Karl Smith is a Professor at UNC-CH and blogger at Modeled Behavior. He was a graduate fellow at the Institute for Emerging Issues, where his work was focused on state and local tax reform. Smith holds a BA and a PhD in economics from North Carolina State University.

~~~

The Conservator’s Report on Fannie and Freddie is out.

Fannie Mae and Freddie Mac are members of a long list of individuals and entities including Gary Condit, Tom Delay, Michael Jackson, Rod Blagojevich and JonBenet Ramsey’s parents. These are folks who were unjustly tried and convicted in the popular press essentially on the grounds that they were creepy or otherwise unsavory characters.

As I hope to continue to argue, being creepy, a bad person, or even a usual suspect does not make one automatically guilty of any particular crime. In this case government subsidies in the housing market are a bad idea for a host of reasons and have been for years. I will testify to this with vigor and passion.

However, that does not mean that Fannie or Freddie caused the housing bubble. Indeed, by my count they were among the biggest victims of it.

The proper question is not: What story is consistent with my general philosophy or worldview?

The proper questions is: What story is consistent with the facts?

>

Fact One: Fannie and Freddie’s primary business of subsidizing conventional loans was not a driver of the housing the bubble.

Indeed, conventional loans represented less than a third of all mortgage originations during the peak price acceleration years.

This was a phenomenon of private-label non-conventional loan securitization.

1.1 Peaking in 2006 at a third of all mortgages originated, the volume of Alt-A and subprime mortgages was extraordinarily high
between 2004 and 2007. In 2005 and 2006, conventional, conforming mortgages accounted for approximately one-third of all
mortgages originated

[ . . .]

1.2 Private-label issuers played a large role in securitizing higher-risk mortgages from early 2004 to mid-2007 while the Enterprises
continued to guarantee primarily traditional mortgages.

image

>

Fact Two: Fannie and Freddie lost market volume during the boom.

That is, during the boom not only did the fraction of loans securitized by Fannie and Freddie fall, but the absolute number fell. At the same time the absolute number of private-label securitizations rose.

There is a simple and obvious reason for this. The development of structured products meant that for many consumers the free market offered a more attractive loan than the government subsidized one.

image

>

Fact Three: The major losses to Fannie and Freddie came through their expansion into guaranteeing non-traditional loans, not through their portfolio.

That is, yes like every other financial entity Fannie and Freddie were buying subprime packages in the secondary market. However, these losses were relatively mild.

The Investments and Capital Markets segment accounts for $21 billion, or 9 percent, of capital reduction from the end of 2007 through the second quarter of 2010. Losses in the Investments and Capital Markets segment stemmed from impairments of private-label securities, fair-value losses on securities, and fair-value losses on derivatives (used for hedging interest rate risk).

>

Fact Four:The key change in the Fannie / Freddie business model was their expansion in the types of loans they willing to guarantee. In particular moving into the Alt-A and Interest-Only categories.

As we can see these loans began to seriously underperform as the economy deteriorated. These loans were not a part of the original “crap hidden by structure” subprime business. Fannie / Freddie borrowers on had on average credit scores above 710 and equity (or down payment) of above 25%.

image

Also notice how loans with low credit scores and high loan-to-value had the largest delinquency rates in the beginning but then were eclipsed by Alt-A and Interest-Only loan categories as the economy deteriorated.

image

>

Fact Five: The higher number of Alt-A and Interest Only loans combined with ultimately higher delinquency rates have meant that a plurality of losses have come from these two categories.

These loans were vulnerable not because the borrowers were poor low-credit individuals that the government was taking pity upon but because the loan concepts were predicated on rising or at least stable housing prices.

image

>

Fact Six: Areas with the largest collapse in home prices have accounted for most of Fannie and Freddie losses.

Refer to the same graph above. This is further evidence that it was the collapse of the bubble and not betting on people who were poor credit risks that induced major losses at Fannie and Freddie.

My Conclusion

The wave of housing price increases was kicked off by changes in private label securitization. These changes left Fannie and Freddie with a smaller market share and lower absolute level of securitizations. Fannie and Freddie attempted to adjust their basic business practices to stay competitive in bubble markets and among aggressive borrowers.

These adjustment left Fannie and Freddie exposed to a large decline in housing prices. This is exactly what happened and Fannie and Freddie reaped enormous losses because of their exposure.

Had Fannie and Freddie stuck to their traditional role of guaranteeing low value traditional loans rather than trying to stay competitive in bubble areas their losses would have been substantially less.

In short, attempting to subsidize the American dream for low and moderate income families may be a fundamentally bad policy. However, it does not appear to be either the origin of the housing bubble or the source of Fannie and Freddie’s trouble.

~~~

Originally published at Modeled Behavior

Category: 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.

58 Responses to “Fannie / Freddie Acquitted”

  1. dimm says:

    The bubble happened in many other countries as well , therefore Fannie and Freddie are not the cause. As simple as that. The facts do not matter though when you choose to believe instead of to know.

