A reminder from 4 years ago today: Look who were the biggest underwriters of subprime — not Fannie & Freddie, not driven by the CRA, not Congress, but private sector banks.

The data, from the Federal Reserve Board, shows:

• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

• Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

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

When it comes to making policy and legislation, facts matter. Those who advocated radical deregulation refuse to accept responsibility for their actions, must find someone else to blame. Hence, the fabrications about CRA/GSEs.

I have my own lists of people who try to obscure factual reality. The confabulators and flat earthers are too costly to allow into my universe. They go on my DO NOT READ list. I suggest you do the same.

 

 

Source:
Private sector loans, not Fannie or Freddie, triggered crisis
David Goldstein and Kevin G. Hall
McClatchy Newspapers, October 12 2008
http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html

Category: Bailouts, Credit, 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.

21 Responses to “Flashback: Private Sector Not GSEs Triggered Crisis”

  1. genehayward says:

    I ask this question is all seriousness and dont know the answer. Looking for clarification. These banks may have issued the loans but did Fannie Mae/Freddie Mac in turn purchase these loans from these banks? In other words, the GSE’s essentially serve as a backstop for these loans and (help) create the conditions for inappropriate lending. Thank you in advance for respectful replies.

    ~~~

    BR: Subprime loans, low credit score, or no money down were known as NONCONFORMING LOANS. Fannie & Freddie were not allowed to purchase these. (Read the article cited). By late 2005, Wall Street iBanks were taking away so much market share buying these NONCONFORMING LOANS that FNM/FRE petitioned their regulator to get into the same business to compete (approval was granted). They were chasing profits (not Congressional policy as the liars would have you believe) and jumped in right at the top of the market.

    This was a private sector, not a policy failure…

  2. DeDude says:

    You are going about this the wrong way. The conclusion is always “gobinment” is bad and everything gobinment does (except military and police) is always causing big disasters (in contrast to free enterprise where nothing ever goes wrong).

    Knowing what the conclusion is, you then just have to ignore, massage or invent a reality that can support your conclusions. Any facts that challenge the conclusion are discarded as conspiracies and lies. If Fannie made as much as a single subprime loan that was the inspiration that gave the “green light” to the private sector (even if it was given years after the private sector exploded with sub-prime loans).

    Starting with the facts -are you crazy?!? You never know what you could end up concludin.

  3. normal1 says:

    Perhaps there was a policy failure that was caused by stacking the gov’t agencies with business-friendly drones? And, in the race to prove who’s more capitalist than the other, perhaps members of both major parties looked the other way?
    In all seriousness, I’ve yet to discover who the Republicans can champion as their John Galt. I mean the field to choose from is vast, no?

  4. AHodge says:

    if you want to argue only subprime triggered (early start) for the crisis? maybe?
    but thats not talking about main causes
    most of which showed up in 2008
    And even back in late 2007 it was clear to sensible people
    you could read Bill Gross in a panic in Aug 2007 calling for a Mortgage Reconstruction Finance corp. He knew the Fannie freddie then did not have central government backing for the trillions he and friends held
    He in effect got his way a year later
    Everybody sensible and huge fixed income guys like morgan stanley
    were all wetting their pants in mid 2008 over their $5 trillion of FF not being worth the guaranteed hold to maturity value
    Hank Paulson not a stupid guy
    thought this was even more the single driver at the heart like his friendsall told him
    he turned out wrong of course- too many other big recession drivers
    but fixing that with massive guarantees or taking losses was stillan essential cleanup
    you could listen to angelo mozilo sayin “perfect storm”it way beyond subrime in JULY of 07
    Fannie and Freddie were one of the 15 main causes of the big one
    and dont rank near last either
    nothing here to change my mind on that

    Beautiful conference
    the best part may be the class audience
    thanks for the 97% other than fnannie and freddie
    you dont drive me crazy on–

  5. Roanman says:

    The best reason to create a do not read list is of course to insure that one’s own assumptions are never challenged.

    Obviously, I think your advice is flawed.

    Nice piece from McClatchy though, I learned something as I would have had the percentages between Fanny/Freddie to have been much more balanced against those of the banks simply based on conversations I had with people at mortgage lenders who were tasked with selling paper as quickly as it closed.

