Joe Kernan on CNBC continues to get this not just a little bit wrong, but terribly, horribly, mind numbingly wrong.

His favorite NYT article comes form  1999 (he referenced it again this morning). This piece has become a right wing meme: Fannie Mae Eases Credit To Aid Mortgage Lending. The article discusses a 24 bank, 15 market pilot program — teeny tiny in the overall total mortgage market — as if its the Rosetta stone of Housing/Credit crisis.

The article states that “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.”
It was the lenders themselves who were pressing the GSEs to buy these loans. The private sector lenders were pursuing this market due to fatter potential profits — not Fannie and Freddie.

These facts don’t stop the pundits; nor does an apparent lack of understanding of the actual causes of the housing boom/bust and the credit crisis. Their cognitive dissonance has also prevented them from acknowledging the role deregulation had in these events.

Some people actually look at the data, while others foolishly parrot talking points. Consider this Federal Reserve Board data, compiled by McClathcy. It shows that:

  • More than 84% of the subprime mortgages in 2006 were issued by private lending institutions.
  • Private firms made nearly 83% of the subprime loans to low- and moderate-income borrowers that year.
  • Only one of the top 25 subprime lenders in 2006 was directly subject to the CRA;
  • Only commercial banks and thrifts must follow CRA rules. The investment banks don’t, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.
  • Mortgage brokers, who also weren’t subject to federal regulation or the CRA, originated most of the subprime loans.

>

>

The “Blame Fannie/Freddie/CRA” crowd, do provide a service: I know anyone who repeats this meme is an empty headed parrot, a mindless drone without an ability to think. This is a huge timesaver, as it has allowed me to dismiss many of the ditto heads I might have otherwise wasted time on.

So whoever came up with this silly talking point, despite your lack of concern for facts and your attempts at muddying the waters — thanks! You’ve saved me an enormous amount of time in identifying people not to bother reading, and to ignore.

Hat tip Econbrowser

Source:
Private sector loans, not Fannie or Freddie, triggered crisis
David Goldstein and Kevin G. Hall |
McClatchy Newspapers  October 12, 2008

http://www.mcclatchydc.com/251/story/53802.html

Category: Credit, Derivatives, Legal, 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.

74 Responses to “Private Sector Loan Losses vs Fannie/Freddie”

  1. Mongbat says:

    Barry,

    Could banks satisfy their CRA requirements by buying such loans from the brokers? Could you fob off responsibility for an annoying law, much like towns in NJ used to be able to “buy off” Mount Laurel housing requirements by paying “credits” to other towns?

    I think that’s an imporant question to answer.

  2. David says:

    Has this virus jumped from ideological counter-attack to mainstream thinking with Kernan? Does he really believe it or is he just repeating what he’s heard?

  3. Jon H says:

    “Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.”

    Which one is that?

  4. daniel says:

    Joe the economist can’t be wrong because his Q rating is so high.

  5. What do you and your readers think of the idea of the government taking over the rating function? The government should be acting as an honest referee and how better to do that than to do the rating itself? The private rating agencies essentially can’t say they won’t rate a bond because they don’t get paid if they don’t rate (which is essentially what happened in this last episode). Furthermore, after all,the government effectively provides a guarantee, so why don’t they be asked to rate up front what they are effectively providing a guarantee for? Corruption (Barney Frank and political influence) is an issue of course.

  6. larster says:

    I think the only reason he survives at CNBC is that he married someone who’s family is a member of Shinnecock. Want to golf at Shinnecock talk to Joe. Otherwise is is dumb as a stump, although he can remember right wing talking points.

  7. Jon H says:

    “Corruption (Barney Frank and political influence) is an issue of course.”

    Such a government rating body would be part of the executive branch, and thus subject to being staffed with political hacks, as Bush did with the Department of Justice and other agencies.

  8. ElamBend says:

    What do you think of the idea that Fannie and Freddie’s size and the competition they represented was partially responsible for sending private banks in the direction of subprime in search of profit. (Granted: looking for profit is no excuse for the actions of these private banks or the loans they gave).

  9. Moe Mortgage says:

    Your argument is correct, this has NOTHING to do with CRA. However your graph shows servicing volume, which is not exactly the same as originations. The servicer may not necessarily have originated the subprime loan. BTW, I suspect Fan & Fred did their share of what the world considers “subprime” but it’s impossible to tell how much as they don’t provide loan-level detail of their portfolios as far as I know. I’d hear all the time from originators that Fan & Fred’s automated loan approval systems would make very aggressive purchases from time to time.

  10. Andrew says:

    The main point you seem to gloss over is that Fannie/Freddie created the market for subprime MBS back in 1995 and still comprised 44% of that market in 2006. Without Fannie/Freddie being willing to buy all this subprime crap, it is likely that the market would not have existed (at least not as it did by 2005/6) and the mortgage brokers wouldn’t have had anyone to sell their subprime crap to. So yes, Fannie/Freddie are quite culpable in this whole mess.

  11. GoldenGraham says:

    So Fannie and Freddie just imploded in spite of strong stewardship by Raines, Gorelick, Johnson, Emmanuel, etc.?

    In spite of the solid capital-to-asset ratio they insisted upon with the help of Barney Frank and the CBC?

    And although AIG held $600MM worth of the two GSE stocks, I’m sure that had nothing to do with AIG tanking?

    Reuters, 9/2008:
    Fannie, Freddie subprime spree may add to bailout

    Freddie Mac Chief Executive Officer Richard Syron stood before investors at New York’s Palace Hotel in May last year lauding his company’s “cautious” avoidance of the subprime-mortgage crisis.

    What Syron, who was ousted last week, didn’t say was that Freddie Mac had been gorging on subprime and Alt-A debt.

    …The purchases by Freddie and Fannie helped fuel the boom in lending that led to frozen credit markets, more than $514 billion in bank losses and the collapse of two of the country’s biggest securities firms.

