Were Fannie and Freddie the Real Enablers of the Housing Bubble?

Via Mark Thoma:

Economist's View: Rise and Fall of Non-Agency Securitization:

This is why I have always thought that the argument that "Fannie (FNM) and Freddie (FRE) did it" is a non-starter. Two reasons:

1. Loans owned by Fannie and Freddie can be a problem for the government, but they are not a problem for the financial system--nobody thinks that they could create a linked domino chain of destabilizing bankruptcies. Securitized loans without a public backstop owned by banks, on the other hand...

2. Fannie, Freddie, and Ginnie were losing market share as the housing bubble grew--not gaining it. They did not force more lax lending standards on the private market, they followed the private market down.

Comments

[Bruce Krasting:]

I am not sure how you can reach your conclusion looking at this graph. In 08 F/F were 70% of the total market. Today they have slacked off a bit but Ginnie may has grown tremendously.

So far in 2009 the D.C. lenders have 90% of the new mortgage market.

Without F/F the insane things that happened in 2005 - 2008 would never have happened. The D.C. lenders are responsible for the mortgage mess.

Oct 28 08:14 AM

[One Eyed Guide:]

Bruce,
Look at the break point in 2004 when F/F suddenly went from 70% of mortgages to less than 50%. The non-agency securitization was all the junk that could not qualify for F/F and it added maybe 20 or 30% to market demand - turning what was a normal bubble into a super bubble.

F/F helped make a normal bubble that would not have collapsed the system. Non-agency securitization turned it into a super bubble spread throughout the economic system.

Regulation of non-agency securitization would have stopped the super bubble. F/F were improperly managed (managed like for profits rather than gov. agencies) which caused the original bubble.


On Oct 28 08:14 AM Bruce Krasting wrote:

> I am not sure how you can reach your conclusion looking at this graph.
> In 08 F/F were 70% of the total market. Today they have slacked off
> a bit but Ginnie may has grown tremendously.
>
> So far in 2009 the D.C. lenders have 90% of the new mortgage market.
>
>
> Without F/F the insane things that happened in 2005 - 2008 would
> never have happened. The D.C. lenders are responsible for the mortgage
> mess.

Oct 28 08:30 AM

[Papaswamp:]

F/F made the loans and then passed them off. Again they are making the loans along with the broke FHA....another disaster looming.

Oct 28 08:43 AM

[Free Market...:]

One eyed guide. Have to disagree with what you say. F& F created the momentum and psychology that caused this issue. This is a big ship and does not turn on a dime. The market was already headed into trouble well before 2004. It was just at about that point that some people began to realize it.

Oct 28 08:54 AM

[Ricard:]

Very nice graphic. Thanks Prof de Long for making this accessible - it explains a lot.

Oct 28 09:36 AM

[Mark Alexander:]

Bruce and Free Market,

Brad’s point and the points made by One Eyed Guide are pretty well established and difficult to refute. The idea that Fannie and Freddie created the momentum that produced the explosion in private market securitization from 2003-2007 seems silly on its surface. What happened to private label securitization when Fannie and Freddie eased up in 2005 was full throttle acceleration, not momentum.

If you really believe that Fannie and Freddie ignited the flame, then you must also be in favour of more governmental intervention in the markets. If the private market were so incapable of restraint that it would need to explosively grow crappy mortgage securitizations because of momentum created by Fannie and Freddie, it is clearly incapable of moderating itself.

Fannie and Freddie were definitely a big part of the problem, but their fault is much smaller than greedy and dishonest originators (of the mortgages and the deals), gullible investors, and rating agencies that allowed their ratings to be bought.

Oct 28 09:55 AM

[Smalltownba...:]

Fannie and Freddie did not create the bubble, they were not the cause of the bubble, they were late to the party as this chart shows. In 2004 Fannie and Freddie began doing stated income loans and began to regain a piece of the market which they had lost to private securitization. I have been telling people for three years that they are scapegoats for Wall Street's non-agency securitization of garbage that accelerated into 2005. The entry of Fannie & Freddie into the stated income market created competition for the non-agency feeding frenzy and drove them to push subprime into higher and higher LTV products in order to feed the insatiable appetite for the over rated securities.

Oct 28 10:12 AM

[po folks:]

Fannie, Freddie, Ginnie, and FHA ARE "interventions" in the "market".

Whenever you have the government in the market, whether by providing direct subsidy or guarantee, it changes the underlying values in home financing and ownership from what they would be if 100% privately financed. Throughout the existence of these agencies there has been a "bubble".

I would also hasten to add, that this intervention has provided stimulus to mining, manufacturing, utilities, home service providers, local governments, and a general improvement in quality of life for the US population. The bubble was kept a manageable size when regulations were effective.

But I am afraid that this goose may finally be cooked. Too much greed, too many grabbing for an outsize share of her golden eggs. So sad...

Oct 28 10:25 AM

[surferdude808:]

while the GSEs share of origination fell in this period does not mean they were not contributing to the bubble. you mistakenly do not add their holdings of private label securities to their originations. while the enterprises had a smaller share of the origination pie, which was a good thing, they were loading up their books with private label securities. this provided an outlet for the subprime, non-traditional mortgages, which did add fuel to the fire.

Oct 28 11:00 AM

[MyrEnforker:]

F/F weren't the reason the mortgage mess happened, but they were a HUGE contributor. It wasn't directly in their actions. It was in the general belief that mortgages could be standardized and therefore sold freely in a liquid market.

