PDA

View Full Version : no bailout for you!


nakman
09-29-2008, 02:26 PM
from http://www.manufacturing.net/News-House-Defeats-700-Billion-Bailout.aspx?menuid=36

House Defeats $700 Billion Bailout
By Julie Hirschfeld Davis, Associated Press Writer
Manufacturing.Net - September 29, 2008



WASHINGTON (AP) -- In a stunning vote that shocked the capital and worldwide markets, the House on Monday defeated a $700 billion emergency rescue for the nation's financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive without it.

Stocks plummeted on Wall Street even before the 228-205 vote to reject the bill was officially announced on the House floor.
As a digital screen in the House chamber recorded a cascade of "no" votes against the bailout, Democratic Rep. Joe Crowley of New York shouted news of the falling Dow Jones industrials. "Six hundred points!" he yelled, jabbing his thumb downward. The decline was about 530 points shortly before the close of the trading day.

Bush and a host of leading congressional figures had implored the lawmakers to pass the legislation despite howls of protest from their constituents back home. Not enough members were willing to take the political risk just five weeks before an election.
"No" votes came from both the Democratic and Republican sides of the aisle. More than two-thirds of Republicans and 40 percent of Democrats opposed the bill.

The overriding question for congressional leaders was what to do next. Congress has been trying to adjourn so that its members can go out and campaign. "We are ready to continue to work on this," said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.
"The legislation may have failed; the crisis is still with us," said House Speaker Nancy Pelosi, D-Calif., in a news conference after the defeat.
"What happened today cannot stand," Pelosi said. "We must move forward, and I hope that the markets will take that message."
At the White House, Bush said, "I'm disappointed in the vote by the United Sates Congress on the economic recovery plan."

The president was to meet with members of his economic team later in the day "to determine next steps," said spokesman Tony Fratto.
Republicans blamed Pelosi's scathing speech near the close of the debate -- which attacked Bush's economic policies and a "right-wing ideology of anything goes, no supervision, no discipline, no regulation" of financial markets -- for the vote's failure.

"We could have gotten there today had it not been for the partisan speech that the speaker gave on the floor of the House," Minority Leader John Boehner said. Pelosi's words, the Ohio Republican said, "poisoned our conference, caused a number of members that we thought we could get, to go south."

Rep. Roy Blunt, R-Mo., the whip, estimated that Pelosi's speech changed the minds of a dozen Republicans who might otherwise have supported the plan. Frank said that was a remarkable accusation by Republicans against Republicans: "Because somebody hurt their feelings, they decided to punish the country."

Monday's action had been preceded by unusually aggressive White House lobbying, and Fratto said that Bush had been making calls to lawmakers until shortly before the vote. Bush and his economic advisers, as well as congressional leaders in both parties had argued the plan was vital to insulating ordinary Americans from the effects of Wall Street's bad bets. The version that was up for vote Monday was the product of marathon closed-door negotiations on Capitol Hill over the weekend. "We're all worried about losing our jobs," Rep. Paul Ryan, R-Wis., declared in an impassioned speech in support of the bill before the vote. "Most of us say, 'I want this thing to pass, but I want you to vote for it -- not me.' "
With their dire warnings of impending economic doom and their sweeping request for unprecedented sums of money and authority to bail out cash-starved financial firms, Bush and his economic chiefs have focused the attention of world markets on Congress, Ryan added.
"We're in this moment, and if we fail to do the right thing, Heaven help us," he said.

The legislation the administration promoted would have allowed the government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions. Getting those debts off their books should bolster those companies' balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan worked, the thinking went, it would help lift a major weight off the national economy that is already sputtering.

More than a repudiation of Democrats, Frank said, Republicans' refusal to vote for the bailout was a rejection of their own president.

Nay
09-29-2008, 02:46 PM
I know, I was hoping they would pay off my credit cards. I need new tires.

