About all that Fannie and Freddie stuff . . .

[we vs us]

Turns out that all that rigamarole about Fannie and Freddie being the major drivers behind the subprime crash -- and hence responsible for the entirety of our current economy is, well, pretty much crap. 

From a blog post by Dean Baker, head of the Center for Economic and Policy Research:

The first culprit is the Community Re-investment Act (CRA). Supposedly the government forced banks to make loans against their will to low-income families who did not qualify for their mortgages. This one is wrong at every step. First, the biggest actors in the subprime market were mortgage banks like Ameriquest and Countrywide. For the most part these companies raised their money on Wall Street, they did not take checking and savings deposits. This means that they were not covered by the CRA.

Let's try that again so that even George Will might understand it. Most of the worst actors in the subprime market were not covered by the CRA. The CRA had as much to do with them as it does with Google or Boeing.

The second CRA problem is many of the worst loans would not have been covered even if the institution was. Many of the worst loans were made to finance homes purchased in newly created exurbs. The CRA is about having banks make loans in inner city areas where they take deposits. So we have the wrong location and wrong institutions for the George Will story.

He includes a couple of other points as well, like the government having no enforcement mechanism to "force" private lenders to make subprime mortgages; likewise there's no sign of any of this happening under duress, because the lenders and bundlers were making money hand over fist, and stealing huge market share from the Fannie and Freddie companies. 

Not that Fannie and Freddie are blameless, but in the fiction pushed by the conservatives that the government is responsible for the real estate bubble they're central actors, and they weren't.  Try the investment banks and the lenders (Countrywide, Indymac, etc).

[nathanm]

The book All the Devils are Among Us, available from the Tulsa Library in eBook form, makes a pretty good case that the demand side (the investment banks) was the primary driver. It points out that there was a subprime "crash" in the late 90s which didn't blow everything up because the CDO market wasn't so highly developed, and there were greater lending standards at the time.

It further contends that the investment banks were in fact largely responsible for that industry-wide lowering of standards, by refusing access to the warehouse credit lines that mortgage originators require to fund the loans before they are then sold to others to those who weren't producing enough volume and by pressuring the originators to generate loans that could produce better yields (read: higher interest rates). The mortgage originators then took, nearly universally, to writing loans regardless of people's ability to pay and pushing prime borrowers toward standard ARMs, option ARMs, and interest only loans, again because the overall profit on those deals was higher for the investment banks.

It also casts a dim light on regulators, as well as implicating Fannie and Freddie in a peripheral role, in that they, along with the investment banks, as well as other loan originators, continuously lobbied Congress to ensure that proposed regulations on the subprime market, mortgage backed securities, and other derivatives were defeated. They went so far as to have the OCC and OTS pre-empt state laws in something like 17 states that regulated the subprime lending market.

Pretty good book. Last year's film, Inside Job is also fairly interesting and topical, although it definitely has a specific point of view it's promoting. It's absolutely worth the $1 it costs to rent at a Redbox.

[cannon_fodder]

I still believe the government mandated housesenabled the poor practicesto thrive.  Countrywide raised wallstreet cash to make crappy loans at poor rates to underqualified borrowers who statstically were likely to default - when they started to default the market was flooded and prices dropped.  BUT, without fannie and freddie to quickly unload all these loans at present value the cycle would have been MUCH slower.  If I can bundle and shuffle off loans with little regard for quality and not caring about the future my incentive to follow best practices goes away.

In fact, the entire notion that owning a home should be everyones American dream is a big problem.

[we vs us]

In fact, the entire notion that owning a home should be everyones American dream is a big problem.

As an aspirational dream it isn't bad at all.  If it forces you to save, to consider your spending, to plan for the future, and to root your family, then it's a fine thing.  And hey, in normal times it's a great asset, one that slowly appreciates and can be sold off at a tax free gain. 

But we chucked all of our lending standards out the window and started giving huge loans to people who otherwise wouldn't have been lending risks, who five or ten years ago wouldn't have even been on the mortgage banking radar.  To me this seems like an obvious breakdown in a system that had provided solid and sustainable gains for decades. 

Just like everything else, it functioned beautifully when it was regulated.

[nathanm]

Just like everything else, it functioned beautifully when it was regulated.

Even mostly regulated worked out OK (at least for those of us not buying subprime loans), since the unregulated parts were too small to cause systemic problems.

And CF, the subprime market and crappy standards got started just fine without Fannie and Freddie. Apparently they bought zero subprime MBS until at least 2006, and they supposedly bought exactly zero CDOs based on subprime MBS. The non-GSE private market was eating the crappy loans up like a fat guy gorging on cheetohs and Coca-Cola. But that incentive to write the crappiest loans possible so as to get the highest yield possible on the derivative speaks quite strongly as to why regulation of all mortgage originators is necessary. And why we shouldn't put people in charge who don't believe in using their authority.

[carltonplace]

In fact, the entire notion that owning a home should be everyones American dream is a big problem.

Agreed. I think the primary reason to own a home shouldn't be as an investment but to be able to control one's living expenses at retirement. If you have paid off your home then you don't have to continually outlay rent or mortgage once your income becomes more or less fixed.

[Conan71]

Turns out that all that rigamarole about Fannie and Freddie being the major drivers behind the subprime crash -- and hence responsible for the entirety of our current economy is, well, pretty much crap. 

From a blog post...

Well that pretty much settles the issue, then.

[we vs us]

Well that pretty much settles the issue, then.

Not all blogs are created equal, you know.

This guy is the director of the CEPR, and he's writing in his official capacity.  This ain't the dude's personal wordpress confessional.

[Conan71]

Not all blogs are created equal, you know.

