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April 23, 2010



"The housing market bubble was the result of government directed lending standards that allowed just about anybody to buy a house with little or no money down."

Incorrect. The loans that caused the problem were not underwritten by Fanny or Freddie. They did not meet Fannie or Freddie standards.

Fannie and Freddie got into trouble for the same reason many other financial institutions got into trouble. They bought mortgage backed securities for their portfolios containing loans that were underwritten by PRIVATE brokerages.

I suggest you read Ronald Reagan economic advisor Bruce Bartlett's comments on this matter.

But as you prefer George W. Bush to Ronald Reagan, the chances of your doing so are not high.


Clogged "assets":
You seem to have omitted the capitulation of banks that were willing to
keep offices, in inner city neighborhoods, to community organizers threatening "boycott" (as if)and protests if they didn't "give money" to folks with "big ideas" and ZERO intellectual or financial integrity on their rap sheets.

And about those credit cards accruing compound interest on the unpaid Laura Ashley/Old Navy outfits "bought" from the suburban strip malls. Aren't those places conveniently located juuuuust remotely enough from the "easy terms" gated McMansions, that one needed a Volvo or BMW to get there?


I didn't omit anything. I simply noted what actually caused the bubble.



Tom Bowler

Consider this from the Wall Street Journal:

HUD's Web visitors learn that in 1999 "Secretary Cuomo established new Affordable Housing Goals requiring Fannie Mae and Freddie Mac—two government sponsored enterprises involved in housing finance—to buy $2.4 trillion in mortgages in the next 10 years. This will mean new affordable housing for about 28.1 million low- and moderate-income families. The historic action raised the required percentage of mortgage loans for low- and moderate-income families that the companies must buy from the current 42 percent of their total purchases to a new high of 50 percent - a 19 percent increase—in the year 2001."

Fannie and Freddie's purchases of subprime loans skyrocketed. The problem wasn't merely that the Cuomo HUD was raising the volume of loans for which taxpayers would be on the hook. It was also encouraging a dangerous decline in underwriting standards at these government sponsored enterprises (GSEs). Says former Fannie Mae chief credit officer Edward Pinto, "HUD commissioned much research aimed at forcing the adoption of more flexible lending standards by the GSEs.

Blake, you may think the pumping more money than ever before into the housing market will have no impact on the cost of housing, but you would be in the minority. The seeds of the housing bubble were planted by government policy.

And then there is this from an article in the New York Times:

The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.


In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.”

Mr. Syron received a memo stating that the firm’s underwriting standards were becoming shoddier and that the company was becoming exposed to losses, according to Mr. Andrukonis and two others familiar with the document.

But as they sat in a conference room, Mr. Syron refused to consider possibilities for reducing Freddie Mac’s risks, said Mr. Andrukonis, who left in 2005 to become a teacher.

“He said we couldn’t afford to say no to anyone,” Mr. Andrukonis said. Over the next three years, Freddie Mac continued buying riskier loans.

Now Blake, you may think Freddie Mac bears no responsibility for the bad loans they were buying, but not everybody would agree. Freddie Mac could have could easily have encouraged higher underwriting standards on the part of lending banks by refusing to buy loans they knew were bad. That's not what they chose to do in 2004.

According to Stan Liebowitz, a University of Texas economics professor, as of July 2009 51% of the mortgages in foreclosure were not subprime loans.

What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.

Many policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates. Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards.

But the focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began -- the third quarter of 2006 -- during which more than 4.3 million homes went into foreclosure.)

Sharing the blame in the popular imagination are other loans where lenders were largely at fault -- such as "liar loans," where lenders never attempted to validate a borrower's income or assets.

This common narrative also appears to be wrong, a conclusion that is based on my analysis of loan-level data from McDash Analytics, a component of Lender Processing Services Inc. It is the largest loan-level data source available, covering more than 30 million mortgages.


Understanding the causes of the foreclosure explosion is required if we wish to avoid a replay of recent painful events. The suggestions being put forward by the administration and most media outlets -- more stringent regulation of subprime lenders -- would not have prevented the mortgage meltdown regardless of their merit otherwise.