Too bad Lehman didn't blow up entirely, they hold my mortgage and if they disappeared I figured I'd just own my house :D:bolt:

Uncle Ben
09-29-2008, 03:03 PM
I know, I was hoping they would pay off my credit cards. I need new tires.

Too bad Lehman didn't blow up entirely, they hold my mortgage and if they disappeared I figured I'd just own my house :D:bolt:

Unfortunately, it doesn't work that way. WAMU owns a lot of my life as our business investments have been financed through them. Not sure who bought their assets but I'm guessing that starting with next months statement I will see a new letter head. :rolleyes: It's all just a big game. As it has always been "They who hold the gold make the rules!"

Romer
09-29-2008, 03:19 PM
I keep saying "don't look at your 401k, don't look at your 401k"

AxleIke
09-29-2008, 03:49 PM
I never thought I'd say this, but sometimes its good being poor.

Lots less to lose :D

Shark Bait
09-29-2008, 11:31 PM
WAMU owns a lot of my life ....

I sat in an office building last Friday in Seattle and watched as the clouds surrounded the WaMu tower down town. Rather fitting. Eventually the tower emerged from the fog. :D

Nay
09-29-2008, 11:57 PM
Unfortunately, it doesn't work that way. WAMU owns a lot of my life as our business investments have been financed through them. Not sure who bought their assets but I'm guessing that starting with next months statement I will see a new letter head. :rolleyes: It's all just a big game. As it has always been "They who hold the gold make the rules!"

Of course not :hill:, even worthless assets that the government must socialize are worth plenty to a buyer assuming said government bailout is coming.

It was fun to wonder, much like playing lotto, what would happen in a Chapter 7 situation with no buyer?

WaMu's banking assets were bought by JP Morgan Chase - my guess is you'll see Chase as the direct consumer branch.

Lehman owned Aurora Loan Services, not sure where that ended up as Lehman was sold off in chunks. It might be Barclays out of the UK.

treerootCO
09-30-2008, 05:55 AM
It's a good time to buy. ;)

Red_Chili
09-30-2008, 06:30 AM
Yeah no kiddin'... Good time to harvest capital losses for future use too.

Red_Chili
09-30-2008, 08:14 AM
The Great Depression of 2008
(http://online.wsj.com/article/SB122272238714287459.html)

nakman
09-30-2008, 08:19 AM
The Great Depression of 2008
(http://online.wsj.com/article/SB122272238714287459.html)

that was a neat article, thanks. :beer:

Red_Chili
09-30-2008, 12:05 PM
With apologies to Sir Winston, it appears the rumours of Wall Street's death are greatly exaggerated... however.

I'm reminded of the scene in The Holy Grail:
"Well... I'm not dead YET. No really, I'm feeling much betta..."
"No, you're dead." POP. "Now shut up."

Maddmatt
09-30-2008, 12:49 PM
I keep saying "don't look at your 401k, don't look at your 401k"

yeah, my retirement fund, such as it is, took a 6% bath YESTERDAY. That felt pretty good on top of the 25%+ I've lost in the last year. Good thing I've got a couple decades before I need it (although retiring at 45 seemed like such a good idea :D )

I'm repeating this quote from the article redchili posted... "when stocks stage their inevitable recovery" in my head over and over. I'm imagining it in Ellen Degeneres's voice, to the tune of "just keep swimming, just keep swimming". Seems to help somehow.
-Matt

Nay
09-30-2008, 03:33 PM
You really don't want a market on steroids trying to save for retirement, this means you'll be buying in some lower positions. You want to be at a high point as you near retirement and move to a capital preservation position. In other words, if this is killing you now, you are in the wrong investments from a risk v. return perspective.

Energy is the real issue long term, we don't solve that problem and it's all just paper money on paper statements.

Groucho
09-30-2008, 08:31 PM
Just for discussion...

