Joe Nocera cuts right to the heart of the “Blame Fannie and Freddie” argument in today’s NYT. It is an article well worth your time to read.

He looks a the CATO/AEI narrative — that the government forced the GSEs (and the banks through the CRA) to make ill advised loans to people who could not afford them. This, goes the the claim in the economic fantasy leagues, was the prime cause of the credit crisis and economic collapse.

Except there is no data that supports this argument, and enormous evidence that demolishes it.

Nocera sums up nicely the role of the GSEs:

“Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.’s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”

But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals — which the G.S.E.’s easily gamed — were not the main reason. Rather, it was the rise of the subprime lenders — and their ability to get even their worst loans securitized by Wall Street —that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.”  (emphasis added)

That is precisely correct. The GSEs were chasing profits and market share. Fannie (and Freddie) were just another crappy bank, no different than Citi or Goldman or Bank of America or Lehman or Countrywide or Merrill or Bear Stearns.

Blaming the government for what are obviously private sector motives is a blatant attempt to exonerate the guilty. I find that intolerable . . .

>

Source:
Wake-Up Time for a Dream
JOE NOCERA
NYT, June 7, 2010
http://www.nytimes.com/2010/06/12/business/12nocera.html

Category: Bailout Nation, Bailouts, Credit, Real Estate, Really, really bad calls

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.

91 Responses to “Fannie & Freddie: Chasing Profits, Market Share”

  1. I try not to constantly slog my book, but in Bailout Nation, all of the data, evidence, and history that shows what the actual causes of the crisis were are laid out in easy to digest format.

    The GSEs simply were another crappy bank — to blame them for the crisis is to marry a narrative for political reasons that is blessedly fact and data free . . .

  2. flipspiceland says:

    Are you saying that the honchos who ran the GSE’s have not one iota of responsibility for the global mortgage debacle?

  3. I am saying that the narrative pushed by economic conservatives — that the credit crisis was the fault of the GSEs — is false.

    But to clarify: Fannie & Freddie are no different — and no more responsible — than Citi or Goldman or Bank of America or Lehman or Countrywide or Merrill or Bear Stearns.

    (I’ll add that above)

  4. Dennis the Menace says:

    This is why I rarely read blog comments.

    BR makes the simple argument that Fannie & Freddie were not the prime cause of the crisis, and the wingnut “blame government for everything” argument is nonsense.

    And the response is to recast the argument in the most extreme form possible, ignoring what was written, and pushing a tired narrative.

    Why you even bother with comments is beyond me.

  5. Greg0658 says:

    and I’m sure – members of the 4 Estates were pushing for Joe6Pack to have the ability to create his own prosperity thus giving Bill & Brenda wine glass the ability to appraise, sell & tax J6Ps wares

  6. ArmadaRisk says:

    Your arguments regarding the GSE’s are starting to have more and more of an ideological bent and less and less data. You have continually asserted, without citing sources (including none in your book), that the GSE’s did not participate in the non-prime market in any substantial way until after 2005.

    Despite your repeated and unfounded claims to the contrary, the GSE’s were aggressive SUBPRIME players prior to 2004, at least according to Federal Housing Finance Agency’s 2004 report:

    “Fannie Mae and Freddie Mac continued to be active in the markets for subprime and Alternative A
    mortgages in 2003. . .20 of the top subprime MBS securitizers sold 49 percent or $81 billion of their MBS production to Fannie Mae and Freddie Mac in 2003″
    http://www.fhfa.gov/webfiles/1149/MME2003.pdf, page 14

    Purchasing 49% of the subprime securities issued by 20 key subprime issuers denotes one heck a market impact. But according to you, they had no influence on the subprime mortgage market until after 2005. What an inconvenient data point.

    If you don’t believe the Federal Housing Finance Agency, then perhaps you should read for yourself in Freddie Mac’s 2004 annual report, specifically pages 119, 120, and most interesting is page 123 where they claim:

    “Table 63 summarizes our non-performing assets. The increase in our non-performing assets from 2000
    through 2003 was primarily driven by higher delinquencies associated with our alternative collateral deals. While these delinquencies result in higher levels of non-performing assets, we have limited loss exposure due to the credit enhancements associated with these securities. Prior to 2004, alternative collateral deals consisted only of Structured Securities backed by non-agency securities, which were primarily backed by subprime mortgage loans. . .”
    http://www.freddiemac.com/investors/ar/pdf/2004annualrpt.pdf

    So, was it CRA or greed that was driving this suprime market share growth? This is the wrong question to ask. The real question to ask was, “Why was a regulated, heavily government subsidized institution allowed to participate in the subprime market at all?”

  7. ArmadaRisk:

    There is asub-prime, and then there is subprime. You are trying to conflate the small number of mortgages the GSEs were allowed to purchase pre-2005 with the junkiest of junky mortgages.

    Not all subprime are created equally. The 2000-02 vintage subprime loans — about 8% of the total mortgages, fairly in line with the prior 25 years — were (for the most part) conforming mortgages. (The 2003 mortgages you cited were fairly similar).

    The CONFORMING original mortgages were made with a reasonable LTV (between 10-25% down) credit checks on the borrowers, ALL of whom had jobs, along with a review of their ability to service the debt, etc.

    Consider the following NON-Conforming mortgages — these defaulted in record numbers. An enormous number of these nonconforming mortgages were written and securitized by Wall St. No GSE need apply.

    How did these pre-2005 mortgages look?

    • In 2005, 32.6% of new mortgages and home equity loans were interest only, up from 0.6 percent in 2000.

    • 43% of first-time home buyers in 2005 put no money down.

    • In 2006, 15.2% of 2005 buyers owed at least 10 percent more than their home was worth (negative equity).

    • 10% of all homeowners with mortgages had no equity in their homes (zero equity).

    • Fully $2.7 trillion of these loans were scheduled to adjust to higher rates in 2006 and 2007.

    Source: Ivy Zelman, Credit Suisse, as noted in Bailout Nation

    We have had subprime mortgages for decades. If you want to know what actually occurred, rather than repeating tired and misleading talking points, it would behoove you to understand which of these went into foreclosures in the greatest percentages, which amounted to the biggest number of dollars lost.

    Your comments are crafty, but disingenuous. You should know the difference between what conforming mortgages look like, and the non-conforming mortgages that defaulted in such a spectacular way.

  8. And for those who want to know what the fast track to moderated comments is, misquote or misstate the research in Bailout Nation

    Like ArmadaRisk did . . .

  9. Greg0658 says:

    ps – ok – the 5th Estate bloggers are pushing for J6p and B&Bwg too .. just not at the expense of total kaos and wealth transfer to a few manipulators

  10. Pat Shuff says:

    ‘And when state officials tried to crack down on these unseemly practices, the Office of the Comptroller of the Currency, instead of investigating, blocked their efforts.’ –Nocera NYT

    They Warned Us About the Mortgage Crisis
    State whistleblowers tried to curtail greedy lending—and were thwarted by the Bush Administration and the financial industry

    “The OCC “took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West,” Cooper says.

    This was but one of many instances of state posses sounding early alarms about the irresponsible lending at the heart of the current financial crisis. Federal officials brushed aside their concerns. The OCC and its sister agency, the Office of Thrift Supervision (OTS), instead sided with lenders.

    The nation’s highest court sided with the Bush Administration, ruling in April 2007 that the OCC had exclusive authority over Wachovia Mortgage. Justice Ruth Bader Ginsburg, writing for a five-member majority, pointed to the potential burdens on mortgage lending if there were “duplicative state examination, supervision, and regulation.” In a dissenting opinion, Justice John Paul Stevens said that it is “especially troubling that the court so blithely preempts Michigan laws designed to protect consumers.”

    http://www.businessweek.com/magazine/content/08_42/b4104036827981.htm

    The lengthy Business Week article detailing states attorney generals attempt to halt the bad lending in their states, taken all the the way to the Supreme Court by the the Office of the Comptroller and the major national mortgage lenders now all bankrupt or taken over. The states lost on the issue of preemption.

    States attempted to rein in bad lending practices as early as 2003.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Monday, December 1 2003

    Orange County Business Journal

    Orange County mortgage companies have seen their business slow since interest rates bottomed out this summer. But there’s another, potentially bigger threat to the county’s subprime lenders: politicians. Governments from Los Angeles to the Carolinas have passed laws restricting subprime lenders,

    Irvine-based New Century Financial Corp. said it expects to make 60% fewer loans in New Jersey after the state’s Home Ownership Security Act went into effect last week. The law, which seeks to curb predatory lending, is one of the toughest.

    In California, Oakland and Los Angeles have passed tough ordinances restricting subprime lending.

    In both cases, Wall Street buyers of subprime loans repackaged as securities could be held liable if a lender is found to be in violation of the ordinances.

    California itself has a subprime lending law, though it doesn’t make buyers of loans sold as securities liable. And that’s a deal breaker, according to Marc Loewenthal, New Century’s senior vice president of corporate affairs.

    “Rating agencies will not rate those loans” made in cities with far-reaching liability laws, he said. “And, in consequence, nobody will purchase them.”

    As of Nov. 1, New Century stopped making loans in Oakland, Loewenthal said. The company doesn’t break down its loans by city, though California accounts for 40% of its lending.

    The ordinance in Los Angeles-a bigger, more important market-is on hold for now.

    Officials there have opted not to enforce the city’s law until an industry legal challenge to Oakland’s is settled.

    Meanwhile, debt rating agencies Standard & Poor’s and Fitch Ratings have said they won’t rate bonds backed by subprime loans made in Oakland, according to Melissa Richards, outside general counsel with the Sacramento-based California Mortgage Bankers Association.

    “We believe that is a great way to clean up the industry,” Schreiber said.