    Fannie Mae and Freddie Mac held $114 billion of subprime and $71 billion in Alt-A securities as of June 30, according to the companies.

    Subprime mortgages were given to people with poor credit scores. Alt-A loans, which rank between subprime and prime, were made to borrowers with better credit who provided no proof of income, bought property for investment or took out so-called option adjustable-rate mortgages.

    “We’ve heard a lot of people stand up and say, `Fannie and Freddie really did not promulgate the problems; they weren’t big players,’” said Joshua Rosner, an analyst with Graham Fisher & Co., an independent research firm in New York. “Actually, they were.”

    The biggest suppliers of the securities to Fannie and Freddie included Countrywide Financial Corp. of Calabasas, Calif., as well as Irvine-Calif.-based New Century Financial Corp. and Ameriquest Mortgage Co., lenders that either went bankrupt or were forced to sell themselves. Fannie and Freddie were the biggest buyers of loans from Countrywide, according to the company.

  12. Dave says:

    I agree, but the BIS paper you linked up a few weeks ago clearly stated that if these private lenders that were originating the loans believed that there was a good chance they would be securitized, then they relaxed their lending standards substantially. Weren’t Fannie and Freddie gobbling up these securitized loans at the direction of our government in their pursuit of expanded low-income and minority homeownership? I’m not placing the blame on Fannie and Freddie – I’m placing the blame on the goverment. Thoughts?

  13. Mike in NOLa says:

    Barry,

    You are doing a good imitation of King Canute, who didn’t seriously attempt to command the ocean, but only did so to show his courtiers that he was not omnipotent. Dittoheads will keep repeating the whatever Rush says, no matter what facts you present.

    I hear on the Bloomberg feed that Cox is planning to blame Congress. I’m sure that will sell to the same element. Had one tell me Tues. nite that the Dems have been running Congress for the past eight years. With that much of the population being so appallingly ignorant of current affairs, it’s no wonder we are so screwed.

  14. Rob G says:

    Barry,

    But didnt the fact that CRA loosened the loan standards with pressure from Clinton et al and allowed these privater institutions to loan to the low income high risk folks help cause this fiasco? I mean they have to be partly to blame dont they?

    Rob G

    ~~~

    BR: WHat Clinton and Bush wanted (more homeowners) didnt matter — THE BANKS wanted to sell more mortgages — that was the key.

    It was the lenders themselves who were pressing the GSEs to buy these loans. The private sector lenders were pursuing this market due to fatter potential profits — not Fannie and Freddie.

    “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.”

  15. Cullen says:

    this whole argument is exciting for someone with a political agenda, but in reality it was 20 years of loose monetary policy that ultimately put the country in this position. None of this would have been possible without 20 years of record low interest rates and a Fed Chair with the prescience of a goldfish.

  16. montaigne says:

    That’s a simplistic look at how the mortgage world worked.

    Couple of things:

    1) I am perpetually astounded at how little the Wall St. / Investor crowd knows about how the system worked. Perhaps if any investors/regulators/Fed guys/etc. would have actually gone through the process they would have known what a mess things were and are.

    2) Sure Fannie / Freddie aren’t on the list, but how in the world did they end up with roughly half of all the mortgages in the country? Maybe it had to do w/ point 3 below.

    3) No one held on to the mortgages. A broker would call someone and get them to agree to a new loan. They would use some lender like New Century or some other firm to do the loan. After using a bunch of subcontractors to get everything done, approved, and signed then New Century or some other lender would have a mortgage. Within a week or two (sometimes before the loan was even signed) the mortgage company would sell it off to a bigger company. That bigger company, say Countrywide, would either keep the loan to service, sell it off to Fannie/Freddie or another bank, or bundle it into some wicked investment vehicle.

    4) In that chain of events, who is the enabler? You say the banks and brokers were pressing the GSEs to buy. I don’t doubt it, since the whole system was pretty dirty. OTOH, did the banks and brokers hold guns to the GSEs heads or were they happy to go along with things?

    5) Judging by the corruption in the GSEs being uncovered, I’d say they were happy to go along with things. If they didn’t buy, would the system have continued for so long? If the Fed hadn’t cut rates, would the system have continued for so long?

    6) I’m not at all surprised by the behavior of anyone in the mortgage system. Remember, you have to defend capitalism from the capitalists.

    BR, I generall dismiss the political hacks and pundits spouting off things to defend the last 8 years or the previous 8 years, too. That said, for you to simply dismiss anyone mentioning Fannie/Freddie is ridiculous. Despite your semi-regular attacks on the free market (as if it is represented anywhere in this mess), I like your blog because you seem to take an apolitical approach to things and find ALL the skeletons. What gives with your approach this time around?

  17. TheGuru says:

    All politics aside as they are pretty much all moronic sheep, the one constant over the last two decades was Alan Greenspan — his ridiculously low interest rate environment from 2001-2005 created this monster. The thinking in America is now so warped that most of the country believes that mortgage rates are currently “high” when they are low by historical standards.

    The problems of today emanate directly from the soft mushy head of former Fed Chairman. Mr. Magoo f’ed us all.

  18. Winston Munn says:

    It’s good to know that CNBC is fair and balanced, too.

  19. Richard says:

    Barry:
    I see you’re back to this nonsense about how government pressure to lower lending standards in the name of affordable housing had nothing to do with stimulating lax mortgage lending and eventually delinquencies. Let me repeat: You can’t have two sets of lending standards, one for the “underserved populations” that the CRA and its expansions aimed to get at and another set for everybody else. Like money, rules are subject to a Gresham’s law, in that bad rules drive out good rules. Another way of putting it (from a different context): “defining deviancy down.”

    This happened; the government pushed relaxed standards in the name of affordable housing. Other things happened too. But this happened. And the more you deny it, the more others will will be forced to reiterate, making it a bigger part of the conversation than it deserves to be.