  2. hughakston says:

    “biggest victims”? – maybe of their own greed

  3. JustinTheSkeptic says:

    The cause, the crux of the housing over building is/was – the system is built on greed! You can prove it by just looking at the way that they ostracize short-sellers. I mean really why would not one like someone on the other side of the fence garding the hen-house? Perhaps because the majority of them are foxes, enjoying sucking from the cash-cow called the housing industry. Why don’t we make it a law that everyone has to use twice the paper to whip ones own ass

  4. Cdale_dog says:

    Nice try Barry, but I’m not buying it. My industry “insiders” tell me that for Freddie and Fannie, they wouldn’t have been originating 90% of the loans that went boom. In section 1.2 above, who pray tell are the Industries “Private Label Insurers”? Can we get a couple of names?

    ~~~

    BR:

    1) My industry insiders tell me your industry insiders are wrong! Humor aside, please save these whispered anecdotes for people dumb enough to accept your “inside info” as proof of anything other than money losing stock tips.

    2) The phrase you are misreading above is private ISSUERS (as in “private-label non-conventional loan securitization”), not private insurers. (Are you at all familiar with this area? Your comments suggest you are an economic neophyte/political provacateur)

    3) You really don’t get the concept of data driven analysis?

    This is the sort of comment that I rail against — it is intellectually lazy, misstates basic facts, and is filled with vague and accusatory remarks aimed at confusing the dumb and the uninformed.

  5. JustinTheSkeptic says:

    Oh, and I ment wipe…not whip…but perhaps its apropos.

  6. Seth K says:

    We appreciate you trying to use data and facts to prove the case, but some people have found a narrative that they prefer, facts be damned.

    You are preaching to the choir to people who are data driven — the wingnuts will never come around

  7. Greg0658 says:

    “the system is built on greed” .. no the system is built on survival for the breeders .. which the system needs too *

    this story clarification .. and a nice job at it .. I just have to wonder how much was FU USG for getting in my way to survive .. I’ll show you how it works .. uckU

    * to repopulate after war and to drive everyday production growth needs

  8. call me ahab says:

    sheesh . . .how long are you going to keep chewing on this old rag

  9. I wouldn’t lump Tom DeLay in with this group. And why was he, of all people, included?

  10. AHodge says:

    yes and no more of chewin on this old rag for me either. you get the last word
    Victim? you make me want to barf.
    they were–and still are– a tool of the mortgage paper and building industry. they will be costing us a half trillion, and the mortgage insures a quarter trillion. and the bill is still ticking up.
    it would be at least theoretically possible to paint you as a ‘D” on this.
    Not the totally objective wise man u often are?

  11. sditullio says:

    What about global imbalances? At the time despite huge budget deficits American treasuries were not able to suck up all of the funds needing to flow into dollars. The next choice was agency securities. These were backed by the US treasury implicit and later explicitly; if these were private mortgages then when the housing bubble blew up the central banks/china/japan/russia would have taken huge losses on private securities. It seems to me that they facilitated global imbalances by being another government sponsored bond. I do think global imbalances were a root cause in the crisis (far more than the housing market).

    A lack of safe assets would of allowed America to deleverage quicker thru default. Instead the agencies were nationalized and these debts ended up on the government balance sheet. These also may have limited China’s and others apetite to buy private label mortgages which may have limited their desires to push out global imbalances.

    Regardless whether Fannie/Freddie caused the housing mess they were a key player in moral hazard and certainly had a small effect on the housing bubble by being a means of getting foreign financing into the US. And they were an entity that the Treasury was forced to honor their debts.

    ~~~

    BR: Probably a factor later int he cycle. Without the ultralow rates, homeowners would not have been able to keep refis going and support their manic purchases of Chinese consumer goods, which China used to buy US Bonds, to keep rates low, etc.

    Its a factor, but less so than Krugman or Bernanke claims it to be.

  12. “There is a simple and obvious reason for this. The development of structured products meant that for many consumers the free market offered a more attractive loan than the government subsidized one.”

    Nonsense. No consumer picks who does their securitization, nor understands or cares about structured products. The originators pick the securitizer. They perhaps were getting a better kickback on the interest spread from private, as opposed to quasi-private, entities.

    But I don’t get the point of this post. Why bother rehashing history? None of it matters anymore. Fannie and Freddie were different animals then than now. Back then, people sort of thought they were not quite government agencies. Now we know they are. The question going forward is whether we should continue indirectly subsidizing inflated housing prices through keeping Fannie and Freddie and Ginnie afloat, or shut them down and let the market go ahead and crash. 97% of all new mortgages are funded by Fannie, Freddie or Ginnie Mae. Private funding is dead (although I’m kind of curious to know who is funding the other 3%). The residential real estate market is rapidly becoming a completely state-run and funded enterprise, wholly dependent on continued government largess. Is that smart?