    Holding investors liable will prompt them to “deal only with reputable people,” he said.

    The next logical step, according to Schreiber, is to pass similar regulations in Santa Ana and San Francisco, cities with big numbers of minority, poor and elderly residents.

    http://www.allbusiness.com/legal/laws/969006-1.html

    “Assignee liability would radically reshape that market by making everyone involved potentially responsible when things go bad. Investment banks that created mortgage-backed securities and investors who bought them would be liable for financial damage if mortgages turned out to be fraudulent. The financial industry opposed assignee liability, maintaining that it would cripple the market for asset-backed securities. Major ratings agencies later agreed that allowing unlimited damages would be disruptive. The agencies threatened to stop evaluating many bonds tied to mortgages covered by the Georgia law. ”

    It was the assignee liability, requiring skin in the game, that was overruled by the Supremes and had sent Mozillo at Countrywide ballistic along with his fellow musical chairs dance floor partners in the industry. Yes, some did see it coming and culpability should be appropriately assigned to what and to whom ensured that preventing it from coming would not be allowed, and that its coming would be fully enforced under the rule of law.

  11. boutyaybig says:

    No more responsible than GS, Citi, or Lehman?

    You’ve got to be kidding. GSE’s obviously weren’t the only cause of the crisis, but to state that the GSE’s, who were responsible for 90% of home loan financing at the end of 2007, were no more responsible for the crisis than the private banks doesn’t pass the common sense test.

    I enjoy your blog but the political partisanship is starting to get a little Krugmanesque…

    ~~~

    BR: First off, I am not sure your data is correct. Please show me a legit source that states 90% of 2007 vintage mortgages were GSE.

    But do not confuse when banks froze and stopped issuing — after the RE collapse had begun — with a causal factor. The GSEs eventually became the only game in town, AFTER banks stopped issuing credit. That is an effect, not a cause.

    Second, regardless of that data point, do you really want to cite the end of 2007 as a causal factor? The die was already cast by then, and by late 2007, it was all over but the crying

    2007 was 2 years AFTER the peak of home prices, long after the all time volume high, and well into the downslide of credit. Foreclosures were ticking up, prices were down, and the RE market was already in the tank.

  12. Ruschem says:

    OK Barry, your argument is very logical as usual (sounds sarcastic but it’s not, I do believe that you are a very logical person). To me there one omission in your argument. These two companies were government sponsored then and are government owned now. With them, unlike real private banks, the government did have power but not will to stop the insanity. The congress and senate weren’t as stupid as some may think, they were political. Not so much in terms of party lines but in terms of outcome of the next election cycle. Goes same way for both parties.

  13. Ruschem:

    Fannie became a private entity (with a government line of credit) in 1968. Freddie was always a private entity, but set up in order to compete with Fannie (spun out by LBJ to make the budget look less bad during the Viet Nam war).

    The implicit government credit line was never supposed to be a guarantee of all debts and obligations. I blame Bush/Paulson/Bernanke for bailing them out.

    Fannie and Freddie have now become the repository for every other crappy mortgage written by other banks. So I now blame Obama/Geithner/Bernanke for using the GSEs as a backdoor bailout for the rest of the banking sector

  14. stonedwino says:

    I usually just read and don’t comment, but I could not help myself this time…

    boutyaybig…your problem seems to be the one most Conservatives and Republicans have – it is called “Cognitive Dissonance”…Cognitive dissonance is an uncomfortable feeling caused by holding two contradictory ideas simultaneously. The theory of cognitive dissonance proposes that people have a motivational drive to reduce dissonance by changing their attitudes, beliefs, and behaviors, or by justifying or rationalizing them.[2] It is one of the most influential and extensively studied theories in social psychology. Dissonance occurs when a person perceives a logical inconsistency in their beliefs, when one idea implies the opposite of another.

    In other words, you see and read the logical explanation and since it does not align with what you believe, you tendency is to ignore what you have just read and learned in terms of actual facts and revert to creating your own “opinion”, which is usually not based in fact at all. Barry is about as level headed and even keeled as I have seen – partisanship has nothing to do with it.

  15. KidDynamite says:

    but barry – the GSE’s were another big crappy bank, only they were operating with the assumed backstop of the US Government! so to say that the CRA wasn’t the problem is one thing… but to say that FNM/FRE’s Government association didn’t matter is another thing entirely – and I don’t think it’s correct.

    it’s like ratings arbitrage… but FNM/FRE had the biggest rating arb of all – the Gov’t was behind them implicitly backing them… THAT was precisely the problem and precisely what allowed them to get so big.

    all i’m trying to say is that sure – the government didn’t force FNM/FRE to make loans… that doesn’t mean that FNM/FRE weren’t a HUGE cog in the wheel, even if they did it on their own volition, leveraging their quasi-government stature.

  16. Marcus Aurelius says:

    The argument against BR’s assertions reminds me of the liability switch that takes place when am asbestos or lead laden house is sold to a (often times unsuspecting) new buyer (of course, if the house was constructed in the time period when these materials were used, the buyer has good reason to question if they are present in a home. However, if that concern was addressed by an affidavit that all such materials were previously removed from the home, the buyer cannot be blamed for taking the affidavit at face value. The falsified affidavit is where the fraud resides).

    The fact is that the fraud in our system took place when the loans were originated. Although sub-prime loans were made to less than perfectly qualified borrowers (thus, their moniker), there were still qualifying hurdles that had to be overcome before the loan was made. With sub-prime, all qualifications were thrown out the window (I have personal knowledge that this happened, because I witnessed it). It is at this point in the process (qualifying) that virtually all of the fraud was committed. The GSEs are a secondary mortgage market — they did not originate loans. They did not qualify borrowers.

    Since the housing bust started, this fraud and criminality has expanded to include prime and Jumbo loans (hardly the type of loans covered by a CRA mandated bank). The losses from these loans will dwarf those realized from sub-prime loans.

    Please answer this: What part of the CRA or any GSE charter required lenders to question (or requalify) prime and jumbo prime loans? The answer, of course, is that there was no requirement.

    In assessing blame (or guilt), it’s important to ask who took money out of the deal, and who took on debt. Those who walked away with cash — the mortgage originators and brokers (in the form of fees) — were the parties that perpetrated the fraud (by encouraging the utterly unqualified to take loans they could never repay), while the players on both sides of them (home buyers, secondary mortgage markets, and those purchasing MBSs) lost big.

    As BR has stated in the past: One cannot point to a black-letter law that requires, encourages, mandates, suggests, implies, or otherwise legitimizes or excuses loans made to people who did not qualify — prime, sub-prime, or otherwise. If the opposite were true, there would have been no fraud involved, as the unqualified would have been qualified, by statute.

    It seem that many here would like to blame the government, rightly or wrongly, for all things bad and foul, but it simply isn’t the case, here.

  17. Marcus Aurelius says:

    Correction to long comment, above:

    Since the housing bust started, this fraud and criminality has expanded to include prime and Jumbo loans (hardly the type of loans covered by a CRA mandated bank). The losses from these loans will dwarf those realized from sub-prime loans.

    Please answer this: What part of the CRA or any GSE charter required them (the GSA’s) to question (or requalify) prime and jumbo prime loans? The answer, of course, is that there was no requirement.

  18. Marcus Aurelius says:

    KidDynamite:

    You seem to be addled. GSEs do not make loans (they are buyers in the secondary mortgage market). The CRA did not mandate loans to unqualified borrowers.

  19. Alaric says:

    Issues with the GSEs have been documented very well over the past ten years by James Grant and others and I find the arguments presented here interesting in that they really miss one large point.

    A large part of the problem with Fannie in particular was how LARGE the organization became; Basically there were INCENTIVES in growing Fannie’s investments in securities — note that investing in securities is not part of the government mandate for Fannie, packaging was.

    James Grant and others pointed out before the crash that the ratio of investments to equity was so small that any decrease in the housing market of greater than 5-10% would put the company in great jeopardy – and so it came to pass.

    Recall too, that Fannie had an incredibly large accounting problem for years in the earlier part of this decade, basically because it was so large, and that this problem took years to deal with (and probably is not being dealt with now adequately but there is no disclosure so we do not know).

    Now, what were the incentives? Well, larger bonuses for the management. Who were the management? Why Franklin Raines, Erskine Bowles and others who were prominent administration officials in yes the Democratic party. Republicans were involved also, but the reality is that Fannie Mae was considered a cushy retirement nest egg for prominent political officials and that is why there never was any serious attempt by yes the Democratic congress to reign it in, in particular the investment portfolio which caused all of the problems.

  20. Alaric:

    The GOP was the majority party in control of the Congress from 1994 to 2007. That period covers the entire ramp up to an enormous size.

    If you have an issue with the oversight of the GSEs — as I do — then I suggest where you should look is at the party in power during its growth.

    Of course, this simple fact does not fit the CATO/AEI narrative, and hence is widely ignored by most if its adherents.

  21. KidDynamite says:

    yes Marcus – i am well aware. when FNM/FRE buys mortgages, they become the lender. that’s what i meant.

    how can you ignore the fact that the largest buyer of mortgages, by a wide margin, is Fannie and Freddie? I’m not talking about the CRA at all. I’m saying that without FNM/FRE’s gov’t backing, there is absolutely no way they would have gobbled up mortgages the way they did, and the lend-to-securitize model wouldn’t have bubbled to the extent it did.

    remember – all of these crappy loans were “sanitized” through FNM/FRE, which resulted in end buyers thinking they were buying not just AAA paper – but US Government backed paper! THAT was the key problem.

