The Sunday New York Times has a very interesting article on Fannie Mae and the current financial crisis. They do a decent job at delving into the complexities of the GSEs, and the many factors that went into the decision making at the senior level of the company. This includes pressure from clients such as Coutrywide CEO Angelo Mozilo, pressure from Congress, and the demands from investors for the company to be more aggressive. Most of all, it looks at the ongoing competitive demands of the market place that Fanny was in.

The key to understanding the GSE story is grasping their role within the bigger picture of the economy and housing sector. While there are some pundits who prefer talking points over reality (Charlies Gasparino, Lawrence Kudlow, James Pethoukoukis, and Jeff Saut all toed the GOP line) I prefer to keep all of my analyses based on the data and facts. Rather than creating historical revisions for partisan reasons, I prefer to keep it reality based. (I’m an independant, and that’s how I roll).

The current housing and credit crises has many, many underlying sources. Its my opinion there were two primary causes leading to the boom and bust in Housing: A nonfeasant Fed, that ignored lending standards, and ultra-low rates.

This nonfeasance under Greenspan allowed banks, thrifts, and mortgage originators to engage in all manner of lending standard abrogations. We have detailed many times the I/O, 2/28, Piggy back, and Ninja type loans here. These never should have been permitted to proliferate the way they did.

The most significant element were the 2/28 APRs, and their put back provision. Just about all of these gave the securitizer/repackager the right to return the loans within 6 (or 12) months if they went into default. Hence, our proposition that the 2002-07 period was unique in the history of finance. If any of these mortgages went bad within 6 months, the undewriter was on the hook.

HOW DIFFERENT WERE LENDING STANDARDS IF YOU ONLY NEED TO ENSURE THE BORROWER WOULDN’T DEFAULT FOR 6 MONTHS VERSUS FINDING BORROWERS WHO WOULDN’T DEFAULT FOR 30 YEARS.

In a rising price environment, 99% of the mortgages were not returned by the securitizers to the originator. From 2001 to 2005, the mortgage firms thrived. However, once prices peaked and reversed, things changed. From 2006-08, Wal Street began putting back mortgages to originators in greater numbers. This led to nearly 300 mortgage firms imploding.

We can blame the lenders, the securitizers, the borrowers, and Fannie/Freddie, but it doesn’t matter much. By the time Fannie and Freddie began changing their mortgage buying rules, the Housing boom was already in full gear, and the crash was all but inevitable.

Some people (especially the political hacks) are focusing their energies in the wrong places. According to a recent investigation by Barron’s, Fannie’s biggest problem was not the subprime mortgages they bought  — it was the better quality Alt A mortgages that caused their demise:

“As Freddie Mac Chairman and CEO Richard Syron recently put it, the GSEs have been hit by a “100-year storm” in the housing market, accentuated by some higher-risk mortgages that they were forced to buy to meet government affordable-housing targets.

The latter contention is more than disingenuous. A substantial portion of Fannie’s and Freddie’s credit losses comes from $337 billion and $237 billion, respectively, of Alt-A mortgages that the agencies imprudently bought or guaranteed in recent years to boost their market share. These are mortgages for which little or no attempt was made to verify the borrowers’ income or net worth. The principal balances were much higher than those of mortgages typically made to low-income borrowers.

In short, Alt-A mortgages were a hallmark of real-estate speculation in the ex-urbs of Las Vegas or Los Angeles, not predatory lending to low-income folks in the inner cities.

Only pure partisans take as gospel the statements of an embattled CEO whose own words are belied by the firm’s balance sheet and P&L statements.

What about the ultra low rates? Consider that the Greenspan Fed maintained a 1.75% Fed fund for 33 months (December 2001 to September 2004), a 1.25% for 21 months (November 2002 to August 2004), and lastly, a 1% Fed funds rate for 12+ months, (June 2003 to June 2004). That was fuel for the fire, and fed the boom even more, sending prices skyward.

And not just here . . . As the central bank for the largest economy in the world, the Fed’s rate action had repercussions in Housing markets everywhere. Rate cuts here richocheted around the world, sending home prices upwards globally.

Fed Fund Rates, 1974-2008

Note the circled area of detail is the chart above, in its historical context19742008

Fed Fund Rates, 2000-2008

200008


As to the credit crisis, it too, has many many  proximate causes, but the two I focus upon as having the greatest impact was exempting CDOs from any sort of regulatory scrutiny (Commodities Futures Modernization Act of 2000) and the payola scandal of the rating agencies Moody’s, Fitch, S&P slapping Triple AAA ratings on all manner of junk paper.

