Fannie and Freddie Did Not Cause This Crisis 83 comments
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An article in the NY Times, "Pressured to Take on Risk, Fannie Hit a Tipping Point," is causing many people to wonder if Fannie (FNM) and Freddie (FRE) caused the financial crisis.
First, let me clarify the question. We are asking what caused the housing bubble, and, by definition, the cause cannot be explained by changes in an underlying market fundamental. I don't mean that we can't point to, say, a rumor that led to a rapid increase in the price of some goods as speculators rush in, just that bubbles - by definition - are divorced from market fundamentals.
I think a more interesting question is what sets the stage for a bubble to emerge - what allows the rumor, irrational exuberance, etc., to express itself as a bubble? One thing that is needed is liquidity and credit, some way of substantially increasing demand. This is the air that inflates the bubble. Even if all the other conditions for a bubble to emerge are present, if there is no way to inflate the bubble - no way for speculators to rush in and drive up the price - then it won't inflate.
We already know that there was enough available liquidity to inflate a housing bubble. So something went wrong in these markets that allowed the bubble to emerge and then pop, and this is causing us immense problems right now, but what was it?
I think the most important factors are agency problems, the mis-pricing of risk, and the failure of securitization to distribute risks across the financial system.
With respect to the agency issues, there is a long chain between the home buyer, the mortgage broker, and, ultimately, the sliced and diced complex securities that nobody fully understands. Let's take one step in the chain, that of a bank or mortgage broker, either one.
Suppose they are paid a fee, i.e. by the number of mortgages that pass through their hands each month (as, essentially, they were). The more mortgages they can push through, the higher their income. They are required to meet certain guidelines as they do this, but so long as their income depends upon the number of mortgages passing through their hands and not what happens to the mortgages later on - so long as it is a fee-based system - they have every incentive to push the guidelines as hard as they can and to find a way around them whenever possible.
If mortgage brokers had done their job and only made loans to people who could pay them back (i.e. with "reasonable" levels of default), we wouldn't have a financial crisis. So right away, in nearly the first step of the chain, we have to ask what went wrong, why they were willing to take so many questionable loans.
The problem is what economists call an agency issue. The brokers had no stake in the outcome once the mortgages left their hands. The same with banks, all they had to do was process the mortgages, package them up, then sell them and collect their fee.
Think about the incentives here. Suppose you are a mortgage broker and you begin to suspect that the bubble will pop soon, that all this lucrative business might end. To protect the business, should you get worried and start checking mortgages more carefully to make sure that things don't get further out of hand? No, you should accelerate what you are doing, write even more mortgages - nothing you can do can stop the bubble from popping, you are just one of many, many brokers far down the chain - so why not collect as many fees as possible before the gravy train ends? What if everyone thinks this way, and they all rush to sell as many of these things as they can? Mania.
A solution to this is to give each person in the chain a stake in the future outcome of the mortgage. If mortgage brokers' income had been connected to a financial instrument that pays off according to the future performance of the mortgages they write, would they have behaved differently? Probably. (What about homeowners, why didn't they say no? Don't they have a stake in the future price of the home? Homeowners in non-recourse states - and more generally - were basically granted cheap options on their homes. The downside was protected and they had no reason to effectively monitor risk. If prices fell, they could just walk away and know that their other assets remained safe and that their credit reputations could be restored with time. Of course, if everyone walks away other assets such as retirement savings don't remain safe, but that doesn't change the incentive on an individual level.)
Ah, you say, but as you go up the chain why didn't people refuse to take the financial paper, why didn't they conclude it was too risky? The risky mortgages don't have to be stopped at the bottom, this is a linked chain, so why weren't they stopped higher up in the chain where the stakes are higher? Isn't that where Fannie, Freddie, and moral hazard rear their ugly heads? Did they encourage and allow this risky paper to pass through the system?
The mis-pricing and mal-distribution of risk played a key role here (along with poor management decisions in cases where alarms were raised). The agency issues above, and the consequences of the failure to predict and distribute risk are much more important than any moral hazard issues arising from the implicit government guarantee granted to Fannie and Freddie.
Institutions in the shadow banking sector were willing to take large volumes of risky loans as they came up through the system. Why?
The people at the top of this complex chain did not fully understand the risks the were assuming when they took on the subprime business, or, rather, when they took on the complex securities derived from the subprime business. When the bubble popped, it shouldn't have been a big problem if the risk assessment models they relied upon had been correct, and if securitization had distributed the risk as promised. As Brad DeLong notes:
- There is $11T of U.S. mortgages.
- There is $60T of global financial assets.
- Even if we had $2T of losses on mortgage-backed securities that shouldn't pose a big problem for Wall Street--actually 48th and Park Avenue.
So if the risks had been distributed fairly evenly, it's much less likely that we'd be in this mess (the losses of $2T - an intentionally high-balled number - are only 1/30th of global financial assets). It wasn't the mis-prediction of the level of risk that was the biggest problem, the losses could have been absorbed, it was the (unintended) concentration of risk through the failure of securitization that was the most problematic.
Fundamentally, then, it was the agency problems and the failure of risk prediction and distribution models that allowed the bubble to inflate and then cause big problems after it popped.
But back to Fannie and Freddie. The willingness of the non-traditional banking sector - the shadow banking system - to take on these risky assets and still pay investors a relatively high return put tremendous pressure on Fannie and Freddie to follow suit. And their response was unwise - Fannie and Freddie followed the shadow banking sector downward.
There is lots to fault in the behavior of Fannie and Freddie and in government oversight of them - the decisions of management, the lobbying efforts that were funded by their ability to extract a premium from the implicit government guarantee - all of this was a big problem. The bubble, and later the financial crisis expressed itself in these institutions, and they may have also contributed to it to some extent as they took on more risky securities when their business began to go elsewhere.
But the agency issues and the failures of risk models and securitization would have created problems in the largely unregulated shadow banking sector even if these two institutions had taken on nothing but the safest of mortgages. The bubble still would have inflated in the shadow banking system - maybe it's a little smaller, I don't know - but it still would have been large enough to cause big problems when it burst.
The best behavior of Fannie and Freddie would not have been enough to stop the bubble from inflating in other parts of the financial sector, and then turning into a full fledged financial crisis as housing prices plunged.