    ~~~
    BR: THE BANKS WANTED TO MAKE THE HIGHER PROFIT LOANS

    They were not pressured by the government, they were BEGGING FANNIE FREDDIE TO BUY SUBPRIME.

    Read the excerpt above — they didnt fight, they diddnt kick, they didnt scream THEY WERE THRILLED TO DEATH TO MAKE LOANS 400 BPS ABOVE PRIME!

  20. Namazu says:

    With all the free time now on your hands, perhaps you could comment on how Fannie/Freddie, given its size, contributed to the mispricing of risk across the mortgage market, if not the entire credit market. This will admittedly be harder to quantify, as will the net benefit of the government guarantee until more of Fannie/Freddie losses are realized.

    ~~~

    BR: Why don’t you explain why from 1938 to 2002, nothing like the current boom/bust/credit freeze ever happened before?

    (What free time?)

  21. Winston Munn says:

    “But the most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly and with unflagging attention. It must confine itself to a few points and repeat them over and over.”
    – Adolf Hitler, Mein Kampf, p. 184

    CRA Evil! Fannie, Freddie’s Fault!
    CRA Evil! Fannie, Freddie’s Fault!

  22. Craig in Georgia says:

    I couldn’t agree more.

    The CRA is thought to represent Democratic policy, so it is therefore the Total cause of the problem. Wrong.

    What’s not talked about should be obvious to anyone involved in local politics anywhere in America—although it may be difficult to prove statistically: that the banking industry is as thoroughly red, as the teaching profession is blue. And that’s where all the outrageously big money was made—by the red banking industry.

  23. grumpyoldvet says:

    Joe is hoping that Jack Weich will invite him to join the rest of the Irish Mafia in Nantucket. Remember, Tim Russert is no longer here so who knows how long his wife will keep the place. Joe’s nightly prayer,
    “Please Mr Welch, can I join the group.

  24. super-anon says:

    This isn’t just a subprime problem though. You have to wonder if any mortgage loans should have been made where prices have been in recent years and whether the government guarantees on agency bonds contributed to a flood of money available for mortgages and mispricing of risk throughout the industry. OK maybe the brokers should have originated the loans, but maybe the government shouldn’t have enticed bond buyers by putting tax payers on the hook for the default risk.

    The US subprime problem may be the most gruesome aspect of what’s going on. But this has been a global bubble across all asset classes.

    Again, US subprime loans didn’t cause the real estate bubbles throughout Europe which in many cases were more extreme (in terms of price increases) than what happened in the US.

  25. Nathan says:

    I have yet to see any convincing evidence that the CRA had any significant effect in causing the mortgage crisis. I think the points that Barry lists above about the extremely small percentage of the subprime market that involved CRA-regulated banks should be conclusive.

    However, it’s not so easy to write off the effect of Fannie and Freddie. Considering the size of these institutions and their enormous role in the mortgage market, it would be very surprising if they did not have at least some part to play in this debacle. However, I think the situation is much more complicated than the right-wing talking points would have us believe. Yes, they did dominate the prime market, which could be one reason that other financial firms went so heavily into subprime. However, there is a smart way and a dumb way to go into subprime, and it doesn’t appear that Fannie and Freddie caused the investment banks and mortgage lenders to go into subprime in such a dumb way. Yes, Fannie and Freddie did purchase a fairly large percentage of the senior tranches of subprime MBS deals, thereby helping to enable that market to grow. But how does the fact that Fannie and Freddie bought a lot of this stuff excuse the investment banks for holding so much of it themselves? How does it excuse the insurance companies for deciding to write so much CDS protection on those tranches? Did Fannie and Freddie force them to do that? Obviously not. If it was only Fannie and Freddie buying this stuff, the solvency problems would have been limited to Fannie and Freddie. So, rather than singling Fannie and Freddie out for special blame in this crisis, I think it’s fair to say that they were just another player in the market – notable for their size and special government backing – but not particularly notable for the riskiness or stupidity of their investment decisions. In fact, a case could be made that, relative to their size, they were more risk-averse than most.

  26. Yeah but its not a subprime problem, it never was. So what is the point of analyzing who gave out subprime loans? This thing was coming down regardless of subprimes. Just add up the numbers. The fact that trillions have been wiped out proves that its a bubble. That is not even a debatable point. Even if subprime mortgages were profitable, we’d still be staring down the barrel of a big long gun. Oil would have just kept going up, probably to $300 a barrel, until the exact same thing happened. Because oil peaked in 2005. Peak oil is the exact precise reason why the Fed’s easy money policies of the last decade/century all the sudden failed. And guess who isnt talking about that eh? Who is the ditto head now? lol. Who is muddying the waters now eh? Things are much simpler than you’d like to believe. Energy is the root of all economic activity. When energy supply growth stops, bubbles pop. Simple as that.

    Economic growth is not possible without expanding oil supplies. It has absolutely nothing to do with the health of the real estate market. If the real estate market was solid, commodity inflation would have killed us just the same.

  27. plantseeds says:

    Mr. Magoo:
    The examination of this issue needs to go back to at least the early 90′s – at least. Short term data gives you as complete a picture as would trying to value a major conglomerate over the same time frame. Monetary policy seems to have been the ultimate enabler. Accusing people being of a mindless drones without an ability to think because they don’t agree with your snapshot view, and political agenda, highlights your level of understanding of “the big picture”, as does your inability to move on.

  28. super-anon says:

    BTW, I’ve talked to a few sensible people about this issue and I think it’s worth pointing out that criticizing the government’s role in housing doesn’t mean somebody is a republican supporter.

    History shows governments do idiotic things all the time. Even if you believe it’s the government’s role to help people improve themselves, that doesn’t mean you have the obligation to support them if they do it in dangerous ways.

    A responsible person would criticize the dangerous policies and offer more sound alternatives.

