Dealing With Fannie and Freddie

-Submitted by David Drumm (Nal), Guest Blogger

With the recent appearance of Gretchen Morgenson and Joshua Rosner’s Reckless Endangerment, the focus on the financial meltdown turns to Government Sponsored Enterprise (GSEs) such as Fannie Mae and Freddie Mac (F&F). The claim is that the role of F&F in the meltdown is being marginalized or ignored. Some claim that this book fills an important void.

However, the role of F&F has been well researched and documented.

The GSEs, by charter, are intended to facilitate mortgage finance to lower-income homeowners. These lower-income borrowers, with no political support structure, are the perfect patsies for those looking to shift the blame for the financial crisis. Republicans have used the “affordability” aspect of the GSEs mission to blame F&F for the financial crisis. The facts just don’t bear them out.

In Raj Date’s presentation, he notes that GSEs $100 billion of private-label subprime Mortgage Backed Securities (MBS) in their portfolio is only 2% of their $5 trillion credit exposure. He writes:

Moreover, the very worst performing GSE loans (that is, the loans where losses are the greatest multiple of original forecasts) were made to prime borrowers, not subprime.

As shown in the graph below, it is the prime mortgages that make up the vast majority of serious delinquencies.

As Raj Date points out, the serious delinquencies came from “Alt-A” and “Interest Only”, which had average borrower FICO scores of 722 and 720, respectively, solidly within the “prime” category.

Between 2004 and 2006 the volume of subprime and the riskier (than conventional) Alt-A mortgages ballooned. In 2005 and 2006, conventional, conforming mortgages accounted for one-third of all mortgages originated.

From early 2004 to late 2007, it was the private-label insurers that played a large role in securitizing (pooling contractual debt into bonds) the higher-risk mortgages.

As Barry Ritholtz points out in his review of the Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States:

They focus blame largely on the so-called “private label” mortgage market. These are bank and non-bank,  brokers, lenders, and securitizers.

If F&F had accepted their lower market share and not tried to stay competitive with the private-label insurers during the bubble, their losses would have been substantially less. The F&F blame game is a desperate attempt, not borne out by facts, to shift the focus of the financial crisis away from  the private-label insurers.

H/T: Mike Konczal, Karl SmithConservator’s Report.

123 thoughts on “Dealing With Fannie and Freddie

  1. so now you are admitting you think the founders did not base the Constitution on individual liberty?

    Are you serious? Where did you go to law school? So they taught you the Constitution was a document to provide social justice to the mob? Probably so, based on your posts.

  2. Buddha,

    If all devils are essentially the same, the covert. However, let me counter by framing the issue with a different imagery, should all fevers be treated with the same drug?

  3. Gyges,

    But you also re-frame the metaphor in terms of corrective action. As framed it above, the metaphor is in terms of identification. To stick to your changed metaphor, one cannot treat a fever one does not recognize nor know the causation thereof.

    The fever can kill you no matter its cause if left untreated, but the first step in successful treatment is proper identification. Causation is relevant to treatment certainly, but the fever is still the net outcome of the illness. In this instance, the net outcome (the fever) is no matter that the initial causation is slightly different than past causations (previous nationalistic forms of fascism versus the Austrian school form of post- transnational fascism that is consequent from their hands off attitude). Compare it to traditional nationalistic fascism as a bacterial infection and post- transnationalist fascism to a viral infection. Untreated the fever either causes will kill you. Again, the idempotency of entailment still applies.


    Corporatist Troll,

    “so now you are admitting you think the founders did not base the Constitution on individual liberty?”

    You keep trying to insert premises into my statements that don’t exist but all you succeed in doing is sticking your own head further up your ass. The foundation of the Constitution is more than one simple proposition. Along with protecting individual rights, freedom from tyranny in all its forms – political and economic, individual and systemic – is also a foundation of the Constitution. You apparently read the Declaration of Independence with as little comprehension as you apply to the Constitution.

    Also “hell, you are too stupid to realize lobbying congress isnt a crime last time I looked.” I never said lobbying as in the right to petition was a crime. But pay for play is illegal. It’s called graft. Here, let me explain what I mean when I say graft. A colloquial term referring to the unlawful acquisition of public money through questionable and improper transactions with public officials. Graft is the personal gain or advantage earned by an individual at the expense of others as a result of the exploitation of the singular status of, or an influential relationship with, another who has a position of public trust or confidence. The advantage or gain is accrued without any exchange of legitimate compensatory services. Behavior that leads to graft includes bribery and dishonest dealings in the performance of public or official acts. Graft usually implies the existence of theft, corruption, fraud, and the lack of integrity that is expected in any transaction involving a public official. Graft is the natural result of the current campaign finance system, a system that was “lobbied” for by industry to override previous safeguards against the practice like FECA.

    You’re also too stupid to realize there is a difference between the Constitutional right to petition (which should cost nothing) and graft (the system currently in place).

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