  13. AHodge says:

    we stipulate FF Not not the whole US bubble.

    that they were a modest part of subprime alt A
    so what?

    these above loss data “facts” showing mostly subprime Alt A losses nearly worthless
    as most of the FF losses yet unrealized as protected by “”your” government.

    creepy loser “R” s dont like FF for political reasons? So what? sound like a partizan argumant to me.

  14. robertso2020 says:

    as far as I’m concerned, the majority of AltA’s and IO’s were for people who couldn’t afford the home they were buying. Therefore, attempting to subsidize the American dream for low and moderate income families (relative to the home they were buying) was very much part of the problem. Fan and Fred, among many others, are way on the hook for the housing bubble. Throw out any stat you want. At the end of the day, loose/easy lending standards create bubbles…period.

  15. Acquited of what, exactly? Being the one and only cause of the bubble? I’d vote not guilty there too. But what about being a significant part of the problem? Not so sure on that one.

    It is the nature of credit disasters that the biggest villians and biggest victims are largely the same folks. I think AIG takes gets the title in both respects this time around. But Fannie and Freddie are towards the top of the league tables too.

    F&F blew themselves up by charging into a new and bad business because they were scared of losing their “franshise” to authentically private companies. Many investors bought the resulting shakey debt because they assumed that in the worst case scenario the government would bail them out. (An assumption that turned out to be largely correct.)

    Did this cause the Great Panic of ’08? No. Did it help cause it? You betcha.

  16. DeDude says:

    “Had Fannie and Freddie stuck to their traditional role of guaranteeing low value traditional loans rather than trying to stay competitive in bubble areas their losses would have been substantially less”

    Absolutely and lets not forget the reason they even wanted to “stay competitive”. Some idiot decades earlier had turned them into private companies with shareholders, CEO’s etc. that were actually concerned about market share. They would never have gotten into all that sh!t if they had remained government entities rather than government sponsored private entities.

    The reason we have to have them is that the private free market entities so clearly have demonstrated that they cannot handle the job of providing a stable funding mechanism for house purchases. For all the trouble they are in they, in contrast to the other players from 2004-07 F&F are still there providing this essential service to our society. Like a hedge fund, the private mortgage securitizers swept in, created a bubble, ripped people off for huge sums, and left the mess for others to clean up. Not surprising though, when you give people the freedom to rob others that is what they do – got that right wing and libertarian morons?

  17. NickAthens says:

    Now that is how to present a “compelling argument”.

    I do not buy the “subsidizing the American dream” argmuents. This was pure and simple profiteering on the part of financial organizations hiding behind such mantras. Rating agencies, appraisers, realtors, who all beniftted from the “churn” were complicit.

    So the issue is any organization who chose to increase their leverage above 13:1 and failed SHOULD FAIL! period!

  18. Soylent Green Is People says:

    The missing piece of the puzzle: What underwriting standards and AU software was used to approve private label loans: Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector. As an originator then (and now…) the lenders at that time ran everything through their DU / LP engines to determine if a loan was approved or not. At the peak, FNMA conventional loans did not require income or asset verification, which accellerated the lemmings rush towards the cliffs. It was possible at the time to get FNMA or private label loans for San Quentin death row inmates with not much trickery involved, providing DU said all was well.

    Over reliance on robot programs that fired “approve/eligible” messages at will, without follow up due dilligence by anyone was a huge part of this problem that academics refuse to address. Perhaps if they interviewed the loan producers – both the good and the bad ones – to confirm what was going on at the time would help sharpen their understanding of fact.

    My .02c

    ~~~

    BR: The NYT magazine had a huge piece on automated underwriting in 2007: The Subprime Loan Machine; Automated Underwriting Software Helped Fuel a Mortgage Boom

  19. I think the facts show that FF book ended the housing bubble and thus made it much worse. It was a housing bubble in 2003 when volume dropped the bar was set awfully high and the private market securitization brought it to a whole new level.. doesn’t mean FF weren’t instrumental. Then when the private securitization market collapsed FF rushed in and tried “save the day” extending the bubble and booking the worst of the loans. They were doing multi-trillions of dollars in business and if “only” a third was “bad” loans it was still a trillion dollar mistake.

    There was no single cause of the housing bubble but FF were still a major multi-trillion dollar contributor to the housing bubble and it is tough to point out any single other entity that was as big. FF were stupid and trying to race to the bottom just like the private securitization market, it’s just private markets were faster to the bottom and faster imploding.

    I looked in the report and didn’t see anything about Debt-To-Income ratios… the expansion and contraction of those across the whole range of products aren’t even mentioned. From 36% max total DTI to over 60% during the boom.. it was 55% until last year.. They are a significant part of the housing market and were a significant but not singular contributor of the housing bubble. We aren’t bailing them out because they were making too many 80% LTV loans or because too many mortgage insurers imploded on the over 80% LTV stuff.