  29. The Great LIBOR says:

    Ack! Greenspan said in his testimony that the first thing we need to do is stabilize housing prices… How can our leaders be this misguided. Do they understand rent vs. own or income vs. property value ratios?? We are going to end up like Japan with zombie banks, but with the addition of zombie car manufacturers and an entire nation of zombie houses at unsustainable prices.

  30. Nathan says:

    Criticizing the government’s role in housing – whether you’re talking about Fannie & Freddie or that enormous government subsidy, the mortgage interest deduction – doesn’t make one a Republican, because lots of Republicans have been in favor of the idea that the government should encourage home ownership. Which party is more likely to be in favor of capping the mortage interest deduction for high-income home-buyers and McMansions? Hint: not the Republicans. But that would be a big step in getting government out of the business of subsidizing housing.

  31. CNBC Sucks says:

    As a registered Republican, I am going to have to ask you to back off Genius Joe Kernen. I think Genius Joe is on the verge of a major breakthrough in nuclear fusion:

    http://cnbcsucks.wordpress.com/2008/10/10/the-fuckface-with-the-gop-id-tag-blames-market-downturn-on-obama/

    Also, please note that his name is “Kernen”, but I also use “Kernan” just to get all the traffic from the misspellers:

    http://cnbcsucks.wordpress.com/2008/06/20/dumbfuck-joe-kernen/

    Yeah, I suck.

  32. VJ says:

    Rob,

    But didnt the fact that CRA loosened the loan standards with pressure from Clinton et al and allowed these privater institutions to loan to the low income high risk folks help cause this fiasco? I mean they have to be partly to blame dont they?

    No.

    The “private[r] institutions”, were UNREGULATED and NOT SUBJECT to the CRA or “pressure from Clinton et al”.

    Got it ?
    .

  33. Fred says:

    isn’t the real question could all of this have gotten to the point it did had Congress simply installed a real independent regulator over the GSEs? at least had they limited their capitalization ratios to at least half of the regulated banks’ limits, wouldn’t that have put a swift damper on at least let’s say 20% of the market for non-conventional mortgages? btw, to simply discard Congress’ complete failure to actually do something, anything, regarding the GSEs is just flat out wrong Barry. you’re a smart guy (with one of the best blogs out there) but your politics are obscuring this particular issue.

  34. concerned & disappointed says:

    I am generally inline with Cullen’s commentary from above. I think that none of the private originators of the subprime mortgages held them. They were in the “gain on sale” business where the wrote the mortgage and solid it to….

    Ta Da, fannie and freddie. My understanding is that FNM and FRE were, and are the gorillas in the biz and their portfolios balloned with this crap, thus enabling it to exist.

    I also echo Cullen’s concern about the lack of Barry’s usually perceptive analysis in this case? I am also concerned about political bias… It would be very disappointing.

    To fan the political fire McCain was trying to increase oversight in 2003 and Obama voted against it. McCain and some other legislators wrote an open letter that pretty much nailed the current situation in 2006. This is a great big crap sandwich and everybody has to take a bite… but I think FNM and FRE go first and biggest.

  35. concerned & disappointed says:

    I am generally inline with Cullen’s commentary from above. I think that none of the private originators of the subprime mortgages held them. They were in the “gain on sale” business where the wrote the mortgage and solid it to….

    Ta Da, fannie and freddie. My understanding is that FNM and FRE were, and are the gorillas in the biz and their portfolios balloned with this crap, thus enabling it to exist.

    I also echo Cullen’s concern about the lack of Barry’s usually perceptive analysis in this case? I am also concerned about political bias… It would be very disappointing.

    To fan the political fire McCain was trying to increase oversight in 2003 and Obama voted against it. McCain and some other legislators wrote an open letter that pretty much nailed the current situation in 2006. This is a great big crap sandwich and everybody has to take a bite… but I think FNM and FRE go first and biggest.

  36. David says:

    It was the lenders themselves who were pressing the GSEs to buy these loans. The private sector lenders were pursuing this market due to fatter potential profits — not Fannie and Freddie.
    >>
    Barry, I might ask:
    1) Why were the lenders pursuing this market? Oh yeah, because Frannie was gobbling up the entire “prime” or standard, conforming loan market, thanks to its Congressional enablers.

    2) Yeah yeah, the ISSUERS were pushing Frannie to buy the subprime crap. So, WHY did Frannie agree to buy it? Oh yeah, the CRA, etc.

    If the issuers had to hold on to the subprime crap, they might have thought twice.

    Other than the obvious glee you get from idea of a one-party gov’t, I don’t understand why you don’t see the obvious culpability of Frannie. Have they been lining your pocket too, like Barney? Sure they’re just part of the entire problem (issuers, buyers, “regulators” etc), but they’re still a BIG part of the problem.

  37. Nathan says:

    I agree that Congress should have done more to regulate the GSEs. But I think it would have been more effective – and gone more directly to the source of the current crisis – if they had done more to regulate the mortgage lenders and investment banks.

  38. fresnodan says:

    thanks Nathan and Montaign – some interesting points to think about

  39. Fred says:

    i’ll just add that i would put money on the next administration’s complete failure to regulate one of the great last frontiers who were directly complicit in all of this (and most of the fraud to boot!): residential real estate brokers and mortgage brokers. they should regulate them the same way securities brokers are regulated (kind of, haha, but at least they have to be moderately literate). resi brokerage was the largest gainer in employment during the boom and invariably when a questionable loan was written, it had passed through the hands of a realtor/mortgage broker. yet, the Dems will pass on that one since realtors are treated just like the Unions by the Dems.

  40. ReturnFreeRisk says:

    It is sickening to me to listen to these people blame the wrong things for the whole debacle.
    1) Greenspan is blaming subprime lending with lax or no standards.
    2) Cox is blaming the lack of cohesion in regulation/oversight – 9/11 style – everybody saw some piece but not the whole picture.
    3) Snow and various congress people blaming GSEs (that did not make the worst loans anyway).