Rather, stronger underwriting standards are needed -- especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell.

Fannie Mae and Freddie Mac owned or controlled over half the mortgage market, and Fannie and Freddie were actively undermining rather than strengthening underwriting standards. They were clearly at the root of the housing crisis which overflowed to the entire financial system.


None of this means very much.

To say that "Fannie and Freddie's purchases of subprime loans skyrocketed."

And to claim that HUD "raised the required percentage of mortgage loans for low- and moderate-income families that the companies must buy from the current 42 percent of their total purchases to a new high of 50 percent - a 19 percent increase—in the year 2001." is accurate.

But as the McClachey link notes in paragraph 13: these loans, and those to low- and moderate-income families represent a small portion of overall lending.

The sellers in the sub-prime fiasco were private lending instituions and so were most of the buyers. That is why a buyout of Fannie and Freddie didn't do much to solve the problem.

Your last paragraph is no good either. The topic for discusstion is not the "mortgage market." It is the "subprime mortgage market." Pretty big difference.

And there is another problem. To the extent that there were mistakes in housing policy that exacebated this problem, those were necessarily committed by Bush political appointees at the Department of Housing and Urban Development, Fannie Mae, Freddie Mac, and other agencies. The majority party was perfectly free to pass new legislation and new executive regulations.

As paragraph 13 of the McClachey link states: "at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending.

I have seen some You Tube videos of statements made by Barney Frank at a committee hearing. The statements don't have anything to do with the loans that caused the problem, and even if they did, since when do statements by someone in the minority (at the time) have anything to do with what the Republican Committee Chairman decides to do?

From Jan 2003-Jan 2007 there were no commitee or floor votes on this issue by the Republican House or Senate.


Incidentally, I'm not quite sure of what use Liebowitz analysis is to this issue. But I am certainly open to an explanation. He is free to differentiate between no-money down loans and sub-prime loans if he wants. But they belong in the overall category of hi-risk mortgage loans, or you can call them phony loans, or you can call them fraud.

I don't see how your statement that “Fannie Mae and Freddie Mac owned or controlled over half the mortgage market” is of much use. First, I’m not sure what you mean by “owned” or “controlled. Second, the issue is high-risk mortgage loans, sub-prime or otherwise -- not the “mortgage market” as a whole.

Tom Bowler

Sorry, didn't mean to confuse you with facts.


Well that pretty much speaks for itself. The Liebowitz article doesn't even mention Fannie Mae or Freddie Mac. It notes that stronger underwriting standards are needed for the private companies that caused the crises. Loans underwritten by Fannie Mae and Freddie Mac didn't cause the meltdown. And even if they did, Fannie Mae and Freddie Mac were run by Bush political appointees at the time.

And it's pretty clear that what is relevant with regard to this issue is Fannie Mae and Freddie Mac's role in the loans that caused the meltdown, not their role in the overall mortgage market.

It’s pretty clear what happened here to all but the most avid Bush/Rove partisans.

From 2002-2007 high-risk mortgage loans skyrocketed.
They were created by private lending institutions.
They were underwritten by private entities such as private brokerage houses.
They were bundled in a non-transparent manner and put on the open market as mortgage-backed securities with a triple A rating.
Other private entities began gobbling them up.
Fannie Mae and Freddie Mac began losing huge amounts of market share in the housing market to the private entities that were buying these securities.
Bush political appointees at Fannie Mae and Freddie Mac pushed for Fannie Mae and Freddie Mac to be able to participate in buying these securities.
They were allowed to participate.

Had Fannie Mae and Freddie Mac not been allowed to buy some of these securities, some other private entity would have.
You could argue that Fannie Mae and Freddie Mac helped create demand. But the whole notion that the scam would not have taken place if Fannie Mae and Freddie Mac did not exist is absurd -- not to mention the fact that the Bush administration was running Fannie Mae and Freddie Mac by 2002 anyway.

The following articles have good data. I'll post them again since you apparently did not read them the fist time.



Tom Bowler

You could argue that Fannie Mae and Freddie Mac helped create demand.