The problems we are having were caused when lots of available liquidity rushed past the checks and balances that a proper agency provides in pursuit of promises that risk models and complex securities did not deliver. The unexpected losses alone might not have caused a crisis had the losses been widely distributed, but, the losses were concentrated and hidden in ways that created widespread fear and threatened the entire system. Getting rid of that fear is not going to be easy.
Update: Given some of the responses elsewhere to this post and others like it, let me add one more thing. Asking the question "what caused the financial crisis," thinking about it, and then arguing that Fannie and Freddie were not the primary driving forces behind the financial meltdown (though they could have affected the size of the problem as noted above) is not the same as defending Fannie and Freddie.
Whether or not Fannie and Freddie are performing a useful function, and if they are performing a useful function how they should be structured going forward is not a question I've fully resolved. The market failure they are addressing is not entirely evident to me, and until I understand how they improve the efficiency of these markets, I won't take a position.
They certainly should not operate as private entities with an implicit government guarantee as before - that's what set up the situation where the implicit guarantee could be exploited profitably and used to fund lobbyists and ad campaigns to make sure the golden goose kept laying eggs. However, I have posted arguments from other people arguing for their existence, and I am thinking about those as well as arguments against their continuation.
In any case, something to guard against, I think, is to inappropriately blame Fannie and Freddie for the financial crisis and then use that as a reason to shut them down irrespective of any useful function they might serve. So when I see those with an agenda against government intervention trying to do just that - arguing honestly in some cases and dishonestly in others that Fannie and Freddie were a big factor in the crisis so they can use them as an example of government intervention gone awry and also shut them down - a double bonus in their eyes - I have tried to present evidence and arguments that the cause lies elsewhere.
But as I said, that is not the same as defending their existence. My interest is in understanding the true cause of the financial crisis and in stopping it from happening again - and to avoid getting stuck on wrong arguments along the way - not in using the crisis to argue about whether Fannie and Freddie ought to continue as government supported institutions. That can wait for another day.
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This article has 83 comments:
You can say they were not a major part of the problem, but they also were not sole cause of it.
On O'Reilly's "The Factor" , Barney Frank claimed he was not responsible for the Fannie, Freddie debacle because from 1995 to 2007 his party was in the minority on the Housing Committee and he had no power until he became Chairman on Jan. 31, 2007.
This is a Big Lie.
For Your Information;
You should be made aware of the following facts that O’Reilly did not have.
During that 1995-2007 period Barney Frank was not powerless but had DE FACTO CONTROL of the Housing Committee on matters concerning Fannie, Freddie and sub-prime mortgages.
Barney Frank was the ranking member and had all the Dems on that committee voting with him as a block and intimidated a few vulnerable Republicans with threats of racism unless they voted with him on matters concerning Fannie and Freddie.
This gave Frank the majority he needed and DE FACTO CONTROL of the Housing Committee.
Unfortunately, O'Reilly's staff didn't equip him with this information.
The bottom line though is Barney Frank, all the Dems on the Housing Committee and Franklin Raines are the prime culprits in the Fannie, Freddie, sub-prime disaster.
Paraphrasing the WSJ Sept 9, 2008 DEMS and BARNEY FRANK USE FANNIE MAE AS THEIR PIGGY BANK
"But the biggest payoff for Mr. Frank is the "affordable housing" trust fund he managed to push through as one political price for the recent Fannie reform bill.
This fund siphons off a portion of Fannie and Freddie profits -- as much as $500 million a year each -- to a fund that politicians can then disburse to their favorite special interests".
NO WALL STREET SUB-SLIME VULTURES who ran stocks into the ground by FALSE RUMORS & NAKED SHORTING will be prosecuted by SEC.
NO WALL STREET EXECS will be fined/punished/suspend...
Power & Influence runs America and those who perpetrated this scam/fraud on the taxpayers will prove to be insulated from personal risk and above the law..........
IMHO
> jack
Maybe they'll do the same when they realize Congressmen were using Fannie & Freddie as thier private piggy banks
The real cause of the bubble was cheap money created by the Fed. Without that money, Wall Street couldn't have created so much credit and government intervention wouldn't have proved as large a problem.
(minutes in extenso tinyurl.com/3g8hmn )
Quote
H.R. 2575—THE SECONDARY
MORTGAGE MARKET ENTERPRISES
REGULATORY IMPROVEMENT ACT
Thursday, September 25, 2003
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
Mr. FRANK.
…welcome the fact that we have in Fannie Mae and Freddie Mac a means of bringing down housing costs…Fannie Mae and Freddie Mac are sufficiently secure so they are in no great danger…I don't think that we have an impending disaster….
Mr. KANJORSKI.
…We must also ensure that the GSEs continue to achieve their statutory obligation of advancing affordable housing opportunities for low-and middle-income families…
Ms. WATERS.
…we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine
…not to impede their affordable housing mission, a mission that has seen innovation flourish from desktop underwriting to 100 percent loans.
…In 2002 alone, Fannie Mae provided $279 billion in credit serving low-and moderate-income households.
…since the inception of goals from 1993 to 2002, loans to African-Americans increased 219 percent and loans to Hispanics increased 244 percent, while loans to non-minorities increased 62 percent.
I am opposed to a new bureaucracy at HUD to track sub-goals. We should focus on those banks, many of them competitors of these GSEs, who avoid CRA and practice predatory lending.
Mr. NEY.
…The United States mortgage and credit markets are the envy of the world.
…This agency has an important role in ensuring our nation is focused on providing decent and affordable housing for all Americans.
Mr. BACA
…One reason Fannie Mae has been successful is because the current status encourages them to be innovative… to be proactive in reaching out to low-income families…
…we should not interfere with GSEs ability …to meet the needs of low-income families in underserved areas
…GSE must …fulfill the responsibility of their congressional charter and housing mission.
STATEMENT OF FRANKLIN RAINES, CEO, FANNIE MAE
Mr. RAINES
Today Fannie Mae is one of only two companies in America to guarantee the nationwide flow of low-cost mortgage capital at all times, even when other suppliers of mortgage capital cannot or choose not to provide such capital.
…Fannie Mae has amassed over $30 billion of private equity capital to finance $2 trillion of mortgages today.