  20. xnycpdx says:

    ‘chewing old rags’ and ‘beating dead horses’ must continue as long as the ‘freddie/fannie did it’ meme continues. ignorance doesn’t vanish on its own. and as long as the wrong cause takes the fall in the public mind, the problems can NOT be fixed. please, barry – MORE ammo to shut up the dittoheads; you can’t argue facts with that crowd, but you can at least make sure theirs isn’t the only voice being heard by politicians.

    as a bonus: kicking one leg out from under bigots. i went to a family wedding in PA, and had MANY arguments with people that ‘fannie/freddie and clinton caused this by lending money to THOSE people, who couldn’t pay cuz they’re shiftless and all.’ i will now have more proof that the neighbors aren’t good people with a differing opinion – they’re racists.

  21. obsvr-1 says:

    The reason that BR is still posting is that there are still a lot of folks that believe the myth that F&F were the cause of the bubble and crisis — which as the report and data show is not true. Were they participants in the bubble and crisis, help pump the bubble, absolutely. F&F were followers into the morass of Alt-A and sub-prime chasing market share, which was due to the greedy private side of F&F, which has failed and now gone leaving only the gov’t enterprise. Now the F&F enterprise is being exploited by the treasury and FED for the backdoor bailouts to wall street (to the tune of 1.2T in asset purchases).

    So stipulate that F&F didn’t cause, but participated in the crisis; the crisis is not over and F&F should continue to be reviewed, watched and discussed as they hold the majority of the MBS asset class with T’s in value and are left to the stewardship of the gov’t – which is controlled by the private sector (banksters) through lobby and funding. Round and round we go …

    @DeDude: Not surprising though, when you give people the freedom to rob others that is what they do – got that right wing and libertarian morons?
    – modify this to: got that right wing, libertarian, left wing, D, R, I morons !!

    @BR — Keep up the pressure, even though folks say F&F is history, this is one we don’t want to repeat; just edit out the “creepy is not guilty” line of thought, save for another post it just illuminated a bias that was not needed in this case.

  22. DL says:

    I’d be interested in the views of the guest author regarding the question of whether the U.S. government should have poured large sums of money into Fannie/Freddie over the last two years, and whether we should continue doing so.

    If Fannie/Freddie are such minor players, then the answer to both questions should be in the negative.

    Of the people who have argued that Fannie/Freddie were minor factors in the housing bubble, I have yet to see a single one answer these questions.

  23. Brett Tibbitts says:

    How can any corporation that gets to use government money for private gain be acquitted? The “transmorphing” of these companies into private companies was a mistake at the outset. And how come Franklin Raines has never been the subject of a government investigation? What a joke.

  24. Aberrational events within complex systems, are usually the result of a multiplicity of factors. This is especially true in the case of the financial collapse

    What makes researching the financial crisis so challenging are the many people who keep peddling their own biased version of what occurred. Given their role in the crisis, they have a vested interest in constructing a narrative that blames others and exonerates themselves. Muddying the waters may also serve their purpose. There is even a word for this: Agnotology.

    This is why we have seen numerous trial balloons blaming everything from the CRA, Fannie & Freddie, Acorn — anything but the actual factors that contributed, separately and in concert, to the crisis. Its also why I push back against bad info.

    I have publicly criticized Fannie/Freddie — we were short them before their collapse, and I have accused the US government of now circumventing congress to use FNM/FRE as back-door bailouts for banks. But when we look at the actual data, they were not major players in the sub prime and alt-A space prior to the market topping. According to all of the data we have reviewed, the GSEs were simply two more troubled banks that used too much leverage, had too little capital, embracing to much risk.

    Have a look at the 20 steps to a collapse here:

    Understanding Context: The Housing Boom & Bust

  25. Don Quixote says:

    Its so much easier for a lie to spread than for the Truth to be recognized. Never forget that people are easily misled, intellectually lazy and afraid to think independently.

    You are fighting against a never ending parade of ignorance.

    Have fun tilting at windmills.

  26. [...] “(N)o one thing generated the crisis.”  (Free exchange also Big Picture) [...]

  27. DL says:

    I’m somewhat willing to accept the proposition that Fannie/Freddie didn’t cause the final “blow-off” top in 2005-2006. But I think that they had a lot to do with the rise in prices that occurred during the period from 2002 to early 2005.

    One could ask the question, if Fannie/Freddie hadn’t existed at all, or if they had existed without any government guarantees, how far would the housing bubble have gone?

    I don’t think it would have gone nearly as far.

  28. Alaric says:

    What about the size of their investment portfolios?

    Also, what about the fact that FNM in particular had a well documented history of accounting troubles and did not have the ability to even comprehend effects of real estate valuation changes or interest rate changes?

    In September 2008, their portfolios compared to equity looked like an inverted pyramid and the market knew it!

