Video of Herman Cain and Ron Paul on who knew the Housing bubble was coming......

http://youtu.be/u4DTwqbi0-E

Video of  Herman Cain and Ron Paul on who knew the Housing bubble was coming.......

   

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  Subject: The Mortgage Crisis: Some Inside Views - WSJ 10/27/11

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The Mortgage Crisis: Some Inside Views

OCTOBER 27, 2011

By CHARLES W. CALOMIRIS

Emails show that risk managers at Freddie Mac warned about lower underwriting
standards—in vain, and with lessons for today.

Occupy Wall Street is denouncing banks and Wall Street for "selling toxic
mortgages" while "screwing investors and homeowners." And the federal
government recently announced it will be suing mortgage originators whose
low-quality underwriting standards produced ballooning losses for Fannie Mae
and Freddie Mac.

Have they fingered the right culprits?

There is no doubt that reductions in mortgage-underwriting standards were at
the heart of the subprime crisis, and Fannie and Freddie's losses reflect
those declining standards. Yet the decline in underwriting standards was
largely a response to mandates, beginning in the Clinton administration, that
required Fannie Mae and Freddie Mac to steadily increase their mortgages or
mortgage-backed securities that targeted low-income or minority borrowers and
"underserved" locations.

The turning point was the spring and summer of 2004. Fannie and Freddie had
kept their exposures low to loans made with little or no documentation
(no-doc and low-doc loans), owing to their internal risk-management
guidelines that limited such lending. In early 2004, however, senior
management realized that the only way to meet the political mandates was to
massively cut underwriting standards.

The risk managers complained, especially at Freddie Mac, as their emails to
senior management show. They refused to endorse the move to no-docs and
battled unsuccessfully against the reduced underwriting standards from April
to September 2004.

Here are some highlights:
On April 1, 2004, Freddie Mac risk manager David Andrukonis wrote to Tracy
Mooney, a vice president, that "while you, Don [Bisenius, a senior vice
president] and I will make the case for sound credit, it's not the theme
coming from the top of the company and inevitably people down the line play
follow the leader."

Risk managers had already experimented with lower lending standards and knew
the dangers. In another email that day, Mr. Bisenius wrote to Michael May
(another senior vice president), "we did no-doc lending before, took
inordinate losses and generated significant fraud cases. I'm not sure what
makes us think we're so much smarter this time around."

On April 5, Mr. Andrukonis wrote to Chief Operating Officer Paul Peterson,
"In 1990 we called this product 'dangerous' and eliminated it from the
marketplace." He also argued that housing prices were already high and
unlikely to rise further: "We are less likely to get the house price
appreciation we've had in the past 10 years to bail this program out if
there's a hole in it."

Donna Cogswell, a colleague of Mr. Andrukonis, warned that Fannie and
Freddie's decisions to debase underwriting standards would have widespread
ramifications for the mortgage market. In a Sept. 7 email to Freddie Mac CEO
Dick Syron and others, she specifically described the ramifications of
Freddie Mac's continuing participation in the market as effectively "mak[ing]
a market" in no-doc mortgages.

Ms. Cogswell's Sept. 4 email to Mr. Syron and others also anticipated the
potential human costs of the mortgage crisis. She tried to sway management by
appealing to their decency: "[W]hat better way to highlight our sense of
mission than to walk away from profitable business because it hurts the
borrowers we are trying to serve?"
Politics—not shortsightedness or incompetent risk managers—drove Freddie
Mac to eliminate its previous limits on no-doc lending. Commenting on what
others referred to as the "push to do more affordable [lending] business,"
Senior Vice President Robert Tsien wrote to Dick Syron on July 14, 2004:
"Tipping the scale in favor of no cap [on no-doc lending] at this time was
the pragmatic consideration that, under the current circumstances, a cap
would be interpreted by external critics as additional proof we are not
really committed to affordable lending."

Sensing that his warnings were being ignored, Mr. Andrukonis wrote to Michael
May on Sept. 8: "At last week's risk management meeting I mentioned that I
had reached my own conclusion on this product from a reputation risk
perspective. I said that I thought you and or Bob Tsien had the
responsibility to bring the business recommendation to Dick [Syron], who was
going to make the decision. . . . What I want Dick to know is that he can
approve of us doing these loans, but it will be against my recommendation."

The decision by Fannie and Freddie to embrace no-doc lending in 2004 opened
the floodgates of bad credit. In 2003, for example, total subprime and Alt-A
mortgage originations were $395 billion. In 2004, they rose to $715 billion.
By 2006, they were more than $1 trillion.

In a painstaking forensic analysis of the sources of increased mortgage risk
during the 2000s, "The Failure of Models that Predict Failure," Uday Rajan of
the University of Michigan, Amit Seru of the University of Chicago and
Vikrant Vig of London Business School show that more than half of the
mortgage losses that occurred in excess of the rosy forecasts of expected
loss at the time of mortgage origination reflected the predictable
consequences of low-doc and no-doc lending. In other words, if the
mortgage-underwriting standards at Fannie and Freddie circa 2003 had remained
in place, nothing like the magnitude of the subprime crisis would have
occurred.

Taxpayer losses at Fannie and Freddie alone may exceed $300 billion. The
costs of the financial collapse and recession brought on by the mortgage bust
are immeasurably higher. Unfortunately, the Obama administration has
perpetuated the low underwriting standards that gave us the crisis and
encouraged the postponement of foreclosures by lending support to various
states' efforts to sue originators for robo-signing violations.

Now they are trying to deflect blame from Fannie and Freddie by suing the
originators who fulfilled the politically motivated demands of the
government-sponsored agencies that drove the mortgage crisis. If successful,
all of those efforts will further postpone the ability of banks to grow the
supply of credit, and they will sow the seeds of the next mortgage bust.

Mr. Calomiris is a professor of finance at the Columbia Business School and a
research associate of the National Bureau of Economic Research.