NY Times Article From 1999 Reveals the Roots of the Current Economic Crisis

In 1999 (yes, 9 years ago!), the NY Times published what is  now a revealing and prescient article about the loosening of mortgage requirements for now-defunct Fannie Mae.

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

Good lead-in!  Easing of credit requirements has been cited as one of the root causes of the current economic crisis.  The next paragraph is even better.

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 officials say they hope to make it a nationwide program by next spring.

Individuals whose credit is generally not good enough?  Why would we ever loan to these folks?  The next paragraph is the reveal.

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.

The dreaded Clinton administration!  And the Fannie Mae stockholders!  An evil nexus of social programs and capitalism if ever there was one.  In the following paragraph, the chairman of Fannie Mae explains the rationale.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

The downsides of this action were foreseen.  Perhaps it was thought the economy would never have a downturn.  Remember, 1999 was during the peak of the dot com boom.

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.

Was anyone thinking about the potential problems this could have created?  As it turns out, the conservative American Enterprise Institute warned of the potential dangers.

''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.''

Ugh.  The penultimate paragraph alludes to the problems with making subprime loans to those who cannot afford them.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.