A New Chapter or a Bad Rerun?

OK, so I admit it. For years, I’ve been pointing fingers at the Fannie – Freddie show relating how their lending threshold revisions in the mid-90’s contributed to the culture change in the U.S. that ultimately created the sub-prime mess. And for the past 16 months or so, I’ve sounded like I knew what I was talking about. To recap, in the mid-90’s:

1. The secondary market, in an effort to increase the percentage of homeownership in this country, loosened their credit standards and collateral guidelines which meant more people bought homes and other people bought homes that were beyond their means.
2. Simultaneously, credit scoring becomes the standard by which loans are made. The thinking is that an empirically-based formula will result in the consistent granting of loans without discrimination. Oh, and it will also help to measure payment risk.
3. Risk-based pricing then becomes the way to grant loans to people with low credit scores and mitigate the higher chance that the loan won’t be repaid. The lower the score, the higher the interest rate & everybody’s happy. The birth and growth of sub-prime lending.
4. At the same time, this thing we call the Internet takes control of our information and daily lives and online commerce becomes an easy way to help us pack in more stuff into our multi-tasking world. Credit card usage explodes. (by the way, credit cards are loans – they use scoring & risk-based pricing too)

So in 2008, it all came crashing down. The party is over and now we have to clean up the mess. Everyone has an opinion on how but the truth is, we are in unchartered waters here.

So then I read this article in Bloomberg and learn that Fannie Mae is reducing credit standards so homeowners can take advantage of historic low interest rates and refinance their mortgage loans. I get the reasoning – saving money on the monthly house payment will free up more cash to buy stuff and stimulate the economy.

But read the article and let me know what you think. Am I wrong to see this as a déjà-vu? http://www.bloomberg.com/apps/news?pid=20601087&sid=aTu9HA5cZgQ4&refer=home