A Lookback

By Danielle Fugazy, M&A Magazine

October 6, 2008

As someone who covers the private equity industry and has several family members working at investment banking houses, I am constantly reading the mainstream news and looking back, trying to figure out exactly when everything went so wrong. Last week, I came across an article from The New York Times, dated Sept. 30, 1999. The article talks about easing credit to afford people the opportunity to buy houses. I found the piece very interesting given where we are today. I have excerpted a few passages below.

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES

Published: September 30, 1999

In a move that could help increase home ownership rates among low-income consumers, the Fannie Mae Corp. 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, 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.

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.''

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.

Danielle Fugazy

danielle.fugazy@sourcemedia.com