgages, and the "economic growth" they spurred.

Greenspan was still hyping this about a Month ago,
still unable to own up to anything, might be amiss.

Some Bankers (and Underwriters) did find a way to disperse the SubPrime risks though (CDOs):
Hedging their bets -- about exactly WHO owns your Mortgage?
09/28/2008

and apparently any semblance of ownership and Mortgage responsibility too, using those CDO's and the related CDS's.

Wall Street made Billions
and now has lost Trillions!

and miraculously No One's responsible for it, anywhere --
that's the Free Market at work!

(It seems the "price tag" for that Free Market,
is MUCH TOO High these day, now that the Party's over)

I came across this post tonight and thought it might be of interest to you. It shows the two bubbles (dot com and housing) during Greenspan's tenure.

SP Long Term Charts and the Reckless Adventurism of the Greenspan Federal Reserve at Jesse's Cafe Americain.

I honestly don't know what to think re: sustainable level.

Rolling the Nasdaq tech bubble over into the Housing bubble. That longterm chart is pretty amazing, the mother of all double-tops.

The fallout of that chart is that we are going to face one helluva long period of the markets' reversion to the mean.

What's stunning about that chart is that it helps understand that Greenspan put a fire under the Nasdaq mania when, in front of Y2K, in order to assure the liquidity was available to the banking system on January 1 2000, he started pumping cash during the half-year preceding the turn of the millenium.

I remember the period in which he announced that policy and I unfortunately did not understand its full import. In retrospect, I understood that it was responsible for one heck of a ride to Nasdaq 5000.

Do you have any recall of just what was the date that Greenspan announced he'd be pumping cash into the markets to front-run the potential for liquidity crisis that could result from screwed-up dates in banking system computers?



"So your party is the only party that can save the country from the mess that your party created?" - attrib. Jon Stewart

-----
"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson

In looking around the web,, soemthing that is consistently brought up about Greenpsan is that he's an "inflation fighter." Everything looked like a nail...so he hammered it.

There is a fantastic timeline of Greenspan's tenure at the Fed at USA Today. It explains alot.

CNN article: In 1995 and '96, he reduced short-term rates three times...
PBS As the Asian currency meltdown spread, hammering U.S. exports, the Fed cut interest rates three times to keep the American economy growing.

This correlates to the first spike up in the chart.

USA Today: In 1998, With the global financial crisis lapping at U.S. shores, the Fed cuts interest rates by 0.25 percentage points. The Fed would cut rates again Oct. 15 and Nov. 17.

Below correlates to the second spike up.

Nov. 6, 2002 — Amid signs of a faltering economic recovery, the Fed slashes rates by a hefty half-percentage point. The move, first since December 2001, brought the federal funds rate to a fresh 40-year low of 1.25%.

June 25, 2003 — The Fed cuts rates a quarter-percentage point, taking the federal funds rate to 1%, lowest since 1958.

Greenspan was one of the main Architects of the current Mess.

Greenspan promoted SubPrime Loans as part of the Free Market "innovation and growth"

Here is a notable analysis of Greenspan's active involvement in promoting SubPrimes, while at the same time, denying he did anything:

Business Week wrote in July 2004 that it was a "Federal Reserve- engineered decline in rates that inflated the housing bubble ... (and) recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable rates mortgages." Greenspan had promoted adjustable- rate mortgages in testimony before Congress. As I remarked in my writings at the time, this was odd for a Fed chairman to do.

But now Greenspan says low interest rates were caused by global forces, not by the Fed's work. We "tried to get interest rates up," he says, even as the Fed lowered rates to 1 percent and held them there for a year.

According to Greenspan, the chairman really knew very little about subprime loan practices, and he couldn't have done anything anyway. In fact, Greenspan had praised subprime loans, saying, "innovation has brought about a multitude of new products, such as subprime loans. ... Improvements have led to rapid growth in subprime mortgage lending; today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s."

Commentary: Greenspan's take on housing a case of 'If I did it'
Daily Journal of Commerce (Portland, OR)
Oct 9, 2007 by William Rutherford

very insightful!

I wonder what Bubble those Wizards of Wall Street will inflate next?

Probably the Green-Energy-Carbon-Neutral Bubble?

Of course, that may actually be a Demand Bubble,
who's time has come, LOL

That Demand has existed, bottled up for years and years now.
Just need the products, at the right price ...

Greenspan, wasn't aware of the Subprime problems- laughable

http://www.youtube.com/watch?v=wAud7Jp3dSg

Funny !

