How Washington Failed to Rein In Fannie, Freddie

Huge WaPo article on Fannie & Freddie that’s (mostly) worth reading:

"Blessed with the advantages of a government agency and a private company at the same time, Fannie Mae and Freddie Mac used their windfall profits to co-opt the politicians who were supposed to control them. The companies fought successfully against increased regulation by cultivating their friends and hounding their enemies.

The agencies that regulated the companies were outmatched: They lacked the money, the staff, the sophistication and the political support to serve as an effective check.

But most of all, the companies were protected by the belief widespread in Washington — and aggressively promoted by Fannie Mae and Freddie Mac — that their success was inseparable from the expansion of homeownership in America. That conviction was so strong that many lawmakers and regulators ignored the peril posed to that ideal by the failure of either company…

Fannie Mae, and to a lesser extent Freddie Mac, became enmeshed in the fabric of political Washington. They were places former government officials went to get wealthy — and to wait for new federal appointments. At Fannie Mae, chief executives had clauses written into their contracts spelling out the severance benefits they would receive if they left for a government post."

One significant omission: Freddie Mac overstated its capital base, and that was pretty much the last straw for the GSEs. The rest of the article emphasizes the attempts to expand home ownership in the 1990s (Clinton) and the 2000s (Bush) via the two GSEs.

While there is some merit to the argument that this movement impacted the housing market, it is for the most part significantly overstated, given what we now know about abdication of lending standards and the issuance of mortgages over the past 6 years. These are the vintage mortgages that are resetting, becoming delinquent, and going into defaults — not the circa 1990s trasnactions. And, the bad RMBS/CDO paper that is the root cause of the present credit crunch also date from the post 1% Fed funds rate. 

The proximate cause of current Housing situation (and eventual Credit crunch) stem primarily from 3 significant errors of the 2000:

1) Grenspan’s FOMC: Took Interest Rates taken to 1%, and kept their for over a year;
Banks and Mortgage Underwriters: Abdication traditional lending standards, and ignored the traditional principle that loans should only be made to those who can reasonably repay them;
Federal Reserve: Failed to adequately supervise banks; I consider this to be Greenspan’s Nonfeasance.

There have been numerous attempts to paint various government agencies and acts (HUD, CRA, and others) as the proximate cause of the current Housing problems. These are misguided, and primarily political, attempts that misstate well known facts about lending, mortgages and the Fed.

Indeed, government policies of the 1990s hardly managed to expand Home
ownership by any significant amount.

What did help out housing dramatically was the economic boom of the 1990s — huge wealth creation and robust income gains led to the end of the housing downturn that had tamped down home price appreciation from the late eighties til 1996. That’s the date of where Home price appreciation began in earnest.

From 2003 forward, however, prices went vertical, thanks to low interest rates, and all but non existent credit standards. If you could fog a mirror, you could get a mortgage. So much for lending standards. Indeed, the vast majority of irresponsible lending was (sua sponte) the idea of the major mortgage lenders. The loans presently defaulting, and the foreclosures now roiling both
the Housing and Credit markets primary stem from poor private sector
decision-making and weak bank policies.

Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference, was typical of the era:


How Washington Failed to Rein In Fannie, Freddie
As Profits Grew, Firms Used Their Power to Mask Peril
Binyamin Appelbaum, Carol D. Leonnig and David S. Hilzenrath
Washington Post, Sunday, September 14, 2008; Page A01

The Ongoing Impact of the Housing Sector   
Barry Ritholtz
Investor Insight, Aug 27 2007, 11:50 AM

Download National Mortgage News February 13, 2003.pdf

Category: Bailouts, Credit, Real Estate

A Sunday Without a Bailout? How Novel !

Category: Bailouts, Corporate Management, Credit, Media, Psychology

Quantifying US Home Price Declines on Real GDP

Goldman Sach’s Jon Hatzius just published an interesting Brookings Paper on the inter-relationship between falling home prices, the credit crunch, and real GDP.

I found some interesting theories and arguments worth chewing over in the paper. (A link to the full paper and the abstract are below).

Here are the four main points I took away from his analysis:

1) The "best case scenario" during the the credit downturn would be a "couple of years of stagnation or mild recession in the broader economy;" and that’s only, according to Hatzius, if the GSE’s continue expanding their books of business (i.e., keep buying up mortgages).

2) On the other hand, if the "GSEs were to stop growing their book of business . . . it "would also raise the risk of substantial adverse feedback effects
between the real economy, the housing market, and the financial

Um, news flash: The feedback loop (in a negative direction) between housing, credit and the economy is not a risk, its a reality. That is precisely what we are in the early stages of experiencing. Its here, its now, and it looks to be getting worse.   