…In 1994, we launched our trillion-dollar commitment, a pledge to provide $1 trillion in financing for 10 million underserved families before the decade was over.
…In 2000, after we met this pledge, we launched a redoubled new pledge, our American Dream Commitment, to provide $2 trillion for 18 million underserved families before this decade is over.
…lead the market in serving minority families. We pledged to provide $420 billion to help serve 3 million minority families…Fannie Mae boosted our pledge to $700 billion
…Our senior debt of course is rated AAA.
…It is by having new programs, with low down payments, and with the ability to deal with people with impaired credit and other innovations that have really allowed us to expand affordable housing.
…we are one of the only people who will buy mortgages on Indian reservations that are governed solely by the Indian judicial system…
…every time we had a new idea, a new activity, a new product, we had to go and get prior approval, that would … slow the process down…will bring innovation within the housing finance industry to a screeching halt.
Mr. BACA.
…I particularly want to thank Frank Raines…The work you do in the Latino community is very important. Both companies have impressive track records of expanding minority home ownership…
Mr. FRANK.
I don't see any financial crisis. You can always make things better, but I do think we should dispel the notion that we are here because there is something rotten that has gone on.
Mr. RAINES. We are vitally committed to our housing mission…it is our number one priority.
…Our housing mission, however, does require us to raise capital around the world. Our investors invest in Fannie Mae not because they necessarily share our housing mission, but because they think that Fannie Mae will be a good steward of the capital.
Mr MILLER
…either considering safety and soundness or considering how to make credit available…among…racial and ethnic minorities and just low-wealth families in general.
EXECUTIVE DIRECTOR, INSTITUTE FOR OPPORTUNITY AND EQUALITY, NATIONAL URBAN LEAGUE
Mr. SPRIGGS
…the size of the securities and mortgage-backed security instruments issued by GSEs is …a little larger than the U.S. Treasury-note market. And so that means that all of us should be concerned about the safety and soundness of these enterprises, and that they are very important to the security of the American economy, if not the world's capital markets.
…However, it is equally important to remember why Congress created the GSEs…to establish increasing access to home mortgages for underserved areas, and this mission must remain paramount in assessing different measures of safety and soundness…
Unquote
Have a good day
Indeed, the agency problem extends throughout the context of the situation. Perhaps another word to describe this is unfettered greed. Selling more snake oil without haveing to answer to anyone. It would seem disengenuous indeed to then blame the buyers for not knowing better than to buy the snake oil. Some of us will manage to avoid the traps, some can afford to avoid the trap, buy many gullibles are waiting in line for the next promise of improving their lot. Someone simply needs to regulate the snake oil salesman a little more closely, at all levels of the product chain. Fannie and Freddie, should have known better, but in the end the GSE's were just another cog in the system facilitating the spread of the contagion, failing to balance the chartered purpose against the pittfalls of agency greed.
The media has shamed McCain into running a Dole-style, gentlemanly campaign, referring to Obama as "Senator Obama" and completely failing to link Obama to the Black Liberation movement, reparations for slavery, and the Community Reinvestment Act.
McCain has run the least inspiring, least gutsy campaign since 1996, and he's going to lose and electoral landslide.
the actual TRUTH is that it's McCain who's got the party ties to Fannie and Freddie.
the smears about obama ties to ex-Fannie and Freddie execs (inc. Franklin Raines) are just more Rep. swiftboating LIES.
"The non-partisan fact-check website Snopes.com looked into these smears, and their conclusions about Barack and the Fannie Mae executives shouldn’t be surprising: “None of them has (or apparently ever had) ongoing roles with the campaign as chief economic advisors.”
Not an adviser: Frank Raines
Barack estimates that he and Raines have talked for “maybe five minutes” in their lives, and Frank Raines himself even released a statement saying that he is “not an advisor to Barack Obama, nor have I provided his campaign with advice on housing or economic matters.”
Not an adviser: Tim Howard
This supposed connection appears to have been made up completely out of thin air. Snopes.com writes, “We haven’t yet found any tangible connection between Tim Howard and the Obama campaign, however, much less any information supporting the claim that Howard is a ‘chief economic adviser’ to Obama.”
Not an adviser: Jim Johnson
Jim Johnson has never held a paid position with Obama for America. He volunteered to help Barack select a vice presidential nominee but stepped down after just one week."
fightthesmears.com/art...
On Oct 05 10:34 AM Art Rimbaud wrote:
> wow. i feel sorry for the 4 daughters being raised by the joseph
> goebbels. but i'm sure they will turn out as well as gov. palin's
> kids. then he'll be "raising 4 grandaughters" in no time.
>
> the actual TRUTH is that it's McCain who's got the party ties to
> Fannie and Freddie.
>
> the smears about obama ties to ex-Fannie and Freddie execs (inc.
> Franklin Raines) are just more Rep. swiftboating LIES.
>
> "The non-partisan fact-check website Snopes.com looked into these
> smears, and their conclusions about Barack and the Fannie Mae executives
> shouldn’t be surprising: “None of them has (or apparently ever had)
> ongoing roles with the campaign as chief economic advisors.”
>
> Not an adviser: Frank Raines
> Barack estimates that he and Raines have talked for “maybe five minutes”
> in their lives, and Frank Raines himself even released a statement
> saying that he is “not an advisor to Barack Obama, nor have I provided
> his campaign with advice on housing or economic matters.”
>
> Not an adviser: Tim Howard
> This supposed connection appears to have been made up completely
> out of thin air. Snopes.com writes, “We haven’t yet found any tangible
> connection between Tim Howard and the Obama campaign, however, much
> less any information supporting the claim that Howard is a ‘chief
> economic adviser’ to Obama.”
>
> Not an adviser: Jim Johnson
> Jim Johnson has never held a paid position with Obama for America.
> He volunteered to help Barack select a vice presidential nominee
> but stepped down after just one week."
>
>
> fightthesmears.com/art...
>
>
All this finger pointing makes me ill. Look, BOTH presidential candidates had/have ties to a myriad of agencies, people, entities, who had a hand in the making of the current situation. No reasonably intelligent person can say that this whole crisis was "unforseeable"....many people saw it coming, and, as the author of this article states, much of the momentum was provided by brokers who decided to ride the gravy train and then leap off at the last second. Collectively, we are ALL responsible for this, and collectively, we all have to swallow the dern medicine and recover. Face the facts and get on with things, already.