Bancruptcy, not bailout is the right answer. (http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview)

farnhamstj
09-30-2008, 08:53 PM
thanks Nathaniel.

nakman
09-30-2008, 09:37 PM
Just for discussion...

Bancruptcy, not bailout is the right answer. (http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview)


like that one a lot! :beer2:

pmccumber
09-30-2008, 09:48 PM
My only problem with all this is that since the internet bubble burst in 2000, the economy has been fed by this surge in home equity that is now evaporating (ed). In other words, a great deal of the growth in the S&P was a mirage. Those who have told us that "the market always goes up" and "it will always come back" may be correct. But the market from 1964 to 1984 was essentially flat. From 2000 to now it is actually down. It will come back but if it takes 18 years that doesn't do me much good. I'm 47, I'm pissed that this segment of our economic foundation was allowed to implode and now we're going to go through how many years of stagnation? The commercial banking sector and the insurance sector are regulated; we have faith that if our house burns down, State Farm will cough it up. Wells Fargo can invest only certain percentages in certain investment classes and we don't have failures of commercial banks. Investment banks however have managed to buy off Congress and skirt oversight and now their indiscretions mean that I'm deprived of what a decade of growth in my retirement fund? No, I'm pissed. And I love markets but markets sometimes need regulation.

Hants
09-30-2008, 10:31 PM
Here's what The Economist had to say about the prior Crash (1930):

http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&story_id=12327393

Maddmatt
10-01-2008, 08:37 AM
Just for discussion...

Bancruptcy, not bailout is the right answer. (http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview)

Good article - I'm confused by one point though. He mentions that in the case of bankruptcy its the shareholders who take the hit - and then at the end he says that bankruptcy is preferable to a bail out because the US taxpayers shouldn't have to take the hit - but aren't they one and the same? Since most people's retirement and savings are tied up in the market, and all money is tied "to" the market, doesn't the US taxpayer take it in the shorts either way? We either end up with decades of increased taxes and decreased services to cover the exploding national debt or we end up with decades of extra working because our retirement and savings evaporated - and we'll probably have increased taxes and decreased services thanks to the Iraq debt (never miss a chance to blame Bush :D I hope he gets a hang nail today)

Have to admit I don't know which way to turn. I'd like the credit markets to free up so that commerce can march on so I can go back to work - but I'd also like the greedy jerks who created this mess to end up homeless, but since I benefited from a subprime mortgage (luckily refi'd last spring to 5.3% fixed :) ) I realize that sometimes you have to take the good with the bad, but I'd like to retire someday, but I'd like to lessen my kids looming tax burden as much as possible so that they have a chance of a life other than indentured servitude to their country..... At this point I just don't know.

Groucho
10-01-2008, 09:30 AM
Have to admit I don't know which way to turn. I'd like the credit markets to free up so that commerce can march on so I can go back to work - but I'd also like the greedy jerks who created this mess to end up homeless, but since I benefited from a subprime mortgage (luckily refi'd last spring to 5.3% fixed :) ) I realize that sometimes you have to take the good with the bad, but I'd like to retire someday, but I'd like to lessen my kids looming tax burden as much as possible so that they have a chance of a life other than indentured servitude to their country..... At this point I just don't know.

Very well said. It doesn't give anyone a clear choice either way. My grandparents "worked" after they "retired" well into their upper 70's, due to social security not being enough to sustain any sort of life outside the bare necessities. We (and I mean my age group) will most likely see our social security benefits evaporate into thin air long before we are eligible to receive them, and our kids probably will often wonder why they are paying into something that doesn't net them one red cent. Retirement planning by investing still has its risks, be it 401K or a simple IRA like we have at work. Too bad we don't seriously consider more savings as a means to that end. The allure of growing money while it sits is too much a factor, I guess.

