Private Sector Loan Losses vs Fannie/Freddie

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

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

The article states that “banks, thrift institutions and mortgage companies have
been pressing Fannie Mae to help them make more loans to so-called
subprime borrowers. These borrowers whose incomes, credit ratings and
savings are not good enough to qualify for conventional loans, can only
get loans from finance companies that charge much higher interest rates
– anywhere from three to four percentage points higher than
conventional loans.”
It was the lenders themselves who were pressing the GSEs to buy these loans. The private sector lenders were pursuing this market due to fatter potential profits — not Fannie and Freddie.

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

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

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



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

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

Hat tip Econbrowser

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

Category: Credit, Derivatives, Legal, Real Estate

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Jim Bianco, president of Bianco Research LLC, talks about the Federal Reserve’s move to provide up to $540 billion in loans to help relieve pressure on money-market mutual funds, credit market conditions and the outlook for the U.S. economy and stock market.

click for video

00:00 Fed move to buy money fund commercial paper
01:59 Commercial paper market; "shortage" of loans
04:36 U.S. credit markets, Fed liquidity efforts
06:59 Outlook for housing, mortgage markets
07:54 Potential second stimulus a "short-term fix"
09:27 Fannie and Freddie loan, mortgage rules
11:08 Bank lending practices, housing market
13:10 Fed liquidity efforts: impact on inflation
16:01 Outlook for U.S. dollar, stocks: strategy
Running time 19:47

Bianco Calls Fed Liquidity Efforts `Hyper-Inflationary’
Bloomberg, October 21, 2008 13:30 EDT

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