The simple fact is that there was more money to be made by talking a borrower into a zero down payment stated income loan than a fully documented loan with a healthy down payment. The same can be said about Payment Option ARMs, loans with prepayment penalties, Non-Owner Occupied loans, etc. So, not only could an originator make more money because they could do more loans with aggressive guidelines, they could make more money on each loan when a more aggressive loan program was used.
It has become typical over the past decade or so to originate loans with no fee or minimal fees charged to the borrower. So how did everyone make money in the loan origination business? The asset must be worth more than face value in order for everyone in the daisy chain to make money. As is typical with all fixed income instruments, there is a price/yield tradeoff. A higher rate instrument is worth a higher price. This relationship is not linier in mortgages, however, because as rate increases, prepayment risk increases, and the prospect of realizing the benefit of higher yield over time decreases. So, an end investor will be reluctant to pay more and more for higher and higher rate loans. Typically, fixed rate fully documented, low loan to value A-paper mortgages with no prepayment penalties tend to “top out” somewhere around 103% of face value, including the value of servicing. That means that if the borrower is not charged a fee, there is 3% of the loan balance to split between all of the players in the chain. By contrast, Alt-A, Payment Option ARMs and sub-prime loans were worth far more than less exotic loans before the bubble burst. Payment Option ARMs received whole loan bids as high as 106% of face value in 2005. True sub-prime loans reached prices as high as 107% earlier in the decade.
This pricing phenomenon motivated many players in the industry to focus on higher risk products and build incentive and compensation systems to drive business to these product categories. The borrower wants to put 20% down and can fully document income? Why not explain the advantages of higher leverage, lower payment structures, maybe point out that they “qualify” for a much more expensive house than the one that they have in mind if they employ modern financing techniques?
This profit motive was a huge part of the equation, and FNMA and FHLMC were no exception. Higher risk products earned the GSE’s higher guarantee fees and allowed them to compete for market share between themselves and the GSE alternatives (Wall Street Broker/Dealers).
I'd lay much of the blame with the SEC and the 2004 decision to permit investment banks with brokerage units to borrow more than permitted. That is the cause of 30:1 leverage and obscene risk-taking.
I would also fault the total lack of regulation of insurance company parents, who seem to have skipped state and federal regulation altogether in a rush to issue "insured" products that were technically not "insurance." It's those products, with swaps and instruments originally intended to limit risk ($40 trillion, or so, give or take), that are causing the meltdown concern, not the few trillion we may expect from defaulted ALT-A and subprime mortgages.
The total failure of the regulators to have seen this coming means that we will now have a lot of well-meaning regulation in future which will stifle economic growth.
And I doubt that new regulators will be any smarter than their predecessors in addressing the next crisis: the default of municipal and state governments on issued debt. Just as with Fanny and Freddie, the politicians will be afraid to touch this until it explodes.
LordDarley
Every lender in the system looks at F/F and either based their lending on the F/F AUS system, ot they design their business model to operate just outside of the F/F AUS model.
Fannie and Freddie are at the heart of the issue. Their lack of true transparency as the real breadth of their underwriting model is the ultimate in veiled business.
As for the supporters of Fannie and Freddie...James Johnson, with big tie to the democratic party, is perhaps the first of the villlians who needs to be examined. What ever his current role is Obama, his initial inclusion in Obama's team illustrates 2 key items: First, that Obama cannot really make good decisions on hiring personnel and in his associations; Second, that the decision to work with Johnson may be the result of the amount of payments made by Fannie and Freddie influence peddlers to Obama. Obama is #2 on the "I own your soul list"...that is not a good list to be #2 on...
By STEVEN A. HOLMES
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
www.deepcapture.com/th.../
If they choose the first choice, they have lower out of pocket spending since they do not pay for insurance or property tax. The trade off is enormous uncertainty as leases are finite. In upscale neighborhoods, vacancy rates are prohibitive and leases are expensive. It is often difficult to find another similar living situation in the same school district for the children. Your landlord could be a benevolent dictator or a ruthless tyrant. Finally, despite much legislation to the contrary, there is still plenty of discrimination on the basis of race and national origin for many potential renters.
Home ownership provides a guarantee that a family can stay in a school district and provide a level of stability for the children in places where rent regulation is weak or pro-landlord. When you have a situation where the only affordable rental places are in dangerous neighborhoods, there is a real impetuous to take on more risk in owning a home. Keep in mind that many real estate brokers, lenders and Chairmans of the Federal Reserve assured homeowners that home prices would continue in value and that there would always be the free flow of credit to refinance no money down ARMs. That was the sales pitch, and it seemed plausible. Now the situation has changed and the homeowner who wanted stability, an appreciable asset which could be passed onto the children, a mortgage interest tax deduction and a stake in the community has now become the lazy overleveraged freeloader intent on destroying Wall Street. Why is the Community Reinvestment Act to blame for our problems?
Fannie Mae and Freddie Mac are not the problem. The problem is that we continue to ignore widening Rich-Poor gap in America which has forced a significant amount of Americans into a risky margin call which financial institutions cannot cover. It is not an economic issue. It is not a price-to-earning ratio issue. It is not a debt to equity ration issue. It is a social issue. Until we get to the root of this divisive nature of American society, our problems will not be resolved.
----------------------...
The democrats didn't gain control of any committees until February of 2007. The republicans were in charge of those committees and not only didn't oversee anything, were actively encouraging banks and lenders to step up their activities. Bush repeatedly stopped efforts by various state governments to rein in predatory lending practices. Minority loans are but a small percentage of troubled mortgages in this market. Here in S. Florida there are thousands of multi million dollar beach front/ocean view properties that are in default that had nothing to do with Fannie or Freddie. You have to remember that Fannie had mortgage limits that have only recently been raised. You could not get an FHA mortgage over, I believe, 300,000 until recently and a large percentage of defaults are over this amount. This blame Fannie by the repubs is trying to draw attention away from their lack of oversight and incompetence and which also has a not so subtle racial element to it although most FHA mortgages are to white folks.
Why don't you call it like it is--cheap money, greedy lenders, crooked investment bankers and dishonest rating agencies all operating with the blessing of the criminals in Washington, including McCain and Obama.
