Unintended consequences

I’ve had a varied career.  I come to librarianship after turns in sales and sales management, the brokerage industry, and higher education.  It’s the stint as a stockbroker that I’ve been channeling these past weeks as the financial industry slides into the abyss.

I know what mortgage-backed securities are, though they weren’t as prevalent when I was a broker.  I rather figured that sub-prime mortgages were a bad idea when I started seeing the ads on television.  (“Own your dream home!  Only 1.5% interest!”)  What I wasn’t too clear on was how all of this came about.

Back in my youth I would have loved to purchase a home of my own, but didn’t have the money for a down-payment.  I also made less than would have been necessary to qualify for a loan.  All of the sudden, though, people who seemingly fell into that same boat were buying houses.  Big ones, too.

An old article in the LA Times sheds some light on this situation.  From May 31, 1999 comes this story.  The story begins:

It’s one of the hidden success stories of the Clinton era. In the great housing boom of the 1990s, black and Latino homeownership has surged to the highest level ever recorded. The number of African Americans owning their own home is now increasing nearly three times as fast as the number of whites; the number of Latino homeowners is growing nearly five times as fast as that of whites.

These numbers are dramatic enough to deserve more detail. When President Clinton took office in 1993, 42% of African Americans and 39% of Latinos owned their own home. By this spring, those figures had jumped to 46.9% of blacks and 46.2% of Latinos.

The really pertinent paragraphs come later in the piece (emphasis mine):

Lenders also have opened the door wider to minorities because of new initiatives at Fannie Mae and Freddie Mac–the giant federally chartered corporations that play critical, if obscure, roles in the home finance system. Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities; that provides lenders the funds to lend more.

In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.

Ah.  Congress, in an effort to help lower-income folks and minorities buy their own homes, mandated that lenders offer loans to folks that they normally might not have.  I suppose it seemed like a good idea at the time, but there probably was a reason the banks weren’t lending to some of these folks (like me) who didn’t make enough to pay the mortgage.

More pertinent information (again, emphasis mine):

The top priority may be to ask more of Fannie Mae and Freddie Mac. The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers.

Well.  We told Freddie and Fannie they had to do this.  And now we’re mad that they did.

Certainly greed played a part.  And there’s plenty of blame to go around.  But it looks as though Congress itself inadvertently got us into this mess.  Now they need to get us out.  Hopefully, the lesson they will have learned is that they need to interfere as little as possible in business, since they tend to muddy the waters.  Unfortunately, Congress isn’t known for its learning ability.

With all of this economic turmoil, libraries will no doubt see an increase in business.  Libraries seem to do better when the economy takes a downturn: people looking for jobs, going back to school and doing research, looking for community.  It’s our turn to help.

Hat tip – Carpe Diem.


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Filed under Me and mine, Miscellaneous, Things that make you go, "Hmmm..."

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