Caseshillerq307real
In order to fully understand the housing and credit crisis, one needs to understand a bit of history in the housing market. To that end consider this timeline:

1987 Federal Reserve cuts rates
1989 Housing Market peaks
1996  Prior purchases get to breakeven
1997  Housing Taxpayer Relief Act
1998 3 Rate Cuts
1995-2000 — Big stock market gains
2001 Rate cuts from 6% down to 1.75%
2002 More rate cuts to 1.25%
2003 one final cut to 1%

Follow the timeline: Home sales and prices cycled up post ’87 market crash — they peaked in 1989, and for the next 7 years, they slid down to sideways. A 1989 house buyer did not get back to break even until
1996/97. (See chart above)

A few other factors impacted housing: In 1997, the Taxpayer Relief Act that dropped capital gains to 20% from 28%, and also exempted the first $500,000 for married couples selling house (allowable once every
two years).

Around that time,the stock market boom and tech dot com bubble was in full throat.  That put ALOT of money in people’s hands in 1997, 98, 99 and Q1 of 2000. In the late 1990s, I had many discussions with clients, real estate agents and traders about the equities into house rotation: Take some equity profits off the table and then trade up in real estate. Consider these S&P500 gains in the markets: 1995=34%, ’96=20%, ’97=31%, ’98=27%, and from Oct ’99 to March 2000, the Nasdaq was up 100%.

The folks who want to place the entire crisis at FNM/FRE ‘s doorstep miss the point — and let me hasten to add that I was never a fan of the company, and we were short FNM from over a year ago, at $42+ — these people seem to miss all of the big picture issues, and are focsing on minor factor and outright irrelevancies. This was not a “social engineering” experiment, as the radical right has called it. This was extreme short sightedness.

Fannie Mae was not a government entity, they were an independent, publicly traded, private sector firm. They were allowed to borrow at better rates than banks as a GSE. They bought what they did in an
attempt top grab share and profits. If they came under pressure from Congress — or Angelo Mozilo, or hedge fund investors — it was because they were trying to capture market share and profits and maintain an advantageous position in the marketplace.

Consider:

“The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.

That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health.

Now consider the key points from the NYT article today:

• Company was in disarray after an accounting scandal;

• New CEO came on board in 2004;

• Competitors were “snatching lucrative parts” and market share away;

• Between 2001-04, the subprime mortgage market grew from $160 to $540 billion

• Between 2005-08, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers.

• By 2004, Fannie had lost 56% of its loan-reselling business to Wall Street;

• Angelo Mozilo, Countrywide Financial CEO, the nation’s largest mortgage lender, threatened to end their partnership unless Fannie started buying Countrywide’s riskier loans;

• Congress was pressuring for more loans to low-income borrowers;

• Hedge fund managers and other investors pressured Fannie executives that the company was not taking enough risk in pursuing profits;

• Like many other firms, Fannie’s computer systems did a poor job of analyzing risky loans;

• Between 2005-07 — afte rthe market’s peak — Fannie’s acquisitions of mortgages with less than 10% down payments almost tripled;

• Fannie expanded in hot real estate areas like California and Florida;

• From 2004-06, Fannie operated without a permanent chief risk officer;

As I have said repeatedly, Fannie and Freddie were cogs in the great housing machinery, and they bear some responsibility for the current debacle. But to claim they were the most significant factors misses the true tale of our twin Housing and Credit debacles.

Fannie has been around since 1938, Freddie since 1968, the CRA has been around since 1977 — suddenly, all of housing goes to hell in 2005, and then credit collapses 2 years after — and the best explanation some people can come up with is Fannie, Freddie and CRA?  Gee, isn’t that rather odd — especially after 70 years?

Then there is the international issue: If Fannie and Freddie and the 1977 CRA (and amendments) are to blame for the US boom and bust, how did the rest of the world end up with a housing boom too? Why did prices and sales go skyward in the UK, France, Spain, Ireland, Australia, etc.?  They had no CRA, or a Fannie Mae, or a  Freddie Mac, — so then what caused their housing boom?

The short answer: Ultra low rates, securitization, and perhaps some of our homegrown, innovative lending standards.

While I understand that reducing the complexities of economic history into bumper sticker phrases is politically expedient, it does not help us understand the root cause of the problems. And, it gets in the way of helping us fashion a solution for the future. Hence, why I hold the weasels who are attempting to obscure reality and rewrite history in such disdain.

For the non-partisan, non hacks amongst you, for the policy makers and academics and economists who are truly interested in how this came to pass, and what we can do to fix it, the bottom line remains: The CRA was irrelevant to the current crisis, and Fannie Mae and Freddie Mac were mere cogs in a very complex financial machine, with many moving parts.

But the primary cause of the mess? Not even close . . .