…welcome the fact that we have in Fannie Mae and Freddie Mac a means of bringing down housing costs…"
Great quote!
This may be the only time ever that Congress has accomplished what it set out to do, just in an unintended way.
Martin Weiss and Warren Buffett have been decrying the dangers of financial derivative leveraging for a very long time--8-10 years at least.
They were ignored in favor of short-term profiteering from the barber who thrived on flipping Florida condos to the investment banker looking to fatten his annual bonus. Freddie and Fannie were indeed in the middle of all this, but were by no means the only culprits here. They DID serve an outsized role IMO though as guaranteers/backers/en... of some very dicey lending practices.
You can say 700 billion is US Sovereign Fund.
Created to support US housing industry.
It some level it is government’s job (and public policy) to help people have neighborhoods with home ownership. That is what makes our nation strong and our future generation competitive. This homeownership and home equity afforded by this safety net is the only retirement nest egg most common citizens have.
If you wake up and think about it you will end up paying more in taxes to get equivalent result. Inflation caused by this 700 billion is also a kind of tax that you and I will have to pay but in different form. In conclusion ‘Expansion required (not just inflation protection) portion of fed’s mandate’ is what put us apart from our friends in Europe.
Thank god for that.
Doing a surgery by a chainsaw
Basic requirement was house be a home and a shelter. To the extent there is no monthly payment shock home owner have to live and pay rent or a mortgage. This was a fundamental assumption. As long as they can afford monthly payment they will stay. That is why home ownership is different kind of investment.
Even this bail out has this assumption. To the extent home owner can afford to make monthly payment lenders with HUD’s co-operation can do loan modification so, people can stay in home.
Unfortunately insensitive consistent prolonged reduction in interest rate and after that prolonged increase in interest rated created dramatic inflated home prices and now deflated home prices.* Just now feds have understood that old fashion monetary policies (raising and reducing interest rate) do not have precise effect. Remember conundrum? Long rates were cheaper than short and world kept on throwing money at leveraged hedge funds. In this global financial market that is loaded by sovereign funds is a different animal. It took so long to have an effect that it damaged the entire credit market. It is like doing a surgery by a chainsaw where you need a laser beam. Now our economy patient is in critical condition. This collateral damage caused by lack of leadership can cost our country a super power status.
Fierce competition and outdated regulations created a disconnect between borrower and lender. Prolonged lower interest rate and inflated home prices created a feeling of have and have-nots home owners. Toward the end 2005-2006 most of the houses were bought by these have-nots who felt left out. To make it affordable they were given teaser rate payments assuming prolonged lower rates.
The real problem was marking to market and it is still a marking to market. SEC is a sleep on the wheel hoping that two wrong will make one right. First when problem started risk pricing was done based on ‘marked to market’, based on previous five years’ experiences. Ignoring the imminent increase in market risk. That caused disaster to investors. Now second time same thing is being done ignoring ‘there is no market CDOs’ there for requiring ‘balance sheet’ and ‘Capital’. Common sense should prevail.
Two wrongs does not make on right.
No market does not mean no value it is a short term assessment bookkeeping problem. There could be a one year ‘suspense account’ valuation or a gray area valuation lead by SEC. Book-keeping should reflect the market and not amplify… either way positive or negative…
Instead SEC, vested interests and politics are creating shotgun weddings and winners and losers of the centuries. This is lead ‘wagon circling’ by the same people who were supposed to help. No wonder banks and lenders do not trust each other and refuse to help. They have vested interest in not helping.
Now decentralized localized negotiated loan modifications with home owners is the only meaningful solution. Each individual mortgage has a home owner and each home owner has a family, neighborhood, township, school and communities that make this nation. Big time games on Wall Street and Washington should not ignore that.
* No one is talking about replacement cost of these houses. Material costs have gone up. These deflated prices of homes will cause another inflated response in future.
Thats like hiring the captain of the Titanic for your luxury liner.
www.nytimes.com/2008/1...
And to keep them honest and balanced, a pretty good article from the same New York Times circa September 1999:
query.nytimes.com/gst/...
Just look at all the swinging gates in this post. How can I be right when everybody's wrong?
To pin this mess on any one party or any one thing is foolish. But we can look at one key entry event that facilitated the whore mongers.
The Mess in fact did start with the 1999 repeal of a depression-era law (Glass-Steagall) that served to keep a check on commercial lending and re-packaging financial products into incomprehnsible paper that was constantly re-sold. Sound familiar?
If we want to pin the blame, McCain chief financial advisor, Phil Gramm, literally inserted in the middle of the night the key provision that allowed the financial industry waters to be muddied with no distinctions between insurance, banking and investing.
Do you really believe the lie that Fannie and Freddie CAUSED this crisis? If you really want to look at who was repackaging the clean mortgage paper into CSE's look no further than the same investment company that was the key reason for the passage of Glass-Steagall -- JP Morgan and the rest of the Investment Banking community. They were doing exactly the same thing they did in 1932 -- re-packaging debt into complex instruments and re-selling.
Though I agree with the premise of this article, there's enough blame to go around. This FIX does not solve the problem until we look at how the accounting rules, lax regulation and religious devotion to unfettered capitalism got us into this mess.
My one regret about the structure of the fix, as far as I can tell, is that the taxpayer still has no real skin in the game. Let's just look at this logically: If Warren Buffet offered to invest his entire wealth to help solve this problem by purchasing paper of unknown real value, do you think that he would exact majority control over the business operations of these companies in which he is literally investing?
We are simply left with the hope that someday about twenty years down the road, most of the honest borrowers will adhere to their debt obligations.
For now, the bankers get their money up front, and it's business as usual.
It's a classic. Can't you people see?
Here's how to prove this yourself: Google "The Curve in the Road by John Mauldin". Look at the two graphs for LIBOR over the last year and for commercial paper outstanding since 1990. Two things stand out: LIBOR also spiked in Dec 07 and from Mar-May 08--to 2% from 0.5%. This past 30 days it spiked from 1% to 3.5%. To me, it doesn't seem unprecedented. I've heard that in the early 1970s a similar spike occurred (can anybody confirm this?). Second, and most damaging: the reduction in commercial paper is not historically abnormal now. From 2000 to 2003, commercial paper dropped 19% (look at the graph: 1600 to 1300). From 2006 to 2008 (today's crisis) commercial paper outstanding dropped 25% (2200 to 1650). Severe yes, but, again, not totally unprecedented.
