Subprime Meltdown: Saw It Coming

An alert reader recently sent us a copy of a news story that reported:

• "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."

• "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton administration to expand mortgage loans among lowand moderate-income people and felt pressure from stockholders to maintain its phenomenal growth in profits."

• "In addition, banks, thrift institutions, and mortgage companies have been pressing Fannie Mae to help them make more loans to subprime borrowers."

• "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on infinitely 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 1980s. 'From the perspective of many people, including me, this is another thrift industry growing up around us,' said Peter Wallison, a resident fellow of 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.'"

The excerpts come from an item that appeared in The New York Times in 1999; they indicate that sound heads saw trouble looming. They also affirm that the government promoted subprime mortgages and that the private sector was eager to make such loans. If an economic model rooted in social policy collapsed, then greed was a catalyst. The failure was a moral one.