How We Got Here: It was a Deliberate Policy

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Adrian Day’s reputation for discovering big winners adds credibility to the global investing pioneer’s insights, which he is sharing with The Gold Report via excerpts from recent articles in Adrian Day's Global Analyst. Discussing in Part 1 what led to the current crisis, he noted that the same folks who caused the problem by initiating unsustainable credit practices seem to have taken charge of trying to resolve it. Expanding on that point, he now calls attention to the government’s role in creating – or at least aggravating – the mortgage mess that precipitated the credit collapse.

Adrian Day’s reputation for discovering big winners adds credibility to the global investing pioneer’s insights, which he is sharing with The Gold Report subscribers via excerpts from recent articles in Adrian Day's Global Analyst. Discussing in Part 1 what led to the current crisis, he noted that the same folks who caused the problem by initiating unsustainable credit practices seem to have taken charge of trying to resolve it. Expanding on that point, he now calls attention to the government’s role in creating – or at least aggravating – the mortgage mess that precipitated the credit collapse.

How we Got Here: It was a Deliberate Policy

I’m sure many of you have read some of the articles on the government’s role in promoting, nay, requiring, subprime mortgages. See the article below from The New York Times, September 30, 1999; it requires no comment.

Fannie Mae Eases Credit to Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, Fannie Mae is easing the credit requirements on loans that it will purchase from banks and other lenders…

Fannie Mae has been under increasing pressure from the Clinton Administration to expand mortgage loans among low income people…

“Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements,” said Franklin Raines, chairman. “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.”

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 rating….They add that the move is intended in part to increase the number of minority and low income home owners… In July, the Department of Housing and Urban Development proposed that by the year 2001, 50% of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers.

In moving 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 1980s.”

Cheerleaders in Congress

This push towards mortgage loans for people who should never have received credit had its cheerleaders in Congress, of course.

Rep. Barney Frank: “I do not think we want the same kind of focus on safety and soundness…I want to roll the dice a little in this situation towards subsidized housing…” September 25, 2003.

Sen. Christopher Dodd: in a hearing on Fannie and Freddie, “This is one of the great success stories of all time.” February 24, 2004.

Sen. Charles Schumer: “I don’t think (Fannie and Freddie) need dramatic restructuring in terms of their mission.” April 6, 2005.

These are the very same people who are now grandstanding about Wall Street excesses, but worse, they are the very same people who are now shaping policy on how to get us out of this mess. And it’s worse even than politicians; after all, we shouldn’t expect ever anything more intelligent from these people. But worse are the regulators. We’ve heard an awful lot about the “lack of regulation.” Frankly, I don’t think there’s been any lack of regulation, but, something different, woefully inadequate oversight.

But it’s worse, far worse, than lack of oversight. The regulators in many cases actively required banks to make bad loans. Here’s the Boston Federal Reserve, warning banks in its jurisdiction that failure to make enough loans to minority customers could result in fine up to 1% of the bank’s net worth. In advising banks to loosen credit standards, it continued that “even the most determined lending institution will have difficulty cultivating business from minority customers if its underwriting standards contain unreasonable measures of creditworthiness…Special care should be taken to ensure that standards are appropriate to the economic culture of lower-income consumers.”

Read that again, slowly and carefully (but please not while you’re eating or you’ll probably get indigestion). A detailed article on this aspect of the problem can be found at: www.independent.org

So if you want to know a good part of why we ever got to this point, you know now. But of course many people in positions of authority simply don’t want to talk about this. Lastly, then, a little humor may be needed. This is John Bird and John Fortune on how the market operates, from last August, but still amusing. www.youtube.com

Adrian Day is President of Adrian Day Asset Management, which manages portfolios in resource and global equities. Contact him at Adrian Day Asset Management, 801 Compass Way, Suite 207, Box 6643, Annapolis, MD 21401; Tel: 410-224-2037; Fax: 410-224-8229; Email Adrian Day

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