ANOTHER PERVERSE INCENTIVE (& 2 GOOD FREDO QUOTES)

Barry Ritholtz explains another part of the Credit Crunch Machine: mortgage brokers only looked out for a 3 to 6 month horizon when making mortgages. If the loan defaulted after that, it was no longer their problem.

Goal: Increase Minority Homeowners by 5.5 Million in a Decade
Tuesday, October 14, 2008 10:00 AM

Understand this simple fact: In an ultra-low rate environment, where prices are appreciating rapidly, and mortgages are being securitized, ALL THAT MATTERS IS THAT THE BORROWER NOT DEFAULT IN 90 days (or 6 Months). The goal was to make a loan that did not default in that period of time, it cannot be put back to the originator.

As a mortgage salesman, you only lose your a fee if a borrower defaults within 3 or 6 months. What do you do to maximize your returns? The best way to do that -- to put people in houses that would not default in 90 days -- was the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. By then, it was no longer your problem.

Can you grasp what a monumental change this was? Instead of making sure that borrowers could pay back ALL OF THE 30 YEAR FIXED MORTGAGE, you only had to find people who could afford the teaser rate for a a few months. THIS WAS AN ENORMOUS AND UNPRECEDENTED SHIFT IN LENDING.

This is the key to the housing boom and bust, and ultimately underlies the entire credit freeze. And, it would not have been possible without the Greenspan ultra-low rates, which made the teaser portion (the "2" of the 2/28) of these mortgages so attractive.

Ritholtz also found 2 gems from Pres. Fredo, each of which can go a little way to demolishing the wingnut claim that Fannie, Freddie and the CRA are responsible for the Big Shitpile.

Fredo in 2002:

Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a home ownership gap. It's a -- it's a gap that we've got to work together to close for the good of our country, for the sake of a more hopeful future. We've got to work to knock down the barriers that have created a home ownership gap.

I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families . . .

Fredo in 2004:

One other thing I've done, is I've called on private sector mortgage banks and banks to be more aggressive about lending money to first-time home buyers. And the response has been really good. There's a lot of people in this -- our communities around the country that deeply care about the issue of home ownership, and they've been responsive.