>

click for bigger graphic

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>

Previously:
How Washington Failed to Rein In Fannie, Freddie (September 14, 2008)

http://bigpicture.typepad.com/comments/2008/09/how-washington.html

Freddie’s Risk Officer: CEO Ignored Warning Signs (August 05, 2008)

http://bigpicture.typepad.com/comments/2008/08/freddies-risk-o.html

His Name is Mudd (August 20, 2008)

http://bigpicture.typepad.com/comments/2008/08/perilous-pursui.html

Fannie Mae Looks Like Hell (November 16, 2007)

http://bigpicture.typepad.com/comments/2007/11/fannie-mae-look.html

Sources:
Pressured to Take More Risk, Fannie Hit a Tipping Point
CHARLES DUHIGG
NYT, October 5, 2008

http://www.nytimes.com/2008/10/05/business/05fannie.html

At Freddie Mac, Chief Discarded Warning Signs
CHARLES DUHIGG
NYT,  August 5, 2008

http://www.nytimes.com/2008/08/05/business/05freddie.html

The Endgame Nears For Fannie and Freddie
JONATHAN R. LAING
Barron’s August 18, 2008

http://online.barrons.com/article/SB121884860106946277.html

Category: Bailouts, Federal Reserve, Real Estate, Short Selling, Taxes and Policy

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.

49 Responses to “Fannie Mae and the Financial Crisis”

  1. leftback says:

    A thoughtful analysis of a complex issue. It is interesting to see the NYT has woken up from years of slumber. Unfortunately they have become an organ of post hoc analysis, being completely unable to process what is happening in real time. Now they are simply catching up with the blogs.

    When the history of this period is written, the Times will be found complicit in the astonishing criminality of this regime. I am still dumbfounded at the lack of protest by the Times against the Iraq War and their inability to see the bubbles for what they were: an illusion of prosperity. Is it possible that they are afraid, or are the Sulzbergers simply on the payroll of the evil Neocon empire?

  2. Jeff M. says:

    Great analysis, Barry. Cue up the CRA and Fannie/Freddie wingnuts.

    Were they part of the problem? Yes, but as you detail, just one small part of a very complex problem all based in rampant greed (and no oversight or “oversight” by industry hacks, which has been the Bush admin’s mantra from day 1) ruling the roost above all.

  3. The current housing and credit crises has many, many underlying sources. Its my opinion there were two primary causes leading to the boom and bust in Housing: A nonfeasant Fed, that ignored lending standards, and ultra-low rates.

    Don’t forget the looming potential energy of all that capital sucked out of the market post dotcom burst and Enron debacle… Folks were looking for returns that were ‘safe as houses’…

  4. Rich Shinnick says:

    Ok, we have diagnosed the patient…now for the cure. 10 ideas, at least 5 that anybody can hate.

    1. Since so many mortgages have been sliced in to tranches (parts) the only way to clean them out of the system is to refinance them. I.E. pay them off at some level and let the payoff flow through to the MBS holders and will eliminate the underlying mish mash of securities by taking them out and replacing them with simple “whole” mortgages.

    2. To refinance mortgages we need a year of 1% rates and a federal bank or guarantee program or some such entity that will do this. That is where to put the $750 billion, not in to buying the complex securities that already exist.

    3. For deferred principal, borrowers need to give a personal note, look at this as a balloon payment. You can’t avoid moral hazard if you start discounting homes, i.e. my neighbor gets a discount for his mortgage, but I am current so I don’t get one. Deferred principal promissory notes are key.

    4. Yes, I know, people will walk anywaay, so any way that you slice it, defaults will accelerate. So, you need to recaplitalize banks by printing some money-no way around that.

    5. Federal government needs to recapitalize itself so we need new taxes. Maybe a national sales tax that excludes food? Anybody who thinks we are just going to do this with new income taxes is crazy.

    6. State and local governments need to shrink immediately. 5% paycuts for most state employees and immediate hiring freezes. This is going to happen sooner or later anyway. States are a disaster, California is a disaster, Swartzenegger promised to cut up the credit cards, he then applied for 100 new ones..what a disappointment. Hard medicine now!

    7. Federal and state lands need to open up to energy exploration immediately. Energy is the one area where we could create massive employment in the next few years.

    8. Bankruptcy judges need to be able to cramdown mortgages, no moral hazard here as bankruptcy is still a stigma and not an option many will consider as it impacts much more than just your home loan. Loan forgiveness outside of this process will create moral hazard.

    9. For new loans, we need a federal program that guarantees loans for those that show up with a 10% downpayment. You put down 10% in cash and you get the loan, period. This could be the new “stated income” but call it “stated income with equity.” You lie, you buy too much house, you lose your 10% skin in the game.