    Fannie/Freddie were always in the thick of it, and the fact that they got in late chasing profits demonstrates the same mindset as that over at the big banks. The fact that were successful at petitioning their regulator to do so is also revealing.

    To the extent that the WSJ is a conservative publication, their complaint against Fannie/Freddie was the implied government subsidy in their structure and that they were going to cost taxpayers a ton of money when/not if they failed. They got that one right. The thing they missed was that all the banks enjoy a government subsidy, although for the majority of them it was unspoken as opposed to implied that has cost the taxpayers tons upon tons of money.

    You can’t exonerate the government with the exception of the FBI who were all over this thing, as both the Bush administration and Congress (consider the famed Barney Frank comment concerning risk) were delighted to ramp up the housing industry, as a booming housing market is good for one’s prospects for reelection.

    One must also consider the activities of the Fed as some consider them to be government, although I hold them comfortably in the same group that includes JP Morgan, Goldman et al..

    When losses are getting jammed up taxpayers ass? Whose fault is that? To answer that question, I’m going with the guys who keep telling me with a straight face how much they care about me and are looking out for my interests. Jamie Dimon to his credit can’t help but smirk.

    Bill Black has pointed out so many times that regulatory oversight concerning the practice of “liar loans” along with a couple of jail terms would have gone a long way toward nipping this whole mess in the bud.

    Our by far most serious problem is that regulators and elected officials have enjoyed a reasonably nice piece of the action via “revolving door” activities”, campaign contributions etc. ….. I’m looking at you Chuck Shummer …. and as such are more than just a little bit complicit.

  6. krice2001 says:

    The misconstruing of facts has led some, I think even you Barry, to exclaim in frustration – You’re entitiled to your own opinion but not your own facts!

    But that’s the beauty of changing the facts (I belive the Daily Show did a skit on this) is that it circumvents having to have your opinion challenged as subjective. By changing the facts, you back up your conclusions (a.k.a. opinions) with these “actual” facts and can then arrive at the comfortable conculsion you originally wanted.

    Then you can present your conclusions (a.k.a. opinions) with your “facts” to other like-minded folks and they are excited to see that the facts really do prove they were right all along.

  7. djfnyc says:

    There’s an extraordinary amount of race-baiting embedded within the false “Fannie/Freddie-caused-the-crisis” narrative. (I’m not sure if DeDude’s comment above was facetious or not.)

    “Loaning to minorities and risky folks is a disaster,” said Neil Cavuto of Fox News. http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html#storylink=cpy

    Peter Wallison: “The crisis has its roots in the U.S. government’s efforts to increase homeownership, especially among minority and other underserved or low-income groups,…” http://www.aei.org/article/economics/financial-services/cause-and-effect-outlook/

    Jeff Jacoby, Boston Globe: “The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless.” http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/09/28/franks_fingerprints_are_all_over_the_financial_fiasco/

    Weekly Standard: “[Fannie] had a massive, ferocious lobbying organization. It proclaimed itself to be leading a righteous mission to spread affordable housing to minorities, poor people, and other “underserved” parts of the population.” http://www.weeklystandard.com/keyword/Gretchen-Morgenson

    The GSEs’ loan performance is 3-4X better than any other segment of the mortgage markets.

  8. louis says:

    Banks using leverage to chase profits, the regulators (IN THE SAME BUILDING AT LEHMAN) turned the other way as the paper crossed the desk. This was nothing more than a massive leverage bet at the casino. They were saved for what? So you could watch your savings rate vanish. They were saved to get you again.

    It’s a big club and you aren’t in it.

    http://www.youtube.com/watch?v=i5dBZDSSky0

  9. S Brennan says:

    “Knowing what the conclusion is, you then just have to…invent a reality that can support your conclusions.” – DeDude

    …has been the SOP at United States Intelligence Agencies since the 50′s…and it’s led the US from one disaster to another…of course when you replace US Patriots with Nazi sympathizers you kinda have to expect that sort of thing. When the FCC still could regulate broadcast media…the cause of our disasters could still be revealed to the masses, but since the 80′s, even that small window hope was nailed shut. Now blow-back is treated as an incomprehensible act.