    A FREAKING ASSET WAS BID UP IN PRICE BASED ON BORROWED MONEY (WITH HUGE LEVERAGE) AND IS NOW DEFLATING ACCORDING TO LAWS OF ECONOMICS. It is destroying the financial system and the economy. These three are making things worse by NOT focusing on the root cause. The fixes will be useless because of mis diagnosis.

  41. mik says:

    Facts don’t matter, righteousness and compassion do. The fact that Fannie/Freddy’s exec bonuses depended on the growth of their lending is totally irrelevant.

    The fact is that just about the only area for expansion was to give loans to people with no credit history and/or no income. This fact is not applicable.

    The fact that F/F set up private foundations with offices in EVERY congressional districts to coordinate with local realtors and mortg brokers to lobby Congressrats for expanding loans to under-served “communities” is completely irrelevant.

    ~~~

    BR: F&F were definitely cogs in the RE machine. But if you want to place the blame on them, you have to explain why from 1938 to 2002 we did not have a housing boom/bust/credit collapse like we do today.

    What changed from then til now?

  42. Ellen1910 says:

    Mortgage brokers . . . originated most of the subprime loans.

    But only because they had a buyer to off-load them on.

    The question is how many of these mortgages or securitized subprime mortgages (MBSs) did the GSEs buy or insure.

    If the GSEs were a small market, then, no opprobium attaches; if large, then, much.

    So, what’s the answer?

  43. mik says:

    There are many talented economists and mathematicians. Most of them would rather die than to admit that sainted minorities may have been involved in housing/mortgage crash.

    Why not construct a relatively simple model that shows that whole system of CMOs, CMO squared and cubed, widely distributed among non-trusting players, is inherently unstable.
    As such any tiny catalyst will cause the whole system to go into contortions.

    Personally I believe this to be the case. I don’t have proof of it.
    I don’t care of a role, or lack of thereof, CRA/minorities lending played in the crash.

    But some of you are so exquisitely PC and must prove that CRA/Fannie/Freddy/minorities lending plaied no role in the scandal.
    Why not do it with class and mathematics?

  44. Fred says:

    Ellen – I did a brief stint at a subprime securitizer in 2001, really before the whole thing took off, but saw some of the beginnings. the rating agencies essentially gave you a pass on any loan that was acquired and “seasoned”. the joke was seasoning involved three consecutive timely payments. so what the solution for high yielding, risky loans? get a broker with a credit line to originate, escrow the first three payments and then sell it straight to the securitizer who pooled it for sale. the fact was that becuase of points and lock outs and prepay penalties, the margins on the subprime stuff was like 10% to 15% plus the B piece. the key was that the industry was built on supposed credit that emanated from the GSEs. at first you would just pepper in 10% of a Fannie-quality securitzation with non-conventional, then the yield hungry pensions decided to throw caution to wind and simply go with pure non-conventional securities. why? because they wanted to be heroes for their plan participants, city and state government officials etc etc. whether or not the Feds should have stepped in and updated ERISA or restrained the GSEs will be questions we’ll be asking for a long long time, BUT the issuers were simply feeding the demand or yield. the middle men – brokers, realtors – were all doing the same thing.

  45. Michael says:

    @mik -

    They don’t actually beat their dogs; they just make them fetch the birds they shoot.

    Further, I’m wondering when McClatchy became the go-to source for unbiased analysis. Nonetheless, it’s sad that they have, since they’ll likely be shutting their doors soon.

  46. loan shark says:

    mk- Minorities have nothing to do with anything other than the treatment they receive under direction from the pc diseased left ideoligists. You guys are apologists for government and rabid anti free markets so a false dichotomy needs to be constructed absent, of course, any acknowledgement of the gray areas involving government malfeasance and self-dealing. The state is not your friend, unless you are a fed supervised lending institution with or without freestanding mortgage subsidiaries. A stong yet misleading defense of governmnet policy has been put in place, statistics included, which protects the interests of no one but those holding power. ‘The lady doth protest too much, methinks’.

  47. John says:

    This Forbes article is a good read on the cause of the crisis.

    Chronicle of a Disaster Foretold
    http://www.forbes.com/opinions/forbes/2008/1027/027.html

    Excess liquidity (neg interest rates and deficit spending) is the cause of the real estate bubble and crisis. When you have excess liquidity that leads to bubbles (, all kinds of bad things (mis-priced risk, corruption, mis-allocation of capital etc) will happen, and a crisis is the result. You can write that down.

    Chronicle of a Disaster Foretold
    http://www.forbes.com/opinions/forbes/2008/1027/027.html

    “The pieces for a classic financial drama fall into place one by one. First, the U.S. financial system, by way of a huge current account deficit and lax fiscal and monetary policies, gets flooded with resources for lending. Next, in their quest for attractive returns, banks and other intermediaries find subprime borrowers eager to buy houses they previously couldn’t afford. House prices start going up, and soon a boom, fueled by cheap credit, unfolds. As financial intermediaries continue to be chockfull of liquidity they become too “creative,” finding ways not only to spread and hedge repayment risk but also to overlook it. Everybody is happy. More and more subprime borrowers buy property, while others take on new debt on what they perceive to be their enlarged home equity. Intermediaries who got into the game early gorge on profits, and once others become aware of it, herds of them stampede to graze in the same pastures.”

  48. Myr says:

    I totally agree with you, Barry. Too many people are letting their political bias infect their analysis of what’s happening(or happened) in the market. All those posters here who say that you are showing your political bias have it wrong. You are simply countering other people’s bias with facts. Thank you. Now let’s get back to our imploding markets!

  49. AJk says:

    So what if private companies originated most of the subprime mortgages? The fact is that Fan/Fred were obligated to purchase billions in either subprime loans or subprime MBS to fulfill their affordable housing initiatives. Mortgage lenders thus had an incentive to ramp up their originations of these loans becuase they knew they had a forced buyer in Fan/Fred. The CRA + Fan/Fred argument is alive and well.