    10. We need politicians to start preaching “personal responsibility” rather than portraying Americans to Americans as idiotic “consumers” who are “sitting around their kitchen tables looking for help.” We are NOT VICTIMS!!!!! Anybody remember, “Ask not what your country can do for you, but what you can do for your country.”

  5. debreuil says:

    I am not a financial person, but there are two questions kind of running through my head that I can’t seem to even get an estimate on…

    1) What percent of all this problem is pure fraud? It seems with all these shady loans, that people involved wouldn’t be morally or fearfully obliged to stop there. So like 5%? 20%? 50%? I have no idea.

    2) Illegal drugs are a 400 billion dollar a year business, and that isn’t the total sum of illegal activity of course. So where does all this crime money go? It doesn’t seem to go into infrastructure investment in Columbia. Is that what funds some of this opaque stuff, like Hedge funds? Or is that what drives them? I have no evidence of course, just it seems like a very hidden, offshore, high return business, maybe better place for returns/loans than a swiss bank account.

    Any ideas?

  6. H Salmon says:

    Great stuff Barry -

    Can anyone tell me if the Roubini web conference is available yet (transcript or video)? I’m not seeing it.

    Thanks

  7. larster says:

    So what will be the effect of a few years at low rates, as it seems like we are heading into now. I believe the insurance industry and pension funds will be crushed due to these many years at unreasonably low rates.

  8. leftback says:

    Excellent post by Rich Shinnick – practical, thoughtful and based on real world solutions. We need to find a middle way between moral hazard and the Great Depression II, and we need to start now.

    It begins with the recognition that these problems began at the grass roots homeowner level and that is where we have to begin solving them. Workouts, one at a time, for each and every household in massive debt. Not talking debt forgiveness here, but cramdowns and deferred payments along with some moderate reflation would probably be the best answer.

    Anyone who doesn’t want to go to 1% right now is blind to the results of inaction. I have no debt and can easily trade to my advantage if there is a massive collapse. But I do not want a re-run of the 1930s, with everything that would entail. Right here, right now we all need to start thinking collectively and abandon the selfish cult of the individual that got us to this point.

  9. redriver says:

    The cause of the whole disaster is the naive concept promoted by congress that everyone should own their own home. Not “many sources”, just one. The resultant “many sources” of fraudulent lending practices SUPPORTED by Congress are simply the vehicles used to perpetuate the myth. I am consistently amazed at how the “brains” come up with these complex answers when it is that simple. Mental circle jerks. No matter what sort of explanation you use to further this situation along in concept the result will once again simply be a reversal to the mean. The mean: not every one is going to be able to own a home and, when you do its 15-20% down and 2.5X your gross household income. Build your life on a foundation of stone not sand. This is what trying to buy votes and “take care of everyone” fantasy gets us.

    Can’t wait to see what new “investment vehicle” the brains come up with next to bubble us out of this mess and into the next.

  10. Jeff M. says:

    Great commentary, Rich Shinnick. Wouldn’t it be great if the inmates running the asylum now would grow up (and ask us to do the same) and come up with real solutions to these problems?

  11. Winston Munn says:

    “Hence, why I hold the weasels who are attempting to obscure reality and rewrite history in such disdain.”

    Well said – especially as these weasels know better but are purposefully obscuring reality for ideoligical gain. But who are they trying to fool? The faithful, of course. The zealots of correctness.

    P-e-r-p-l-e-x-e-d better expresses my feelings on hearing these faithful repeat the slogans and mantras without thinking, delving, or questioning. What is there about looking for truth that is so objectionable? How did we get to the point where the object was simply to win, regardless? What happened to the America that used to say, “It’s not whether you win or lose but how you play the game.”

    The simple answer is this: there is little difference between the arrogant elitist and the blind fundamentalist: both are sure of the complete rightness of their cause and thus any action is justifiable that furthers that cause.

    To understand this is to grasp how the cries of “Death to America” from the Islamic fundamentalists and the stern warning that, “You are either with us or with the terrorists,” share the same parenting lineage. When your father is total righteousness, your offspring cannot be defiled.

    We have reached the crossroads. Our polarization has led us to the Rubicon, where we either cross and condemn ourselves to Empire’s historical defeat or alter course through a re-awakening of rational thought, of scientific inquiry, of honest discourse, and a disdain for anything less.

    The choice is ours.

  12. p.a. says:

    Why was the Fed fund rate held so low? To prop up a crap economy to help the party in power? I’m no Bushite to begin with, but is this too cynical?

  13. Estragon says:

    Offered as food for thought, not to be critical of a good pieoe:

    In looking for cause/effect relationships, we tend to consider chronology as at least partly definitive. If three events happen at times t1, t2, and t3, we conclude e2 may be cause by e1, e3 may be caused by e1 and/or e2, but we rule out the possibility of e2 being “caused” by the anticipation at t2 of e3.

