Posts Tagged ‘Brian Lehrer’

Brian Lehrer Show question

If you didn’t catch the Brian Lehrer Show this morning, you can hear my segment here.

Listener C.G. from Manhattan poses a very good question:

I’m not sure I follow Ms. Katz’s explanation about the Community Reinvestment Act. If pro-CRA activists had to convince Fannie Mae to insure formerly redlined mortgagors, why would there be competition between Solomon Bros. and other sub-prime lenders and Fannie Mae to finance the mortgages?

I had to condense a decade of history into a brief explanation, so let me unpack the sequence of events that led from a drought of financing for high-risk borrowers in the 1970s to a ferocious race to the bottom by the end of the 1990s.

When the pro-CRA activists first persuaded Fannie Mae to buy mortgages they previously wouldn’t have, in the late 1980s, the Wall Street mortgage-backed securities market was still in its infancy. It was only in 1983 that Congress permitted open trading in mortgage-backed securities, and only with the tax code overhaul of 1986 was it even feasible for investment bankers to sell mortgage-backed securities on a large scale. Then it took a few years of persuasion and demonstrated returns to convince investors that mortgages to high-risk borrowers were worth betting on. The Wall Street-backed subprime market really took off in 1994, when mortgage lenders essentially ran out of new customers.

Once the subprime industry, backed by Wall Street mortgage-backed securities, got growing and producing returns by charging high interest rates and fees to high-risk customers, there was no looking back – it was a lucrative business that had to keep pursuing new customers to grow. Those customers were ones who either didn’t qualify for Fannie Mae/Freddie Mac-financed mortgages, even under those agencies’ newly  generous lending standards, or were qualified but pushed into subprime by unscrupulous mortgage brokers.

Wednesday, June 24th, 2009 | Tags: , , ,
Posted in A Lot More, News and Reviews | No Comments »