Can we therefore say that this credit crisis is a 'routine' (albeit severe) response to the credit expansion we've had over the last five years or so? If so, then why did Bernanke and Paulson panic? Could it be that as middle-aged men who have never witnessed a severe credit contraction (such as happened in the early 1970s and early 1980s), they overreacted? Of course, more cynical and sinister theories are possible, but this is the benign theory: they were simply over their heads in responding to a relatively normal credit contraction. And we taxpayers have to pay, as well as setting an extremely damaging precedent for the USA.
One final note: you can argue that "but for" the government intervention, the contraction in commercial paper would have been much more severe, which therefore justifies the intervention. But this is complete speculation. In fact, you can argue that $700 B is not enough to prevent further contraction, and therefore this argument is circular.
PS--A professional economist has independently made a similar argument to the above: Google "What Crisis" by professor John Seater.
even such thuings as ...Obama trying to give affordable housing to minorities? ....really ...even if it was millions in loans....you think that created the problem?
I believe the main problem was the and is the mis-pricing of the mortgage-backed securities/derivatives... The risk was not properly priced...because if it was, everyone would have known what they were getting themselves into. Hence, what it comes down to, is that the lack of regulation and a standard models to price these securities is what created the problem.
ITS LIKE PRICING OPTIONS WITH OUT THE BLACK - SCHOLES OPTIONS PRICING MODEL...it would just be a big mess...which is exactly what happened to the mortgage securities. When someone is able to come up with a standard model, things will get much better.
The problem with the terminology used in this article is that the reader can be confused because FNM/FRE loans are commonly referred to as "agency loans", in the sense of "via government agency". Although we all know that FNM/FRE are not really (or supposedly) "government agencies", the terminology seems to be very common.
In 1988 I received an Alt-A loan to purchase my first home. Although the loan was backed by Fannie, I got it through the VA. I paid $500 for closing costs, and moved in. Since then I've sold that house, bought another, and recently paid the mortgage off. So the Alt-A loans aren't all bad and many of the Alt-A's recipients are vets like me. I still believe that our country should provide low cost home mortgages to the men and women who defend us.
On Oct 05 08:11 PM valueinvesto r888 wrote:
> As everyone casts around looking for the reasons for this crisis,
> everyone seems to ignore the fact that as a nation and on an individual
> citizen basis we are broke. Spending beyond our means for the last
> thirty years has finally caught up to us. Triggers, such as housing
> bubble, etc., are just triggers, not the root cause. Root cause
> is we are broke and deep in debt -as a nation and as consumers.
The collapse is a catastrophic proportion, not just the mortgages but the derivatives. The fact that Fannie and Freddie agreed to take mortgages as triple AAA just because they had insurance without evaluating the insurance credibility is an extraordinary oversight that is tantamount to fraud.
So now... who picks up the check or do we all just lie about our financial institutions and insurers owing close to the net worth of the US in derivatives.
I believe the change in CRA rules are a huge contributing factor, as these changes effectively made banks offer mortgages that weren't in the best interest of investors that later owned these loans including Fannie and Freddie. These rule changes made it extremely difficult to grow your bank and expand if you didn't have a high enough CRA score. Your CRA score went up as you offered mortgages to many people that couldn't afford these loans in the first place. One might reason that they didn't need to use adjustable rate sub-prime loans from Hell, but many of these people had low credit scores and little if any income. If they received the same lower fixed rates offered people with credit scores over 75o, then fixed rates must go up for everyone regardless of one's credit score. This is essential to balance the additional risk associated with high risk individuals. The adjustable got them into the home but time would push them out if they couldn't refinance, or find more income to offset future rate increases. I am of the belief that very few people did not understand this. We had a raging real estate bull market and people saw this as their best and only opportunity to become homeowners. The likely reasoned that they couldn't lose because they could always sell their house for a profit down the road, or at least that's what they thought. So now, we're being asked by many in Congress to bail them out with either a low fixed rate or a freeze on foreclosures. Regardless, this is a rewrite of their contract which makes future contracts not worth the paper they are written on. What does that mean to people with higher credit scores? Higher fixed rates in the future, or an entire block on people with low credit scores and a short income history.
If we follow this path of bailing out people without the sense to avoid these loans, younger families can expect to remain paying rent for a much longer period of time. I expect then the government will attempt to fiddle again with the market. Being that the GSEs are now fully in government hands I see moral hazard for as far as the eye can see.
Only huangjin came close to the root cause of the housing bubble. That would be "easy money" Al Greenspan who kept fed funds below 2% for the 3 years from December 2001 to December 2004, then below 3% for another 6 months, all in an attempt to avoid a recession. Thanks Al. Take a look at the fed funds chart at www.moneycafe.com/libr... and it is obvious when the easy money mortgage boom started and when it stopped.
The CRA did not cause the problem (although it was a participant) as the CRA has been around since 1977 with mid-'90s modifications and few resulting problems, at least until 2005/6.
For rabid Art Rimbaud, go take a look at Senate Bill S.190 of the 05-06 session. Look at the list of co-sponsors. Read the bill. Read the floor speeches. Look at Fannies political "contributions" for the last 20 years and see who ended up #2 after only 3 years in the Senate.
You say "they [Mortgage Brokers] have every incentive to push the guidelines as hard as they can and to find a way around them whenever possible.
If mortgage brokers had done their job and only made loans to people who could pay them back..."
Fannie and Freddie created an automated underwriting system where a computer algorithm checks the data and issues an approval. The algorithm would approve loans in excess of 65% total debt ratio and sometimes not require income verification. This had nothing to do with the Broker/Originator and everything to do with Fannie and Freddie.
The GSE's approved these parameters and the rest of the lenders followed suit, even within their own porfolio products. The Algorithms did the underwriting, the brokers did the originating, not the other way around.