    A simple example in the housing boom was that rising prices were caused, at least in part, by the expectation that housing prices would rise. Lending on mortgage debt driven at least partly by the assumption (correct,as it turns out) of government intervention if the wheels came off the wagon. GSE debt buyers, for example, correctly assumed the premium yield they got over treasuries was “free” money. In a way, the GSE conservatorship, which only happened recently “caused” the mispricing of risk, even though the mispricing of risk occured much earlier.

    Along those lines, consider the following line from Bernanke’s famous 2002 speech:

    If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

    That sounds a lot like TARP to me. So the question is, was TARP made necessary by the lending preceding it, or was the lending preceding it caused by the expectation that something TARP-like would follow?

  14. JS says:

    Will paying down debt actually do anything to help these banks? I know they need to deleverage,but wil flushing all the assets of a bank (customer deposits; in reality liabilities) to pay down assets (liabilities due to inability to value notes) help?

  15. Norman says:

    Without government guarantees and setting of terms (0% down!!) there would be no housing crisis regardless of the low interest rates. No entitiy that was going to have to hold on to these mortgages themselves would ever have written them.

    The Dems started it and the GOP fell in line. With the bill passed a few months ago we have government guaranteed $740,000 mortgages allowing 3.5% down. More problems to follow.

  16. Brian says:

    I found your argument convincing. The only thing that puzzles me is that this phenomenon seems to be worldwide. House prices in Spain, Ireland, the UK and Australia all rose even more than they did in the hot US markets of California and Florida. They are now crashing, also. There have been runs on banks in Europe, as well as the US. Many times, these have been banks that have absolutely no operations in the US. How do you explain the commonality of these issues, if, as you argue, it was largely a US/Federal Reserve problem.

  17. Arrowhead says:

    Barry, I love your site, but the Dems in Congress DID play a significant role in this crisis. You did fail to mention that the article also said,

    ——————-
    “Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

    “When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”

    But Fannie’s computer systems could not fully analyze many of the risky loans that customers, investors and lawmakers wanted Mr. Mudd to buy.”
    ————————

  18. Brendan Eich says:

    BR — love your blog, read it daily, but I cringed to see Angelo Mozilo’s name misspelled as “Mozilla” (twice ;-). He *is* kind of a giant house-crushing monster (albeit orange, not green), but happily he’s no relation to us at the Mozilla Organization (http://mozilla.org), or to Firefox or Thunderbird.

    /be

  19. How do you explain the commonality of these issues, if, as you argue, it was largely a US/Federal Reserve problem.

    Posted by: Brian | Oct 5, 2008 3:10:28 PM

    Brian,

    I speak not for BR, but I’ll give the A: a try.

    He’s been focusing on factors, that are primary, driving Housing prices, in the U.S..

    To the commonality that you point out, there has been coordinatined, and massive, CB ‘liquidity’ creation, throughout all the markets you’ve mentioned, and then some..

  20. j. rempel says:

    sir:
    such a pleasure to see informed analysis outside the constraints of ideological political agenda. keep on keepin on.
    plus great play list.
    jr

  21. BR: A little tough to have moral authority when the Internet never forgets:

    Don’t Buy Housing Bubble Propaganda
    By Barry Ritholtz
    RealMoney.com Contributor
    5/26/2005 2:04 PM EDT
    http://www.thestreet.com/p/rmoney/barryritholtz/10225437.html

    ~~~
    BR: I stand by everything I wrote in that article — read the entire thing (its very good) — but here are the key excerpts:

    “My position is that housing is not in a bubble — yet. But it is an increasingly extended asset class that may be subject to a significant correction in the future. But a 25%-35% retracement is a very different situation than a bubble (recall that the Nasdaq dropped 80%), primarily because there are very different consequences for both homeowners and investors.

    “That said, comparing real estate with other true bubbles — most especially the tech/telecom/dotcom bubble of the 1990s — is imperfect, due to several factors. Homes are illiquid assets that take several months to sell; stock can be liquidated instantly.

    The housing market is regional, with an uneven distribution of asset appreciation: Equities are national, and even global.

    Lastly, there is an intrinsic value of a house as a place where you can live; Compare this with a company whose only asset was a sock puppet — the tulip bulb of its day — and it’s clear why a profitless, assetless, publicly traded company can go to zero. Barring an external disaster like Love Canal, houses will not.”

    -snip-

    [Is any of that incorrect? ]

    “The most recent asset bubble saw prices drop 80% from peak to trough. That was the Nasdaq from March 2000 to October 2002, and those losses are very comparable with the Dow crash in 1929, or the Nikkei collapse in 1989. How likely is it that real estate will suffer from similar distressed sales in the U.S.? In my opinion, not very.