As for the Shareholders & US Taxpayers question, I can only suggest that not everyone participates in the investment game (whether it be retirement like 401K or just investing in general) so not everyone should have to take the hit by socializing the loss. Anyone who believed that 401K was/is a sure thing needs to look further into their portfolio. Either having the 401K go into stocks/bonds/money market investments or by purchasing company stock all fall under certain amounts of risk categories. How long will that retirement package hold its value by propping it up artificially? Unless someone is on the verge of retirement it won't help much. The market will eventually hurt the value, maybe even worse later down the line.

pmccumber
10-01-2008, 09:37 AM
but I'd also like the greedy jerks who created this mess to end up homeless, but since I benefited from a subprime mortgage (luckily refi'd last spring to 5.3% fixed :) )

The doods who profited from this, some of them made billions, knew what they were doing was a ponzi scheme. But letting these institutions fail doesn't hurt them; they got so much loot they're warming their mansions with bricks of thousand dollar bills. Nobody really believes that letting these go teaches anyone a lesson do they? Now if there were laws, regulations maybe, and they violated them, then I would be happy to seen them slam the cell door next to the crooks from Enron, Tyco, and Worldcon.

Uncle Ben
10-01-2008, 11:55 AM
The doods who profited from this, some of them made billions, knew what they were doing was a ponzi scheme. But letting these institutions fail doesn't hurt them; they got so much loot they're warming their mansions with bricks of thousand dollar bills. Nobody really believes that letting these go teaches anyone a lesson do they? Now if there were laws, regulations maybe, and they violated them, then I would be happy to seen them slam the cell door next to the crooks from Enron, Tyco, and Worldcon.

It's easy to point fingers when thing go sour! The fact is this, like all business, is based on supply and demand. If people would go back to spending what they can afford and tossing credit cards the demand for bad loans would come to a screeching halt! The fact is we as Americans have conditioned ourselves into an "I want it now" mentality and greedy bankers simply gave us exactly what we asked for! Now it's up to us to suck up the consequences of our material greed and it's time the baking industry also paid for it's monetary greed! I applaud the elected officials with enough Cahones to say "go fish!"

Red_Chili
10-01-2008, 12:41 PM
My only problem with all this is that since the internet bubble burst in 2000, the economy has been fed by this surge in home equity that is now evaporating (ed). In other words, a great deal of the growth in the S&P was a mirage. Those who have told us that "the market always goes up" and "it will always come back" may be correct. But the market from 1964 to 1984 was essentially flat. From 2000 to now it is actually down. It will come back but if it takes 18 years that doesn't do me much good. I'm 47, I'm pissed that this segment of our economic foundation was allowed to implode and now we're going to go through how many years of stagnation? The commercial banking sector and the insurance sector are regulated; we have faith that if our house burns down, State Farm will cough it up. Wells Fargo can invest only certain percentages in certain investment classes and we don't have failures of commercial banks. Investment banks however have managed to buy off Congress and skirt oversight and now their indiscretions mean that I'm deprived of what a decade of growth in my retirement fund? No, I'm pissed. And I love markets but markets sometimes need regulation.

Regulation, at least overmuch, CREATES flat markets. Prosecuting criminals in suits, however, creates trust, and a stable business environment.

The folks who are now saying there is not enough regulation <coff coff Barney Frank and Maxine Waters et al coff> and that the other party is to blame, a few years ago were saying the regulator from the other party needed to be investigated and possibly fired for suggesting there was a looming bubble and lending standards had to be tightened - why, look how many more people are homeowners, they said. Could it be racism on the part of this conservative regulator, they said. That magic word stopped the conversation and most of the gutless conservatives (with a few exceptions, including one on the current stage) ran for cover. Nice. And W (is he an R, or a D? Who knows?) touted the increase in home ownership as his achievement. Just listen to the tapes of what they said then, versus what they say now. Why is this not played on the major networks? THAT pisses ME off. Transparency, or lack thereof.

