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Archive for September, 2008

Year 1999 – The Birth of Subprime

While researching for a paper on Sub prime and the lessons for microfinance, which i am currently writing, i came across this rather interesting NY Times article dated Sep 30, 1999 which I call “The Birth of Subprime”

Must Read, click here.

Alternatively download here.

Reproduced below:

Fannie Mae Eases Credit To Aid Mortgage Lending

September 30, 1999, The New York Times

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.

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.

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.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

”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.”

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

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.

”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.”

Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990’s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

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.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.


Recommended Eating: Kake Da Hotel (Delhi’s Best NWFP Cusine)

Recommended Eating: Kake Da Hotel (Delhi’s Best NWFP Cusine)

If you are ever driving in Connaught place – outer circle, once you zip past the Rohit Bal designed-one of Delhi’s unquestionably most serene restaurants i.e. Veda, switch off the air conditioning (if your car has one !), roll down the screens and press the car to the left until the wafting smell of kebabs, biryani’s and secret Indian curries from the 65 year old Delhi’s legendary gastronomical landmark i.e Kake Da Hotel, enters your car….

The owners of this eatery fled Multan of undivided India some 65 years back (now in Pakistan) and started this 30 cover eatery in New Delhi. There are only about 20 odd very carefully selected dishes on the menu, which haven’t changed since India won Independence and neither have any of the recipes. I think the secret to Kake’s success lies in a.> the use of Indian Masalas (Spices). Each of which is freshly ground with a pestle and mortar and not bought off the shelf from some supermarket b.> Use of Pure Desi Ghee ( Clarified Butter made from cow milk) only, this is a rarety these days as usually restaurants end up using some industrial sludge (read: vegetable oil).

A minimum waiting period of 20 minutes gets you a table. I think what is really brilliant is the Sag-Paneer ( Indian Cottage Cheese in a spinach curry), Egg Curry (Boiled Eggs in a tangy tomato-garlic-onion-ginger-secret Indian herbs curry), Sag-Meat (Mutton in a spinach curry), Murg Makhani or Butter Chicken ( Roasted Chicken in a tomato-butter-fresh cream-onion curry ) and the Meat Pulao (Basmati Rice cooked with Mutton).

Each dish is accompanied by a plate of freshly sliced onion rings with lemon juice and rock salt sprinkled on top. Along with the dishes one can order Indian breads- the Naan, Roti or a Tandoori Lachha Parantha . There are no desserts on the menu.

Must Eat, Whenever you are next in Delhi.

Address: 74, Municipal Market, Connaught Circus, New Delhi


Mobile Banking Transactions in India – Operative Guidelines for Banks (Second Draft – Sep-08)

The Reserve Bank of India has modified its earlier draft guidelines on mobile payments in India.
Click here for the updated Operative Guidelines for Banks – Mobile Banking Transactions in India.
Also reproduced below is The Economic Times article summarising the guidelines…
MUMBAI: Small-ticket payments and remittances from mobile phones will become a reality soon. Keeping in mind the superior reach of mobile phones as a delivery channel, the Reserve Bank of India on Friday released its final operative guidelines for mobile banking.

  • The central bank has decided to keep the limit on the ticket-size for mobile banking at Rs 2,500 per transaction, and Rs 5,000 per day. Banks have also been allowed to put in place a monthly transaction limit, depending on the bank’s risk perception of the customer.
  • While the guidelines will enable lenders such as State Bank of India and Axis Bank to go ahead with their launch of mobile-banking services, the central bank has decided to restrict the services only to holders of debit and credit cards. The card user base in the country is 80 million, with 55 million debit card users and 25 million credit card users.
  • However, it comes as a blow to players who intended to use mobile banking to reach out to the underbanked in rural India. A number of microfinance institutions and mobile payment operators such as mChek, PayMate and Obopay had tied up to offer mobile-based financial inclusion products in the hinterland. Banks, however, have been allowed to use the services of banking correspondents for extending this facility to consumers.
  • Only Indian rupee-based domestic services shall be provided on the mobile-payment platform, and the use of mobile-banking for cross-border transactions have been strictly prohibited. Banks which are based, licensed and supervised in India will be allowed to offer such services. Further, only banks which have implemented the core banking platform will be allowed to offer mobile banking.
  • At the same time, the RBI has recommended that all mobile banking transactions are validated through a two-factor authentication system, thereby complying to the latest security and encryption standards. The RBI has also said the long-term goal of the mobile-payment framework in India would be to enable funds transfer from and account in one bank to any other account in any bank on a real-time basis, irrespective of the mobile network the customer has subscribed to.
  • The guidelines also recommend that banks do not compromise on their know-your-customer and anti-money laundering guidelines. They will also be required to file suspicious transaction reports (STRs) to the Financial Intelligence Unit for all mobile banking transactions, as in the case of regular banking transactions.
  • It has also been recommended that banks explicitly state the risks to the customer and also get them to sign a contract before the service is adopted. It has also asked banks to make their mobile-banking services available across all phone networks.
  • The number of mobile phone connections in the country was at about 296 million at the end of July this year and it is growing at about 8-9 million per month, according to telecom regulator Trai. Banks have been exploring the feasibility of using mobile phones as an alternative channel of delivery of banking services. Some banks have also started offering information-based services like balance enquiry, stop payment instruction of cheques, transaction enquiry, location of the nearest ATM or branch, etc. Acceptance of transfer of funds, instruction for credit to beneficiaries of same or another bank in favour of pre-registered beneficiaries have also started in a few banks, the RBI said.





Plural turns One – The Wine ‘n Cheese Party

Plural‘s celebrated their 1st founding day at their well equipped office in Gurgaon’s tony Sushant Lok 1 neighborhood.
To recollect, there was over a dozen variety of cheese – ranging from plain to pungent, cheddar, gouda, goat, blue…  A brilliant big fresh potpourri salad bowl. Oven fresh bread – classic French baguette, croissants, dinner rolls. A fine selection of drinks – over 2 dozen varieties of tea, chardonnay, wine. A superb selection of cold cuts – smoked ham, salami, chicken breasts, sliced turkey breast. And to top it all a “melt if your mouth” Cheesecake for dessert.

What’s Next – The Fondue Party  ?

About Plural
Plural is a South Asia focused management consulting firm for microfinance and the micro, small and medium enterprise (MSME) sector. Set-up by professionals with over half a decade each of intense engagement with the microfinance and MSME sector in South Asia, Plural seeks to stimulate new markets by reducing information asymmetries and creating conditions conducive for market approaches to work in an inclusive manner.

Amongst other values, Plural maintains high confidentiality and never discloses client names.

In 1 year, Plural has achieved the amongst other’s the following milestones:

– Launched the World’s first capsule course in Microfinance – The Microfinance Passport

– Partnered to launch a leading online competition for social entrepreneurs

– Consulted, to prepare a financial inclusion vision document for a large Indian state, struck by poverty

– Conducted Impact Assessment Studies on a client of a leading microfinance funding institution

– Consulted to provide business strategy for an India MFI



Quarter Life Crisis – Must Watch Advertisement

A young nervous, “never been abroad” Techie working for some “sweat shop IT company” – is going overseas for an “on-site” assignment for 6-8 months. His parents are equally nervous and keep inquiring about what time is the flight, boarding time etc, and whether he has “packed” his bags etc ?

Watch the ad for more.

The Food Map – India’s Best Kept Secrets !

(Click the picture to enlarge)