Huge WaPo article on Fannie & Freddie that’s (mostly) worth reading:

"Blessed with the advantages of a government agency and a private company at the same time, Fannie Mae and Freddie Mac used their windfall profits to co-opt the politicians who were supposed to control them. The companies fought successfully against increased regulation by cultivating their friends and hounding their enemies.

The agencies that regulated the companies were outmatched: They lacked the money, the staff, the sophistication and the political support to serve as an effective check.

But most of all, the companies were protected by the belief widespread in Washington — and aggressively promoted by Fannie Mae and Freddie Mac — that their success was inseparable from the expansion of homeownership in America. That conviction was so strong that many lawmakers and regulators ignored the peril posed to that ideal by the failure of either company…

Fannie Mae, and to a lesser extent Freddie Mac, became enmeshed in the fabric of political Washington. They were places former government officials went to get wealthy — and to wait for new federal appointments. At Fannie Mae, chief executives had clauses written into their contracts spelling out the severance benefits they would receive if they left for a government post."

One significant omission: Freddie Mac overstated its capital base, and that was pretty much the last straw for the GSEs. The rest of the article emphasizes the attempts to expand home ownership in the 1990s (Clinton) and the 2000s (Bush) via the two GSEs.

While there is some merit to the argument that this movement impacted the housing market, it is for the most part significantly overstated, given what we now know about abdication of lending standards and the issuance of mortgages over the past 6 years. These are the vintage mortgages that are resetting, becoming delinquent, and going into defaults — not the circa 1990s trasnactions. And, the bad RMBS/CDO paper that is the root cause of the present credit crunch also date from the post 1% Fed funds rate. 

The proximate cause of current Housing situation (and eventual Credit crunch) stem primarily from 3 significant errors of the 2000:

1) Grenspan’s FOMC: Took Interest Rates taken to 1%, and kept their for over a year;
2)
Banks and Mortgage Underwriters: Abdication traditional lending standards, and ignored the traditional principle that loans should only be made to those who can reasonably repay them;
3)
Federal Reserve: Failed to adequately supervise banks; I consider this to be Greenspan’s Nonfeasance.

There have been numerous attempts to paint various government agencies and acts (HUD, CRA, and others) as the proximate cause of the current Housing problems. These are misguided, and primarily political, attempts that misstate well known facts about lending, mortgages and the Fed.

Indeed, government policies of the 1990s hardly managed to expand Home
ownership by any significant amount.

What did help out housing dramatically was the economic boom of the 1990s — huge wealth creation and robust income gains led to the end of the housing downturn that had tamped down home price appreciation from the late eighties til 1996. That’s the date of where Home price appreciation began in earnest.

From 2003 forward, however, prices went vertical, thanks to low interest rates, and all but non existent credit standards. If you could fog a mirror, you could get a mortgage. So much for lending standards. Indeed, the vast majority of irresponsible lending was (sua sponte) the idea of the major mortgage lenders. The loans presently defaulting, and the foreclosures now roiling both
the Housing and Credit markets primary stem from poor private sector
decision-making and weak bank policies.

Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference, was typical of the era:

Nat_mortgage_news

Sources:
How Washington Failed to Rein In Fannie, Freddie
As Profits Grew, Firms Used Their Power to Mask Peril
Binyamin Appelbaum, Carol D. Leonnig and David S. Hilzenrath
Washington Post, Sunday, September 14, 2008; Page A01
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/13/AR2008091302638.html

The Ongoing Impact of the Housing Sector   
Barry Ritholtz
Investor Insight, Aug 27 2007, 11:50 AM
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2007/08/27/the-ongoing-impact-of-the-housing-sector.aspx

Download National Mortgage News February 13, 2003.pdf

Category: Bailouts, Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “How Washington Failed to Rein In Fannie, Freddie”

  1. Scott in Chicago says:

    I’d add, on the political front, that the guy who has taken over the anchor chair for MSNBC’s election coverage, David Gregory, just happens to be married to an attorney that did some fine work for Fannie and/or Freddie. D.C. is an incestuous sewer…Fashizzle. And I know I should look up the specifics, but I’m watching the Bears.

  2. James says:

    The proximate cause of current Housing situation (and eventual Credit crunch) stem primarily from 3 significant errors of the 2000:

    1) Interest Rates taken to 1%, and kept their for over a year;
    2) Abdication of lending standards by Banks and Mortgage underwriters;
    3) Nonfeasance on the part of supervising banks

    ————-

    And where was the government oversight of (2) and (3)? These lending practices were hardly a secret, and regulatory agencies and Congress had a responsibility to step in. This problem can’t be parked solely at the door step of the lenders and banks, especially when it’s been made clear time and again that the business community is often highly incapable of self-restraint and smart decision making when there’s money to be made hand-over-fist.

  3. Jim Haygood says:

    “The agencies that regulated the companies were outmatched: They lacked the money, the staff, the sophistication and the political support to serve as an effective check.” — WaPo

    This is a standard line that ALL government entities take, no matter how lavishly funded they are. They ALWAYS claim to be outgunned, and lacking the resources to perform their mission. It’s a pre-packaged excuse for failure; a costless put option, if you will.

    You’re quite right in putting Mad, Bad Al’s “One Percent Forever” rate sale in first place as the proximate cause of the housing crack-up.

    Nevertheless — despite having a fool and a madman chairing the Federal Reserve — OFHEO could have required the GSEs to hold the same 8% to 10% capital levels that banks commonly do, instead of the jakeleg 50-to-1 leverage that vaporized the GSEs.

    The WaPo may be right that OFHEO didn’t possess the political horsepower to impose such prudential standards. But they didn’t even try. In fact, they even eased the capital standards a bit, a few weeks before the final plunge.