  22. Ruschem says:

    To Marcus Aurelius:
    Marcus, I am very far from real-estate industry. My only connection with it was that I bought one house in my lifetime in the USA (17 years now). In 2005 my friend, not a speculator by nature and not a very rich person bought a small condo in addition to the house he already owned. The condo has never been occupied or rented out. In 2006-7 I started hearing (newspapers and radio) that the home ownership reached 70%. In my area, where median family income was $56K the median house price reached $250K. I was asking myself how all these people could afford these houses? I couldn’t find the answer. Not an economist or accountant or real-estate dealer I saw that there was something wrong with this picture and was very worried about the residential real estate and stock market. And believe me, I don’t think I am too smart as far as the economics is concerned. Very few seemed to be worried at that time. Do you honestly believe that GSEs management was so stupid and didn’t understand what papers they were buying? It is correct but also convenient to blame only rating agencies and subprime lenders but GSEs should’ve used common sense. If I could see it, they should have too. And what about the government? When they continued increasing GSEs ceiling, did they honestly believe that home ownership at 70% is sustainable and can go to 80, 90, 100%? They were motivated, as Barry correctly stated by grid (profits, market share) at GSEs and, as I keep saying, by politics of elections at senate and congress. No one wanted and still doesn’t want to deal with GSEs problems. And this was and is the real problem.

  23. Marcus Aurelius says:

    KidDynamite:

    The mortgages taken on by the GSEs (that, after all, is the purpose of the GSEs, in the first place) were “rated” when they were originally made (in the process of qualification). The GSEs have no way to re-qualify loans.

    To see where the fault lies, one need only look at credit card default rates to understand that the Banks make their money right here, right now, and leave the consumer and the buyers of securitized debt in the secondary markets holding the bad debt bag.

    The fraud lies squarely in the lap of the banks.

  24. Marcus Aurelius says:

    Ruschem:

    You ask:

    “Do you honestly believe that GSEs management was so stupid and didn’t understand what papers they were buying?”

    I ask, in return:

    Do you honestly believe that the originators of these loans actually thought that the loans would ever be repaid?

    Do you honestly think that, in the absence of fraud, all of the management and shareholders of Lehman, or WaMU, or AIG (or any other insolvent “bank” — and that includes all of the large “banks”), could have been stupid enough to think that is was a going concern with good, sound business practices?

    I sat in settlements. I listened to 22 year-old mortgage brokers tell much older, more experienced, ostensibly wiser businessmen that they had a “new product” that would qualify almost anyone looking to buy a house. They were perpetrating fraud as fast as they could.

    The point of fraud resides with the mortgage originator. The GSEs were doing what they were designed to do (that being a good thing, or bad, is another issue, entirely).

    The purpose of the GSEs is to buy existing loans — not to make loans or qualify borrowers or rate banks. As BR points out, the growth of the holdings of the GSEs took place under an uber-business-friendly Republican (law and order, and all that good shit) administration, that by its own admission, did not believe that government could manage its way out of a paper bag — and they set out to to prove it (a self-fulfilling prophecy, if there ever was one). The liberalization of finance (including mortgages qualified for purchase by the GSEs), and the complete abandonment of oversight and law/regulation enforcement (under the misleading name of ‘conservatism’), were responsible for allowing the fraud to go unchecked.

    As for the GSEs being a problem — of course they are. So are the TARP assets. So is our national debt. So are the banks and banking, in general. As I said — that’s another issue entirely.

  25. Arturo says:

    How anyone can blame the hapless and incompetent Dems when all of this occurred on W’s watch is beyond me.

    I can’t stand either party, but some of you are giving W a pass:

    Bush, and the people he appointed, oversaw-and overlooked-a period of breathtaking financial speculation, and failed to regulate the explosive growth of subprime mortgages, credit default swaps, collateralized debt obligations, and other exotic financial instruments. Banks and companies profiting over the course of the bubble had all been major contributors to Bush’s 2004 campaign: real estate, $10.5 million; securities, investment, and various financial services firms, $14.3 million; contractors and construction services, $5.2 million; insurance, $3.2 million; commercial banks, $3.1 million. Campaign contributions do not in themselves tell the whole story, but are rather a signal of the corporate and commercial interests that wielded power over the action-or inaction-of the government regulatory apparatus during the Bush years.

    The price of Bush’s dereliction was immense. The Bush presidency terminated with the nation caught in the worst economic meltdown in 75 years. In the United States alone, more than 8.4 million jobs were lost and nearly three million homes were foreclosed on, with more to come. The number of personal and commercial bankruptcies reached unprecedented levels. In 2008-a single year-American households lost $11 trillion, 18 percent of their wealth.

    Only the Democrats could be so incompetent to allow this counter-factual history to be running wild.

  26. Firefox says:

    Check out this chart of the post 2005 GSE mortgages — IOs, ARMs, NINJa — the change in loan quality after the 2005 rule change is pretty astounding

    Credit Suisse Mortgage Chart

  27. Tarkus says:

    @Pat Shuff . Not only were there state attempts to stop the fraud, but also the FBI’s warning as early as 2004.
    http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/

    “FBI warns of mortgage fraud ‘epidemic’
    Seeks to head off ‘next S&L crisis’”

    So why were all of these efforts thwarted and warnings ignored by everyone high enough to do something about it? The Atty General, Congress, the President, the Fed, etc, etc?

    When they say “no one (with access to this information and whose job it is to monitor it – not Joe the Plumber doing his plumbing job) could foresee it”, who is the “they” who chose to ignore it?

  28. KidDynamite says:

    come on Marcus – i’m not talking about ratings flaws here – i’m talking about how FNM/FRE’s involvement in the process sanitized everything and put the government’s stamp of approval on it. that’s a huge problem – an even bigger one than the massively incompetent ratings agencies.

  29. Marcus Aurelius says:

    “Only the Democrats could be so incompetent to allow this counter-factual history to be running wild.”
    __________

    It’s a bitch when your only options are to be governed by either the criminally insane or terminally feckless retards.

  30. Ruschem says:

    To Marcus Aurelius:

    You sound alike a gladiator not an emperor. We are way pass the point of fraud in mortgages. Who would deny that? The question is why FNM/FRE were buying these junk and why were they given green light? Were they deceived by ratings or did they want to be deceived and reckless knowing that the government had they back? What are they buying now? When and how will it stop?

  31. VangelV says:

    Blaming the government for what are obviously private sector motives is a blatant attempt to exonerate the guilty. I find that intolerable . . .

    I remember watching a hearing in which banks were being attacked by politicians because they were not lending enough to poor credit risks. That was in the 1990s, when Clinton was pushing affordable housing policies. When Bush got elected his HUD people followed the same policies.

    The securitization could not have taken place without help from the government sanctioned ratings oligopoly. And the bubble could not have grown to the extent that it did without the GSEs and the Fed’s easy money policies. Sorry but no matter how you try to spin the argument government is to blame.

    ~~~

    BR: The ratings agencies are another clusterfuck who deserve to die . . . And I think you are aware of my views on Easy Al.

  32. RW says:

    @ stonedwino, we have passed the point where comments such as those of “boutyaybig” can be referred to as cognitive dissonance I think: The discomfort one would normally expect from mental conflict is simply not present.

    Notice too the comments of “ArmadaRisk;” e.g., the accusations of BR’s increasing “ideological bent,”[BR] makes repeated and unfounded claims, cites no data,” etc. — either Armada did not read BR’s book (which contains extensive references and logical linkages) or Armada is a bald faced liar or …

    He, boutyaybig and the rest of the “poor colored folks and evil government were primarily responsible, the private finance sector was a victim too, sucked in by bad regulation, and anyone who disputes this must be a socialist symp” crowd may be practicing doublethink:

    “To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy …” – George Orwell, 1984 (http://en.wikipedia.org/wiki/Doublethink)

    There are some legitimate points that can be made WRT the role of the GSE’s in amplifying the credit crisis but none of them (if honestly made) can raise the GSE profile above the banks, brokerages and rating agencies in that regard much less demonstrate GSE causality.

  33. Mike in Nola says:

    It’s the wingnut schtick. While driving the other day, tuned across a talk radio station where I heard the host say that since BP had managed to get away with breaking regulations, the spill was really the government’s fault. Doesn’t matter they they bribed people or that W appointed a bunch of industry lackeys.

    These are just more examples of Al Franken’s dictum: The Republicans say government doesn’t work. And every time they get power they prove it.

  34. boutyaybig says:

    Stonedwino,

    Got it. I’m a close-minded idiot.

    I like how you never addressed my actual concern. It’d be nice if you came down off your ivory tower and actually explained how I’m wrong.

    Like everyone here, I’m just trying to make sense of this stuff.

  35. OK, I will take a stab at it.

    Fannie Freddie blamers:

    When I was researching what the basis of the crisis was, I tried to stick with actual causal factors that could be proven. Hard dollars, real activities, actual pre-collapse causation. Every causal factor I listed had to have hard dollars in big numbers directly leading to the collapse.

    As far as any evidence Fannie and Freddie (GSEs) were concerned, I found that they were accounting frauds and debacles and deserved to die. We very publicly announced we were short their stock weeks prior to their collapse. However, in all of the research, there was only tenuous connections between how this crisis occurred and what FNM/FRE did.

    Anyone that wants to assign major blame to the GSEs you need to explain what they had to do with the following:

    • What was FNM/FRE role in the banks decisions not verify income or payment history of mortgage applicants?

    • What was the roles of the GSEs in setting interest rates? Isn’t that the Fed’s role?

    • The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. If the national GSEs were the cause, why were these regions so disproportionately impacted by the housing collapse? Why wasn’t it more national in character?

    • 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How exactly was this the responsibility of the GSEs ?

    • How did Fannie cause Derivatives to be exempt from reserve requirements, exchange listings and other regulation?

