The Mortgage Correction
I recently came across a New York Times article written in September of 1999 that provides some insight as to how we got into the financial mess we’re in today, and an explanation of why credit has become so difficult to obtain. The article discusses a decision by Fannie Mae to ease the credit requirement for loans that it was purchasing from banks. Instead of buying loans made only to qualified borrowers, Fannie Mae became a buyer of subprime loans.
At the time, subprime loans were relatively unknown outside of the mortgage world. They were mortgage loans that usually had interest rates 3-4 percentage points higher than traditional mortgage loans because the borrowers didn’t meet conforming loan credit requirements. Because Fannie Mae was willing to buy loans that they had previously stayed away from, banks became much more willing to make those loans.
The goal was to expand home ownership and make it possible for a greater number of people to have a chance to own a home. The risks were known at the time-these were borrowers who were considered “subprime” for a reason. They had been unreliable borrowers in the past, hurting their credit scores to the point that banks were scared to lend them money. When banks became willing to work with these borrowers, mostly because a government agency was willing to support this action by buying the loans, a huge group of homebuyers entered the market that really had no business being there.
This policy adopted by Fannie Mae is one that had a great chance of working out when the economy was strong. But we all know that the economy goes in cycles, it’s a volatile place with boom years and downturns. As we have seen in the housing meltdown of 2008, apparently the risks were not understood nearly well enough.
In the end, hundreds of banks that had billions of dollars on the books a few short years ago will be gone, and we will have learned an important lesson. Credit qualifications have tightened again, and lenders and once again trying to work only with qualified borrowers. The economy will continue to cycle, but hopefully the hard lessons we have learned during this recession will help us to avoid allowing history to repeat itself.
If you enjoyed this post, make sure you subscribe to my RSS feed!
Tags: Fannie Mae, lending, Loans, mortgage, subprime
Related Posts