And as far as being down from 2000... I am in much better shape (MUCH better shape) than I was in 2000. AFTER this 'poof' in the markets. The P/E ratios are not only sane now, they are undervalued. This is a great time to get in. Manage the risk by spreading it via diversification. It does work.

And if you think only those who invest in equities are participants in the equity markets, think again. There are no isolated subsystems. It is not quite 'butterfly effect', but it most definitely affects the entire system.

Hulk
10-01-2008, 01:08 PM
Here's an article about why doing nothing -- letting things collapse -- isn't such a great idea. Essentially, doing nothing was what turned the market collapse of 1929 into the Great Depression of the 1930s.

Here's the way I read this. The financial crisis doesn't affect me personally that much: I still have 3 cars, a house, a job, and some investments (that have taken a hit). It's easy for me to tell Wall Street to go to hell. But what is a crisis for Wall Street today will be a crisis for me next year. It's "trickle down" theory, the favorite of Ronald Reagan, in bad times rather than good.

Lesson From a Crisis: When Trust Vanishes, Worry
http://www.nytimes.com/2008/10/01/business/economy/01leonhardt.html?em

-----------------

This is from a different article, but I think it sums up the problem of the decade:
We’re living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial. Then the money managers panic and it sloshes out, punishing the just and unjust alike.
Here's the link (warning: NY Times editorial):
Revolt of the Nihilists
Op-Ed Columnist By DAVID BROOKS
http://www.nytimes.com/2008/09/30/opinion/30brooks.html

Maddmatt
10-01-2008, 01:43 PM
It's easy to point fingers when thing go sour! The fact is this, like all business, is based on supply and demand. If people would go back to spending what they can afford and tossing credit cards the demand for bad loans would come to a screeching halt! The fact is we as Americans have conditioned ourselves into an "I want it now" mentality and greedy bankers simply gave us exactly what we asked for! Now it's up to us to suck up the consequences of our material greed and it's time the baking industry also paid for it's monetary greed! I applaud the elected officials with enough Cahones to say "go fish!"

UB, that really puts something into focus for me about my own life.

The last 10-15 years were definitely an interesting time, financially speaking. If you're my age (looking straight into the face of the big 40 next spring) you spent your 20's and early 30's being pounded by the post 80's greed is good message, followed up with a good debt vs. bad debt chaser (rich dad poor dad?).

My wife and I bought our first place in 1995 with an FHA backed 3% down "1st time buyer" loan. In 1995 as 1st time buyers we were very heavily counseled by the banks, realtors, etc... as to exactly what we could afford, the documentation, and in my case the cleaning up of poor decision making in my younger years (signing up for 3 credit cards as a full time student and then maxing them all out to buy a new mountain bike seemed like a great idea when I was 19!) was tremendous and we felt like that $650/month mortgage was the weight of the world - in short it was exactly what you would expect buying a house to be like.

Didn't make a dime on that place, but we got our feet wet, built up a credit history, etc... In 1998 we sold it and bought our 2nd place - and even though we spent far less than we were "qualified" for, it was still a stretch for us for the first couple years. Qualifying for the loan seemed to be a bit easier, but I attributed that to our good credit standing.

Fast forward to 2006 - we actually made pretty good money on that second house and decided to move "up" market into a bigger, nicer place. Qualifying for the multitude of loans took one 15 minute phone call, we played some serious games with the system (at one point, for about 3 weeks, we had five (5!) mortgages all floating on top of each other (yikes) but we got the house we wanted.

I did endless spreadsheets before we jumped into that juggling act, and at the end of the day we played the system and got mostly what we wanted. In fact had our realtor and inspector not been incompetent and the seller not been technically dishonest, we would be sitting pretty with one fixed rate mortgage and pretty happy with ourselves. Why we still have 2 notes is the subject of a different rant.

But the point is, Kevin makes a good point. I had felt like the ease with which we could talk our way into massive debt was the result of our diligent payment making and of course my exemplary sales skills, but in reality it probably had more to do with the relaxed standards and aggressive loan programs of the time.

