Who’s On First?
The Meltdown
With all the turmoil in our financial markets you have to wonder who’s on first and who and or what is at the foundation of or current problems. Typically, economic meltdowns do not happen over night, so that leaves a person to ponder when it all started? Here’s my take...
Back in the late 70’s congress passed a law designed to increase homeownership for those who may not have had the type of credit banks typically looked for in terms of qualified buyers. This new law, The Community Reinvestment Act (CRA), enacted by Congress in 1977 (12 U.S.C. 2901) and implemented by Regulations 12 CFR parts 25, 228, 345, and 563e, was intended to encourage depository institutions (Banks) to help meet the credit needs of the communities in which they operate. Homeownership for all Americans is a lofty goal and this endeavor was indeed noble but what wasn’t noble was the unintended consequences of this type of potentially risky business practices including relax underwriting guidelines that ultimately became the vehicle that drove us down the road to millions of foreclosures.
Rekindled in the early 1990’s, that 1977 lofty goal to increase homeownership by allowing those with less than perfect credit was exacerbated by changes with the two institution Freddie Mac and Fannie Mae who purchase loans on the secondary market. These GSE’s (Government Sponsored Enterprises) were under constant political pressure to help low to moderate income families qualify for home loans. This pressure spawned another practice called “Desk top Underwriting”. Desktop underwriting is a general term used to describe an automated way of underwriting mortgage loan applications which uses artificial intelligence to enable lenders to make credit decisions based on a computer review of the loan application. As a sophisticated computer-based method, desktop underwriting also commonly referred to as automated underwriting, was developed to review the critical factors that affect a loan underwriting decision.
Two of the most commonly used automated underwriting systems are run by Fannie Mae and Freddie Mac. Desktop Underwriter® (DU) is Fannie Mae's automated underwriting software program, while Loan Prospector® (LP) is Freddie Mac's software program. The computer analyzes credit history, calculates debt-to-income and loan-to-value ratios, employment stability, assets and affordability to determine a borrower's profile and whether loans meet eligibility requirements.
Banks all across the country then used DU to qualify borrowers at times requiring very little verification of work history, income, debt or ability and willingness to repay the loan. Let’s face it, computer programs can not use it’s intuition or experience to help determine whether or not a borrower may be a high risk, but when all is said and done, that is exactly what these programs were designed to do. Eliminate the possibility of discrimination.
Now we’re looking at yet another government sponsored proposal. An economic recovery plan that will put at risk 700Billion dollars of tax payers money. Although sold to the public as a loan or asset reinvestment and procurement plan, this new law H.R. 3221: The Housing and Economic Recovery Act of 2008 addresses the housing problem, the credit crunch and hopefully will restore consumer confidence, but the one thing it does not address is the fact that the government expects us, the average taxpayer to trust them to fix a problem they started.
Ronald Reagan said it best. “Government is not the solution to our problems, government is the problem.”
Back in the late 70’s congress passed a law designed to increase homeownership for those who may not have had the type of credit banks typically looked for in terms of qualified buyers. This new law, The Community Reinvestment Act (CRA), enacted by Congress in 1977 (12 U.S.C. 2901) and implemented by Regulations 12 CFR parts 25, 228, 345, and 563e, was intended to encourage depository institutions (Banks) to help meet the credit needs of the communities in which they operate. Homeownership for all Americans is a lofty goal and this endeavor was indeed noble but what wasn’t noble was the unintended consequences of this type of potentially risky business practices including relax underwriting guidelines that ultimately became the vehicle that drove us down the road to millions of foreclosures.
Rekindled in the early 1990’s, that 1977 lofty goal to increase homeownership by allowing those with less than perfect credit was exacerbated by changes with the two institution Freddie Mac and Fannie Mae who purchase loans on the secondary market. These GSE’s (Government Sponsored Enterprises) were under constant political pressure to help low to moderate income families qualify for home loans. This pressure spawned another practice called “Desk top Underwriting”. Desktop underwriting is a general term used to describe an automated way of underwriting mortgage loan applications which uses artificial intelligence to enable lenders to make credit decisions based on a computer review of the loan application. As a sophisticated computer-based method, desktop underwriting also commonly referred to as automated underwriting, was developed to review the critical factors that affect a loan underwriting decision.
Two of the most commonly used automated underwriting systems are run by Fannie Mae and Freddie Mac. Desktop Underwriter® (DU) is Fannie Mae's automated underwriting software program, while Loan Prospector® (LP) is Freddie Mac's software program. The computer analyzes credit history, calculates debt-to-income and loan-to-value ratios, employment stability, assets and affordability to determine a borrower's profile and whether loans meet eligibility requirements.
Banks all across the country then used DU to qualify borrowers at times requiring very little verification of work history, income, debt or ability and willingness to repay the loan. Let’s face it, computer programs can not use it’s intuition or experience to help determine whether or not a borrower may be a high risk, but when all is said and done, that is exactly what these programs were designed to do. Eliminate the possibility of discrimination.
Now we’re looking at yet another government sponsored proposal. An economic recovery plan that will put at risk 700Billion dollars of tax payers money. Although sold to the public as a loan or asset reinvestment and procurement plan, this new law H.R. 3221: The Housing and Economic Recovery Act of 2008 addresses the housing problem, the credit crunch and hopefully will restore consumer confidence, but the one thing it does not address is the fact that the government expects us, the average taxpayer to trust them to fix a problem they started.
Ronald Reagan said it best. “Government is not the solution to our problems, government is the problem.”
posted by Gene Quinney Owner/Broker at 11:59 AM
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