1. you're right, fannie & freddie didn't cause the crisis. THE GOV. did by guaranteeing the loans!
there was no 'inability' to measure risk... THERE WAS NO RISK!
uncle sam picks up the tab! on what level do you NOT understand?
then Clinton informed Fannie & Freddie to increase its portfolio of sub-prime and alt-a debt... as a written ORDER
Risk was in play until the CRA loosened lending STANDARDS, not PRACTICES.
When you loosen lending standards on for a loan co-signed by the government you further exploit the LACK of risk.
things were fine and dandy on GSE's until the lending standards were FORCED to lend to RISKY borrowers PER ACORN and your apparent bosses in the democratic party!
How much did Barney Frank pay you to write this garbage?
Your misunderstanding about the current situation DESPITE your YEARS of education in the field of economics is easy to believe given the fact that you obviously sat through years of left wing economic propaganda without having the faintest idea the 'education' you were receiving was garbage!
Somewhere along the way to your PHD you obviously forgot your 101 course of economics!
But I guess if you really had a grasp on the situation, you would be in the private sector making money instead of on your BLOG
* Beginning in 1992, Congress pushed Fannie and Freddie to increase their purchases of mortgages going to low and moderate income borrowers.
* In 1996, HUD gave Fannie and Freddie an explicit target - 42% of their mortgages HAD to go to borrowers with income below the median in their area. The target INCREASED to 50% in 2000 and 52% in 2005.
* For 1996, HUD required that 12% of all mortgages purchased by Fannie and Freddie be "special affordable" loans, typically borrowers with income less than 60% of their area's median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%.
*Between 2000 and 2005, Fannie and Freddie met those goals every year, funding HUNDREDS of BILLIONS of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.
*Fannie and Freddie also purchased HUNDREDS of BILLIONS of subprime securities for their own portfolios to make money and to help satisfy HUD affordable housing goals. Therefore, Fannie and Freddie WERE IMPORTANT CONTRIBUTORS TO THE DEMAND FOR SUBPRIME SECURITIES.
*Congress demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the Federal budget, at least for the short run. It was a political free lunch. (Until the need for the $700 Billion rescue bill)
*The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters - their bottom line and the so-called common good. First passed in 1977, the CRA was strengthened in 1995, causing an increase of 80% in the number of bank loans going to low and moderate income families.
*Fannie, Freddie, and banks opposed these policy changes at first. But when they found out that following these policies could be profitable - which they were as long as rising housing prices kept default rates unusually low - their complaints stopped. Maybe they could serve two masters.
*They turned out to be wrong. And when Fannie and Freddie went into conservatorship, politicians found out that Federal budgetary dollars were on the line after all.
*The regulatory push for more low-income homeowners dramatically increased the demand for housing. (the irony is that homes didn't become more "affordable", credit became too easy).
*Between 1997 an 2005, the average price of a house in the U.S. MORE THAN DOUBLED. Speculation played a role in the bubble, but much less than did the government policies that increased the demand for housing. Without the surge in housing prices, the subprime market would have never taken off.
*Fannie and Freddie PLAYED A SIGNIFICANT ROLE IN THE EXPLOSION OF SUBPRIME MORTGAGES AND SUB-PRIME MORTGAGE-BACKED SECURITIES. WITHOUT FANNIE AND FREDDIE'S IMPLICIT GUARANTEE OF GOVERNMENT SUPPORT (which turned out to be all too real), WOULD THE MORTGAGE-BACKED SECURITIES MARKET AND THE SUBPRIME PART OF IT HAVE EXPANDED THE WAY THEY DID? I think not.
*Did greedy investors on Wall Street play a role in this mess? Yes
*Did greedy (and under-funded) home buyers on Main Street play a role? Yes, although it isn't politically correct to assign any blame there, especially in an election year)
*But the root of all of this, the people largely responsible for shooting the gun to go back to the original analogy, are the politicians who MANDATED ever-increasing numbers of mortgages to high-risk, low-income borrowers in an attempt to "do good" and increase home ownership in the U.S.
*The consequence? The entire financial system is now at risk.
*Moral? Beware of trying to do good with other people's money. Unfortunately, that strategy remains at the heart of the political process, and of the proposed solution to this crisis.
you could have summarized your statement of who caused the problem as the GOVERNMENT... the conduit, fannie and freddie
co-conspirators as Alan 'low rate' greenspan... charge -negligence.
wall-street acted as capitalist seizing the moment and various accountants doubling as chefs while in the kitchen.
you can perform an autopsy to determine 'actual' cause of death... I choose to categorize the event as a single gunshot to the head
explaining the ACTUAL cause to Dr. Thoma is a waste of time... someone that doesn't listen rarely hears you
I don't pay congress to suggest or warn of potential danger... FIX IT
I want a politician with a SPINE!
and a PAIR
The decline in home values would not have touched off this global financial crisis if unbacked Credit Default Swaps had not been accepted by regulators as sufficient to upgrade the credit rating of banks' housing-backed assets. This is what allowed the huge increase in outstanding credits/debts. This is what allowed the entire chain of agency problems outlined above to occur.
The CDS market is reportedly $45 to $62. Compare that to a total US mortgage outstanding of $10 trn traditional and $10 trn non-traditional. There is clearly something wrong here.
All of Japan's prodigous savings are only $14trn. And these baseless CDSs are $62?
These CDSs are merely a type of braggard's bet, an unbacked, reserve-free, unregulated gamble. But regulators apparently accepted the mere purchase of this bit of frippery sufficient to allow the upgrade of a risky asset -- requiring a reserve of, say, 8% -- to a safe asset -- requiring a reserve of, say, only 0.59%.
This was clearly regulatory failure.
This failure occured globally. European banks bought these things and used them to reduce their reserves and increase their lending also.
Since these CDSs cheaply enabled the "improvement" of asset grade, they allowed massive increases in credit by reducing the required reserves banks and non-banks were required to hold.
These massive increases in available credit were going to go somewhere and they just happened to flow to sub-prime housing.
Before that, it was tech stocks, remember? VC, remember?
It's as though 5 guys, each with a buck to his name, play poker all night and run up huge gains and losses -- some lose thousands of dollars and some win as much -- but when any one of them stands up and says he's cashing in his chips to go home, all hell breaks lose -- because none of the losers can pay what they owe and none of the winners can collect.
This is what happens when the banker hands out chips for free.
