Clinton to Fannie in 1999: Down payments are overrated

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I was recently reading the original announcement of Fannie Mae easing credit in 1999 published by the Times. How did this affect real home prices? I took Robert Shiller's home pricing data that he has going back to 1890 (this just shows from 1960), and every time the real home prices go 5% or above, growth slows in the next year.  It almost seems as if there is a barrier that stops home prices from going above 5% for more than one year.

However, in 1999, Fannie Mae started subprime lending.  In that year, subprime lending increased dramatically.  It seemed in 2000, that home price growth would again slow down, however, with the increase in subprime mortgage lending, homeownership was pushed to the point where everyone qualified.  Home price increased, and investors piled on.  Fannie Mae and Freddie Mac together bought up over 50% of the loans in the secondary, so the effect is not trivial. 

When reading the press release from Sept 29, 1999, the story hits home so hard it is almost comical.  This story is from Sept 29, 1999(See
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Fannie Mae [officials] ... add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.  In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
...Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Funny, except for the fact that the world is reeling in economic chaos, but what are we to expect when politics trumps prudence.


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