The Used Car Mortgage

The Used Car Mortgage is one phase of the current credit crisis that I have always found incredibly hard to believe. Having purchased several homes, I'm familiar with the required documentation and the required amount of money for a down payment or an equity sale. I'm very aware of the relationship between the amount of money paid up front and how it relates to the monthly payment and the financing of the balance. The Used Car Mortgage, however, is something else entirely.

I've never understood how companies like Freddie Mac and Fannie Mae – the companies once headed by Obama advisers Jim Johnson and Franklin Raines -- could be publicly traded while at the same time being government sponsored. But they are and they're legal. A bit of history sheds some light on how it came to be this way.

In 1977, President Jimmy Carter signed the Community Reinvestment Act that pushed Freddie and Fannie into aggressively lending to impoverished minority communities with what Carter said were hopes of raising them to middle class. History shows that poor minorities would have been better served if they had been offered jobs and education instead of mortgages they couldn't afford to pay, but Carter didn't see it that way.

Fast forward to 1995 -- President Clinton directed Robert Rubin, his Secretary of the Treasury, to re-write the rules for Freddie and Fannie, and by 1997 Clinton, using his HUD Secretary, Mario Cuomo, double-teamed the process. In so doing, Clinton turned the quasi-private mortgage-funding firms into semi-nationalized monopolies that not only dealt in mortgage paper but they also began making loans to large Democratic voting blocks, and handing out jobs and money to political allies. Corruption was inevitable.

Clinton had put Freddie and Fannie into the subprime market in a huge way. They now had immense leverage due to government guarantees that allowed them to hold only 2.5% of capital to back their investments. Banks were required to hold 10%.

Business boomed for Freddie Mac and Fannie Mae as they dumped billions of dollars into loans in poor communities. They became the used car salesmen of the mortgage market, generating the "No job -- No income documentation = No problem" loans. If you had a pulse you could get a mortgage. The insanity had begun.

By 2007, Freddie and Fannie owned and guaranteed nearly half of the $12 Trillion US mortgage market. This was an overwhelming exposure of taxpayer money into private equity and it was doomed to fail.

It was only a matter of time.

Nikki