Lots of blame to go around

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By The Staff

Dear Editor,

In a recent letter to the editor (Sept. 11) takes the Republican Party to task for a variety of financial ills, including the recent takeover of Fannie Mae and Freddie Mac by federal officials. Was this wrath properly directed or should it be more bipartisan? A brief history leading to this crisis is instructive.

The takeover was initiated by the increasing number of mortgage foreclosures and delinquencies leading to the current havoc in the financial markets. Reasons for these increases vary considerably with housing markets, financial circumstances of individual families, etc.

The fraction of loans failing is much greater for riskier types (e.g. subprime, ARM and Alt-A). For these loan types, the national foreclosure rates are 9 percent, 7.5 percent and 6 percent of their individual totals, respectively. For prime loans, the foreclosure rates are 3 percent, or less. The foreclosure percentage of riskier loans is expected to increase further since those delinquent under 30 days is currently 25 percent for just the subprime category!

Subprime mortgage loans originated during the Carter administration in 1977 with the Community Reinvestment Act (CRA). Considerable opposition to this act came from the banking community because it required banks and thrifts to offer credit, including home mortgages, to underserved members (low income) of their communities.

In January 1995 the Clinton administration implemented regulatory revisions to the CRA which substantially increased the number and aggregate amount of loans to small businesses as well as low and moderate income individuals. From 1993 to 1998 the number of CRA loans increased at a rate nearly 2.5 times that of other loan types.

In 1999, walls between banking, investment and insurance companies were removed by repeal of the Depression era Glass-Steagall Act. Although Republican sponsored, this repeal had the near-unanimous approval of members of both parties. Intended to make the country’s financial institutions more competitive, it led to banks approving even more loans to people who couldn’t afford them and to investment banks to “spread the risk” by combining bad with good mortgages. Everyone thought this infallible since real-estate values could never fall!

In 2003 the Bush administration proposed to regulate Fannie Mae and Freddie Mac (the leading agents of subprime loans) by the Treasury Department. This was fiercely opposed by Democrats who claimed that they were “not facing any kind of financial crisis” (Barney Frank D-MA). Some saw our present financial problems brewing but not enough was done to stave off the maelstrom.

Los Alamos