    • The non-conforming “No Money Down” Mortgages (0% down payments) that so many banks approved — were they somehow required by Fannie? Freddie?

    • Explain the shift in Loan to Value (LTV) from 80% (i.e., a 20% downpayment) to 120% (ipiggyback loans): Can you show me anything that the GSEs did to change this traditional lending requirement?

    • What about real estate agents and mortgage brokers using the same corrupt appraisers again and again to get friendly price appraisals. What was FNM/FRE’s involvement?

    • Did the GSEs require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

    • How exactly did Fannie and Freddie force Moody’s, S&Ps and Fitch to rate collateralized junk paper as Triple AAA?

    • What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time? What was Fannie’s role in this?

    • Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE requirement?)

    • Did the GSEs require banks to not check credit scores? Assets? Income?

    • What was it about the GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood ?

    • What was it that Fannie did to force banks to make “interest only” loans? Were “Neg Am loans” also their doing?

    • Consider the February 2003 speech by private sector mortgage underwriter Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages. Was that Fannie & Freddie’s fault, or just a grab for more market share, and bad banking?

    • Fannie & Freddie were not permitted to buy subprime paper — at least not in size — until after 2005. By then, the die was already cast. The boom had peaked, it was all downhill.

    • Fannie Mae had been around since 1938, and Freddie since 1968 — why was there no problems during those 7 decades ?

    These are tough questions, but they lead to the actual causes of the crisis. If you want to actually assign blame where it is due, then you simply must be able to answer them. Otherwise, you are merely repeating uninformed political talking points. Along with the blame CRA crowd, the blame Fannie and Freddie simply does not have any proof, and cannot demonstrate causation.

    I was short the Fannie’s stock from $40 downwards. I have long thought they were a disaster. If there was any proof that they were a direct cause of the crisis, I have yet to find it.

  36. Alaric says:

    BR – I certainly agree with you about the fact that the GOP was in charge.

    I have not expressed my points clearly – I am not laying the blame solely on the Democrats. In fact I really wanted to point out that in large part, Fannie Mae’s demise was entirely predictable and indeed well-known and that even now, the political arguments over it obscure a large part of the reality. Fannie Mae had some things in common with some banks, however, I believe the story is fundamentally different in several respects. My points:

    1. A misalignment of incentives led to an expansion of their business into holding a directional and inordinately large investment portfolio which was not supported by an adequate capital base; this was understood by a large portion of the investment community. Yes, the same was true of some banks (Lehman in particular), but the banks could never claim, as Fannie Mae did, that the expansion of its business into holding a large investment portfolio was consistent with its special status and “mission”.

    2. The company was already too large, had for a time not been able to even produce audited financials for years, and had been the subject of fraud investigations (no bank would have survived just the inability of not being able to produce audited financials for years)

    3. The former political appointees who managed the company had incentives to grow the investment side of the business inordinately large and protected themselves from constraints through vigorous lobbying – indeed on both sides of the aisle. You could say that the banks could lobby too, but Fannie Mae was by far the most powerful because it had the former political appointees with connections to various administrations as well as the special status and mission (you can be against the banks as a politician but how could you be against home ownership as it was sold by Fannie?

    I certainly do not want to offend you, but when you discuss the GSEs you seem to reduce it to political attacks on the “right wing”….. I would suggest that for proper analysis all should be encouraged to perhaps re-read what James Grant in particular was writing about from 2000-2007.

    There is enough blame to go around on both sides; I and many others may particularly remember Barney Frank’s comments right up to the nationalization, however, please do not think that because we recall these comments we are political hacks of the right wing.

    Separately, I would be very interested in a discussion of where we go from here, perhaps at some point you could start that up. For example, what are the powers now saying about the organization? What are the current plans? Look at the incentives in place now – what is Fannie Mae now and what is it going to be?

    BR – I have quite a bit of respect for what you have been able to achieve and the people who you have come to know in the course of building your business, and the purpose behind the blog is very clever. It would be great to meet you one day, I would hope to somehow be accretive to your thinking here.

    Barry Ritholtz Says:
    June 12th, 2010 at 9:52 am
    Alaric:

    The GOP was the majority party in control of the Congress from 1994 to 2007. That period covers the entire ramp up to an enormous size.

    If you have an issue with the oversight of the GSEs — as I do — then I suggest where you should look is at the party in power during its growth.

    Of course, this simple fact does not fit the CATO/AEI narrative, and hence is widely ignored by most if its adherents.

  37. Marcus Aurelius says:

    KidDynamite:

    I still assert that the problem (the problem being that we were, are, and will continue to lose money, both privately and publicly due to criminality, regulatory capture/deregulation, and lack of law enforcement in the lending industry) began and still resides in the private sector banks and lenders, and that the problem is the result of fraud by one or more parties at the point of loan origination, prior to to assumption of any loan or creation of any MBS by the GSEs or anyone else. Your argument would make more sense to me if the very trash that wrecked the GSEs were confined to them, as opposed to being being spread to institutions — both public and private — around the globe (and always rotten from the point of origination). Of course, the GSEs took these loans on a grand scale — that’s why we give them access to cheap money and minimal capitalization requirements. Did the banks take advantage of the function of the GSEs? Yup.

    I guess the difference here is whether you believe the GSEs were victims of their own reason for being, or co-conspirators in the underlying crime. I believe the former, as they’re now losing money hand over fist. I don’t believe they caused the crash in RE.

  38. KidDynamite says:

    “What was FNM/FRE role in the banks decisions not verify income or payment history of mortgage applicants?”

    with FNM/FRE’s ample appetite to gobble up crappy mortgages, the banks realized they didn’t need to make good loans – the bad loans could be sold too – because the buyer of the loans (FNM/FRE) was a sucker. isn’t that the key point? all the rest stems from that.

    again – the presence of a US GOVERNMENT SPONSORED AGENCY (two of them, actually) in the middle of the process made it easy for hundreds of billions of dollars of capital from all over the world to rationalize participating in the MBS market. FNM/FRE, with their implicit government backing, put the ultimate stamp of approval on the entire market, “validating” the entire clusterf*ck

  39. Jack Damn says:

    I don’t have anything to add, but the comment section to this post is filled with interesting dialogue. Great information by others and a good extension of the original post by Barry’s contributions.

  40. Marcus Aurelius says:

    Barry Ritholtz Says:
    June 12th, 2010 at 11:49 am
    __________

    BR with the KO.

  41. Marcus Aurelius says:

    Alaric Says:

    “(no bank would have survived just the inability of not being able to produce audited financials for years)”
    ______________

    Ummmm . . . right now, looks like ALL of the banks (even the Fed) were allowed to do just that. The banks are insolvent. The Fed is marking assets to fantasy.

  42. Marcus Aurelius says:

    KidDynamite Says:
    June 12th, 2010 at 12:03 pm

    ” . . . the banks realized they didn’t need to make good loans – the bad loans could be sold too – because the buyer of the loans (FNM/FRE) was a sucker. isn’t that the key point? all the rest stems from that.”
    ____________________

    Knowingly making a bad loan (and profiting from the transaction) is CRIMINAL FRAUD. Buying a lemon is not.

  43. [...] For the Thousandth Time… Freddie and Fannie did not cause the financial crisis: The Big Picture [...]

  44. Pat Shuff says:

    There is, as well, the festering issue of the government-sponsored enterprises (GSEs).

    In past analyses, I have combined the growth in Treasury debt to the expansion of federally-backed MBS – referring to this aggregate as “federal finance.” In the six quarters ended December 31, 2009, this “federal finance” had expanded $3.1 TN. Well, the Federal Reserve threw a monkey wrench in my work this quarter by reclassifying Fannie and Freddie MBS.

    From the Z.1: “Beginning 2010:Q1, almost all Fannie Mae and Freddie Mac mortgage pools are consolidated on Fannie Mae’s and Freddie Mac’s balance sheets.” After this reclassification, GSE assets expanded $3.874 TN during the quarter to $6.887 TN. Confusing the issue, “Agency- and GSE-backed Mortgage Pools” declined $4.328 TN during the quarter. That leaves $455bn of MBS unaccounted for, perhaps partially explained by large write-downs.

    Q1 changes to the holding quantities of Total Mortgage debt is inconsistent with the presentation of GSE, mortgage pool/MBS and ABS assets (on separate Z.1 pages) – though this presentation does make more sense. Mortgage pool holdings of mortgages dropped $4.328 TN, while (reclassified) GSE holdings jumped $4.363 TN.

    http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10390

  45. Alaric says:

    BR – just read your comment and your list is extremely comprehensive, well thought out and all right. I would suggest that you bring your thinking up one level and view the events of 2000-2008 as not just one crisis but the confluence of several:

    1. Cyclical Credit Boom – long term cycle here, started generationally when those who could remember installment / margin debt run up in the 1920s were long gone; banks, rating agencies reduced standards, most of the things on your list relate to this.

    combined with…

    2. Financial Innovation / Derivatives / Shadow Banking – started ironically with Carter – interest rates, brokerage fees, all de-regulated, allowing broker/dealers to increase leverage ratios, but ——- in particular, however, the expansion of OTC derivatives and the unknowable nature of the systemic liabilities between organizations (banks, governments, funds).

    combined with….

    3. The post 2000 crash movement of capital to real estate as a “safe haven”, not just in the US but in most English speaking nations.

    I would argue that if two of the three events occurred – say a credit boom & a real estate boom — the crash may not have been as severe – but to combine a credit boom/bust, real estate boom/bust with the expansion of unknown derivative liabilities and you have a very serious systemic problem.

    Unless there is a way to manage OTC liabilities properly (through a clearinghouse where risk & positions sizes is known daily and positions netted), busts of any kind will be worse than those experienced post WWII.