This guy is the director of the CEPR, and he's writing in his official capacity.  This ain't the dude's personal wordpress confessional.

And I see he's most definitely non-partisan too.

http://conservativenannystate.org/

[Gaspar]

LOL!

Fannie & Freddie are the retirement grounds of liberal politicians (and where they can get their boyfriends jobs).

We are going to see a lot more struggle to prop them up as victims and innocents.  There are actually better articles out there that make more convincing (yet still hysterical) claims.

The housing bubble was a huge success.  They are most certainly going to try it again.  A family making $40,000 a year on teachers salary buys a $400,000 home on the beach. . .you can't buy better votes than that! 

[Conan71]

LOL!

Fannie & Freddie are the retirement grounds of liberal politicians (and where they can get their boyfriends jobs).

We are going to see a lot more struggle to prop them up as victims and innocents.  There are actually better articles out there that make more convincing (yet still hysterical) claims.

The housing bubble was a huge success.  They are most certainly going to try it again.  A family making $40,000 a year on teachers salary buys a $400,000 home on the beach. . .you can't buy better votes than that! 

History being re-written right before our very eyes!

[nathanm]

The housing bubble was a huge success.  They are most certainly going to try it again.  A family making $40,000 a year on teachers salary buys a $400,000 home on the beach. . .you can't buy better votes than that!  

Odd that McCain won, then. (It's actually a bipartisan fuckup, at least as far as we can blame it on politicians, which isn't all that fair to either party..Clinton started it and Bush doubled down on the "let's not regulate anybody" stuff)

Interestingly enough, homeowners are significantly more likely to vote Republican than renters, and it's been that way since the 80s.

I still can't recommend All the Devils are Among Us enough. It shows quite clearly that there's plenty of blame to go around. A couple of months before everything imploded, the investment banks hatched a plan to forgive and modify a bunch of mortgages, but their hedge fund clients told them where to stuff it when they realized that would keep them from making billions on their naked CDS contracts. Yes, even the investment banks that were the primary source of the mess tried to keep it from blowing up once they finally wised up.

The problem was mostly subprime loans. Non-conforming loans, that is. Loans that by definition Fannie and Freddie would not underwrite. Of course, greed got the best of the morons and they bought up a bunch of subprime MBS in 2006 and 2007 in an attempt to make up for profit lost to the private securitization market. Without the private securitization market, there would have been no subprime bubble because there would have been no money to be lent.

Going further, without lenders like Ameriquest and later Countrywide writing a loan for anything that moved by doctoring up W-2s, bank statements, and the like, there would have been many fewer loans to be sold.

Blame Fannie and Freddie all you want, but the fact of the matter is they weren't the ones funding the majority of the subprime loans, much less the subprime loans that had lax underwriting.

[Conan71]

Odd that McCain won, then. (It's actually a bipartisan fuckup, at least as far as we can blame it on politicians, which isn't all that fair to either party..Clinton started it and Bush doubled down on the "let's not regulate anybody" stuff)

Interestingly enough, homeowners are significantly more likely to vote Republican than renters, and it's been that way since the 80s.

And the majority of those who live in public housing vote Democrat and have for decades.  Coincidence?

[nathanm]

And the majority of those who live in public housing vote Democrat and have for decades.  Coincidence?

LOL, I went looking for statistics on the number of people living in public housing and who get section 8 benefits, and found a report that catalogs the number of homes with various features, like decks, fireplaces, separate dining rooms, and so on. The US government really does seem to collect data about nearly everything.

Anyway, further searching led me to find that there are only 2,244,082 people living in public housing, at 2.2 persons per unit, or a little over a million households, most with only one adult, while 66.4% of American households own their house. Given that there were 112,611,029 households total in the nation, there were almost 75 million homeowning households.

You're not going to convince me that people receiving housing assistance are a significant voting bloc, especially since they're by definition poor, and therefore less likely to vote, thus further diminishing any impact.

[Conan71]

LOL, I went looking for statistics on the number of people living in public housing and who get section 8 benefits, and found a report that catalogs the number of homes with various features, like decks, fireplaces, separate dining rooms, and so on. The US government really does seem to collect data about nearly everything.

Anyway, further searching led me to find that there are only 2,244,082 people living in public housing, at 2.2 persons per unit, or a little over a million households, most with only one adult, while 66.4% of American households own their house. Given that there were 112,611,029 households total in the nation, there were almost 75 million homeowning households.

You're not going to convince me that people receiving housing assistance are a significant voting bloc, especially since they're by definition poor, and therefore less likely to vote, thus further diminishing any impact.

Who said they were a significant voting bloc?  I simply replied with snark, but if you look at income ranges which could qualify for many public assistance programs, it does become a significant bloc.  45% in 2004 and 37% in 2008.  And they overwhelmingly vote Democrat.

Along those lines, in the 2004 presidential election 45% of all voters were identified in CNN exit polls as having $50K or less in household income and 55% of those people voted for John Kerry.  Out of those making $15K to $30K (15% of all voters in that election) 57% voted for Kerry.  Out of those making less than $15K per year (8% of all voters in that election) 63% voted for Kerry.

http://www.cnn.com/ELECTION/2004/pages/results/states/US/P/00/epolls.0.html

In 2008, 37% of voters in CNN exit polls were identified as having $50K or less in household income.

Under $15K (6% of voters) 73% voted for Obama
$15K to $30K (12% of voters) 60% voted for Obama
$30K to $50K (19% of voters) 55% voted for Obama

http://www.cnn.com/ELECTION/2008/results/polls/#val=USP00p1

Those who are more likely to be on safety net programs, public housing, medicaid, Section 8