3) Now’s where things get interesting: "The specter of such a feedback loop was likely an important reason for the Treasury’s decision to take the GSEs into conservatorship on September 7." 

I would argue that the adverse loop was already visible to the Treasury (and the Fed), and their concern was a rapid expansion of this negative (duh) inter-relationship between credit, housing and the economy. Its the only half-decent economic explanation I have heard so far to justify the conservatorship.

4) "Macroeconomic policies may need to remain unusually expansionary during the adjustment of the financial system to the housing and credit market downturn." 

Um, yeah. At this point, a tighgtening is off the table for the Tuesday Fed meeting. I expect by next Summer’s fishing trip, rates will be down to 1.5%.

A few charts and the  ABSTRACT are after the jump . . .

Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn
Brookings Papers, September 10, 2008

Read More

Category: Credit, Data Analysis, Economy, Real Estate, Taxes and Policy

Cramer Calls (Yet Another) Bottom in Housing

This week, one of my fellow LIRR commuters handed me a New York
, and asked me my opinion about an article by Jim Cramer on a bottoming in Housing sector. The articles title?  On June 30, 2009, Buy an Apartment.

Gee, that seemed rather specific, I wonder what’s in the article? I thought.

practically spit up my coffee when I read the first paragraph:

more than a year, I’ve been a huge bear on housing. From the moment the
credit-crisis storm began to form, I’ve been shouting in my usual
unhinged way about just how bad the devastation would be, and carrying
on about how anyone who bought a home in this environment would lose
money immediately. At various points along the way, my house-hating
judgment has been questioned, but I’d say I’ve been vindicated by the
relentless decline in home values we’ve seen, the worst since the Great
Depression. Even here, in our so-called real-estate-superstar city,
prices may not have fallen, but the rate of acceleration has started to

That paragraph struck me as particularly
disingenuous. Perhaps Cramer’s long housing bias had spanked him enough times that he finally flipped bearish, but, damn, that was only after
getting the credit bubble and housing collapse, and especially, repeated bottom calls on the Home Builders,  very, very wrong for a long, long time.

Now, I don’t know when Cramer flipped bearish on Housing — I do not watch
the show regularly, nor do I read him at TSCM — but he
certainly was bullish in 2005, 2006 and early 2007. Maybe he flipped bearish some time in the past year. I don’t know.

But here’s the funny thing: I get tons of emails about James Cramer, asking me "Why don’t you focus on Jim ever?" Why doesn’t TBP cover him more?

Fair question. For a couple of reasons, making Jim a focus of the blog doesn’t interest me. I’ve criticized him on many an occasion, but being his stalker — ala Luskin on Dr. Paul Krugman — simply isn’t my bag.

Why? First, I respect Cramer’s accomplishments with Forget the TV pundit you see today, not many people had the foresight in 1995 to recognize that web based business content was going to be big. But Cramer did, and that sort of foresight and business acumen earns my respect.

Second, being Cramer’s Jiminy Cricket is not how I want to define myself. I have my own opinions, beliefs, and perspectives. I’ve carved out a nice little corner of the internet for the Big Picture. And if I make Cramer the focus of this blog, I give up my own identity. Besides, he retired from finance years ago, and now works in entertainment industry.

But third, and perhaps most of all, I don’t need to. Why? Because Don Harrold already does:

Jim Cramer Calls a Bottom in Housing – HERE’S THE TRUTH (


Jim Cramer Called "The Bottom"? 1 Out of 10 Ain’t Bad!  (


On June 30, 2009, Buy an Apartment
Our resident financial expert calls the end of the housing-market free fall—to the day.
James J. Cramer
NYMag, Sep 7, 2008 

Don Harrold

Don Harrold on YouTube

Category: Markets, Real Estate, Really, really bad calls, Video

Prior Slumps

Category: Markets, Trading

Forbes: Where’s the Ref?

Category: Bailouts, Credit, Taxes and Policy

Jim Rogers: “American Socialism for the Rich”

"America is more communist than China is right now. You can see that
this is welfare of the rich, it is socialism for the rich… it’s just
bailing out financial institutions," Rogers said.


See also:  Welcome to the U.S.S.R. (United States Socialist Republic)  Citigroup  (PDF)

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Category: Bailouts, Credit, Video

Jim Rogers: “American Socialism for the Rich”

"America is more communist than China is right now. You can see that
this is welfare of the rich, it is socialism for the rich… it’s just
bailing out financial institutions," Rogers said.


See also:  Welcome to the U.S.S.R. (United States Socialist Republic)  Citigroup  (PDF)

Read More

Category: Bailouts, Credit, Video

Lehman Gets PE Bid; Friday Night Fed Meeting

Category: Bailouts, Corporate Management, Credit, M&A, Valuation

Freddie & Fannie

Category: Bailouts, Credit, Real Estate