    Also, lack of transparency of the GSEs / or government liabilities generally, may also make a future crisis that much worse….

  46. Ruschem says:

    Barry,

    all you said is correct. No argument here. But tell us, what do you do when you get a Nigerian scheme email or letter? You should do the same when you see loans like GSEs bought. It’s a story for the four-year olds to say that GSEs didn’t understand or know what they were buying because papers were AAA rated. They were too greedy and their overseers were too gutless to stop it. They are not guilty of originating the crap but they are guilty of happily buying it and therefore encouraging more and more these crap. They deliberately played the role of the last fool in the pyramid. As I said here, if you and many other Wall Street insiders saw it, if I saw it, then the question is how and why they did not?

  47. Joe Friday says:

    The timing is important here.

    HUD became the regulator of Fannie & Freddie in 1992, and reviewed their affordable-housing goals every four years.

    * In 2000, as HUD revisited its affordable-housing goals, HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or THAT WERE GRANTED WITHOUT REGARD TO THE BORROWER’S ABILITY TO REPAY.

    * But by 2004, when HUD next revised the goals, Freddie and Fannie’s purchases of subprime-backed securities had RISEN TENFOLD. Foreclosure rates also were rising.

    That year, President Bush’s HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and “must do more.”

    “That was a huge, huge mistake,” said Patricia McCoy, who teaches securities law at the University of Connecticut. “That just pumped more capital into a very unregulated market that has turned out to be a disaster.”

    http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_2.html

  48. Alaric says:

    Hi Marcus Aurelius, not sure if the banks are actually insolvent at this point, or if they will be insolvent.
    You may say that it will be impossible to tell, perhaps, particularly with Citibank and other banks where you really need to be omniscient to understand what is going on.

    What may be interesting to consider is that the low interest rate policy of the government is leading to a very large wealth transfer from those with funds to the banks. In this manner, the government will ensure solvency of the banks and if this does not work, then accounting standards will be relaxed and/or the banks will be provided with subsidized credits from the government…..

    One interesting area for research is how WWII was financed and the incredible debt eventually repaid. During that period, the public and banks purchased huge quantities of government bonds (indeed the banks were strongly “encouraged” to buy bonds), yet interest rates did not increase and there was no high inflation (that came years later after the financial system changed), and the bank insolvency slowly improved……

  49. lulsh says:

    What was FNM/FRE role in the banks decisions not verify income or payment history of mortgage applicants? They gave it implicit approval by using their AAA rating to make the securitization structures used for these loans viable

    • What was the roles of the GSEs in setting interest rates? Isn’t that the Fed’s role? rates really were not the issue. These loans were floating Libor vs 2 year swaps

    • The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. If the national GSEs were the cause, why were these regions so disproportionately impacted by the housing collapse? Why wasn’t it more national in character? Because all these areas always lead the country in real estate bubbkles based on loan size if nothing else. That said, i can sell you full city blocks in Detroit.

    • 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How exactly was this the responsibility of the GSEs ? GSE’s helped provide liquidity

    • How did Fannie cause Derivatives to be exempt from reserve requirements, exchange listings and other regulation?

    • The non-conforming “No Money Down” Mortgages (0% down payments) that so many banks approved — were they somehow required by Fannie? Freddie? No, they were not. Freddie and Fannie did allow 97% LTV

    • Explain the shift in Loan to Value (LTV) from 80% (i.e., a 20% downpayment) to 120% (ipiggyback loans): Can you show me anything that the GSEs did to change this traditional lending requirement? They provided liquidity.

    • What about real estate agents and mortgage brokers using the same corrupt appraisers again and again to get friendly price appraisals. What was FNM/FRE’s involvement? That was fraud which the GSE’s did a very poor job of managing.

    • Did the GSEs require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

    • How exactly did Fannie and Freddie force Moody’s, S&Ps and Fitch to rate collateralized junk paper as Triple AAA?

    • What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time? What was Fannie’s role in this? They allowed the piggyback on their first mortgage.

    • Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE requirement?) That was fraud which was most likely the biggest problem of all.

    • Did the GSEs require banks to not check credit scores? Assets? Income? They provided liquidity

    • What was it about the GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood ? No connection

    • What was it that Fannie did to force banks to make “interest only” loans? Were “Neg Am loans” also their doing? No.

    • Consider the February 2003 speech by private sector mortgage underwriter Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages. Was that Fannie & Freddie’s fault, or just a grab for more market share, and bad banking? Who do you think he was selling it to? Fannie was his co-conspirator.

    • Fannie & Freddie were not permitted to buy subprime paper — at least not in size — until after 2005. By then, the die was already cast. The boom had peaked, it was all downhill.

    They were buying it as early as 1999. Also they were using their AAA rating to provide guarantees for Alt A/subprime securitizations.

    • Fannie Mae had been around since 1938, and Freddie since 1968 — why was there no problems during those 7 decades ? huh?

  50. lulsh says:

    • Did the GSEs require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

    yes they did, in fact they provided their free of charge to originators!!!!

  51. ArmadaRisk says:

    My original quote was: “You have continually asserted, without citing sources (including none in your book), that the GSE’s did not participate in the non-prime market in any substantial way until after 2005.”

    You may moderate me for this comment, but it is true. You did not cover’s the GSE’s market share and active role in subprime market prior to 2005 in your book.

    As far as the deterioration of subprime underwriting between 2000 and 2007, I’d suggest you do more than cherry-pick a few data points that help your case. There has been extensive research done on it by multiple credible sources, including an excellent paper by Yuliya Demyanyk of the Cleveland Fed, which can be read for free here:
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1020396

    But it is worth pointing out a brief synopsis of her research, which she posted on the Cleveland Fed website here:
    http://www.clevelandfed.org/research/commentary/2009/0509.cfm

    “An analysis of subprime mortgages shows that within the first year of origination, approximately 10 percent of the mortgages originated between 2001 and 2005 were delinquent or in default, and approximately 20 percent of the mortgages originated in 2006 and 2007 were delinquent or in default. This rapid jump in default rates was among the first signs of the beginning crisis.

    If deteriorating underwriting standards explain this phenomenon, we would be able to observe a substantial loosening of the underwriting criteria between 2001–2005 and 2006–2007, periods between which the default rates doubled. The data, however, show no such change in standards.

    Actually, the criteria that are associated with larger default rates, such as debt-to-income or loan-to-value ratios, were, on average, worsening a bit every year from 2001 to 2007, but the changes between the 2001–2005 and 2006–2007 periods were not sufficiently high to explain the near 100 percent increase in default rates for loans originated in these years.”

    Her 40 page original research paper on the subject (with footnotes) analyzes the impact of product features (term, rate, fixed/arm), borrower credit (FICO, DTI, LTV), and economic factors. As she very clearly illustrates, observed delinquency rate is a poor proxy for credit quality, because it completely ignores the underlying economic conditions that the mortgage borrowers lived through during the early key years of the mortgage.

    Please do not use straw man arguments to misrepresent what I’ve said. I am not solely blaming the GSE’s for the financial crisis, nor am I making excuses for Wall Street, Congress, the regulators, or the Fed. But I am pointing out that your arguments regarding the GSE’s proper role in the crisis are flawed, uninformed, and misleading. Moderate me for this if that’s your only recourse, but at least be honest about it.

  52. Winston Munn says:

    For 8 years the nation was led by a man and his party who practiced a brand of religion known as laissez-faire capitalism, with dogma that expresses the belief that any government intervention with business is inherently evil, and all decisions by businesses is by its nature good and just.

    The failure that brought about the crisis was the failure of ideology.

  53. Andy T says:

    Geez Barry. How many times are you going to go to the well on this topic….

    Enough already.

    We get it. The US government jacking trillions of dollars into the credit system to subsidize housing had nothing to do with decades long bull market in housing and subsequent blow off bubble.

    The government is great. They should be heavily involved in all aspects of our lives and businesses/private industry is bad.

    We got it.

  54. KidDynamite says:

    marcus – i’ll try again, because this is important and we clearly still have a communication gap somewhere.

    buying bad paper is not a crime (well maybe it is in terms of fiduciary duty failure, but let’s ignore that for the context of this discussion) – i absolutely agree with you there. but FNM/FRE did much more than that. they leveraged their position with their defacto government stamp of approval, to magnify the issue (by selling trillions of dollars of their own debt!) to an untenable level. that’s all i’m saying. That’s precisely why they had to be bailed out – because they had flooded the world with so much crap, on behalf of the government, that letting them fail would have been apocalyptic.

    FNM/FRE were the central cog in the crap in –> crap out pipeline. and the REASON they were such a central cog is because they had the backing of the US Government. THIS is what distinguished them from being just another crappy bank like the other players. I keep saying the same thing, so i’ll just quit now and go watch the soccer game.

  55. The argument being made — since you do not reach the same ideological conclusions as (CATO/AEI), you must therefore be partisan — deserves one last attempt at debunking.

    Not for those who believe it, as it is a waste of time arguing with true believers, ideologues or partisans — but for any fair minded people who want to know what actually happened>

    I previously called the talking points movement to blame F&F for the crisis “Get Me ReWrite!:”

    Let’s start with my approach to everything I have written, studied and analyzed in on this subject: I start with the data and evidence and go forward from there. Figure out what the “Truth” is; try to get as close to the objective reality beneath the noise in order to make intelligent investing decisions for myself and my clients.

    There are others who do not share this objective. Their goals are either political (winning the next election) or ideological (having their belief system become dominant). Truth is irrelevant to these people.

    Not surprisingly, these folks – many of whom contributed to the crisis in a their own way – are desperately trying to duck responsibility for what happened. I put your ideology in this group. You are part of the group whose belief system helped cause the crisis, and are now engaged in an ongoing effort to rewrite its history.