    But real estate is an extended asset class, and it’s likely to come in — eventually. . . We shouldn’t be surprised if purchasers at present prices see a similar price sequence over the next decade. As the rate cycle plays out, prices will slide. I’m looking at a slow asset depreciation of 10%-30% over the next several years as a realistic possibility. But a 1999 dot-comlike bubble? I hardly think so. [end]

    ~~~

    I have since said that I believe Las Vegas, SoCal, and South Florida were bubbles, but we still did not have a full blown national housing bubble (credit bubble yes)

    And so it is.

    Hey, if we see Houses down 60-80% across the nation, I’ll be happy to mea culpa — but until then, this was very good work.

    (Full article here: URL: http://www.thestreet.com/p/rmoney/barryritholtz/10225437.html)

  22. Ethel-To-Tilly says:

    If one subscribes to the belief that inflation rates have been substantially officially under-stated over the past several years, then for a good part of this period wouldn’t the extra-low federal funds rates actually have been negative rates?

    I thought only Japan did that…

  23. Growler says:

    This is a good article and analyses. Hind sight being 20/20 -Starting in 2006, I did find it strange that FNM appraisals no longer needed photos of the home’s inside, some only required an appraiser “drive by”.

    Many assumed technology had advanced enough, most properties were inventoried through national records.

    BTW: Mozillo should have his fortune stripped and be sent to jail (general population). Perhaps his anus could use some “underwriting scrutiny” of its own.

  24. Jason says:

    I don’t think that adding several hundred bilion dollars at the parabolic part of the housing price boom was minor, but it was an important contribution to the speculative fever.

    Speculative booms and busts have occurred from time immemorial and often followed periods of technical innovation and globalization.
    They seem almost impossible to prevent because everyone, the government included, believes the paradigm of the day and jumps onto the band wagon. We’ve now observed this first hand.

  25. cloudy says:

    Everyone is going to interpret things their own way, but you have a good analysis. I agree with you more than I disagree.

    I have some differences of opinion.
    Fed lowered rates, maybe that equates with money supply growth, but there was too much money. Banks could securitize and come back to lend more. So lower rates, in themselves weren’t the culprit.

    Fed oversight? Maybe I’m wrong, but I thought oversight was responsibility of OFHEO, Dept. of Housing, and banking regulators. Fed was in the mix, for sure, but this wasn’t their mission.

    You (and others) seem to equate FNMA and FHLMC with CRA. Forget CRA. FNMA and FHLMC lowered standards to get more business. Don’t confuse CRA with FNMA/FHLMC. FNMA/FHLMC were the primary drivers for the excess. All the major loan originators used automated underwriting from the GSE’s, like Loan Prospector, DU (desktop underwriting). The investment banks would buy stuff that may have been a little outside some of the regular parameters, but they were, for the most part, buying loans that were originated/underwritten with the same metrics.
    If FNMA/FHLMC had not been lowering standards, then maybe investment banks would have captured an even bigger market share, or the exotic mortgages just would not have proliferated. I think the non-GSEs took their cue from the GSEs. The GSEs were the Mother Ship, even though the Lehman and Bears and Merrills were cutting into their biz.

    If FNMA/FHLMC had kept their standards, the market would have settled down like it had during prior boomlets.

    I have worked for builder and bank mortgage companies. When the market might normally have been expected to level off, originators used lower standards to tap into ‘underserved’ populations. This was a business proposition. It wasn’t high-minded at all, though there was some pretense. Getting lower income, poor credit people into homes is what fueled the move-up market.

    I just feel the discussion about CRA-pro and con-misses the point.

    I remember around 91-93? maybe when rates got around 7% for a 30yr fixed. People bot and refi’d, but rates went up as one would expect.
    In 2002 or so, when rates got to 7%, they continued to go down, down, despite demand, and coincided with all these new loan products.
    Again, it wasn’t just low rates; it was the loan products offered something for everyone. And I don’t think oversight for all that was primarily the Fed.

    I gotta think that the securitization process has led to a lot of fraud, the extent of which we don’t even know yet.

    In any event, it sure is fascinating.

  26. shtove says:

    This is the bit I don’t get:

    “And not just here . . . As the central bank for the largest economy in the world, the Fed’s rate action had repercussions in Housing markets everywhere. Rate cuts here richocheted around the world, sending home prices upwards globally.”

    Assuming banks in europe were following the US lead in lunatic lending and securitisation, didn’t their CBs still have the choice to pursue an alternative policy?

