This piece from the Washington Post does use hindsight. But it has real numbers and it shows Fannie and Freddie’s role (and HUD’s) in creating the debacle. A little more Bill Clinton below the fold:
In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.
Eager to put more low-income and minority families into their own
homes, the agency required that two government-chartered mortgage
finance firms purchase far more "affordable" loans made to these
borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.Housing experts and some congressional leaders now view those decisions
as mistakes that contributed to an escalation of subprime lending that
is roiling the U.S. economy.The agency neglected to examine whether borrowers could make the
payments on the loans that Freddie and Fannie classified as affordable.
From 2004 to 2006, the two purchased $434 billion in securities backed
by subprime loans, creating a market for more such lending. Subprime
loans are targeted toward borrowers with poor credit, and they
generally carry higher interest rates than conventional loans.
Further down the page, some facts and some politics. Lovely:
Fannie and Freddie finance about 40 percent of all U.S. mortgages, with
$5.3 trillion in outstanding debt. Owned by private shareholders but
chartered by Congress, they are exempt from state and local taxes and
receive an estimated $6.5 billion-a-year federal subsidy because they
can borrow money more cheaply than other investors. In return, they are
expected to serve "public purposes," including helping to make home
buying more affordable.HUD officials dispute allegations that the agency encouraged abusive
lending and sloppy underwriting standards that became the hallmark of
the subprime industry. Spokesman Brian Sullivan said the agency and
Congress wanted to increase homeownership among underserved families
and could not have predicted that subprime lending would dominate the
market so quickly."Congress and HUD policy folks were trying to do a good thing," he said, "and it worked."
Since HUD became their regulator in 1992, Fannie and Freddie each
year are supposed to buy a portion of "affordable" mortgages made to
underserved borrowers. Every four years, HUD reviews the goals to adapt
to market changes.In 1995, President Bill Clinton’s HUD agreed to let Fannie and
Freddie get affordable-housing credit for buying subprime securities
that included loans to low-income borrowers. The idea was that subprime
lending benefited many borrowers who did not qualify for conventional
loans. HUD expected that Freddie and Fannie would impose their high
lending standards on subprime lenders.
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You're a bit long on angst and a bit short on true cause & effect analysis. Try a simple tool like an Ishikawa Diagram instead of just shouting louder than everyon else.
For The Record: I had an FHA mortgage on my first home and have one of those evil Zero Down loans on my current home. I've never missed a payment and never will. But according to your twisted uber-market logic, I'm part of the problem. I don't know what the lower classes have been thinking, trying to ape their betters by actually owning a home. Next thing you know, everyone will want to be able to fly on an airplane and drive their own automobile!
Russ,
It is a good thing to point out the obvious. In other words the current crisis is a creation of government interference. But i don't see any warning of a bubble in housing or a crash later on, in any of these write ups.
-Oil
underserved –> undeserving
Russ,
How much of this do you think is the result of perverse public choice incentives?
"by actually owning a home." If that were the case, there wouldn't be a bailout. Unlike you, a small but large enough portion of the population chose loans they could not manage.
My problem isn't with taking a risky mortgage, but those that took risks and will not bear the respective costs. I have a problem with the Federal Government backstopping the companies that made and traded those loans. In addition, banning short selling and backing up MMFs.
For The Record: I had an FHA mortgage on my first home and have one of those evil Zero Down loans on my current home. I've never missed a payment and never will. But according to your twisted uber-market logic, I'm part of the problem. I don't know what the lower classes have been thinking, trying to ape their betters by actually owning a home. Next thing you know, everyone will want to be able to fly on an airplane and drive their own automobile!
You're pretty much relying on a single instance anecdote here. Russ is not saying that everyone will become a bad homeowner, but that instead the type of bad homeowner that would otherwise not get a loan now will get that loan. Increasing the instance of bad homeowners. It would be like if I said that the stock market lost money today, and you happened to own stocks that didn't lose money and cited it as a counter-point to say the stock market didn't lose money.
I'm an economist and used to work in the affordable lending group at Fannie that analyzed the market (i'm no longer at Fannie mostly cause i didn't drink the kool aid). Although the GSEs bought some subprime, they were really late to the party and only dipped their toes in. If you look at Fannie's book now, although performance is worsening it's nowhere near the terrible performance of the market as a whole. As much as I dislike Fannie, the reason the market tanked was not because of them, but because of the lack of incentives in the private label MBS market. No one cared about performance in the private label market, not the broker, not the funder, aggregator, nor investment bank, nor the rating agency that was shopped and pressured into a good rating. The only person that cared was the bag holder, some foreign (usually asian) inestor who got a note that said AAA on it. In Fannie's case, they cared, so they ran loans through their underwriting engines and had put back provisions so the lenders had to eat the bad loans. None of that existed in private label market. Having said all this, homeownership is oversubsidized and that helped to some extent, but that wasn't the cause. The problem was the lack of incentives and monetary policy that lit the match when Greenspan lowered rates to 1% in FF market.
David Peterson, you're right that Russ is not saying that everyone will be a bad homeowner.
Neither is Russ providing any evidence that the subprime loans the GSEs purchased had a failure rate that was out of line with what the GSEs projected.
What Russ is doing is casting aspersions with innuendo, and it is disappointing.
I think the entire issue is about packaging (CDO's) and accounting rules. As I understand, there are about $1.2 trillion in subprime mortgages — and only about 10% of these are in default. That's only $120 billion if you assumed that the underlying assets were worth zero. This just needs to get sorted out with a new method of packaging.
Mike, You're not part of the problem, any more than I'm part of the problem for refinancing and taking the best deal available. And Russ is not saying that.
Here's the thing. Loose credit increased the pool of qualified buyers. If you deny this point, then you shouldn't have supported the GSEs or the HUD regulations in the first place. Increased pool of qualified buyers led to more competition for existing homes. More competition led to higher prices. If you deny these, you need to revisit Econ 101, supply and demand. Increased prices and low interest rates and loose credit led to more refinancing. In one quarter of 2003, it peaked with 77% of mortgage loans being refi loans! Cash out refis peaked too. People were converting bubble equity to cash, so when the bubble burst, many home owners were underwater in their homes, and when economic conditions made them less able to keep up with payments, they couldn't refi or sell the asset to pay the debt.
Meanwhile, originators made money by selling mortgages, and there was the potential for lots of fraud, from misstatements of income to faulty appraisals of homes. And I bet every one of us in a hot housing market knew someone who played the game at least a little on the shady side. And I bet we also all knew someone who got screwed by credit fix refi, where the loan was a 2 year ARM and the originator sold it as something that could be refied when it reset.
Clearly we have a system failure here. Some people want to call it the market run amok. Others are looking for government interventions that might have set things out of balance. Nobody, Mike, is saying that people who played the game by the rules in place and lived up to their obligations were part of the problem. If anything, you made it a little less of a problem than it otherwise would have been.