    The goal? Exonerate their own bad behavior, throw off any responsibility for the collapse, blame anything but their own ideology and horrific decision making. They want to keep pushing their tired political agendas, despite the damage they may have caused.

    When writing Bailout Nation, I tried to steer clear of partisan finger pointing. I kept the focus on what actually occurred, what could be proven mathematically. I blamed Democrats and Republicans – not equally, but in proportion to their actions, and what they did.

    Unsupported theories, tenuous connection, loose affiliations were not part of my analysis. Because something supported housing did not mean it was at fault. There is a difference between a home and a liar loan, and some observers fail to make that distinction.

    To be blameworthy, every legislative change, each regulatory failure, any corporate action had to manifest themselves in data, in actual mathematical proof. This led me to ascertain the following 30 year sequence:

    -Free market absolutism becomes a dominant intellectual economic thought.
    -Deregulation of markets, investment houses, and banks becomes a broad goal: This led to Glass Steagall repeal, unfettering of Derivatives, Investing house leverage exemptions, and a new breed of unregulated non bank lenders.
    -Legislative actions reduce or eliminate much of the regulatory oversight; SEC funding is weakened.
    -Rates come down to absurd levels.
    -Bond managers madly scramble for yield.
    -Derivatives, non-bank lending, leverage, bank size, compensation levels all run away from prior levels.
    -Wall Street securitizes whatever it can to satisfy the demand for higher yields.
    -”Lend to securitize” nonbank mortgage writers sell enormous amounts of subprime loans to Wall Street for this purpose.
    -To meet this huge demand, non bank lenders collapse lending standards (banks eventually follow), leading to a credit bubble.
    -The Fed approves of this “innovation,” ignores risks.
    -Housing booms . . . then busts
    -Credit freezes, the markets collapse, a new recession begins.

    You will note that the CRA is not part of this sequence. I could find no evidence that they were a cause or even a minor factor. If they were, the housing bubbles would not have been in California or S. Florida or Las Vegas or Arizona – Harlem and South Philly and parts of Chicago and Washington DC would have been the focus of RE bubbles. But we could find absolutely no evidence that the CRA zones were remotely bubblicious, so we dismissed that unsupported theory as lacking evidence.

    Nor could I find any proof that Fannie and Freddie were to blame. Now understand, there is no love lost between myself and the GSEs. For years, I have called them “Phoney and Fraudy.” Since George Bush and Hank Paulson nationalized them, I have accused the government of using these two as a backdoor bailout for banks – a hidden PPIP/TARP used to buy all the garbage mortgages that banks are desperate to get off their balance sheets. Longtime readers of my blog “The Big Picture” will recall we very publicly shorted Fannie based upon their fraudulent practices and horrific balance sheet when FNM’s stock was in the $40s — and it soon after collapsed.

    So these aren’t the blatherings of a Fannie & Freddie cheerleader — its the result of careful research and analysis of someone who has long disliked both firms.

    But even I simply could not reconcile with any hard evidence the movement to place all of the world’s troubles at the feet of the GSEs. Not, at least, according to the data. Indeed, I could not prove anything other than F&F were just 2 more crappy iBanks.

    That lack of evidence, however, doesn’t stop ideologues from trying. Consider this attempt at rewriting the causes of the credit crisis by Kevin Hassett (Freddie Finances Scarier Than Bad Slasher Flick, Bloomberg, May 10 2010):

    “The worst financial crisis in generations was set off by a massive government effort, led by the two mortgage giants, to make loans to homebuyers no matter whether they could make the payments. Lenders were willing to lend money to just about all comers, no matter how low their income. Why? Because the lenders knew Fannie and Freddie would purchase the loans from them for a high price before bundling them into securities to sell to investors.”

    Now, this makes for a fascinating narrative that plays into a number of different ideological beliefs. It exonerates the radical free market deregulators, it ignores what the private sector did, and it somehow ignores the fact that Congress was controlled by a very conservative GOP from 1994 to 2006 – the prime period of time covered leading up to and including the beginning of the crisis.

    But worse than all of that, the data supporting Hassett’s position simply isn’t there.

    Over the past 2 years, I have repeatedly asked the people who push this narrative to provide some evidence for their positions. I have offered a $100,000 if they could prove their case.

    Specifically, I have requested some data or evidence that DISPROVED the following facts:

    -The origination of subprime loans came primarily from non bank lenders not covered by the CRA;

    -The majority of the underwriting, at least for the first few years of the boom, were by these same non-bank lenders

    -When the big banks began chasing subprime, it was due to the profit motive, not any mandate from the President (a Republican) or the the Congress (Republican controlled) or the GSEs they oversaw.

    -Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street – NOT Fannie & Freddie

    -In fact, prior to 2005, the GSEs were not permitted to purchase non-conforming mortgages.

    -After 2005, Fannie & Freddie changed their own rules to start buying these non-conforming mortgages – in order to maintain market share and compete with Wall Street for profits.

    -The change in FNM/FRE conforming mortgage purchases in 2005 was not due to any legislation or marching orders from the President (a Republican) or the the Congress (Republican controlled). It was the profit motive that led them to this action.

    These are data-supported facts I pounded on in BN.

    Of course, folks like yourself and Hassett hate this factual history, as it conflicts with your politics. Rather than produce evidence, you create story lines unsupported by facts. But Monkeys love a good narrative, and so you give that to them.

    However, as an investor, I demand evidence, data and facts. The “blame Fannie & Freddie crowd” have managed to remain blissfully data free. They have steadfastly ignored all calls for proof.

    Its way past the time to call out their intellectual dishonesty. If you cannot show any data, if you cannot prove what you are alleging with actual facts, you need to be called out for what it is you actually are: Proponents of a failed philosophy.

  56. ArmadaRisk says:

    Barry’s arguemnts:
    “-Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street – NOT Fannie & Freddie
    -In fact, prior to 2005, the GSEs were not permitted to purchase non-conforming mortgages.”

    Barry, you read my post above (with links to gov’t and GSE documents) which completely demolishes this assertion. Why do you feel the need to re-iterate a debunked talking point?

  57. lulsh says:

    “In fact, prior to 2005, the GSEs were not permitted to purchase non-conforming mortgages.”

    That was a loan amount characteristic, not a credit/income/documentation characteristic.

    “Prior to 2005, nearly all of these sub-prime loans were bought by Wall Street – NOT Fannie & Freddie”

    as early as 1999, Freddie has the data somewhere….I cannot access it…

  58. lulsh says:

    “The origination of subprime loans came primarily from non bank lenders not covered by the CRA;”

    I agree that CRA was small potatoes in all this, but what is your definition of originator?

  59. lulsh says:

    “Over the past 2 years, I have repeatedly asked the people who push this narrative to provide some evidence for their positions. I have offered a $100,000 if they could prove their case.”

    What would the prize money be if one could prove the GSEs bought subprime loans in bulk before 2005?

  60. Tarkus says:

    Why are the GSE’s talked about like they were calling the shots? If they were buying sub-prime, why didn’t Congress step in and stop them? Who was in charge of Congress at the time? Who was Atty General when the FBI was reporting rampant mortgage fraud in 2004? What was the “Ownership Society” all about?
    The mess could have been stopped by those in charge at the time. Who were they??

  61. DeDude says:

    AND the only reason the GSE’s were worried about losing market share was that we had been stupid enough to turn them into private for-profit entities. If they had remained government owned they would never have been allowed to implement loser standards and they would never have ended up costing government any money.

  62. ArmadaRisk says:

    Yeah, like the tight standards of government-owned Ginnie Mae. Good point DeDude.

  63. Cdale_dog says:

    Barry,

    After watching this, not sure how the Republicans should be the party blamed by you for the GSE debacle? http://www.youtube.com/watch?v=_MGT_cSi7Rs

    Also, looks like at least President Bush knew we had trouble brewing…. http://gatewaypundit.firstthings.com/2008/09/bush-called-for-reform-of-fannie-mae-freddie-mac-17-times-in-2008-alone-dems-ignored-warnings/

    The intenet is a b*tch – YouTube is pretty cool, you should try it sometime. However, I’m sure this post will be deleted since it doesn’t fit your agenda.

    ~~~

    BR: 2004? You mean when the White House occupant was President Bush, and he had a GOP controlled Congress? Remind em what this group did about the GSEs?

    What’s that you say? Nothing except give speeches arguing for greater minority home ownership?

    Ahh, but you somehow equate speech giving with actual legislation or policy (its absurd). But since you seem to think speech giving is so important:

    A Home of Your Own, by President Bush

    or this?

    President Bush Discusses making Home Financing affordable

    There was this also, but it was taken down by the GOP.
    President Bush 2002 Speech Encouraging More Lending Fanny Mae and Freddie Mac

    Oh wait, here is the transcript.

    Hey, you are right, the internet is a bitch.

    This is why I detest partisans. You are all brain damaged. I mean that literally — your cognitive functions are similar to that of people operating with significant deficits.

  64. Graphite says:

    Can’t the same argument be made on behalf of the investment banks? Fannie & Freddie owned the market for prime, conforming loans, and with the help of their idiot public subsidy they made mortgage credit so easy for the prime borrowers that those poor banks just had to go searching for borrowers in the more exotic regions of mortgage lending. If it weren’t for F&F cramming credit into the largest & most

    I mean, “they were losing market share, so they had to go into subprime?” That’s the argument here? Why do we assume the GSEs had any right to exist or have any market share at all?

    I still maintain that subprime mortgage loans were only the first wave of this crisis and that a significant portion of the rest of the GSE’s portfolio, including “better” subprime vintages as well as many prime loans, are still slated for demolition.