  27. Sarah Palin says:

    “I am proof that we are a banana republic with nucular weapons.”

    I am Sarah Palin and I approved this message.

  28. didn’t their CBs still have the choice to pursue an alternative policy?

    Posted by: shtove | Oct 5, 2008 5:27:49 PM

    sht,

    didn’t you hear the Howling from EU-based Industrials when the U$D/EUR cross was on it way to ~1.6 ?

    don’t you hear the Howling from PROC-based Manufacturers now w/ RNB/U$D under 7?

    LSS, we led the, recent, ‘loose’ Monetary Policy gam(b)(e)it..the others, in order to shield their Export flows, had to follow..

    Barring that, their ‘Reserves’ of U$Ds would have Imploded…good thing, for us, they got rid of all that ‘low-yield’ Au. too bad, for them, they replaced it with a ‘high-yield’ atomic derivative, aka U$D.

  29. Namazu says:

    “The short answer: Ultra low rates, securitization, and perhaps some of our homegrown, innovative lending standards.”

    Seems about right, but I’d add: a tax code which encourages debt relative to savings.

  30. “This nonfeasance under Greenspan allowed banks, thrifts, and mortgage originators to engage in all manner of lending standard abrogations.”
    ~~~~~~~~~~~~~~~~~~~~~
    Why do you say nonfeasance instead of misfeasance or malfeasance? Surely Greenspan knew what would happen, and knew what was happening when it was happening? Isn’t his nonaction really an action in that it produced results that it did? Because then you say:
    ~~~~~~~~~~~~~~~~~~~~~~~~
    “These (bad loans) never should have been permitted to proliferate the way they did.”
    ~~~~~~~~~~~~~~~~~~~~~~~~
    Didn’t Greenspan have something to do with that permission to proliferate? Thank you, I am new to the subject of economics and I’m not a lawyer.

  31. Here’s what: Economics of Contempt wrote about The Official List of Pundits/Experts Who Were Wrong on the Housing Bubble:

    “One close call was Barry Ritholtz, who wrote a column in 2005 with the headline, “Don’t Buy the Housing Bubble Propaganda.” While the headline would suggest that Ritholtz denied the existence of the housing bubble, it appears to have been more hyperbole than anything. The substance of his argument was that housing values wouldn’t fall in value as much as tech stocks did when the dot-com bubble popped (80%). In fact, he outright predicted a significant correction in house prices: “As the rate cycle plays out, prices will slide. I’m looking at a slow asset depreciation of 10%-30% over the next several years as a realistic possibility.”

    Since that’s more or less what has happened, it would be difficult to say that Ritholtz was “wrong about the housing bubble.” Therefore, Ritholtz does not go on the list.

    (PS: Headlines usually get written by editors, not the writers themselves)

  32. Richard says:

    Rich Shinnick said:

    “8. Bankruptcy judges need to be able to cramdown mortgages, no moral hazard here as bankruptcy is still a stigma and not an option many will consider as it impacts much more than just your home loan. Loan forgiveness outside of this process will create moral hazard.”

    Cramdown isn’t nearly enough. We need to make everybody who’s paid off their mortgage get a new one, since they have already shown they will make their payments. Then we have to use this money to pay off the mortgages of the deadbeats who refuse to pay their mortgages. Problem solved.

  33. Chris says:

    mmmmm….

    “I’m looking at a slow asset depreciation of 10%-30% over the next several years as a realistic possibility. ”

    Yeah. BR was way off the tracks there.
    LOL

    I know lots of you wingers are frothing at the mouth as McSame craters along with the economy….but really….will the Shrub ether ever wear off?

  34. Me says:

    Many of the mortgage originators, such as Countrywide, were not subject to Federal Reserve oversight.

  35. The following words are from a Barron’s article titled “The Endgame Nears for Fannie and Freddie August 18.” Note in particular the second sentence from the second paragraph:

    Note, too, that Fannie and Freddie have nonpareil lobbying operations and formidable political strength, owing to their hefty donations and penchant for hiring former political operatives. Besides, the agencies claim they’ve landed in their current predicament through no fault of their own. As Freddie Mac Chairman and CEO Richard Syron recently put it, the GSEs have been hit by a “100-year storm” in the housing market, accentuated by some higher-risk mortgages that they were forced to buy to meet government affordable-housing targets.]

    The latter contention is more than disingenuous. A substantial portion of Fannie’s and Freddie’s credit losses comes from $337 billion and $237 billion, respectively, of Alt-A mortgages that the agencies imprudently bought or guaranteed in recent years to boost their market share. These are mortgages for which little or no attempt was made to verify the borrowers’ income or net worth. The principal balances were much higher than those of mortgages typically made to low-income borrowers. In short, Alt-A mortgages were a hallmark of real-estate speculation in the ex-urbs of Las Vegas or Los Angeles, not predatory lending to low-income folks in the inner cities.

