Fannie And Freddie Not Responsible For Housing Bust; Affordable Housing Goals Not At Fault

To hear some conservative commentators, like George Will, our financial crisis was caused by Fannie Mae and Freddie Mac irresponsibly making shaky, high risk housing loans to low income people.

I spent some time with Google and I found that Fannie and Freddie did not sell sub-prime mortgages, and that, in fact, selling such high risk mortgages is contrary to their charter.  What got Fannie and Freddie into trouble is the fact that, like other banks and financial institutions, Fannie and Freddie bought bundled sub-prime mortgages, “AAA rated,” as an investment and as a means to increase their profits for shareholders.

An article published in July by Arizona W. P. Carey professors Herbert Kaufman and Anthony Sanders says that “the rate of serious delinquencies on loans held by Freddie Mac was 0.81 percent. Fannie Mae’s rate of serious delinquencies was 1.15 percent. Those rates compare to market-wide rates of serious delinquency of 1.47 percent for prime mortgages, 8.35 percent for Alt-A mortgages, and 20.74 percent for subprime mortgages.”

Thomas Frank in a Wall Street Journal column entitled, “The GOP Blames The Victim” says,  “I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn’t originate any of the bad loans — that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck. …

“A 2007 report by the Mortgage Bankers Association reports that the FBI estimates ’80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders.’ That means the lenders, not the borrowers.  …

“Just imagine the flights of fancy that the theory of borrower malevolence and Wall Street victimization requires conservatives to take: All these no-account folks, you see, got together and forced investment banks to engineer subprime mortgages into highly leveraged securities. Then they tricked all manner of hedge funds and pension funds and financial institutions into buying these lousy products. Just for good measure, these struggling homeowners then persuaded bond-rating agencies to misrepresent the risk associated with these securities.”

An article in Salon, The truth about Fannie and Freddie, by Andrew Leonard, states, “Nearly everyone agrees that Hank Paulson and Ben Bernanke had no choice — the consequences of not acting were simply too great. That this is happening under George Bush’s watch is the most dramatic demonstration we have seen in modern times that ideology is no defense against economic reality. …

“A point that gets easy to miss in the current hullabaloo over the bailout is that Fannie and Freddie were not primarily responsible for either the housing boom or its bust. That responsibility is more fully borne by the non-government sponsored enterprises who play in the real estate market — the private mortgage lenders, commercial banks, investment banks and myriad institutional and hedge fund investors who engaged in an orgy of exotic mortgage loan and mortgage security innovation and speculation. Toward the very end of the boom, Fannie and Freddie did begin to get more involved in subprime loans and related derivative markets, but that was because they were losing market share to the fully private sector.

“We shouldn’t be shocked at all that Wall Street went completely overboard in its love affair with housing market manipulation. That’s what happens when a market is left to its own devices, and government eschews its oversight responsibility. That’s what always happens.”

An article in The Washington Independent, by Mary Kane, Low-Income Borrowers Blamed in Bailout Crisis Conservatives Cited Affordable Housing Goals as Trigger for Meltdown. House GOP Concurred, says, “In 2004, the agency that regulated their housing efforts, the U.S. Dept. of Housing and Urban Development, informed both entities (Fannie and Freddie) they needed to increase affordable housing efforts, with the mortgage market so strong.

But HUD never told Fannie and Freddie to jump into the subprime market. Both chose to dive into subprime mortgage securities, and the purpose wasn’t to satisfy regulators — it was to increase market share, Cecala said. Afterward, they asked HUD if some of the securities they purchased could count toward their affordable housing goals. HUD agreed.

“Fannie and Freddie were huge players in the subprime market, buying 48 percent of all subprime-mortgage-backed securities offered in 2004 — way above anything they would ever need to meet affordable housing goals. They continued to buy loans made to multi-family dwellings, as in the past, to satisfy regulators.

“Despite claims to the contrary, the two did not rely, for the most part, on subprime securities to meet their regulator’s goals. In any case, the majority of subprime loans were refinancings, which wouldn’t have counted anyway. … It was a business decision by Fannie and Freddie, not government-mandated.