    If they had remained government owned they would never have been allowed to implement loser standards and they would never have ended up costing government any money.

    Wow, let me have some of whatever you’re smoking. Yes, I’m sure the government would have felt no pressure whatsoever to make credit easier to get and to lower standards to make that happen. And they would have seen the housing bubble for what it was and stopped it before it got out of hand.

  65. Bomber Girl says:

    BR – your conclusion that anyone who thinks Fannie and Freddie share some blame for the crisis is partisan similarly lacks the data that you so decry on the other side. There have been various data filled responses here and in earlier posts (one about the price effect of Fannie/Freddie on the market comes to mind). You ignore them and go back to the cry of “partisan! partisan!”. Give me a break. It’s economics.

  66. RW says:

    @Bomber Girl, since that is not BR’s conclusion and he did the exact opposite of ignoring any claim to alternative facts (multiple posts in refutation and clarification) your “point” provides the necessary coda the arguments he actually did make. Q.E.D.

  67. Tarkus says:

    “Bomber Girl says

    BR – your conclusion that anyone who thinks Fannie and Freddie share some blame for the crisis is partisan similarly lacks the data that you so decry on the other side. ”

    Ok – I gotta take that as a sarcastic demonstration of what it sounds like when partisanship flat-lines your EEG. Good one! :D

  68. Bomber Girl says:

    What did I say that was partisan, Tarkus? I am an economist (not that that has any merit, I agree) and a reformed wall-streeter who happens to disagree with BR on the importance of Fannie and Freddie in the crisis. He refutes some arguments, ignores others and calls those who disagree “partisan”. Partisan of what? Common sense?

  69. pdzxc says:

    Alan Greenspan and the Federal Reserve deserve a good share of the blame too – it wasn’t just the banks and credit rating agencies.

  70. The Curmudgeon says:

    Okay, really late to the game, but:

    If the idea that Fannie and Freddie were about to implode was a purely partisan hack meme, how come Review and Outlook in the WSJ was taking them to task as early as 2004–when the world was controlled by their overseers in the Republican Administration and Congress–that they were too big, too clumsy to manage risk, and dependent on the implied (now explicit) backing of the US government?

    Fannie and Freddie and to some extent Ginnie Mae were basically laundering Alan’s money, feeding the Chinese production machine so it could make cheap stuff for Americans and have some place to invest the proceeds. If you don’t believe that, check to see how much of their shit paper was sold overseas in the last few years of the boom. It’s also the reason why the implicit debt guarantees became explicit when they both failed.

    But, Fannie and Freddie did not cause the housing crisis. They just helped facilitate it. The “but for” cause of the housing crisis was Alan Greenspan’s Fed trying to stave off massive deflationary forces attributable to a queered up international trade regimen where China decided to artificially prop up the dollar so it could look like it was making more money than it was. Prices for Chinese goods should have been going up, and the dollar going down, but since it didn’t, the money had to flow somewhere. It settled on housing. There’s really nothing partisan about that. And I don’t get why it bothers people to hear partisan hacks claim it all had something to do with politics. For partisan hacks that never objectively seek truth, everything has to do with politics.

  71. arel says:

    There are at least two story lines of causality re the implosion of the GSE

    FNM and FRE were really 2 companies and the proxy statement of (I think 2001 or 2002) was the dividing line.

    Company #1 was a packager, servicer and guarantor of mortgages, the first 2 parts were low risk as was the third until the sub-prime universe expanded. (nothing to add to all the comments on this point)

    Company #2 was as a very highly leveraged hedge fund focused on interest arbitrage between cost of funds (GSE debt) and revenues from the mortgages bought and retained for its own portfolio.

    This part of the company really took off in 2001 (2002 ?) when as stated in the proxy and annual report, management was to be “very well” rewarded if EPS was to reach $7 a share. (I can’t retrieve the proxy- possibly someone else can and preferably post the relevant parts)

    There were no restrictions placed on debt or the use of leverage in order to reach the EPS goal. (this was the killer)

    At this point GSEs started to pump out debt (not MBSs) and use the proceeds to leverage up and buy both mortgages and MBSs for their own account.

    There were no restrictions on the amount of GSE debt that US banks were permitted to own. So GSE debt was competing with Treasury debt both in the US and abroad.

    So even without the subprime debacle it is likely that there would have been an implosion at the GSEs because of the leverage and the need to hedge both sides of the hedge fund balance sheet. (couple of Trillion after a few years)

  72. Sun Tzu says:

    The real issue is who tried to game the system, or pushed ethical boundaries, or committed outright fraud. Who committed mortgage fraud? Who gamed an opaque cds market? Who underwrote bonds they knew were crap and took massive bets on the other side? Who really got bailed out?

    You can blame the GSE’s and even AIG for being inept, too slow to react, and maybe even unwilling to police themselves. But they are really the effect and not the cause. They got gamed.

  73. Graphite says:

    Having reviewed the thread in more detail, it is truly amazing that nowhere in BR’s timeline of the crisis does he mention the Fed’s repeated, predictable decisions to provide liquidity to bail out bad actors in 1987, the early 1990s, 1994, 1998, and the early 2000s. The market was attempting to withdraw liquidity to more sane levels and purge the losers from the system, and instead those laissez-faire absolutists in charge overruled it time and time again.

    Oh, right. Doesn’t fit the storyline.

  74. As I noted in the very first comment to this thread, I do not want to constantly slog Bailout Nation.

    The entire middle section of the book — 4 chapters — is devoted to that exact issue. I actually mentioned all of those years, including charts, in Bailout Nation. And the phrase I coined for Greesnpan’s post-2001 monetary policy was “Ultra-Low Rates. ”

    In Who is to Blame, 1-25) my #1 blamee is Alan Greenspan.

    Unless you guys want me to rewrite the entire 343 page book every time I post on a related subject, I will stick to the narrow topic at hand. The entire timeline of the book is implied.

  75. Dennis says:

    Graphite:

    You comment is perplexing. You post here all the time, but do you even read what BR writes? He has been constantly bashing the Fed and Greenspan for 6 years for their role in causing the mess.

    Yours has to be one of the more seriously willful ignorant comments ever posted here. You might as well have accused BR of being in favor of the bailouts.

    Please get a clue.

  76. Tarkus says:

    BR has said F&F were contributors to the debacle, not the cause. Posts that F&F purchased subprime prior to 2005 do not alter that argument. The implicit gov’t guarantee also may have been a factor, but the corrupt actors of a shadow banking system (names well known) that had grown (lobbied-for unregulated) derivatives to 10x’s world-wide GDP were going to get bailed-out anyway no matter what they did, and they probably knew it. That F&F were a part of that group is incidental.
    Greenspan/Fed is Patient-Zero. People forget the Internet Stock bubble already. With all that liquidity flooding the system, its going to bubble-up something.
    Politically, liberals are stuck with a bad mantra of spending us into oblivion. Conservatives, however, are equally stuck because all one needs ask is “What, if any, role do you believe the gov’t should take in the financial markets?” The answer HAS to be “small to none” to qualify as a conservative viewpoint, and they know that is disastrous, so the only other alternative is to do some historical rewriting or deliberate obfuscation.

  77. Jim67545 says:

    Read most of this yesterday but lost password.
    I’ve run a very small bank mortgage operation selling to Freddie. I too shorted FRE, but also MTG and LEH. If that gives me bones in this, here goes…
    Someone pointed out that the GSEs DID encourage automated underwriting systems. True. Several other items BR says the GSEs did not “force” in fact they indirectly did. Here is how.
    The core article said it was a competitive situation. True. In the 5 years or so during which this unfolded the GSEs offered progressively more liberal terms. LTV went from 95% to 97% (Freddie Alt 97s) to 100% (Freddie 100s.) TLTV went from 80-0-20s to 80-5-15s to 80-15-5s (in other words a piggyback.) Piggybacks, a particularly suicidal form of bank lending, circumvented having to deal with those troublesome PMI underwriters.
    By absorbing the market niches already being served by other non-GSE originators, the GSEs pushed the non-GSE originators into even riskier structures. You can say that the GSEs were competing with the non-GSE originators or that they were answering the needs of their customers (the Seller/Servicers.) Had the GSEs not pushed into these areas those operating at the fringes would not have needed to venture farther out to retain their market share.
    Incidentally, this is happening again right now with those other Government Sponsored Enterprises called Credit Unions and Farm Credit.
    Of course, it can be said that even if the GSEs offered 100% LTV financing nobody is forcing an originator to take it. That is naive. If the product (say Freddie 100) is offered by the GSE, the originator has to offer it or else it will be uncompetitive. The originators always will push at the boundaries and seek the line of least resistence. Whenever the GSEs lengthened the leash the originators ran again out to the end.
    On the conundrum as to why Nevada, Florida, California and Arizona, I suspect it has to do with poor selection of Seller/Servicers by the GSEs. It is one thing to sign up your community bank. But when you get into bank owned mortgage companies, then mortgage companies of the trunk-of-a-car variety, then into mortgage companies that are captives of home builders (again all for competitive/customer service reasons), you are begging for fraud and conflict of interest. If you then tailor programs for those home builders such as 3-2-1 temporary subsidy buydowns and seller’s concessions, you create a bubble where the home building is occurring most vigorously.
    The rest of the equasion is the practice in subdivision land of using the last home sold as the comp for the next. You start high and progressively ratchet higher. The GSEs fully accepted this in their underwriting guidelines and if they accepted it – could anyone else do otherwise? I think this explains the conundrum as, indeed, relating to the GSEs.
    I think the depiction of the GSEs as more or less just going with the flow is like saying that what GM does has no influence on Ford.

