-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 Smith, Conservator’s Report.
.
OS,
Sort of like our Nobel Peace Prize-winning President?
Peter Schiff is an investment broker and talk show host whose highest academic achievement is a Bachelor’s degree. Paul Krugman, Ph.D. is a Nobel Prize winning economist and Princeton professor.
I could say some more about Schiff, but I try to keep it civil, so will stop now.
TY ALL!
ekeyra/puzzling:
good posts and exactly right. Peter Schiff is one of the good guys. He could clean the floor with Krugman in a real debate.
ekeyra is right about Taibbi, he truly is ignorant about things economic.
AY,
For the social security ponzi scheme:
1. Payroll taxes will continue to increase
2. Retirement age will rise much faster than actual longevity
3. The ability to draw social security with part-time employment will be highly constrained
4. Survivorship benefits will be cut
5. The future value of benefits will continue to decrease relative to real inflation (as opposed to official inflation)
6. Ultimately, benefits will be means-tested against Roth, IRA, 401K, 403B, and pension holdings.
Ekeyra,
Schiff is exactly right.
And the same thing will happen with student loans in the coming decade. Government sets artificially-low lending rates, creates wide availability for student loans, and the cost of tuition can rise far beyond what a free market would otherwise bear, particularly to fields with low employment viability.
In the future many to most of these loans will be defaulted, to be picked up by the taxpayer through new debt and inflation. Government will also want to introduce student debt “forgiveness” in exchange for government employment, creating further dependency in coming generations upon the government for a job. If the empire continues to seek out new wars, some of that service might require military enlistment.
You think this is something….just wait and see what they do to Social Security….
ekeyra,
“matt taibi can keep his one liners since he doesnt have a clue”
That’s your opinion. One thing I like about Taibbi–he’s not partisan in his accounts of what the causes of the financial crisis were. He criticizes both Democrats and Republicans.
“This is my optimistic scenario. Think of the housing market that would follow. As housing prices adjust downward, the role of housing as a middle-class inflation hedge would end. Millions of mortgage holders would foreclose, and many millions more would find themselves upside down. This would be a disaster for many, sure, especially for undiversified households with equity primarily in their houses. But consider the upside as well. Housing would become affordable, which would be a true godsend compared to both today’s market and what will follow if Fannie and Freddie are bailed out. What’s more, the quality of mortgages after the bubble bursts would be much better than what exists today. Imagine: a mortgage market dominated by debtors of financial means! There would be short-term pain in the economy, but in the long run the housing market would be sustainable again, and general prices would fall, thus raising real incomes.”
http://mises.org/daily/3053
The greatest irony of fannie and freddie in particular, is their mission to make homes more “affordable” was completely turned on its head. If the banks and gse who had made the bad loans had been allowed to fail, if the recipiants of those loans would have been allowed to suffer the losses instead of foisting them on taxpayers, the artificially inflated housing prices would have fallen dramatically. Homes would actually be affordable, instead of the “affordable” of government backed mortgage loans. All the bailouts did was prop up housing prices to stem the devestating tide of devalued assets that fannie, freddie, the federal reserve, and the chosen few financial firms (goldman sachs, aig, etc.) were left holding the bag on. Propping up fannie freddie and the rest of the too big to fail crowd is exactly what is making home prices out of reach for so many americans. Not to mention the federal reserves role, interest rate manipulation and credit expansion, in the entire mess.
But you dont want to hear that. It was greedy people. There you go. Dont think too hard, just wring your hands over those “corporations” and the evil “free market” that exists in a nation where the interest rate is set by a government protected banking cartel. The same government that can tell you what toilet and what kind of light bulbs you are allowed to buy. I might be more inclined to buy your “free market did it” stories if one actually existed. As it is you might as well blame it on unicorns.
matt taibi can keep his one liners since he doesnt have a clue
BULLSHIT ISNT PURE! IT RANKS! ILL BE HONEST,,I CANT WAIT TILL THE LOCK UP ALL THE SOBS!!!
Thanks for the link to the pdf on selling points. It looks to honest to be something they would actually hand out. I will be very surprised if this is legit because it makes it obvious what they are trying to do. Most of these things talk about how to meet questions by reinforcing the spin not by explaining why the questioner is correct and the spin pure bullshit.
Slightly off topic but … maybe not:
http://www.digtriad.com/news/watercooler/article/178031/176/Florida-Homeowner-Forecloses-On-Bank-Of-America
“Crackonomics: take literally all the spare money from four square city blocks and turn it into one tricked-out Escalade.”
Matt Taibbi has a gift for throwing exactly the right light on these people and revealing them for exactly what they are.