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11 Responses to Fannie And Freddie Not Responsible For Housing Bust; Affordable Housing Goals Not At Fault

  1. Joe C. says:

    The Democrats without shame or conscience have steered us (purposely, I believe) towards a manufactured economic crisis for political gain, and as an ideological mechanism to nationalize the financial structure of the U.S. The Republicans in Congress, being “moderate” (i.e. feckless) didn’t have the guts to stand up to them and their Media organs. The few Conservatives left in Congress couldn’t convince their linguini-spined peers to stand up against the assault despite their repeated warnings. The Media created an alternate reality narrative to protect this economic coup, then their Trojan Horse Treasury Secretary six weeks before the election as McCain is surging orchestrates an economic panic and convinces an emasculated center-left lame duck president that his legacy will be a second Great Depression if he doesn’t succumb to his blackmail.

    This Obama-Bush Wall St. Bailout Bill will have two immediate outcomes: 1. It will set the stage for der Fuhrer Obama to socialize the entire economy of the U.S., and 2. It will do nothing to ease the self-inflicted “credit crisis” but will throw another $850 billion after the previous $900 billion already yacked this year that had no effect.

    All of this is foreshadowing the Obama economy that started after the election of ‘06. At that time, businesses and productive citizens (i.e. taxpayers) started preparing for the coming oppressive regulation and high taxation; hence, the reason a vibrant economy had the breaks put on by the Democrats and Media.

    But I hate to disagree with Thomas Frank. (HHEHEHHHHEHHAHAHHAHH)

  2. Brian says:

    Looks like the third to last paragraph in your article is wrong…

    http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260

    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

    The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

    In addition, 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.

    ”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

    Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

  3. J.R. Locke says:

    Wow. That Conservative Kool-Aid got you Joe C. Conspiracy! I love it, it is like it is 1992 again…..

    So Brian blames it on the government giving loans to blacks….let’s turn that back to 1962!

    You know for all the trouble that Fannie and Freddie caused I would love to see the regional differences, how hard the rust belt was hit compared to California in regards to govt induced or private market induced overblown mortgages?

    Also I would love to know for all these subprime loans what types of houses were foreclosed on and what did it cost per Fannie and Freddie foreclosure as opposed to any other mortgage?

  4. Stan Hirtle says:

    Good lord. Now the economic crisis is manufactured by Democrats so that “der Fuhrer Obama [can] socialize the entire economy of the U.S.” In fact naming the bailout the “Obama-Bush Wall St. Bailout Bill ” suggests from the ordering of the names that Obama persuaded Bush to persuade Wall Street ot make a crisis and then Obama made Bush and Paulson and Bernake write this bill (which in its original version gave Paulson rather than Obama totally unreviewable discretion.

    I sometimes wonder what it means that people come up with, and apparently at least some of them believe, this kind of thing. More and more website posts engage in demeaning and insulting the oppositon, seemingly assuming that everyone will join in. Obama gets more flack for supposedly being too cautious and nuanced (that Harvard educated elite thing and all that) that for being “der Fuhrer.” But probably more significant is how we have a country in which people distrust and demean the people who agree with then to that extent. We do have talk radio and various websites where people of that mindset can reinforce each other. And in politics, success often comes from generating mistrust. It appears that McCain’s campaign is losing enough ground that Palin is now accusing Obama of “palling around with terrorists” namely a guy who was in the Weather Underground which blew things up in the sixties when Obama was a kid. The guy subsequently became respectable and once was on some charitable board Obama was on. McCain however has his own youthful indiscretion associations to worry about as one of the “Keating Five” in Congress, who tried to intervene on behalf of a major perp in the Savings and Loan Crisis, an earlier version of the subprime mortgage meltdown. Since the mortgage crisis may be more on top of voter concerns than the Weather Underground, we’ll see how if this negative stuff works out. Obviously part of the dynamic is that power is all that matters and if one is going to lose power one should at least, as the football players say “leave it all on the field.”

    Campaigns obviously think it is worth going negative, and we all end up living with the many consequences of the ugly political environment. But it may be more serious that people get in the emotional state to embrace and then throw around all this negative stuff, not only because the real “der Fuhrer” cut his teeth demaning and eventally actually exterminating the people he blamed for what was wrong with his society, and of course who really weren’t. Or because seeing all good on our side of the conflict and all bad in there’s is almost certainly untrue. But also because anyone who thinks Obama is going to be “der Fuhrer” is very much out of touch with the reality of how politics operates here. Such feelings are what leads to destructive policies which bring much harm, and ultimately prevent or destroy community. If people get these kind of feelings and keep them, we will be living in an unsafe and unpeaceful place.