  78. Bomber Girl says:

    Tarkus, I think the problem with reading a lot of BR’s posts on the topic are that he has not seemed to say that Fannie / Freddie were “contributors” to the debacle as you state above, rather he has seemed to exonerate them from blame – although I now note that he has finally elevated them on his top 25 list to at least share a ranking with the other “crappy banks”. Given what many commentators above and elsewhere have said about the impact of Fannie Freddie on market pricing, market structure, implied backing of gov’t., etc. they at least (de)merit that and more. It is particularly to read the comments of those people actually involved in this market and their reaction to the impact of F&F on their business model.

    It doesn’t mean one has to go all the way and say they were THE cause, there were many guilty parties as amply demonstrated by BR and others. Unless one is partisan, of course.

  79. Bomber Girl says:

    (sorry, left out a word, meant to say “it is particularly interesting to read….)

  80. Alaric says:

    arel’s comment expresses some of what I believe to be true – Fannie Mae company #2 (highly leveraged owner of mortgages and issuer of debt), contributed to the crisis – as it became clear to more in the market in September 2008. Did FNM company #2 cause the crisis or were they a symptom of what was occurring generally?
    Who is to say, but they did have a role in it due to the size and scope of their activities in the market, and indeed to deny that they were a central part of the market would be very blinkered…..of all the banks and other actors, they, rather than the banks, were relying on the implicit government guarantee in amassing such a large investment portfolio outside of their original mandate. No written evidence has emerged of this reliance or probably ever will now, but if you were in Washington DC in 2007 you would have been color on this, in particular the sheer hubris of the very successful middle management employees who were reflecting the views of their superiors.

    BR — in investing, politics/power is a data point and not just a filter that those who you may feel are biased do not see truth. This is particularly true now. The power of Fannie Mae and those who control it will be felt for years to come, and need to be examined as an input to the investment process. The employee compensation incentives have changed, now there are new incentives. Ultimately, the new incentives of those who control this company and the unfunded liabilities it will generate will be of great importance to Americans, and will be part of a new crisis yet to be born.

  81. d4winds says:

    F&F were late to the party, then decided to plunge. Fortunately for MER, which was in the same boat though not as late, F&F came along to partially save them from themselves. There is a governmental culprit in the financial crisis but it has little to do w/ F&F or the CRA: the Greenspan/Bernanke put. The Lehman collapse raised the terrible spectre that “free enterpise” might exist. Fortunately we were all saved from such a calamity by vigorously re-instituting the put in a form & to an extent never previously dreamed possible.

  82. garrisongold says:

    I have never read where the government directly suspended due diligence requirements, but they were certainly lax in over seeing the market to say the least. My daughter was a bank auditor working the low income residential loan markets, and she was constantly challenged to make certain real banks (regulated) were only accepting loans that at least met what she felt were weak requirements. She didn’t write the guidelines, and felt a certain amount of helpless in stopping a disaster. However, she feared most for the markets in the coastal areas and even she was shocked by the amount of fraud perpetrated by the non-regulated lenders and securitizers.

    How could it happen? Two totally corrupt political parties in Washington D.C. Read the quote below and ask yourself what type of home buyer was the president talking about.

    “I want to set up a single family affordable housing tax credit to the tune of $2.4 billion over the next five years to encourage affordable single family housing in inner-city America. One of the things that the Secretary is going to do is he’s going to simplify the closing documents and all the documents that have to deal with home ownership. And I’m proud to report that Fannie Mae has heard the call and, as I understand, it’s about $440 billion over a period of time. They’ve used their influence to create that much capital available for the type of home buyer we’re talking about here. It’s in their charter; it now needs to be implemented. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital”.
    President George W. Bush – June 18, 2002

  83. Joe Friday says:

    UNDER PRESSURE FROM BANKS, BUSH EASED LENDING RULES

    (AP) – The Bush administration backed off proposed crackdowns on no-money-down and interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

    Bowing to aggressive lobbying – along with assurances from banks that the troubled mortgages were OK – REGULATORS DELAYED ACTION FOR NEARLY ONE YEAR. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

    The administration’s blind eye to the impending crisis is emblematic of a philosophy that trusted market forces and discounted the need for government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.

    Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false.

    Dec 1st, 2008

  84. gbgasser says:

    I think when looking at blame of FNM/FMC one must ask the question, If they werent around would this have still happened? I think the answer is a resounding yes.

    FNM did invent mortgage securitization in 1938. It was the only way banks would make home loans in that environment. It was sort of an FDIC for lenders. They had to meet standards but if they did a failed loan would be “backed” by the govt. They started the 15/30yr mortgage. They coexisted with a very stable housing market for over 70 yrs. It wasnt til they started chasing shareholder value and competing with other investment banks for market share that they became unstable.

    Would the idea of secondary markets have happened outside of the govt? Most assuredly. Would the idea of trying to get more people to but homes have happened without the govt? Most assuredly. Big developers and realtors were huge behind the govts push of homeownership for OBVIOUS reasons.

    The weakness of the conservative argument here is that they want us to believe that ONLY the govt is capable of pushing for things that while well meaning are not good for us in the end. They want us to believe that people not trying to govern but simply chasing profit would never have created a system like our housing market, that banks would never have sought out more customers on their own and pushed the envelope and followed flawed models which said that the risks were much less than previously thought. People running for profit businesses have this incredible insight into their markets they know the risks and always pursue the most profitable choice and never put their enterprise at risk of collapse

  85. Tarkus says:

    Again, everything about F&F said so far says they were actors on the stage, but they did not SET the stage.
    This was the argument from the beginning – that revisionists are attempting to shift the CAUSE of the crises onto CRA in order to absolve their actions for and philosophy in unregulated markets.

    If anyone is directly addressing causality, could you please post “F&F and CRA CAUSED the financial system collapse” and how it did, rather than contributed (like all the other for-profit banks who were also too big to fail).

  86. stonedwino says:

    @ Mike in NOLA said it best quoting Senator Al Franken…

    “The Republicans say government doesn’t work. And every time they get power they prove it.” So damn right….and it has been like that since Nixon. Deregulate all you can and then when shit hits the fan, socialize the losses and blame the government – how anyone with half a brain is still buying that elephant dung, I haven’t a clue.

    Then again – Just let Cheney do his thing with the energy task force and then it’s the governments fault that industry oversight got gutted and industry insiders were appointed as regulators after the BP spill….yeah right….. GOP and Bush have done so much damage to this contrary in so many ways, that it will take a generation of serious re-regulation and clean up all the messes….like the GSE”s and their mortgage business and how they had to keep up with the deregulated folks that were originating the boat load of subprime loans, and it turns out it wasn’t the deregulation to blame, but the GSE’s for lending to lots people who could not afford it anyway….honestly…then again there is plenty of blame to go around no matter how we slice it.

  87. “I want to set up a single family affordable housing tax credit to the tune of $2.4 billion over the next five years to encourage affordable single family housing in inner-city America. One of the things that the Secretary is going to do is he’s going to simplify the closing documents and all the documents that have to deal with home ownership. And I’m proud to report that Fannie Mae has heard the call and, as I understand, it’s about $440 billion over a period of time. They’ve used their influence to create that much capital available for the type of home buyer we’re talking about here. It’s in their charter; it now needs to be implemented. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital”.
    President George W. Bush – June 18, 2002

    this, the above, is, but, one part of the co-ordinated Ramp of nominal RE Prices..

    It’s a Simple Story: these Transactions, of RE, were based on Credit Availablity, and, with that, the more Credit available, the higher the possible Price achieved, in ‘the Market’..

    Development, like the CRA, and, certainly, further, the GSEs “new Rules”, helped drive Liquidity into, previously, moribund Housing Markets–at the low-end..

    just, add ‘knock-on’ effect, and a massive Media campaign, from there..

    HUD, previously/still, and the GSEs, recently/now, have been become massive Laundromats for all kinds RE-related ‘Sleaze’.

    But, hey, it’s ‘All OK’, those claims, ultimately, back by you, are in your ‘Pension’/SocSec+ other unfunded Gov’t ‘Promises’/Insurance Co.s/Bond MutFundz/”Money Market” Accounts/ and, any other Poke one could stick a piece of the Pig..to say nothing of the ‘Hams’-still on the Balance Sheets of the TBTFs..

    One, objectively, would have to admire a Looting, so Well Done..

  88. DeDude says:

    The RE bubble and its financing was a big Ponzi scheme. Fannie and Freddie were brought into it at the end because the masters of this fraud needed a bigger sucker to get in at the end so they could get out unharmed. Look at the players that came out ahead in this game, those are our masters and even without “personhood” they had no problem getting the needed political influence to ensure that F&F were allowed in to suck up the loses in the end. Anybody who buy the story sold through the corporate media about F&F and CRA and soci@lism – are just being played like the idiot tools they were born to become. Our masters know exactly how to play the idiot public, the political system and the courts. They rob you and then make you point you finger at another fool who also got robed.

  89. chris says:

    Barry , I always enjoy reading and listening to your views and logic .I do have a question though.You have stated that you do not see a double dip in the economy though you do see real estate prices continuing to decrease.Can we avoid another fall in the markets and economy if real estate goes south?

  90. annechris says:

    Here ‘s Robert Kuttner’s reaction to Nocera piece.

    http://www.huffingtonpost.com/robert-kuttner/dont-blame-the-dream-of-h_b_610594.html

    He says:

    It is depressing that a rightwing theme has invaded the mainstream Times.

    Nocera contends that the subprime industry’s “raison d’etre” was to promote homeownership “for people who lacked the means — or the credit scores — to get a traditional mortgage.” Sorry, Joe. The industry’s reason for being was so that financial wise guys could make a bundle at the expense of suckers. Low income prospective homeowners were merely useful props. They were the poster children, but not the real purpose.