“Fannie & Freddie” should have kept their day jobs as porn stars.
Nal,
Here’s an interesting discussion about mortgage fraud, foreclosures, rocket docket courts, and robo-signers with Matt Taibbi and Christopher Hayes.
Thanks Nal and Elaine…
But, this incredible crap just
burns me…
All these home owners did was pay for their
house, and B.of A. thinks it is theirs!!!
http://www.rawstory.com/rs/2011/06/04/florida-homeowners-confront-bank-threaten-to-seize-property-after-foreclosure-mistake/
Elaine,
Excellent links.
Nal,
More from Matt Taibbi:
Mortgage Bubble Blamed, Ludicrously, on the Government
11/17/2010
http://www.rollingstone.com/politics/blogs/taibblog/mortgage-bubble-blamed-ludicrously-on-the-government-20101117
Excerpt:
The reason there was a sudden rush to lend out homes to subprime borrowers was not because of Fannie and Freddie, but because the banks had discovered fancy new derivative tools like CDOs and CMOs that allowed them to chop up bundles of home loans and turn them into AAA-rated securities. Countrywide was not trolling the streets looking for jobless indigents to lend mansions to (this literally happened, by the way) because the government was forcing them to. It was because big banks like Goldman and JP Morgan Chase and Bank of America were letting them know that they had a virtually limitless market for mortgage-backed securities, thanks to the new derivative tools that allowed them to sell billions of subprime MBS as AAA-rated investments to suckers like German land-banks and Icelandic trade unions and the like.
Every time the AEI or some other stooge comes out with one of these “But the government made us lend this shit!” arguments, we need to stand up and repeat: no, sirs, it did not. This was not a government program to put people in homes. This was an international fraud scheme to disguise crappy American home loans as AAA-rated safe investments so that they could then be hawked to foreigners and insurance companies and pension funds. The fact that a whole bunch of people who probably didn’t deserve credit ended up owning mortgages and buying homes was actually an incidental side-effect, a kind of collateral damage, to the underlying fraud scheme. Not about greed, Richard Hahn? This crisis was about banks bundling subprime mortgages and selling it off as AAA-rated gold to pension funds.
That means a bunch of jackasses on Wall Street with $1000 suits and slicked-back hair were passing the word to Countrywide lenders that they needed masses of crap loans that they could then turn into investment-grade paper and sell it all off to, say, the state pension fund of Indiana.
That way, thousands of Indianan toll booth operators and teachers and prison guards and janitors who’d been working their whole lives and saving up nest eggs were made into customers of this toxic crap these bankers knew would blow up eventually. Indiana’s pension fund lost $5 billion during the crisis. Virtually every state in the union suffered similar fates. Why? Because a bunch of used-car salesmen on Wall Street sold them fleets of lemons with no engines under the hoods.
I don’t know what Richard Rahn would call making your yearly bonus goal by robbing some janitor in Indiana out of his pension. As a flack for the Cato Institute, I’m sure he would call it good business. But in my mind, if that’s not greed, I don’t know what the hell is.
This has to be repeated: Fannie and Freddie did not invent this scheme to turn subprime crap into AAA-rated gold. They were not the ones who were mismarking dicey home loans; that was the fault of the ratings agencies, who did so because they wanted to retain relationships with the big banks. Here’s what Fannie and Freddie did do; they followed the market and bought lots of these loans after the banks had already collected them and chopped them up and mismarked them. As Barry Ritholz points out, they were essentially just another in a long line of dumb banks that jumped ass-first into the MBS market once it started to bubble up.
There’s certainly a legitimate debate about government housing policy and whether or not it makes sense to have the Government-Sponsored Entities like Fannie and Freddie putting so much of our capital at risk to help low-income borrowers get houses. It may very well be that the Clintonian dictums went too far and were ultimately unsustainable. But that is an entirely separate issue, very different from the question of what caused the mortgage bubble and, by extension, the crash.
Plain and simple, the mortgage bubble was caused by the unregulated mass-marketing of mismarked, or fraudulently marked, subprime mortgages to customers who had no idea or only a very dim idea of what they were buying. This was high-tech fraud and stealing, and not just greed but unconscionable, criminal greed on a grand scale.
As for Richard Rahn talking about observers in the “political class” who blamed the crash on greed “without waiting for the evidence,” let me just ask this: on the literary totem pole, what could possibly be lower than a flack for an industry-fattened think tank taking a paycheck to defend greed? I guess there are all sorts of creatures in God’s kingdom, but man, are some of them ugly.