    Here are three juicy, tip-of-the-iceberg paragraphs from the WaPo article:

    ————

    In the Senate, Robert F. Bennett (R-Utah) added an amendment giving Congress the ability to block receivership, weakening that bill to the point where the White House would no longer support it. Bennett’s second-largest contributor that year was Fannie Mae; his son was then the deputy director of Fannie’s regional office in Utah.

    Fannie Mae even persuaded the New York Stock Exchange to allow its shares to keep trading. The company had not issued a required report on its financial condition in a year. The rules of the exchange required delisting. So the exchange created an exception when “delisting would be significantly contrary to the national interest.”

    The amendment was approved by the Securities and Exchange Commission. FNM would remain on the NYSE.

    ————

    Obviously, the GSE collapse is Congress’s Enron. Why aren’t the Senator Bennetts, the bribed NYSE directors, the corrupted SEC management, facing prosecution? Cause they RUN the courts, baby.

    Ahhh, the sweet smell of impunity! The moral of this tale is: don’t steal without a license. Big-time crime needs official sponsorship.

  4. James says:

    Obviously, the GSE collapse is Congress’s Enron. Why aren’t the Senator Bennetts, the bribed NYSE directors, the corrupted SEC management, facing prosecution? Cause they RUN the courts, baby.

    ——————–

    Absolutely. We’ll put people in jail for possession of pot, but for running our nation’s financial system into the ground where are the hearings, the determination of responsibility/culpability, the . . . jail time?

  5. russell says:

    Regarding the NATIONAL MORTGAGE NEWS attachment, I’d be interested in the article in the lower left: GREENSPAN: NO BREAK FOR GSE Somehow I think that might be relevant to this story.

  6. Michael says:

    “Indeed, government policies of the 1990s hardly managed to expand Home ownership by any significant amount.”

    How can you say that? Weren’t significant oversight changes made in the early-to-mid 90′s?

    Homeownership bounced around 64% from the mid-80′s to mid-90′s. From late 1994 until the turn of the millennium, it jumped to 67% while rates generally bounced around in the 7% to 9% range (and were close to 8% by 2000). After 30-year mortgage rates settled in and around 6% after 2000, homeownership hit a peak of 69% in 2005.

    Weren’t Fed benchmark rates more like icing on the cake?

  7. wally says:

    “…primarily from 3 significant errors”

    Do not forget that millions of Americans agreed to pay prices for homes that were not justified by traditional standards of value. There was a true bubble mentality, a mania. It may have been enabled by many things – and you have listed the 3 biggies – but you cannot absolve Joe 6 from his own foolishness.

  8. BG says:

    James wrote:

    “…..We’ll put people in jail for possession of pot, but for running our nation’s financial system into the ground where are the hearings, the determination of responsibility/culpability, the . . . jail time?”

    You are asking the right question. It amazes me that we don’t so much as hear a whisper about such a thing.

    You are correct, our laws are written to lock you up and throw away the key for some offenses and give you a free pass for others.

    I can not believe that not one person has been investigated for anything. Apparently, we are witnessing the melt down of the financial system of the entire free world and no one did anything wrong. Can you believe that shit?

  9. BG says:

    Joe Six Pack took the money because irresponsible bankers gave it to him for their own selfish reasons of which Joe wasn’t even aware of at the time.

  10. Tom C says:

    FNM was created in the 30′s. It was taken off budget in the 60′s. It has always had the benefit of a lower cost of funds than private sector players. Implied guarantees exist because of it’s exemption from state and local taxes by federal mandate. The one factor that is continually overlooked is it’s ability to make political contributions to it’s congtessional patrons who oversee it’s regulators. One would need to be deaf, dumb and blind not to grasp the conflict. These entities should nver have been created. They are, like many government dependant agencies, interested only in their expansion at whatever cost. It’s the nature of the state. This is not a left/right problem. It is a systemic/structural failure related to government being involved where it simply does not belong.

  11. Alex says:

    MOZILO: LET NO EMPLOYMENT HISTORY OR LACK OF SAVINGS STAND IN THE WAY OF HOME OWNERSHIP.

    Mortgage Chief Says That Only Quality Of Tan Should Matter When Qualifying For Rate.

  12. VennData says:

    Will GS, JPM, MER et al continue to confidently issue press releases saying they are “doing business with Lehman” again today?

    Now there’s a technical indicator to get out of a stock…

  13. mote says:

    I would submit the Taxpayer Relief Act of 1997 for a possible 4 slot on your list.

    The radical change in the capital gains treatment for home sales provided by this act fostered a culture of house flipping and multi-home ownership speculation.

  14. Fred S. says:

    The three reasons you state are valid. But the question is why did the three occur? It is becoming obvious to me that the strict, often over zealous adherence to the conservative economic orthodoxy is the fuel which has fed the fire.

  15. Fred S. says:

    The three reasons you state are valid. But the question is why did the three occur? It is becoming obvious to me that the strict, often over zealous adherence to the conservative economic orthodoxy is the fuel which has fed the fire.

  16. Joe says:

    Any opinions on the effect of LEH and the other falling investment banking dominoes on RE prices ? Will it substantially accelerate and/or steepen RE price declines on residential RE and CRE ?

  17. I can not believe that not one person has been investigated for anything. Apparently, we are witnessing the melt down of the financial system of the entire free world and no one did anything wrong. Can you believe that shit?

    Posted by: BG | Sep 14, 2008 4:03:34 PM

    BG,

    that’s a good Q, though can you believe there has not been a Hearing/Tele-Townhall explaining how “Mortgages” even work?

    towit: what gets loaned, who ‘funds’ it, et al.

    I wonder if the answers would even be proffered on this thread..