Friday, September 9, 2011

Fannie and Freddie Acquitted (Again)

The chart at left shows that the total Fannie loan book outperformed prime loans generated by private lenders and greatly outperformed private subprime loans. In other words, Fannie was like a super prime lender.

Calculated Risk has been following this issue and they just put up a new post reporting that Fannie's delinquency rate today is 4.08% and Freddie's was 3.51%. The overall market is 7.72%. That means private loans suffer much greater delinquency than GSE loans. This is, of course, consistent with the long time position of this blog that Fannie and Freddie were bit players in the subprime debacle.


  1. The delinquency rates on Fannie Mae and Freddie Mac are falling because their portfolio of 20% down payment, high credit score loans are outperforming, and experiencing very low delinquency rates.

    This isn't evidence that Fannie Mae and Freddie Mac are better than the private sector at loan purchases and securitization. Fannie Mae and Freddie Mac used the advantages bestowed on them by the federal government - greater access to capital and lower interest rates courtesy of an implied federal guarantee and a much smaller regulatory and oversight burden to name just a few - to crowd out private sector lenders, “cherry-picking” the lowest risk loans for themselves. So, it is not surprising that Fannie and Freddie have “outperformed” the private sector using this metric.

    What this demonstrates is that if the federal government had not imposed reduced borrowing standards on lenders, in a misplaced effort at social engineering, the continuation of conventional mortgage practices would have helped to prevent the kind of property bubble and massive misallocation of resources that have led to our current recession.

    You consistently misread the data, drawing false conclusions.

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  3. Well, I am encouraged that you agree that the high-risk lending was concentrated in the non-GSE portfolio.

    But, there is no law that "imposed reduced borrowing standards on lenders." You can search the CRA in vain for such a provision. That is the law. That is why repeated Fed studies conclude the CRA had nothing to do with the crisis, and only six percent of subprime loans even qualified under the CRA.

    As Chase CEO Jamie Dimon stated to the FCIC: "I blame the management teams 100% and. . .no one else." (p. 18).

    Why do you insist on being more of an apologist for reckless banksters than the banksters themselves?

    You consistently indulge ideology at the expense of reality. For example, is there anything the GOP did to contribute t this crisis?

    I could write a book on the errors of both parties. For you though its all partisanship.

  4. Hah. I love it. I have nothing substantive to add, but I'm totally resharing it on G+ & FB. :)

    Tamara (Memphis)

  5. "Well, I am encouraged that you agree that the high-risk lending was concentrated in the non-GSE portfolio."

    You are misreading again. Reckless lending by the GSEs was at the heart of the mortgage crisis as they became the largest purchasers of high risk loans. Since the onset of the crisis, and the re-imposition of higher lending standards, other parts of their portfolio have grown resulting in a reduction of delinquent mortgages as a percentage of their overall portfolio.

    "Why do you insist on being more of an apologist for reckless banksters than the banksters themselves?"

    I'm not an apologist for anyone. I would have let all of these banks fail. In fairness though, the banks were, in many ways, victims of government policy. Banks were sued and denied the ability to merge or expand unless they met government imposed lending targets. The securitization market grew-up to accommodate the loans created by these lending targets. Fannie and Freddie created a market for these loans, and the re-writing of Basil spread this poison throughout the system, even onto the balance sheets of banks that were not directly involved in mortgage lending or securitization. Calling them "banksters" simply conveys your own bias and prejudice.

    "... is there anything the GOP did to contribute t this crisis?"

    Yes. While they tried on several occasions to rein in the GSEs, they simply conceded the fight when the Democrats, community organizers and the leftists in the media pushed back. They should have stood their ground, imposed the tighter regulation and oversight that they wanted and pushed for more aggressive prosecution of the Democrats running the GSEs. It was far too easy politically to simply accept the situation and take credit for increases in home ownership instead of doing the hard thing which would have meant explaining and fighting for changes before the problems became manifest.

    Nor, I should add, are the GSEs totally or solely responsible. Overly accommodative interest policy, incompetent - bordering on criminal - regulatory enforcement and sleazy lawyers all played a part. But at the end of the day, the policies that led to and sustained the housing bubble were the work of leftist non-profit organizations, like ACORN, and their Democrat collaborators in the government.

  6. While many economists — including this reviewer — have argued that government actions caused the crisis, Morgenson and Rosner use their investigative skills to dig down and explain why those actions were taken. To avoid reckless policies in the future, we need to understand their causes, and the authors’ identification of government-industry links deserves careful consideration by anyone interested in improving the economy. . . .

    The book then gives examples where Fannie’s executives — Jim Johnson, CEO from 1991 to 1998, is singled out more than anyone else — used the excess profits to support government officials in a variety of ways with plenty left over for large bonuses: They got jobs for friends and relatives of elected officials, including Rep. Barney Frank, who is tagged as “a perpetual protector of Fannie,” and they set up partnership offices around the country which provided more jobs. They financed publications in which writers argued that Fannie’s role in promoting homeownership justified federal support. They commissioned work by famous economists, such as Nobel Prize-winner Joseph Stiglitz, which argued that Fannie was not a serious risk to the taxpayer, countering “critics who argued that both Fannie and Freddie posed significant risks to the taxpayer.” They made campaign contributions and charitable donations to co-opt groups like the community action organization ACORN, which “had been agitating for tighter regulations on Fannie Mae.” They persuaded executive branch officials — such as then Deputy Treasury Secretary Larry Summers — to ask their staffs to rewrite reports critical of Fannie. In the meantime, Countrywide, the mortgage firm led by Angelo Mozilo, partnered with Fannie in originating many of the mortgages Fannie packaged (26 percent in 2004) and gave “sweetheart” loans to politicians with power to affect Fannie, such as Sen. Chris Dodd of Connecticut. The authors write that “Countrywide and Fannie Mae were inextricably bound.”

    Washington Post