Find the Loan Behind the Loans
By GRETCHEN MORGENSON - New York Times - Published: September 7, 2013, at:http://www.nytimes.com/2013/09/08/business/find-the-loan-behind-the-loans.html?nl=todaysheadlines&emc=edit_th_20130908
Toward the end of the article the author, Gretchen Morgenson, makes this observation:
“The funding arrangements used by Western Sky and Cash Call are reminiscent of what occurred in the recent mortgage mania. The most egregious predatory lending wasn’t done, for the most part, by big national banks. It was done by smaller subprime mortgage companies like New Century, NovaStar and Fremont General, which made thousands upon thousands of loans.
But these companies wouldn’t have been able to make even 100 loans had they not gotten the money they needed from the big Wall Street banks. The warehouse lines of credit provided by those banks, therefore, enabled the underwriting of billions of dollars in dubious mortgages. Without access to that money, most of the worst loans would not have been written. When Wall Street cut off the credit spigot, these companies folded almost overnight.”
It’s interesting that Gretchen Morgenson focuses on “the Wall Street Banks” as enablers of predatory lending and dubious mortgages. When you consider Fannie's and Freddie’s aggressive purchasing of mortgages which later have been labeled predatory mortgages, or dubious mortgages, it would seem more accurate to include Fannie Mae and Freddie Mac, along with “the Wall Street banks”, as significant enablers of unqualified borrowers, predatory lending and dubious mortgage practices.
After all, there are those who believe Fannie Mae's and Freddie Mac’s long-term practice of progressively lowering of mortgage qualification standards and their apparent lack of ongoing auditing of borrower qualification standards for the mortgages they bought were major factors enabling mortgage originators to unload their predatory mortgage originations, and their dubious mortgage originations.(1)(2)(3)
Together, Fannie Mae and Freddie Mac were (are) the ten thousand pound gorilla that set the terms for competition in the mortgage industry (and, it seems they still are). And, perhaps more importantly, they had (and have) ‘government endorsement’ for the standards they set.
1. Qualifications like: income, assets, employment, and if the borrower was actually going to be the resident in the property
2. From Automated Underwriting: “Each entity has its own system; yet despite the different names, the systems are intended to achieve the same goals. Fannie Mae calls her system Desktop Underwriter (DU), while Freddie Mac calls his Loan Prospector (LP). Portfolio and subprime lenders have trade names for theirs, as well.”