First off, there are many, many reasons for our current economic state. Much of which is being spoken of in the media, some is not. I wanted to share with you some information from a mortgage standpoint.
I am a mortgage broker. In 2007, I was made aware of an act that began in 1977 called the Community Reinvestment Act or CRA. Nearly 50% of my loan volume in 2007 came from CRA products. Lenders offered pricing incentives (increased commissions) if the borrower or the property's location met CRA guidelines. If the property was in a CRA-designated census tract or the borrower made less than 80% of the county's median income the loan would qualify for special CRA financing or a dramatic increase in my commission as much as 1.5%.
For example, Bank of America had a wholesale program (available through brokers like me) that allowed a borrower to be one day out of foreclosure, to be one day out of bankruptcy, to have open collection accounts, charge offs, judgments and repossessions, to be one day on the job with no other required job history and a 60% debt ratio (spend more than half of their gross monthly income on bills) to buy a home so long as they had a 620 credit score and made less than $60,000 per year. Now, many of your aren't mortgage people but does that not still sound absolutely ridiculous?
Why would lenders do this? They are REQUIRED by the government to do these loans. Due to the CRA, depository lenders that have a branch located in an area are required to do a minimum number of loans that meet CRA guidelines. Bank of America, for example, was mandated that 4 out of 10 loans closed in CT had to be CRA loans (in 2007) or else face stiff fines from the government because of the large amount they had on deposit here. They offer these special programs (the BoA one was definitely extreme) to incentivize their useage. This program was a beautiful thing for me and CRA-type borrowers, but what about the shareholders of the lenders and banks?
What is CRA? To answer this, let's go back to Carter's administration. In 1977, we saw the creation of the Community Reinvestment Act (CRA). The initial premise of the Act was to discourage "red lining" or the denial of mortgage loans in certain neighborhoods or due to a borrower's race and ethnic background. Red lining was very common back in the 1970s and also led to the creation of Fair Housing laws.
During the Clinton Administration, changes were made to allow the CRA to reach more people. Due to these changes, lenders like Countrywide were able to package subprime loans and sell them on the secondary market to companies like Bear Stearns, Merril Lynch and Morgan Stanley. Between 1993 and 1998, there was a 39% increase in CRA mortgage loans versus a 17% increase in other loans. These changes also allowed Fannie Mae and Freddie Mac to hold less leverage capital, only 2.5% versus 10% that are required of ordinary banks. As a result, in 2007 Fannie and Freddie owned or guaranteed around half of the $12 trillion in mortgage loans in the US.
In 1999, this article came out in the LA Times with reference to home ownership for blacks and hispanics being on the upswing due to increased pressure from the Government.
The article praises the efforts of the Clinton Administration for forcing Fannie and Freddie to devote a certain percentage of their loan portfolio to lower-income and minority borrowers. While this Affirmative Action-type mandate may sound good, there is a reason why lower-income borrowers were not lent to in the first place - they have a higher rate of default (irrespective of their race and ethnicity.)
Per the article: "The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers; HUD, which has the authority to set the targets, is poised to propose an increase this summer. Although Fannie Mae actually has exceeded its target since 1994, it is resisting any hike. It argues that a higher target would only produce more loan defaults by pressuring banks to accept unsafe borrowers. HUD says Fannie Mae is resisting more low-income loans because they are less profitable."
Key point in that paragraph is that "[Fannie Mae] is resisting any hike". Having a huge portfolio comprised of 42% high-risk loans and 2.5% leverage should seem unreasonable, even for the economically-challenged. Basically, through government interference of Fannie's and Freddie's business practices, it would ultimately cause their demise. And unlike what Barney Frank said in 2003 as he opposed moving the oversight of the companies into the Department of the Treasury, the government, as we know, did bail out the companies.
There are still no-money down financing programs available and, wouldn't you know it, they are all through the government. However, unlike that crazy Bank of America loan that I mentioned above in paragraph 3, these loans have been set up in such a way that they do not suck money out of the government. For more information about these loans, you can visit our website, email me to eboucher@dynamicfundingonline.com or call our office at 860-282-6182.
Eric Boucher
Dynamic Funding Solutions
www.dynamicfundingonline.com
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