I do argue that Fannie Mae and Freddie Mace helped create demand, and in fact I argue that as the largest players in the residential mortgage industry they were largely responsible for the rise of the housing market bubble. I also argue that the primary reason for the bubble was lower collateral requirements on the part of borrowers, and Fannie and Freddie were at the root of that. As the largest players in the mortgage market they set the standard for the entire industry.

I brought up the study by Liebowitz to illustrate that the foreclosure problem, which is at the root of the subprime problem, was insufficient equity in the houses - insufficient collateral - which meant the value of the houses didn't cover the loan balance. Over 50% of foreclosures were not subprime. The foreclosure problem was not limited to the subprime market.

The toxic assets were toxic because a high percentage of the underlying loans were going into foreclosure because the collateral behind them was insufficient. Fannie Mae and Freddie Mac continued buying those loans, but the feeding frenzy in the housing bubble created more loans than even they were capable of buying, thus their loss of market share. It was not because of any prudence on their part. If the mortgage backed securities sold by Fannie and Freddie didn't turn toxic it was only because the government stepped in and took them over in 2008.

Your eagerness to absolve Fannie and Freddie from any responsibility in any of this is obviously partisan - even to the point of blaming Republicans for the mess at Fannie and Freddie because they failed to overcome the largely Democratic opposition to reining in them back in 2003 and 2005. And in your book Democrats who opposed those efforts are the good guys.

This is not to argue that some financial regulation is not warranted. However, I certainly wouldn't want to trust Democrats with it since they will simply use it to pay off favored constituencies, the way the United Auto Workers were favored over bond holders at Chrysler. I don't know if you've noticed but Democrats are the biggest receivers of Wall Street campaign money. As a matter of fact they were the biggest receivers of Countrywide campaign money as well. You know - the subprime mortgage lender? Didn't Chris Dodd get a couple of sweetheart deals from Countrywide's chief? Dodd was a Friend of Angelo, right?

And isn't Dodd writing the financial reform legislation? Doesn't that just warm your heart? Oh, but that must be OK. He's a Democrat. In reality Dodd didn't inherit a mess. He is the mess.


Well you are actually writing some stuff in your last two paragraphs that I can get behind.

And I must say, I like aspects of your blog (your health care articles are quite observant) but I'm not sure your really in a position to be claiming other people's motivations are partisan.

I along with many other Americans will be voting Republican this fall. And one of the more enjoyable aspects of election evening this fall will be watching Barbara Boxer lose.

But I will only be voting Republican so that there will be divided government -- not because I have any faith in the Republican Party at this time.

I fear the deadheads running the Republican Party are going to misread the results.

In addition, should Romney be the Republican nominee in 2012, you will have to tie yourself in intellectual knots in order to write an article endorsing him. I certainly hope you will not go that route should that happen, but based on your past behavior, I won't hold my breath. At least make sure that you delete all the health care articles you have written before you endorse him so that it will be less embarrassing for you.

Tom Bowler

Maybe I misjudged you, Blake. Whenever somebody leaps to the defense of Fannie and Freddie I immediately suspect partisan motivation, so I'm delighted to hear that you're in favor of voting the bums out this fall.

I think the Republican party is going to undergo some changes before all of this is over with. The TEA Party movement reflects a fairly broad libertarian streak in a America. While the mainstream press occasionally reports the rise of the TEA Party as a schism among Republicans, the Republican party is actually embracing the TEA Party. In fact, I would argue that the TEA Party is dragging the Republican party in a more libertarian direction, which is what needs to happen for both to be successful.

As to Romney, how could you possibly think I'll have a problem endorsing Romney over Obama - or anybody else the Democrats throw up there? He's certainly not the ideal candidate, but he's better than any of the Democrats by a very long shot.

Among Republicans it's another story. I could see myself supporting him depending upon who the other Republican candidates turn out to be. I would support Romney over McCain, for example. That said, it's hard to imagine him as my first choice, MassCare being his big negative.

I'm glad to hear you like the blog - as partisan as it is. Thanks.

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