    You may say that their levered portfolios or the fact that you needed to be an Omniscient Being to understand their books did not “cause” the “housing crisis” but it certainly helped cause the panic of the autumn of 2008……

  29. The Economist:

    AS A general rule of thumb, the answer to the question, “Did x cause the crisis?” is no, for all x. No one factor caused the crisis, and that’s as true of the involvement of Fannie Mae and Freddie Mac in mortgage markets as it is of anything else. The right question to ask is to what extent various factors contributed to the crisis. Where Fannie and Freddie are concerned, the answer would seem to be: some, but less than many may imagine.

  30. dsawy says:

    As with many macro-level analysis of the real estate bubble, this posting ignores the fact that California housing prices were inflated well before what is now considered the “start” of the housing bubble – 2003.

    California housing prices were inflated beyond sustainable valuations by the late 90′s. The dot-com stock option money sloshing around California had propelled housing prices in some markets (eg, the Bay Area, LA Metro area) to levels that could not be supported by nominal household incomes (ie, without stock option grants) and bankers responded by getting Fannie/Freddie to lower the down payment requirements on conforming notes.

    [BR: Fannie/Freddie bought conforming non-jumbo loans. Are you arguing all that big Dot com money was buying homes for $408k conforming mortgages? THATS pretty lame, before I even ask you for your data on this].

    This propelled housing prices higher, and also set the stage for the disastrous losses by banks today. If the 20% downpayment requirements of old had been maintained for conforming loans throughout the 90′s, the California housing market would have been limited by market forces and the final run-up into complete insanity starting in 2003 through 2007 would never have happened.

    Barry has mentioned before how bankers need to go back to a “3-6-3″ business model – deposits pay 3%, the bankers lend at 6% and they’re on the golf course by three o’clock. Another part of that business model was the 20% down payment requirement, which did two things:

    1. It proved that borrowers had a long-term ability to manage their finances, and would insure that borrowers had enough “skin in the game” to prevent most all ruthless defaults, and

    2. It provided a very good cushion for the banker in the event of a housing market downturn.

    When the US quits developing financial and regulatory policy to allow people to buy over-priced homes in California, the entire market will truly come in line with what is sustainable. Fannie and Freddie today are still not requiring enough down payment from borrowers to prevent losses in markets like California’s.

  31. Cdale_dog says:

    Barry, if Fannie/Freddie weren’t major players in the space, who was? Fannie/Freddie were buying everything up, they couldn’t get enough of it, but they weren’t major players?

    ~~~

    BR: 1) Private banks were the underwriters of Alt-A and subprime. You can see a list of 384 of them that blew up because of it at Mortgage Implode.

    2) No, F&F were not buying everything. From 2000 to 2005 they were not allowed to buy nonconforming loans — no sub-prime, no jumbos, no alt-As.

    3) They petitioned OFHEO do allow them to get into the Sub-prime, Alt-A space because they were losing market share to Wall Street. This was not a policy decision, it was a market decision. Approval was granted, and by late 2005 F&F charged in.

    By this time, volumes had already peaked in home sales (prices would peak the next year).

    The situations are complex, the facts are complicated, and reality does not lend itself to simple answers. I choose to follow the data . . you are to follow the wingnut talking points, but don’t expect not to be called out on it around here.

  32. curbyourrisk says:

    Why Frankilin Raines is not in jail…….that is just beyond reason…..

  33. willid3 says:

    dsawy, i suspect California’s housing bubble problem has little to do with regulations and financial policy as California (like Florida) has a history of having housing bubbles. in California’s case, it has a lot more to do with how property taxes are set. you can have 2 houses side by side, but one could be paying 10-40 times more in property taxes. and a lot of the housing bubble this time around was do to lack of regulations, rating agencies that would rate hot air. originators who would approve borrowers if they could breath, and of course the quants who invented the securitzation model that supported originate to sell. and we can’t forget the 40-1 leverage of the wall street banks

  34. GuinnessFan says:

    @curbyourrisk Says:” Why Frankilin Raines is not in jail…….that is just beyond reason…..”

    I’m not sure I understand this post. I believe Franklin Raines had left Fannie before they started buying all the crap in 2005. Franklin Raines is guilty of cooking his books in order to pay himself large bonuses and screw his shareholders. This just puts him into the fraternity of other “great” American CEOs.

    In retrospect other Wall Street CEOs made him look like an amateur.

  35. algernon says:

    Some of the facts presented in your piece, Barry, are misleading. Below I’ve attached an article with a quote from it by Raghuram Rajan is a professor of finance at the University of Chicago’s Booth School and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy. I think he puts in better perspective the contribution of Fannie/Freddie, CRA, etc to the main cause of the boom/bust, which was easy money. Rajan has no political axe to grind & properly is critical of Bush as well as Dems.

    “Not only did Fannie and Freddie purchase whole sub-prime loans that were not securitized (and are thus not counted in its share of securitizations), they also bought substantial amounts of private-label mortgage backed securities issued by others. When these are taken into account, Fannie and Freddie’s share of the sub-prime market financing did increase even in those years.”

    http://faculty.chicagobooth.edu/brian.barry/igm/reviewingkrugman.pdf

    ~~~

    BR: 1) Its not my piece, its professor Smith’s, 2) That Rajan piece has already been debunked; 3) I hope you are more skeptical out of the junk science the Chicago Booth School has been churning out for decades — its shite. 4) That PDF was posted a Freakonomics, and I commented here.

