-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.