Fannie, Freddie, and the New Red and Blue
by Matt Taibbi
January 4, 2010
http://trueslant.com/matttaibbi/2010/01/04/fannie-freddie-and-the-new-red-and-blue/
Excerpt:
Everyone was involved in the mortgage scam. At the lender level the deceptions were myriad; liar’s loans, fraudulent income documentation, negative amortization loans, HELOCs, etc. The rush to get as many loans written as possible and then get those hot potatoes moved to the next sucker in the line was furious and extended from coast to coast, sinking one lender after another in Ponzoid debt and indictments.
Then there were the countless deceptions that emerged from the securitization process, the bad math that allowed banks like Goldman to do $474 million mortgage deals where the average equity in the home was just 0.71 percent, and sell 93% of that deal as investment grade paper.
Are we really to believe that the people who did those deals didn’t know what total crap they were selling? That the people who used CDO-squareds to magically turn BBB investments into AAA investments didn’t know how nuts that was?
There were the ratings agencies, who accepted all that bad math and slapped AAA ratings on crap mortgage-backed securities in exchange for the continued largess of the banks upon whom they were financially dependent — the same ratings agencies that later sputtered and coughed up bullshit my-dog-ate-my-homework excuses for mismarking mortgages, with the Moody’s revelation that a computer error caused them to misapply AAA ratings to billions’ worth of MBS being the comic low point.
Then further along in the chain you had crooks like the folks at AIG, who took advantage of the basic nonexistence of derivatives regulation to issue billions in guarantees for these mortgage investments that they had never had any intention of paying off, to say nothing of actually having the ability to do so. And of course underwriting the entire enterprise was the implicit guarantee of Alan Greenspan’s Fed, which made it known time and time again that its modus operandi was to refuse to recognize the existence of bubbles until after they blew up, at which point it would rush in and clean up the mess, bailing out all the chief actors out with easy money.
Everyone had a hand in the bubble, from the congressmen who killed regulatory initiatives to the regulators who snoozed at the wheel to the GSEs to the Fed to the banks to the ratings agencies to the lenders. I don’t think it’s really controversial to say that, but it does seem like there’s an argument brewing about what that across-the-board complicity means.
My own personal feeling is that our recent bubbles weren’t much different than pyramid scams and lotteries; they’re the handiwork of an essentially regressive and deeply cynical political organization that systematically hoovers up taxes and investment money mainly from middle-class suckers, where it eventually gets eaten in short-term cashouts and mostly blown on sports cars and tropical vacations and eye jobs for the trophy wives of Wall Street executives. Crackonomics: take literally all the spare money from four square city blocks and turn it into one tricked-out Escalade.
For me the basic dynamic of the mortgage bubble is some Ivy League dickwad hawking a billion dollars of securitized subprime mortgages to a pension fund, and then Hobie-sailing off into the sunset with a bonus after they all blow up. Of course my seeing it that way might have a lot to do with my own personal psychological prejudices, and I get that some other person with different hangups might choose to focus on Barney Frank deciding to “roll the dice on home ownership” with the GSEs.
But what I don’t see is how anybody can say that all of this happened because Fannie and Freddie rigged the game to get Mexicans in homes, and then the banks and the ratings agencies just reacted organically to the corrupted market and helped the bubble along through no fault of their own. That’s just another (albeit more convincing) version of the early attempt to pin the disaster on the Community Reinvestment Act, which in turn is just another way of playing the red-blue blame game, which in turn is missing the point.
This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.
p.s. Just to get this out of the way, I love Zero Hedge, and Marla Singer has been really nice to me personally. I just don’t completely agree with this particular thing. I don’t see any reason why focusing blame on the banks and the ratings agencies and AIG was “fundamentally flawed,” because, well, shit, they were to blame. The fact that Fannie and Freddie now get to jump in the pigpen with them doesn’t change that for me.
I think in the end what we’re going to find is that all the relevant actors had their own motivations for getting involved in the bubble. Two and now three presidential administrations let the Fed overheat the economy for political reasons that should be obvious. Alan Greenspan, hell, he did it because he loves seeing himself on magazine covers and wanted to keep getting invited to the right Manhattan parties. There were congressmen that converted the expansion of cheap credit into low-income votes. The bankers and lenders went along because the system of compensation on Wall Street is fucked and rewards short-term thinking while ignoring long-term consequences.
To me all of these people were equally guilty of making bad decisions to benefit themselves in the here and now at the expense of the whole in the future. When it comes to bubbles, It Takes a Village, and blaming the whole mess on the “socialist” aims of a pair of government agencies seems off base — particularly since the Randian protocapitalists running the banks benefited every bit as much from this socialism as actual homeowners, and perhaps even more, when one considers that homeowners get foreclosed upon, while bonuses are forever.