Luckily during all that time we never paid interest on a credit card and we made sure we never financed more than one car at a time. We weren't able to live without credit (we probably could have, but, you know, I likes my toys....) but with the exception of one monthly car payment we came pretty close. I didn't know we were being so smart though, I just thought we lacked the credit-courage everybody else seemed to have to acquire boats and things.

I still "want it now", but clearly our 8 year old Subaru and 192k mile 4runner will have to suffice for a few more years. Luckily we had the foresight/luck to make our major purchase/investment (and I still think that over time real estate will prove out as an investment) in a high demand area. Ten years from now, we'll all look back on this and laugh, right? I just hope I'm handing out the soup, and not standing in line to get it.
-Matt

pmccumber
10-01-2008, 03:34 PM
Regulation, at least overmuch, CREATES flat markets. Prosecuting criminals in suits, however, creates trust, and a stable business environment.

The P/E ratios are not only sane now, they are undervalued. This is a great time to get in. Manage the risk by spreading it via diversification. It does work.


Agree with everything you said, almost. I'm not placing blame, honestly. And I have contempt for politicians who try to place blame. Not one of them went on record to my memory. And I remember your references from the past about housing; made my blood boil back then. But, somehow politics is out of the way in managing commercial banks, insurance industry, food supply, and many others. And what we end up with is stability and faith in these fundamental building blocks of our economy. They're not nationalized, just regulated. And Wells Fargo and State Farm still clean up.

Now when 100s of SNLs collapse or this much worse debacle, you get years of ripple through the economy. You say things are a buy now and if you believe that you should act. I personally believe the almost overnight erosion of wealth that is happening will make all equity markets (real estate, stocks, bonds) drop and trend the right for a very long time.

I want growth and stability and now speculation and bubbles. I'm much more afraid of deflation right now than anything. And I love discussing it btw.

pmccumber
10-01-2008, 03:48 PM
Now it's up to us to suck up the consequences of our material greed and it's time the baking industry also paid for it's monetary greed!

Believe me, I don't have the answer now. I just have an inkling how we got here. To bail out or not? Seriously, I have no idea.

But I guess the thing that torques me in all of this is kinda what you alluded to. My dad always said "If you have to finance it, you can't afford it." Of course this man was 90th generation on a family farm. Now I have a mortgage but I've never had a car loan and I've own cars for 30 years . I'll take the Pepsi-Credit-Rating challenge with anyone. Point is, I've done everything in my power and always have to live within my means and a bunch of actions by bozos across the country out of my control are pushing on the bubble of my world. Hard! I only get anxious when I can't do anything and right now, I have this sinking feeling of a lack of power.

Beater
10-01-2008, 07:54 PM
The bailout is simply needed to prevent the panic. the big players that are left are not going to continue to through good money after bad. If you notice, the smart players didn't play the under qualified market anyway.

I am glad that I "own" everything but my house.

I sell things to big business for a living, and you know what? They're still buying.

however, if we let the market collapse, they won't be.

Nay
10-02-2008, 08:11 AM
it's time the baking industry also paid for it's monetary greed!

Harsh! The baking industry just wants you to have a nice cookie so you can feel better. :hill::D:lmao:

corsair23
10-03-2008, 12:38 AM
I didn't have a chance to read through this whole thread again to see if anyone mentioned this but a friend mentioned that she
"...heard something earlier today that there is a push to sneak some land use legislation (more wilderness protection) into the economic bailout bill."
Anyone else hear anything like that? I know they are trying to stick a whole lot of crap that doesn't belong in there as it is :rant:

corsair23
10-03-2008, 09:57 PM
I got this via email...Interesting for reading...

http://query.nytimes.com/gst/fullpage.html?res=9c0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all


September 30, 1999

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
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.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''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.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, 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.
''From the perspective of many people, including me, 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.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they 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.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
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.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.