  50. Mark says:

    Back in the *present* moment in time… ;-)

    I wish I could give credit to the fine fellow (or lady) who posted here that one problem with all the histrionics around this being a magnificent and historical go-long moment is that the short interest is low right now.

    Sure enough, I picked up a copy of IBD today (a truly rare moment, if only for a general belief that the founder is a bit off his nut and more than a bit mean-spirited), and sure enough…there it is on page B6: NYSY short interest ratio is at a mere 9.83, whereas it hit peaking, nearly 2x values of 18 or so back in early September.

    So, here’s the thing: since all great bear market rallies start with a short-covering frenzy, who exactly is going to be doing that short covering thang…?

    Again: credits to the market-focused (not PC politics-focused) individual here who first posted this clarifying thought. Clearly, a high VIX and other historical variances aren’t everything.

    BTW, the put/call ratio has not hit an all-time high in the last 2 months, either. People just don’t get it (yet).

    CBOE Total Put/Call Ratio

    To offer one other observation in kind to the previous MARKET-FOCUSED individual, LIBOR aside credit spreads still indicated trouble for equities yesterday p.m., as the |absolute value| of the spread between the Moody’s Corp Bond Indices BAA and the yield on the U.S. 30-yr T-note hit a NEW HIGH yesterday. (One good turn deserves another.)

    Last but not least, I want to offer my personal and sincere thanks to the freeeaking idiot who was offering thousands of XLP Nov. 23 PUT options the day before yesterday at .50-.60 apiece. Can you say $1.40 ask, $1.27 last-trade…in just 2 days? Sure ya can.

    Moral to the Story:

    BE IN THE MOMENT AND LET THE POLITICIANS PLAY POLITICS…unless you’d rather “be right” than “make money.”

  51. Matt Falloon says:

    How come the rest of the world housing is collapsing? They didn’t have a Fannie/Freddie!

    House sales fall to 30-year low
    Tue Oct 14, 2008 2:51pm BST

    LONDON (Reuters) – The decline in house prices accelerated in September and sales fell to the lowest level in at least 30 years, a survey showed Tuesday, in a sign the housing market slump may have some way to go yet.

    The Royal Institution of Chartered Surveyors said its house balance fell to -84.2 last month from -81.8 in August, broadly in line with economists’ forecasts.

    The balance had shown some improvement in recent months after hitting a series low in April but RICS said market conditions had now deteriorated to their loosest since the housing market crash of the

    The figures are likely to reinforce expectations that the housing market will remain weak with many economists expecting Britain to slide into recession in the second half of this year.

    Less than one completed property sale per surveyor went through per week in the three months to September, with the number of sales over that three-month period falling to 11.5 from 12.7.

    Sales are down more than 50 percent on a year ago and at the lowest level since the survey began in 1978, RICS said.

  52. Mark says:

    @Matt Falloon: It’s called “fractional reserve banking” and “domino effect.” Please stay after class. ;-)

  53. Kid Dynamite says:

    but barry – isn’t the reason the banks were thrilled to make these loans BECAUSE they knew they had a guarantor in the form of FNM/FRE ?!?!?!? The banks had no risk because FNM/FRE had a voracious risk appetite.

  54. London Property sales down 53 percent

    he number of properties changing hands halved in September compared to a year earlier, as the fallout of the global credit crunch crippled mortgage issuance, turning the country’s housing boom into bust.

    Revenue and Customs said there were a seasonally adjusted 59,000 property sales in September, down 53 percent on the year and just below August’s 60,000, even after the government raised the threshold at which homebuyers have to pay tax on purchases.

    That compared to 126,000 in September last year, underlining the difficulties for estate agents and retail businesses that depend on the housing market for their survival.

    House prices have fallen by more than 10 percent in the last year as once-easy mortgage lending dried up. Cash-strapped banks have become afraid of even lending to each other overnight, let alone to homebuyers in a falling market.

    The government has said that in exchange for its recapitalisation of British banks, it wants to see mortgage lending return to more normal levels.

    But analysts say it may be a while before the housing market recovers and prices still look set to fall sharply.

    “More forward-looking indicators do not make any more pleasant reading, with latest mortgage approvals and lending data sinking to new long-term lows as housing market activity continues to be suffocated by very tight lending conditions and still-stretched affordability ratios,” said Howard Archer, economist at Global Insight.

  55. OhNoNotAgain says:

    You want to know whether the CRA and Fannie/Freddie have much to do with the *cause* of this situation ? Just wait until after the election is over. You’ll see all of these stories, including those about Acorn, dwindle to nothing overnight. That tells you everything you need to know.

  56. Imelda Blahnik says:

    The fact is that Fan/Fred were obligated to purchase billions in either subprime loans or subprime MBS to fulfill their affordable housing initiatives. Mortgage lenders thus had an incentive to ramp up their originations of these loans becuase they knew they had a forced buyer in Fan/Fred. The CRA + Fan/Fred argument is alive and well.

    As Greenspan pointed out in his testimony, pre-2004 subprime loans are doing okay, default rates at historical levels. Plain vanilla (fixed rate) subprime loans for houses that are priced reasonably compared to incomes are not the problem, and these have been around for decades without causing a housing bubble.

    Between 2004 and 2006 Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent. One reason is that Fannie and Freddie were subject to tougher standards than the mortgage brokers and other unregulated non-bank firms in the private sector, the ones who really weakened lending standards.

    From 2004-2006, securitization was dominated by private investment banks. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie.

    As to the CRA part of your claim….where’s the evidence?

  57. Troy says:

    To fan the political fire McCain was trying to increase oversight in 2003 and Obama voted against it

    Obama snuck into the senate in 2003??? Whose vote did he steal?

    This blame-Clinton BS is just standard Party bullshit, as in if you don’t have the facts on your side baffle them with bullshit. It’s really amazing how much BS true party believers can swallow and spew.