  36. OhNoNotAgain says:

    Wow, the trolls just get more and more bitter as the Republican party sinks into the abyss. It’s kind of like the Clinton years again – the better the economy did under Clinton, the more they tried to bring him down.

    Rich Shinnick,

    One of the problems with your remedies is that it proposes to increase taxes and cut spending at a time when both are required in order to try and keep demand from collapsing. As long as the government spending is stimulative in the form of wages or actual productive investment, then I see no problem with it. My point being that it seems to me that practicing austerity measures in a time like this is a recipe for disaster. Yeah, you may clean out the excesses, but you’ll most likely take down the whole economy in the process.

  37. Scott says:

    That Street.com piece was dead on!

    How can anyone say that forecasting HOUSING GOING DOWN 25-35% is wrong? Wow, the wingnut/retard factor is off the charts. It is spot on in just about every way.

    You should be very proud of that article, and the forecasts contained therein.

    Of course, you actually have to READ IT to know whats in it. Trolls and wingnuts cant be bothered. If you are going to comment on something, at least read the damned thing.

  38. Drew says:

    May I make a small suggestion?

    If you are posting on a topic that is annoying the right wing loonies, and therefore attracting trolls and asshats, then just delete the idiots and ban their IP and email addresses. If you check, I’ll bet the one poster and the 2 morons agreeing with him are one and the same guy.

    I’m a sysadmin, and we don’t tolerate that at any of the other forums I am involved in.

    Throw another asshat onto the fire . . .

    ~~~

    BR: -sigh-

    I prefer to see a divergence of views, but alas, you are right — 2 guys were responsible for 7 posts under 5 names, all congratulating each other. The risk I run is that by tossing these asshats, I may be losing some variety in viewpoints.

    But you are right — they are disruptive clowns — They have all been marked as Spam, all of their prior comments — under many different names, but the same IP address — have been unpublished, and their email/IP addresses toasted.

  39. Scott in Chicago says:

    Zounds, homes! Banishment for bad acting? How quaint…how, how..absolutely well deserved. Off to asshat purgatory wit (as we say in Chi-town) da bot’ a you’se…

  40. Rich Shinnick says:

    OhNoNotAgain,

    The idea that we need to keep the government spending to prop up the economy is tired. Government austarity and a sensible tax regime that is targeted at paying off debt would embolden business to invest and give the people of this country faith in government again, not to metion long term faith in the dollar.

    I own a busines and I do not mind paying taxes, in fact I do not mind having my taxes go up in order to help the country get out of this mess, BUT I do mind them going up to fund more spending while the government takes on more debt that my kids will have to pay.

    If you don’t cut government in bad times, believe me, there are too many politicians with great new “programs” to fund in good times to ever make cuts then. In any case, if federal and state government does not take drastic action to increase revenue and cut spending now, it is going to have to do it under much harder circumstances later.

    So, OhNotAgain, in my opinion the question is whether we want to lose the leg below the kneecap now or wait and lose it at the hip bone? Or maybe lose the patient?

  41. pkut says:

    “Its my opinion there were two primary causes leading to the boom and bust in Housing: A nonfeasant Fed, that ignored lending standards, and ultra-low rates.” which of these was bush responsible for?

  42. flenerman says:

    Another well-written, thought provoking post, Mr. R. I also appreciate the comments of several of your regular respondents. Thanks for providing a great place to find sensible discussion.

  43. fresno dan says:

    Nicely done and insightful analysis. Although I am a nominal republican (and becoming more nominal daily) as they were thought of as the “conservative” party, I think events have shown the present day republicans to be anything but conservative. I appreciate your independent reality based perspective.

  44. Mary says:

    So, when do the arrests of these financial terrorists begin? Move over Enron Execs.

  45. Shnaps says:

    I think you meant 2/28 ARMs, not 2/28 APRs.

    Almost all loans had some provision for repurchase in the event of EPDs (Early Payment Defaults), not just the 2/28s. The issue isn’t product-specific so much as channel-specific.

    I think we’d agree on a fundamental regulatory aim – we should at all times ensure that: the party that underwrites a loan must have the primary risk exposure based any future non-performance of that loan. It’s that goddamnned simple.

  46. bcd says:

    so Barry, can i take this post to be your rebuttal to Peter Wallison at AEI?

    off-topic: is Max a schnauzer or schnoodle?

    thanks for the keen insight and great posts!

    –bcd

  47. matthew says:

    SNL on the bailout

  48. Keedu says:

    Some people talk that we are in crisis some people are trying to convince we are not, go figure.