REPORTING FOR DUTY
-
-
-
-
Oct
6
The Fannie And HUD Multi-Trillion Dollar Feedback Loop
October 6, 2008 | 1 Comment
Once upon a time in 2003, Dartmouth and Goldman Sachs got together and produced a written synopsis of Fannie Mae and her mission statement, including who oversees the company, and what motivated it’s policies regarding the mass purchases of risky debt.
The report begins with a look at Franklin Raines and how he viewed his position at Fannie Mae:
“It’s a unique opportunity for me to combine the power of the private markets with a public purpose as important as home ownership.”3 Raines became Chairman and CEO-designate of Fannie Mae in 1998 and CEO in January 1999, becoming one of the first black CEOs of a Fortune 500 company.
……..
Raines reflected on Fannie Mae’s mission statement, “to tear down barriers, lower costs, and increase the opportunities for homeownership and affordable housing for all Americans.” Given that minorities were underserved by traditional borrowers and often the target of predatory lenders, Fannie Mae needed to play a critical role in dealing with this difficult social problem.
That explains a lot. But the problems started before Raines got there. Here is a timeline of Fannie that is an interesting read. Over time, the GSE bloats into a colossal multi-trillion dollar public subsidy in the name of affirmative action:
Exhibit 1: Company Timeline
1968 After 30 years of business, President Lyndon B. Johnson signs legislation amending Fannie Mae’s Charter Act and establishes Fannie Mae as a private, shareholder-owned company.
1970 Fannie Mae stock (FNM) is listed on the New York and Pacific stock exchanges. President Richard M. Nixon signs legislation authorizing Fannie Mae to purchase conventional mortgages.
1978 The conventional mortgage program expands to include the purchase of two- to four-family homes.
1981 Chairman and Chief Executive Officer David O. Maxwell joins Fannie Mae. The corporation
begins purchasing adjustable-rate mortgages (ARMs) and second mortgages and introduces its
Mortgage-Backed Securities (MBS) business.1982 Fannie Mae funds one of every seven home mortgages made in the U.S.
1983 Fannie Mae begins purchasing conventional multifamily housing loans.
1984 Fannie Mae issues its first debenture in the overseas Euromarket, marking its entry into foreign capital markets.
It’s those foreign markets we are bailing out now.
1988 Fannie Mae stock is added to the Standard & Poor’s 500 stock index.
1991 James A. Johnson becomes Fannie Mae’s Chairman and Chief Executive Officer. The $10 billion “Opening Doors to Affordable Housing” initiative is launched.
1992 Fannie Mae becomes, for the first time, the largest issuer and guarantor of MBS, surpassing Ginnie Mae and Freddie Mac.
1993 Fannie Mae exceeds the “Opening Doors” goal of producing $10 billion in purchases for low- and moderate-income and other special housing needs.
1994 In an expansion of the “Opening Doors” campaign, the Trillion Dollar Commitment is launched, pledging $1 trillion in targeted housing finance that will serve 10 million low- to moderate-income families.
1996 Fannie Mae celebrates its 10th consecutive year of record earnings. Fannie Mae contributes $300 million to the Fannie Mae Foundation to expand its consumer outreach efforts.
1998 James A. Johnson announces his intention to retire. Franklin D. Raines joins Fannie Mae as
Chairman and Chief Executive Officer – Designate. Fannie Mae reaches $1 Trillion mark in mortgage book of business outstanding.1999 Franklin D. Raines becomes Fannie Mae’s Chairman and Chief Executive Officer. Conventional loan limit increases to $240,000.
1999 Fannie Mae changes its Mission Statement to: Our Mission is to tear down barriers, lower costs, and increase the opportunities for homeownership and affordable rental housing for all Americans. Because having a safe place to call home strengthens families, communities, and our nation as a whole.
2000 Fannie Mae fulfills the Trillion Dollar Commitment ahead of schedule and launches the American Dream Commitment. It is a ten-year, $2 trillion pledge to increase homeownership rates and serve 18 million American families.
2001 Conventional loan limit increases to $275,000.
And what effect did pouring trillions of tax payer guaranteed dollars have on the mortgage market? With that much mortgage money in the system, banks competed heavily to make loans, driving down the costs of financing. That was the goal. On the flip side, it also drove up the cost of housing because, as with any market, if money comes pouring in, inflationary pressures take over. That was also the goal because it boosted consumer spending.
And as interest rates dropped, millions of consumers opted to refinance their outstanding mortgages. In 2001, some seven million homeowners refinanced their mortgages, with over half taking out cash in the process. Fannie Mae estimated the cash generated by these refinancings at $80 billion, a significant infusion of capital into an otherwise sluggish economy.
And that doesn’t even cover what bankers were making on fees and commissions.
Isn’t this massive market manipulation in the name of social engineering? The whole system seems to be dependent on housing values NEVER falling. If I, a total economic layman can see that, how could it have escaped the folks at HUD (Fannie’s direct regulator) and the entire congressional oversight apparatus?
Oh, that’s right, HUD was in on it!
In October 2000, HUD published a new rule (the 2000 rule) that increased the affordable housing goals for the GSEs for the 2001–2003 period. Under the 2000 rule, the share of all eligible units that each enterprise finances that must be affordable to low- and moderate-income families increased from 42 percent to 50 percent.
That’s right, Fannie’s overseer HUD required them to take on greater risk. Well who oversees HUD?
UPDATE: It occurs to me that this creates an interesting feedback loop. Fannie pours money in to the system. Rates drop but purchase prices go up. The more the purchase prices go up, the pool of people that can’t afford the purchase price grows. HUD requires more assistance for the growing group of people that can’t afford the housing. Fannie pour more money into the system. Rates drop further. Getting dizzy?
Comments
1 Comment so far
[...] lack of regulations. Quite the opposite, the cause of present day failures is precisely because of an abundance of socialist regulations and agendas, which multiple government agencies inflicted on t…. The two cases are not even comparable, except in that they both are related to banking. [...]