    Not that the GSEs are blameless here, but it’s my theory that Rove saw the polling numbers of the 2000 election and how the “homeowner” demographic was quite strongly (R) leaning, and directed policy to reinforce this segment, as part of his “permanent majority” concerted effort of policy management.

  58. f says:

    So FNM and FRE are completely innnocent ?

    So Congress didn’t change legislation to promote homeownership for most everyone ?

    Who has the wrong meme now ?

    Must be the Tin Foil Hatters who blame everything on the same old same old … usually politically motivated

    ~~~

    BR: No one said they were innocent — what I have said is that they are not the proximate cause of the boom, bust and credit crunch — they were merely cogs in the machine.

    (ps: anonymous comments have not earned the rigth to bold face — next time, and they get deleted

    Why don’t you show yourself?

  59. loan shark says:

    Have you noticed how only the hardest partisans always claim non-partisanship? The use of the ad hominem style of disourse is another give away. Don’t deal with facts but attack your opponent. Over and over. Pure bs.

  60. montaigne says:

    BR:”Why don’t you explain why from 1938 to 2002, nothing like the current boom/bust/credit freeze ever happened before?

    (What free time?)”

    - Come on Barry. Must we really go there. It’s like you’re panicking and forgetting everything you know and showed us for the last few years. Here’s the quick of it:

    Bretton Woods I killed. No more gold standard. Gov’ts are free to run wild with monetary policy. This is easier than raising taxes. We get a wicked bit of inflation in the seventies (housing prices jerk north) because fiat currency is worth less. We get a good bubble in the eighties, it pops but doesn’t fully correct because the fed pumps money into the system, the system reflates and we get a new tech bubble, bubble pops, but the correction is halted with a new infusion of cash, then we get a new bubble in housing. Bubble pops, fed desperately tries to reflate to the tune of almost $4 trillion so far this year. Still failing. So maybe we’re at Peak Credit like the Austrians think and the world order resets.

    During each bubble and pop, regulations were piled on regulations. The rules were changed, the definitions were changed, and the measurements were changed(you’ve been pointing this out)all so everything looks good for those in power.

    This is all very basic human nature in action. So that’s why housing has had a huge bubble and popped. Also, the change to capital gains tax in the late nineties might have made housing a more attractive investment.

    Anyway, anybody who thinks the industry isn’t heavily regulated must rent. All of the mortgage forms are the same, standardized stuff written in VERY plain english so that almost anyone can understand what they’re signing. Thing is, no one cared when house prices were going up and they could use their house as an ATM. Now everybody wants someone to blame.

  61. sms says:

    As long as the McClatchy article is being plagiarized in the comments, let’s add this one:

    “This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.”

  62. Concerned & Disappointed says:

    Troy raises a good point about my comment about McCain and legislation. Clearly, Obama was not in the Senate in 2003.

    I had my timeline screwed up, that is what I get for being brief.

    2003 – GSE accounting scandal emerges, further regulation somehow avoided then.

    summer 2005 McCain cosponsors GSE legislation that never gets out of committee, all dems oppose it.

    Thus, Obama never had a chance to vote for it or against it. He certainly didn’t co-sponsor it and he was/is the #2 recipient of FNM/FRE contributions. maybe that is b/c he is a big proponent of reining them in and they were trying to change his mind ;>

    More importantly, Troy has no idea there even was/were attempt(s) to introduce legislation and doesn’t care b/c it would screw up his narrative.

    The other point is that FNM/FRE both bought mortgages for their own portfolios and provided guarantees, very similarly to the monolines, that allowed others to securitize and were the biggest players and major enablers of the originate and securitize model.

    more, importantly why did BNI trade down afterhours when BNI smoked the quarter and gave Q4 guidance above consensus??? Didn’t seem to be any other earth shattering news divulged during the call.

  63. Concerned & Disappointed says:

    Troy raises a good point about my comment about McCain and legislation. Clearly, Obama was not in the Senate in 2003.

    I had my timeline screwed up, that is what I get for being brief.

    2003 – GSE accounting scandal emerges, further regulation somehow avoided then.

    summer 2005 McCain cosponsors GSE legislation that never gets out of committee, all dems oppose it.

    Thus, Obama never had a chance to vote for it or against it. He certainly didn’t co-sponsor it and he was/is the #2 recipient of FNM/FRE contributions. maybe that is b/c he is a big proponent of reining them in and they were trying to change his mind ;>

    More importantly, Troy has no idea there even was/were attempt(s) to introduce legislation and doesn’t care b/c it would screw up his narrative.

    The other point is that FNM/FRE both bought mortgages for their own portfolios and provided guarantees, very similarly to the monolines, that allowed others to securitize and were the biggest players and major enablers of the originate and securitize model.

    more, importantly why did BNI trade down afterhours when BNI smoked the quarter and gave Q4 guidance above consensus??? Didn’t seem to be any other earth shattering news divulged during the call.

  64. VJ says:

    sms,

    As long as the McClatchy article is being plagiarized in the comments, let’s add this one:

    ‘This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families.’

    And ?

    Those were NOT the vast overwhelming majority of the loans that went bad.
    .

  65. OhNoNotAgain says:

    More information on this via Steve Benen at Washington Monthly:

    http://thinkprogress.org/2008/10/23/mica-waxman/

    It’s what I’ve been saying all along. You have to look at the timeline, specifically *when* did FM&FM start buying up these AAA securities in huge numbers.

  66. Kevin C says:

    You all miss the point.It is simply a case of government crowding out private industry in conjuction with Fannie and Freddie being the suckers at the poker table. The GSE’s had effective duopoly control of the mortgage market. Their Automated Underwriting Engines commoditized mortgages. The only way private industry could make money was to create niche products (Alt A, Subprime). Then they used the rating agencies to facilitate “credit” arbitrage. Then they capitalized on the stupidity of Fannie/Freddie and the ratings agencies to sell the crap.
    It is not that complicated to anyone that actually knows anything about the industry. The only somewhat surprising part of it all is that the Investment Banks drank their own kool-aid. Except for Goldman, of course, who sold the crap to investors while simultaneously shorting the paper they created knowing it was garbage. Thanks Paulson.