The stock market is very liquid, because with each share of stock, you know what you are getting. The financials and relevant company events and information have all been standardized, released in quarterly/annual financials, and rules enforced by the SEC.

The mortgage market could NEVER be standardized unless the same standards are enforced. If people could release quarterly financials, relevant personal events with regards to payment of mortgage, etc., then maybe I could see a liquid mortgage market.

That chart shows me that securitization of packages of 'standard' mortgages became rampant in '04. Without the securitization of mortgages, the banks would not have had all that extra money and leverage to go lending crazy. Then without that money, there would have been WAY less incentive do all that CRAZY stuff that drove the market to higher heights (CRAZY = exotic mortgage, fraudulent mortgages, etc.)

Oct 28 01:05 PM

[Mark Alexander:]

surferdude,

"Loading up their books" is an overstatement. Based on 10-K’s, Fannie’s holding of subprime and Alt-A peaked at around $75B at year-end 2009 – around 3% of Fannie’s mortgage credit portfolio, and around 3% of the balance of these mortgages outstanding at the time.

Oct 28 02:56 PM

[Ricard:]

Excellent comment.

I would add to your list of reasons greedy speculators and an all-too-believing prospective home-owner.


On Oct 28 09:55 AM Mark Alexander wrote:

> Fannie and Freddie were definitely a big part of the problem, but
> their fault is much smaller than greedy and dishonest originators
> (of the mortgages and the deals), gullible investors, and rating
> agencies that allowed their ratings to be bought.

Oct 28 11:14 PM

[Mark Alexander:]

Correction to previous comment: Fannie's subprime holdings peaked at year-end 2007.

Oct 28 11:14 PM

[Moon Kil Woong:]

This chart just shows that the Mae's got burned by the securitization trend right as it collapsed leaving all taxpayers to foot the bill. I my mind that is contrary to the argument is that they aren't the cause.

If they weren't there to eat all the loss I doubt if people would have indulged to excess the way they did. Things only got really bubbly when they started to buy up all the trash. In my mind that makes them one of the biggest contributors and the chart vindicates that view. Not the other way around.

Oct 29 01:01 AM

[surferdude808:]

looking at their pls holdings at 2009 as a share of their total book is an apple/orange analysis. what is more relevant is the share of pls to the flow of total mortgage assets acquired during the bubble years, which is way more than 3%. in general, prices are set at the margin. since the enterprises were buying pls at the margins, this contributed to the run-up in housing prices, which fueled the need for "innovative" mortgages so that buyers could purchase homes with higher prices. the enterprises played a very large and direct role in the housing bubble.


On Oct 28 02:56 PM Mark Alexander wrote:

> surferdude,
>
> "Loading up their books" is an overstatement. Based on 10-K’s, Fannie’s
> holding of subprime and Alt-A peaked at around $75B at year-end 2009
> – around 3% of Fannie’s mortgage credit portfolio, and around 3%
> of the balance of these mortgages outstanding at the time.

Oct 29 09:58 AM

[Old Rick:]

It is even worse than that. In 2005, Johnson at Fannie initiated a stealth "bribery" (for lack of a better word) campaign to buyoff several Senators of both parties to scuttle the Hagel/Dole/McCain FNM/FRE reform measure (S.190 I believe). That measure was also backed by Bush (who favored greater oversight back in 2003) but, of note, it was opposed by BHO, a huge recipient of FNM/FRE bucks. You can read about it in the excellent NYT series, "The Reckoning", available on-line. Thus, the politicians were the real enablers of this mess that they now purport to want to clean up.


On Oct 28 08:14 AM Bruce Krasting wrote:

> Without F/F the insane things that happened in 2005 - 2008 would
> never have happened. The D.C. lenders are responsible for the mortgage
> mess.

Oct 29 10:44 AM

[Mark Alexander:]

Surferdude, have you actually looked at Fannie's financials or are you making this stuff up as you go along? What you are saying sounds good, but it doesn't fit the facts (at least my understanding of them). Securitization was exploding. If you look at year-over-year or quarter-over quarter changes in Fannie's holdings of sub-prime and Alt-A, they changes are piddly (i.e., the marginal rate is about the same as the snapshot). If you see otherwise, it would be great to see some data.

OldRick, there is no doubt that Fannie and Freddie ;played the old fashioned corrupt political game with the rest of them ... and they were and continue to be a major problem. They just weren't as bad as the combination of crappy banks and Wall Street.

On Oct 29 09:58 AM surferdude808 wrote:

> looking at their pls holdings at 2009 as a share of their total book
> is an apple/orange analysis. what is more relevant is the share of
> pls to the flow of total mortgage assets acquired during the bubble
> years, which is way more than 3%. in general, prices are set at the
> margin. since the enterprises were buying pls at the margins, this
> contributed to the run-up in housing prices, which fueled the need
> for "innovative" mortgages so that buyers could purchase homes with
> higher prices. the enterprises played a very large and direct role
> in the housing bubble.

Oct 29 07:35 PM

[W.E. Heasley:]

The problem is well explained in John B. Taylor's book Getting Off Track.

Cheap money created by the Federal Reserve from 2002-2004 caused the environment for the enablers to become enabled. The lag time from 2004 until 2006 to recover to the Taylor Rule principle further enabled the enablers including Fannie and Freddie.

In other words, the Government caused the problem and varying Government Entities became enablers as well as other entities.

Oct 31 08:05 PM