    Alex. I’ll take confirmation bias for $100 please . . .

  36. AHodge says:

    so data guy what is your “data” on the FF losses
    incl what got put to the insurers
    and why are you quotin approvingly someone who did not include it please? this is sloppy possible axe grinding statistics
    is he “acquiting” them or are you?

    ~~~

    BR: See this or this

  37. Alaric says:

    “BR: According to all of the data we have reviewed, the GSEs were simply two more troubled banks that used too much leverage, had too little capital, embracing to much risk.”

    Yes, I concede., they were really two more troubled banks.

    They were, however, the only banks with an implicit government guarantee which the market expected, but did not know, would be made explicit. That is perhaps one additional reason why there is so much political heat around the question of whether they were the cause of anything or not.

    You could also possibly add the fact that many former political appointees worked at these institutions….

    ~~~

    BR: Draw the connection to how this led to the crisis, rather than giving me nefarious sounding facts that have zero causative relations.

    Data man, I WANT DATA that proves your case

  38. DeDude says:

    Obsrv-1@12:44

    I was thinking deregulation free marketers crowd as it relates to the housing and financial disaster – but if I broaden the horizon and subject area then you are right.

    I stand corrected. Should have said: when you give people the freedom to rob others that is what they do – got that right wing, libertarian, left wing, D, R, I morons !!

  39. DeDude says:

    DL@1:08, Put your thinking cap on. F&F were minor players in the housing bubble but have always been major players in financing house loans. Because the blow up of this bubble affects everybody it also affected F&F (and even my house has lost value despite the fact that I did not overextend mylself). The reason government has used 100 billion on backstopping F&F is that now (after the other private players have left), F&F, etc. are the only (97%) game in town regarding financing of houses, and the cost of going cold turkey to a cash market would be a heck of a lot more than 1/5’th of our annual military budget.

    DL@1:34, F&F was just another player who could convert house loans into AAA rated securities. Had they not existed then the other players converting house loans into AAA rated securities would have taken over their business. For the securities investors the important thing was AAA rating not the presumed government guarantee. That is why the other companies could take market share away from F&F, nobody cared as long as the AAA was there. The difference came after the crash where nobody would bye any mortgage securities that were not government backed (and that is why F&F now is the only game in town).

  40. JackOtter says:

    Someone send this post to Joe Kernen

  41. dsawy says:

    BR: Yes, I’m saying that dot-com money was buying homes and putting down a fat down payment to get conforming notes. I know dozens of people who did this in those days. I know dozens of engineers, still working in the valley, worth well over $10 mil, who live in modest homes for which they paid too much, but they wanted their kids in a particular school district, so they paid up to get into the neighborhood of their choice. Put down a huge down payment to get a conforming note and be done with it.

    Everyone thinks that the dot-com bonanza ran up the prices of only high-end homes. Not true. In the early 90′s, you could go into regular tract neighborhoods with solid, post-WWII houses (eg, Sunnyvale) and find homes (say, a 1.5 Bath, 3 BR) home for, oh, in the $400K+ range. Put down 20%, perhaps a bit more, and you’d be in the ballpark of a conforming note.

    By 1998, those same types of homes had been run up to around $800K. A lot of people who had dot-com money would use their dot-com windfall for a huge down payment and get a conforming 30-year for the rest. I worked with people who bought these types of homes in just this fashion – from admin staff to engineering directors.

    As soon as someone would be imprudent enough to buy (and close) on a house by paying it down with their windfall, the real estate agents happily bumped all the other houses in the neighborhood up in price with their comps.

    ~~~

    BR: Explain to me again how putting a huge down payment somehow led to the crisis?

    Your story is internally inconsistent, and it does not conform with either fact or data.

  42. Andy T says:

    Well, there you have it. He’s a professor of Economics and has a Ph.d. Therefore, his conclusions must be The Truth.

    What a tired subject Barry.

  43. hdoggy says:

    Maybe they’ve been aquitted, but Franklin Raines did not need to be because he settled out of court for a paltry settlement according to

    http://en.wikipedia.org/wiki/Franklin_Raines

    “”An editorial in The Wall Street Journal called it a “paltry settlement” which allowed Raines and the other two executives to “keep the bulk of their riches.”””

    and this is still an argument in progress. The taxpayers now back Fannie and Fredie and an aquittal is not going to mean much to us.