  67. TKL says:

    Seems like there’s plenty of blame to go around, and you highlight some interesting facts. But your zeal on this issue is compromising your intellectual honesty. The 1999 NY Times story did not merely say that banks etc. were pressing the GSEs. It said:

    “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.”

    Why did you only quote the second paragraph? For the sake of your readership, if you can’t be honest, move on to another subject.

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  69. LC says:

    Orson Scott Card (science fiction author and huge jerk) is the latest on the blame-Freddie bandwagon:
    http://www.snopes.com/politics/soapbox/honestreporter.asp

  70. guydreaux says:

    Fannie Mae had little to do with subprime lending directly. It is also fair to say that the $700 billion bailout and bank rescues also had little to do with subprime directly. To blame the crisis on “subprime” is a fallacy. One need only to look at the table of subprime servicing volumes to understand that those amounts, on their own, would not materially impact the economy or cause this crisis.

    Now, if we’re going to talk about the “crisis” specifically rather than the “subprime” strawman, then Fannie Mae IS very relevant, and not just because the FNMA bailout in asset terms is multiples of the $700 bio bank deal. FNMA eased lending standards in the 2000s significantly, abetted by Congress. When you have a government subsidized-entity effectively cutting prices and easing terms (and using govt. subsidies to offering prices lower than private companies can) as well as using govt-subsidized credit to buy mortgage securities in the secondary market (pushing down yields), then it leaves private companies with three choices
    1) exit the lending business (some banks did this- orginating/selling directly to FNMA or to securitizers rather than doing actual lending, but again it is hard for a regulated, high cost firm to outcompete unregulated mortgage brokers)
    2) stay in the business but cut prices to match the govt-subsidized competitor
    3) move to niches without a government-subsidized competitor (subprime, jumbo, home equity, option pay, etc).

    Greenspan’s low interest rates and the “Greenspan put” made options 2 and 3 seem attractive for awhile.

    There is no doubt that FNMA’s govt-subsidized activities in the core market drove private market activity to subprime and other niche products. The republicans weren’t anti-FNMA because of regulatory arguments, they were anti-FNMA because the banking sector was lobbying them to provide a broader playing field for them to compete in. FNMA had made core lending less profitable and pushed banks to more exotic and profitable (but much smaller and more dangerous) niches. The Democrats were of the view that the more govt credit at below market terms the better, and the more involvement by non-banks the better.

    In hindsight the solutions were simple:

    1) tightly regulate mortgage brokers. Prosecute fraud by mortgage brokers, real estate agents and homeowners.
    2) prevent FNMA from writing mortgages without strict income/employment and primary residence tests and significant downpayments (10-20%). Limit FNMA’s activities to new mortgage origination rather than secondary market speculation/carry-trades
    3) prevent banks from writing neg. AM mortgages and require special capital reserves against mortgages without significant downpayments and income tests.

    The mortgage brokers have disappeared (sadly without prosecution of homeowners, real estate agents and most mortgage brokers) but I don’t hear many pols or regulators talking about 2) or 3). Instead, the pols are talking about looser FHA/FNMA terms and more government subsidy.

    “Bush” is unfairly blamed for the current mortgage crisis and no doubt will be blamed when the next president and Congress make it even worse

  71. VJ says:

    TKL,

    The 1999 NY Times story did not merely say that banks etc. were pressing the GSEs. It said:

    ‘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 ?

    Once again, for the UMPTEENTH TIME, those were NOT the vast overwhelming majority of the loans that went bad.
    .

  72. HowieCarr says:

    There was far too much eagerness to extend far too much credit to far too many uncreditworthy individuals. Not everyone is worthy of a home (or home loan.)

    Hopefully institutions private and public will learn from this and be much more prudent with their- or taxpayers’- funds in the future.

  73. Sean says:

    I’m afraid you miss the whole point. Certainly private entities wanted to make these subprime loans, and they wanted to do so for selfish reasons (i.e., more profit), as you suggest. But the simple fact is that, despite these desires, they COULDN’T have made these loans, at least not in mass quantities, unless there was a secondary market for them (i.e., unless they could sell them to others, who in turn could sell them to others if they so desired). Well, as luck would have it, buying loans that were originated by others in mass quantities was Fannie and Freddie’s particular specialty.

    And THAT’S why these private entities were pressing Freddie and Fannie to start buying subprime loans. After all, no private company would do it, at least not in mass quantities!

    So, when Fannie and Freddie agreed to lower their standards (primarily for political reasons and certainly not as a matter of sound business practice) and started purchasing subprime loans in large amounts in the late 1990′s, they almost single handedly created a secondary market for such loans. The existence of this secondary market allowed allowed private banks and brokers to begin originating such loans in much larger quantities. And, when certain private competitors like Lehman saw the enormous profits that Fannie and Freddie were realizing in the subprime market, they eventually stepped in and began to compete with Fannie and Freddie for this business, which expanded the secondary market even more, which in turn allowed even more such mortgages to be written.

    So certainly the private sector bears some of the blame, but it all started with Fannie and Freddie’s ill-conceived decision to create a secondary market for these securities.

  74. Dan says:

    It is certainly silly to place blame on any single factor for the current situation because there are so many, some that have to do with government regulation, some that have to do with lack of government regulation, reckless lending and reckless borrowing, poor monetary policy, etc. Doesn’t lend itself to ideologues on any side. That said, it is interesting to note that the homeownership rate in the US spiked dramatically after the CRA revision, from 64% in 1994 to nearly 70% in 2006. Check the US Census Bureau for the data.