    Think about it. 24,000 bombing missions in 8 months in support of racist Al Qaeda influenced operatives…that’s 100 missions a day blowing up infrastructure of the most progressive Arab country, a country with the highest standard of living in Africa, the only Arab country that treated darker skinned Africans as human beings…and we go blow it up…and Libya’s black folks are rounded up to be executed. And the US Media celebrates this event

    The Libyan bomber campaign was the equivalent of of China bombing the hell out of the US in support of the CRIPS & BLOODS protesting the LAPD’s policy of locking up gang members until the US was ruled by gangland killers.

  10. carleric says:

    I have heard all of the arguments about how the GSE were blameless….the reality is they provided the liquidity to enable mortgage lenders and their ilk to make more and more idiotic loans and then when given permission to compete for this junk the GSEs jumped in with both feet…..ever wonder why they needed and still need so much added taxpayer money….just eliminate these two pieces of garbage and move on.

    ~~~

    BR: Its not my position that they were blameless — they were two more crappy banks, jumping into the subprime market to chase profits. (NOT because they were told to do so by Congress) This was a private sector error . . .

  11. Vitus Capital says:

    Wow! Trolls out in force! Great post BR… Succinct; unarguable.

  12. tahoejoe says:

    I don’t think that the chart goes with the article. The banks that were servicing subprime loans were not necessarily the banks that originated the loan.

    ~~~

    BR: To me, its the Fed data that was so damning: 84% percent of subprime mortgages in 2006 issued by private lending institutions; 83% of lo-income subprime made by private firms, and only 1 of top 25 subprime lenders in 2006 was subject to CRA.

  13. whskyjack says:

    Yep, this one is sure fired intelligence test.
    One other thing, when I see some one wandering toward the blame freddy and fannie, I warn them that I’m not very polite when people bring up stuff that can be disproved with a 30 sec. google search.
    It slows a lot of that crap down.

    Jack

  14. [...] still see the wrong kind of argument everywhere re: government participation/role in subprime lending. The basic idea is to focus on [...]

  15. Bomber Girl says:

    Agree with AHodge. BR can’t see forest for the trees on this one (gov’t enabling context, coupled w/private greed). Also likely wrong in disbelief in current turnaround in RE market. But hey, I’m making money and the rest of TBP is good stuff.

  16. Here is the list of who to blame

    Who is to Blame, 1-25
    http://www.ritholtz.com/blog/2009/06/who-is-to-blame-1-25/

    I hardly hold the government blameless — but I find the “Barney Frank, poor people and minorities caused the crisis” to be not only wrong, but wholly unsupported by data.

  17. maxborg says:

    aren’t we giving the rating agencies a pass here??? didn’t they give these loans there blessing??? without that would any of this crap been sold at these profitable levels???

  18. Rating agencies are #s 4-6 out of my list of 25 blamees

    4-6. Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings (rating agencies)
    http://www.ritholtz.com/blog/2009/06/who-is-to-blame-1-25/

  19. philipat says:

    I think that it is VERY imporatant to continue to point this out because the forces of darkness will continue to attempt to re-write the facts and change history, along the lines that if you repeat something often enough it will eventually be believed.

  20. ElSid says:

    Still, nothing will be as good as my question to the right wingers as to who instigated the Spanish housing bubble. They never have an answer for that. They just throw in a red herring or whatever and fail to respond. Who got the Irish housing bubble going? Fannie Mae? Seriously dumb, people.

    No. It was the Europeans watching our credit bubble grow, from about the Reagan administration on, who started to believe in this economic liberalism and started to institute it. That ended up screwing them. At the same time, we even started to believe “Morning in America”, Republicans rammed a veto-proof measure through in 1999, and Clinton signed it. Fannie and Freddie were public companies, who had to keep profits rolling in for shareholders, and that pretty much sets us up.

    And the only reason Jamie Dimon comes out on top is that JPM was busy digesting the Capital One merger, and he was too busy to destroy his company with that garbage. By the time he’d climbed to the top in ’06, the train had left the station on the worst of the stupidity, and there were a few months there where he probably felt left out in the cold.

  21. DeDude says:

    What is true about the GSEs is that without them the housing crisis would have been much worse. The private sector mortgage securitization operations turned out to be “fly by night” and without Fannie and Freddie to step in we would basically have had an all cash market for at least a year.