  5. Mike Bock says:

    Brian, the New York Times article you refer to, “Fannie Mae Eases Credit To Aid Mortgage Lending,” was written in September 1999, nine years ago. The article adds light to the entire picture, but it doesn’t refute the article I quote that was written three months ago that gives the actual statistics of the delinquency of Fanny Mae and Freddie Mac loans.

    The research that I did, via Google, is incomplete, I’m sure, but, it seems to refute the contention that the housing crisis was caused by Fanny Mae and Freddie Mac making loans to high risk borrowers. The evidence I’m finding shows that, in fact, Fanny Mae and Freddie Mac did not make any sub-prime loans, because such loans were against their charter. The article I quote shows that the rate of delinquencies and foreclosures at Fanny Mae and Freddie Mack were very low, and so, the evidence seems to show that whatever political pressure was brought to bear on these institutions to make more loans available didn’t work to change the basic soundness of their lending guidelines.

    The information I found shows that where Freddie Mac and Fannie Mae got into trouble was in mimicking other financial institutions and acquiring already sold sub-prime loans that were “bundled” and misrepresented as “AAA” investments.

    I am ready to be corrected if someone has more complete information about these conclusions, but the 1999 article you cite doesn’t refute the claims that this article is making.

    Joe C, you make a startling claim when you say, “The Democrats without shame or conscience have steered us (purposely, I believe) towards a manufactured economic crisis for political gain, and as an ideological mechanism to nationalize the financial structure of the U.S.” Sometimes startling claims are true, but this assertion seems unbelievable. It is fun to make sometimes to extrapolate one’s thinking and fears to some extreme conclusion, in the spirit of a lively bull session, but eventually such extreme projections must be mediated by an honest look at reality. Your sharing of your extreme speculations of “der Fuhrer,” etc. is useful in that these notions reveal how extreme conversation can become, particularly on radical radio shows, but such talk can become its own force making up an alternate reality that seeds such misinformation that it becomes harmful. We live in dangerous times and words and ideas have consequences. If you have any evidence to back up your claims, I would like to know what it is.

  6. Ted says:

    The forclosure situation in the City of Dayton is a perfect example of the Freddie and Fannie debacle. We can sit here all day and play the blame game just like the politicos or the walls street dead beats. The fact remains, individuals borrowed money they couldn’t or wouldn’t pay back to buy houses at over inflated prices. They did so because Freddie and Fannie did not require them to provide adequate proof of finacial ability. Our mothers and fathers would have been laughed out of the bank in their day if they tried to acquire these fraudulent loans.

    I still haven’t heard one good reason why the taxpayers should bail out irresponsible lenders and borrowers. Maybe you could give me one!

  7. Mike Bock says:

    Ted, You write, “Individuals borrowed money they couldn’t or wouldn’t pay back to buy houses at over inflated prices. They did so because Freddie and Fannie did not require them to provide adequate proof of financial ability.”

    That assertion contradicts what I wrote above, quoting from an article, “The rate of serious delinquencies on loans held by Freddie Mac was 0.81 percent. Fannie Mae’s rate of serious delinquencies was 1.15 percent. Those rates compare to market-wide rates of serious delinquency of 1.47 percent for prime mortgages, 8.35 percent for Alt-A mortgages, and 20.74 percent for subprime mortgages.”

    Fannie and Freddie, according to this information, did not make subprime loans, but held to a much higher standard and their delinquency rates and foreclosure rates were far below those companies like Countryside that did make subprime mortgages. Like a lot of financial institutions, Fannie and Freddie got into trouble because they bought loans made by other companies. This action might show incompetence or maybe even criminal corruption, but, according to this information the bad loans themselves did not come from Freddie or Fanny. Correct me if I’m wrong.