    I took this argument with full force very early on. I basically said, if you lay the cost of capital below the true market cost then s happens. I agreed whole heartedly that Fannie and Freddie were the problem. This was in the midst of the meltdown so it’s been a while, but living and learning does not mean I can let the nationalized Freddie and Fannie off the hook. This time, I’ll say this argument is moot as the facts do not justify what I believed, mostly because of this site, but the problem is still there. All you backdoor fans, keep writing and prove me wrong. It’s no longer an affordability issue, it’s a fiscal issue because we’re all on the hook, or maybe nothing has changed and we were correct all along.

  44. lulsh says:

    Barry,

    I said this before and I will say it once more. Your data is invalid. Fannie and Freddie participated in the subprime loan business in 2 ways:

    1) They actively purchased the stuff

    2) They indirectly participated by providing their triple A rating to the upper tranches of the securitizations of the stuff and they provided liquidity for the entire mortgage market.

    They certainly are not the only culprit, one of many. Difference is they were backed by the American taxpayer.

  45. gbgasser says:

    DL said

    “One could ask the question, if Fannie/Freddie hadn’t existed at all, or if they had existed without any government guarantees, how far would the housing bubble have gone?”

    I agree, this is a great way to approach this question. I come to a different conclusion than you however. FF had been around a long time before this happened. Fannie since 1938 Freddie in the early 70s I believe.

    If the presence of a guarantor of mortgages backed by the Fed Govt were, in and of itself, a destabilizer to the housing market, why did we not see it earlier? The CRA was around since the mid 70s. Why did it take 25+ yrs to blow up? What occured during that time?

    Barry has described a scenario where well intended and well designed housing market supports have worked until certain market players start believing they can push the envelope. Wall St gets in on the game and its a march to the edge of the cliff.

    Does anyone seriously believe that if the govt hadnt decided to create a way to secure mortgage issuers that the private market wouldnt have done it themselves? We’re just talking about insurance. There is no doubt in my mind that a private “mortgage backer” would have emerged simply because ITS PROFITABLE! The idea of insuring mortgages is not destabilizing or bubble producing, its who gets into it and what their prime goals are.
    The GSEs wanted to make housing affordable and mortgages accessible to more people. The non GSEs simply wanted to capitalize on the American desire to own homes, and they got stupid and greedy.

  46. Pat says:

    Irresponsible lending by the banks was the result of deregulation by the government hoping the banks would lend more for the social good. Since no one was holding their feet to the fire to have responsible business practices, they did not. Ummmm. Okay. Let me correct that a little for you.

    After years of political capture and massive lobbying, the financial industry was stripped of all regulatory oversight. Accounting rules were so negated that even the shakiest banks could hide their conditions. The political cover for some of this was encouraging the economy and for others it was helping those who needed it most.

    In reality this let the financial industry play massive games with financial ‘instruments’ and ’securitization’. To protect these games the federal government even used the OCC against state regulatory agencies. All along the financial spectrum people took their cut, making it individually profitable to those who might make noise. For those at the top it was rolling in cash time. And the housing bubble needed to continue because those at the top needed product to slice and dice and sell to continue rolling in it. So new and exotic mortgages were created – all unstable. Standards were relaxed or ignored.

    None of this was for the public good. Phil Gramm and Richard Rubin didn’t design this for the public good. It was all done for greed. And the political and regulatory capture was so complete that when it all burst, the people at the very top of the food chain were saved by the American tax payer. And only the 95% at the bottom chain were held responsible – through taxes and falling home prices and lost jobs and lost homes.

    There is one answer to all this – Cheap labor conservative economic policies of the last thirty years. The boondoggle of supply side economics coupled with the I owe nothing to my workers, my community, or my country only to my own profits deregulation push have brought us to this point where the ONLY thing keeping the US economy afloat was the housing bubble. We moved out the jobs, sold the ideas, and regressively taxed working Americans out of all progress for three decades. Until there was practically nothing left.

    Greed is good. Only when it isn’t. And now we aren’t even supposed to recognize that those who have been the greediest are at fault. The government was for not making them be responsible to their business, their workers, their community and their customers.

  47. DeDude says:

    “if you lay the cost of capital below the true market cost then s happens”

    There is no such thing as true market cost of capital. The cost of capital is constantly being manipulated by private and public entities, while markets are huffing and puffing trying to keep up. The only question is for what purpose and with what outcome should the cost of capital be manipulated by whom.

    But the main reason F&F should exist is not that they can provide slightly lower rates than private securitizers. It is that they can provide a stability that these fly-by-night private entities like GS cannot. The Gold markets can be left to sleazy private profiteering outfits because nobody cares if it doubles then loses 70% up and down making billionaires of its masters and milking the idiots. But housing is a critical foundation for the consumers who carry the economy.