The Federal Reserve Board, Governor Edward M. Gramlich new all about the details of SubPrime Market in 2004
(as noted in the Story above)

PBS NewsHour 20070918 Greenspan part 1 of 2

http://www.youtube.com/watch?v=yU4WjhijOMY

this is rich!

Greenspan blame the Housing Bubble on the End of the "Cold War"

Maybe he is clueless?

Jim Lehrer pins Greenspan down about the role of "low interest rates" in the Housing Bubble --

Greenspan agrees, and says they failed on "trying to raise the interest rates" to curb the Boom.

Greenspan then goes on to promote "the value of SubPrime Loans, at getting Low Income people into Home Ownership, for the first time."

Lehrer counters, about all those ARM Loan Resets hurting those first time Home Owners--
Greenspan tries to discount that, and then change the subject ...

Wow, talk about "deniable plausibility" --

Greenspan -- you DON'T got it!

The New York Times

The Reckoning
Taking Hard New Look at a Greenspan Legacy
By PETER S. GOODMAN
Published: October 8, 2008

Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.

http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=2&em&oref=slogin&oref=slogin

Thanks to montanamaven at ProgressiveBlue.com for the info on this timely article.

Had you seen my earlier piece that's related to Bush's predatory lending agenda?:



"So your party is the only party that can save the country from the mess that your party created?" - attrib. Jon Stewart

-----
"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson

Spitzer sure got a raw deal --

He was one of only "Sheriffs one Wall Street" --
and the mob, drove him out of town!

The Greed-fest wasn't quite over yet --
and they didn't need No stinkin' Sheriff!
handing out fines and bills.

Good information, and thanks Susie and Luaptifer for the other links and information too.

It's going to take smart people and a well-informed public to turn this mess around.

Thanks for keeping us educated.

thanks for the feedback!

(an Informed People are an empowered People)

MYTH: Fannie Mae and Freddie Mac caused the "current financial mess"

In a September 19 Huffington Post blog post, Center for American Progress senior fellow David Abramowitz wrote:

"There must be a Republican playbook circulating widely with a chapter entitled, 'What to say if asked who's to blame for the foreclosure mess.' Because an awful lot of Republican candidates are all suddenly yelling 'Fannie Mae, Fannie Mae, Fannie Mae' whenever plunging home prices and the housing crisis comes up. [...] So their plan seems to be to chant Fannie Mae often and loudly enough, and hope the public will get confused about who really caused this huge national calamity. It is always a good political story to just blame a bad guy who has something to do with the same topic.

Indeed, during the September 24 edition of Fox News' Special Report, host Brit Hume said, "Many financial analysts are saying that if mortgage giants Fannie Mae and Freddie Mac had been effectively regulated years ago, the supercharged subprime mortgage meltdown that led to the current financial mess would either never have happened or would have been nowhere near as severe." But rebutting the suggestion that the subprime mortgage purchasing activities of Fannie Mae and Freddie Mac caused the "current financial mess," economist Dean Baker recently stated:

Fannie and Freddie got into subprime junk and helped fuel the housing bubble, but they were trailing the irrational exuberance of the private sector. They lost market share in the years 2002-2007, as the volume of private issue mortgage backed securities exploded. In short, while Fannie and Freddie were completely irresponsible in their lending practices, the claim that they were responsible for the financial disaster is absurd on its face -- kind of like the claim that the earth is flat.

(Emphasis Added)

for more Fannie and Freddie facts at:
http://mediamatters.org/items/200810100022

Hat Tip to Priceman (at ProgressiveBlue.com) for the Fact Checking!

at a Republican leaning event last week. It was thinly veiled of course, but nonetheless, it was all the fault of Fannie and Freddie and their overpaid CEOs.

to target the Dems and Fannie and Freddie
for all the Blame the current Financial Meltdown.

(Negative Ads to that effect are playing in my State now)

That is why I decide to research it my self,
and write this post.

The truth is rarely as simple
and 1-Dimensional as the right wing
would have you believe!

(Rush, Hannity, and Bill-O not withstanding)

Do you read Barry Ritholtz blog, The Big Picture? Little of the ponzi scheme would have been possible without Alan Greenspan holding rates too low for over a year. Mortgages got cheap. very insightful! I wonder what Bubble those Wizards of Wall Street will inflate next? Probably the Green-Energy-Carbon-Neutral Bubble? Of course, that may actually be a Demand Bubble, who's time has come, LOL That Demand has existed, bottled up for years and years now. to target the Dems and Fannie and Freddie for all the Blame the current Financial Meltdown. That is why I decide to research it my self, and write this post. The truth is rarely as simple and 1-Dimensional as the right wing would have you believe!

 

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