    The consensus of everyone who claimed center stage in this discussion of bail out was that without a bail out, terrible and awful economic consequences would befall us all. It was sold through fear. We now know that the Iraq War was sold through fear and that we bought into a bum, expensive, and foolish notion. It is hard to judge, yet, whether the bail out is a similarly flawed endeavor. Certainly, the Senate’s $150 Billion addition seemed to exploit a situation and added extreme and unnecessary additions to the original bill.

  8. Brian says:

    Salon is left-wing dogshit. The bottom of the first article you link to from July 22nd says Fannie Mae and Freddie Mac aren’t on the verge of collapse. Not sure how reliable that is, or your other articles. Fannie Mae overstated its profits its earning by $10 billion from ’98-’04, and in ’04 Greenspan warned they were getting too big. They may not be solely responsible for the housing bust, but they are just as guilty as the big banks. Comments like “We shouldn’t be surprised at Wall Street’s love affair with the housing market….” should be directed at the GSE’s also.

  9. Rick says:

    Folks I am not an expert at this and have a couple of questions. Mike Bock asserts above (and I have no basis to doubt them) that the rate of serious delinquencies was about the industry average. If that is the case, then why are they in trouble? Mike also stated Fannie and Freddie didn’t originate any of the bad loans — that disastrous piece of work was done by purely private, largely unregulated companies. As far as I know, Fannie Mae and Freddie Mac don’t originate any loans, they just buy up the loans of others. Am I correct on that? Could it be that the Community Reinvestment Act required/encouraged subprime loans to those who would not otherwise qualify and the bankers realized they could make subprime loans to even high income folks and quickly sell the loans? Just a thought.

  10. Stan Hirtle says:

    The Community Reinvestment Act only applied to depositories, that is places like banks and thrifts that take deposits. They are supposed to demonstrate that they serve the communities they take deposits from. They get examined about this but all but a handful pass, and all but a handful of their mergers get approved. The CRA instructs that loans be financially sound.

    Most of the major subprime lenders were not depositories. In addition their loans were not “conforming” to the standards of Fannie Mae and Freddie Mac and were securitized outside that process.

    Fannie Mae and Freddie Mac lost out because the mortgages they held declined in value and because they were “overleveraged” and had borrowed to much in order to purchase mortgages. This is the same problem that is facing banks and causing the credit crisis.

    It would have been possible to make affordable loans to people whose credit histories did not rise to the level that prime lenders were used to. You could also charge a reasonable risk premium for doing so. What happened is lenders charged an excessive risk premium, which in turn made loans less affordable and more likely to fail. They then took products which were suitable for a narrow base of customers and sold them to a wider base of customers for whom they were not suitable. Adjustable rate mortgages with a low initial teaser rate may be a good idea for someone who is moving to Dayton to work at WPAFB for 3 years and then going elsewhere. However it is a very bad idea for a senior citizen on a fixed income. This became a way for loan originators to convert peoples’ home equity into origination fees, and when the equity was tapped out, to fabricate some equity with bogus appraisals. The market incentives encouraged originators to write loans whether they were suitable or not. Securitizers who bundled and sold loans, eventually put out calls for loans to be written, and originators filled the need. The supply of investment money drove the demand for loans. People trusted loan originators and assumed they would get good advice. However originators claimed (usually in fine print in confusing legal documents) they had no obligations to their borrowers. Often they and the lenders agreed to profit by selling the borrower an unnecessarily expensive loan, a practice known as yield spread premiums. This made the loan more likely to fail.
    The idea of making mortgages available to those who were excluded from the traditional prime market is not a bad idea. However the way it was executed using trick and trap products was very bad. This was a business model devised by the industry, generally outside Fannie Mae and the influence of the Community Reinvestment Act.

    We now need to fix those bad mortgages that they wrote, as this is the best way to do the best by the borrowers, their neighbors and communities, and also the lenders who lose lots of money foreclosing, usually end up buying the house cheaply in foreclosure and probably sell it even more cheaply to get rid of it. Now we can add the taxpayers who need to get the most out of the bailouts. It was good to hear both Obama and McCain endorsing the fixing of bad mortgages in tonight’s debate. Now let’s make them do it.

  11. conrruption says:

    Joe C., you are demented or something. They are in it together. Wake up. When Republicans had total control they blew your theory out of the water. Either you are confused or just dumb.

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