  48. DeDude says:

    We need F&F to get back to the past and simply be there to provide responsible loans to responsible people, so these people can purchase a house that they can afford. The rule needs to be that you can get a F&F loan if you have 20% cash for a down payment. None of this borrowing the 20% from somewhere else. You may have car loans and student loans, but no other loans when you bring that 20% cash to closing. We also need to reinstate the traditional demands regarding income relative to loan size and monthly payments, to ensure that baring major negative events, people can afford the house they get into. Under those conditions F&F would be extremely safe and a government guarantee would only cost “we the people” money if we had an Armageddon like event. Keeping F&F a non-profit, government guaranteed, institution, would ensure that they could provide loans at very low rates, rewarding those individuals who do the right thing acting responsibly and delaying gratification. For those who do not want to act responsibly, the private profiteering market, would still be available. However, those need to be strictly regulated to ensure that consumers are fully aware of what they are getting themselves into, and that the players in that field cannot disguise, or ship off, all the risk to someone else. Rewarding good responsible behavior by shielding such people from greedy rent seekers is exactly what government should do.

  49. AHodge says:

    BR thks for answer it looks like a different view and good ammo for my side.
    quotin a “goverment economics assistant professor of north carolina” with an obviously slanted view?
    its garbage and completely inconsistent with your earlier. may i cc?
    If everything goes precisely wrong, taxpayers are potentially on the hook for another $1 trillion bailout:

    The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

    Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

    Its not a coincidence that many of these banks are finding the capital to pay back their bailout loans. The Obama administration is continuing one of the more horrific policies of the Bush administration: Using the GSEs as a back door bailout for the rest of the banking sector: These banks are selling their garbage to the GSEs — and according to some anecdotal evidence, are getting pretty close to full boat (100 cents on the dollar) for these bad loans.

    Hence, Fannie and Freddie have become a dumping ground for all manner of bad bank loans.

    The GSEs have had their own problems over the years — accounting fraud, recklessly chasing market share, lowering loan quality, etc. — but they have now become are now the last stop for every crappy mortgage ever written”

    end quote. Now tell me about the acquitting part again and where your jackass asst prof includied that?

  50. AHodge says:

    make that your “chief underassistant Tarheel govmint econ prof…” done to the stones beat

  51. AHodge says:

    hes “sittin there thinkin,..just how smart i am… ,-,

  52. DeDude says:

    “hes “sittin there thinkin,..just how smart i am”

    - or he has realized you are such a biased moron that no fact based statements can result in anything else than more brainless babbeling. If you look at the drawings from the line of credits that the GSE’s have, and pay attention to the speed of loses at F&F, through the past two years- the $1 trillion you are talking about is straight out of gaga-land. Furthermore, since it is from a “line of credit” it is not a “cost” until and unless the companies go bankrupt. But I guess these are inconvenient facts so they can be ignored. Since F&F is pretty much the only game in town they could easily start producing substantial profits and begin paying back these loans, at the time “we the people” decide that the damage from such an act is work its benefits.

  53. DeDude says:

    I will say that I too was outraged when the banks started using the GSE’s back in 2007 to off-load bad loans. I was even more outraged when Bush forced the GSE’s to take bad loans, at way above market value, from the GOP campaign donors. I am glad to see that Obama has put somewhat of a brake on that, but agree we must closely scrutinize what type of assets are purchased at what kind of price from the private players. There is a very thin line between the legitimate mission of providing liquidity and the illegitimate action of bailing out.

  54. AHodge says:

    not that you care to hear from biased moron
    i have wasted time with you on this before
    i wasnt referrin to barry but his expert –this is where you say oops nevver mind–like last time,,, what was that you called me theM word?

    not that you care since you could have read yesterdays post I dont think it $1 trillion, i thin its a Half trillion, or 3/4 trillion with what they put to the insurers

    and trust me on this you will be paying, i say this as someone who owns their stock now.
    when i want to hear from a partizan stooge bush obama blah blah blah with zero knowledge of accounting or this particular issue i,ll ask?

  55. DeDude says:

    I read your post (Sept 23, 10:43 AM) not your mind. And there you said “The cost of fixing Fannie Mae and Freddie Mac, ………………will be at least $160 billion and could grow to as much as $1 trillion”. If that now has turned itself down to half a trillion then its hard to “trust you”. Now you are saying that this number is including what “they put to the insurers”, but I will be paying? I thought insurance was exactly about making sure that someone else is paying.

    Obviously a huge mistake for a person to think that a post starting with “BR thks for answer” would be addressed to our host. So a good thing that my post simply made the assumption that the person you addressed was a male (“he”). Is this where you say oops never mind – or is this where I shake my head and say neeeever mind.

  56. AHodge says:

    its not my post
    you …(insert whatever fits)
    ITS BARRYS POST from june that he linked to mine above and i quoted.
    after “may i CC ?” starting with “if everything goes precisely wrong…. $1trillion”
    down to where it says “end quote” THATS BARRY
    Soooo are you 8 years old? can you follow links? i cant tell. if you are an adult, the common term for your mental level starts with M.
    or you can answer why that version of barry and fannie is so contradictory to yours…?

  57. AHodge says:

    its not a huge mistake, he answered me. do you need anymore 8 year old level explanation? goodbye forever

  58. [...] originally found these charts on Barry Ritholtz’ The Big Picture [...]