Jan VanDenBerg
The fact is a lot of people can't afford it, so why allow people to believe they can. It's a problem that came full circle- right back to the government.
Now, that's not to say that people weren't being greedy, speculative, and borrowing way more than they could afford, but it just means that the government should take some responsibility.
We are at this juncture purely because of unbridled, utopian socialism that was created by the nutjobs of ACORN in alliance with their liberal pals Chris Dodd, Barney Frank and Barack Obama. President Bush and many free market conservatives for years attempted to strengthen regulation of Fannie & Freddie only to be tagged as 'racists' trying to destroy home ownership for minorities. We now reap what the irresponsible socialists on the Left have sown.
Unfortunately, the federal government is now the only institution with pockets deep enough to clean up the gigantic mess they made with their socialistic, direct manipulation of the mortgage market. The simple reality is that without Fannie & Freddie and government pressure to make loans to the unqualified those loans would have never been made. If Fannie & Freddie didn't exist to buy this rotten paper, individual banks would never have accrued the risks in the first place. If Fannie & Freddie didn't "guarentee" this paper MBSs would never have caught fire on Wall Street the way they did and eventually burn down the house. Is Wall Street culpable, of course - they are guilty of greed and stupidity. Crimes not prosecutable in a court of law. However, the real criminals were the negligent liberals who in the name of socialism ignored all the red flags of an artificial housing bubble for years and boldly and nakedly took kickbacks from Fannie & Freddie donors and stood in the way of any new regulation - the very same regulations Barney Frank decries we didn't have!!!!
This is all very sickening and it is poetic justice. Now, the government will end up putting on their books all the toxic loans they forced others to make. What goes around comes around I guess. Unfortunately, we will now all suffer for the utopian kumbaya fantasies that Dodd, Barack Obama and Barney Frank and the idiots at ACORN brought to us. Capitalism wasn't the problem, in a sane world it would never had come to this if it were allowed to prevail and destroy the institutions early on that were generating such risk before the risk could become systemic. Instead, Socialism propped up and rewarded the failures and led directly to the impending calamity.
I weep for America and the idiots it suffers from our dimwitted friends on the Left. I live in Europe and we are taking on characteristics of their society that have absolutely stifled all economic growth and creativity. Why do we want to emulate failing, rotting, socialistic societies? America is better than that and I expect better of its leaders.
You are right, I could have summarized my point as briefly as you stated it above. I guess in my effort to lift the key facts from Russell Roberts' WSJ article, I ended up practically plagiarizing the whole piece well enough to be a speech writer for Joe Biden.
I'd like to take the time to debunk two widely parrotted views on this whole mess:
1. "Since Bush has been President the last 8 years, this whole mess is the fault of Bush andf the Republican policies."
There is plenty of blame to go around for both parties. Check the timeline again. This whole stew of government mandated mortgages to low-income, high-risk borrowers; low interest rates; CRA mandates, etc. was brewing while both Clinton and Bush were in the White House. Just because it is just now boiling over doesn't mean all the cooks watching the pot along the way don't bare part of the blame.
Ironically, it was the BUSH administration that pushed Congress to pass legislation in 2003 to set up a new Federal agency to supervise Fannie and Freddie, both Government Sponsored Enterprises (GSEs). But Democrats pushed back, particularly Barney Frank, then ranking member, now chairman of the House Financial Services Committee. The legislation was blocked. So debunking talking point number 1, BUSH-backed legislation to increase oversight of Fannie and Freddie was blocked by Democrats.
2. "This is all the fault of those capitalist pig, no government oversight loving Republicans. They always scream for deregulation and keeping government out of business to favor their fat cat corporate supporters. Had we had more regulation in place, this wouldn't have happened."
This talking point has gained traction in the media and the Obama campaign because, generally speaking, Republicans ARE for less regulation and less government involvement in business activities. Let the free markets work, as they say.
But talking point number 2 is debunked because it was actually JOHN MCCAIN WHO IN 2006 COSPONSORED LEGISLATION PUSHING FOR GSE REGULATION. Why the McCain campaign has done such a dismal job of communicating this is beyond me. In a speech on the senate floor May 25, 2006, John McCain said:
"For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac...and the sheer magnitude of these companies and the role they play in the housing market...the GSEs need to be reformed without delay."
The bill never made it out of the Senate. The vote went down party lines, with all Senate Democrats voting No, all Republicans voting Yes. So debunking talking point number 2 is the fact that Republicans saw the need to regulate something the government was already involved in. The Democrats did not.
This is why I have to scratch my head when the polsters say the increased lead of Senator Obama in recent days is due to the current financial crisis. They say "whenever the issue is the ecomony, Obama is favored in the polls." Seeing that John McCain is the candidate that had the foresight to see the precarious situation of Freddie and Fannie, and that he tried to do something about it, why do people think Senator Obama, who was complacent on this issue, is better qualified to handle the ecomony?
There ought to be a law against this sort of thing. Spreading the risk.
In a speech on the senate floor May 25, 2006, John McCain said:
"For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac...and the sheer magnitude of these companies and the role they play in the housing market...the GSEs need to be reformed without delay."
May 25, 2006? Sorry, the damage had already been done; as usual, too little too late.
If McCain had been so concerned for so many years, why didn't he raise the red flag during his campaign in 2000? Since he's been in the Senate for 26 years and if he felt so strongly about the GSE's, he certainly has had many opportunities to bring up the importance of reform.
McCain, like Obama, is just another self serving opportunist who will say anything to further his ambitions.
I voted for Bush 2x... but I explicitly remember him touting "record homeowner ship" countless times during his tenure.
It goes both ways, if he claims it, I give it to him...
As for Obama, he is up in the polls because the average American is an uniformed, dumb and lazy too busy looking for a hand out.
Fret not, I have a prescription for the above problem for us Americans... it will be here soon. We NEED some hard times to check ourselves, get off our butts and arm the people with knowledge.
With the financial meltdown en route, its time for an attitude adjustment
The problem of Fannie was not that they lend to people who could not afford a mortgage.
The real problem is that Fannie borrowed very large sums of money on which it promised good returns but now cannot perform because Housing prices are collapsing.
Such borrowing was done by everyone in Mortgage business and all of them are in trouble now.
The most important question to ask is who arranged all this billion dollar funding. The answer is clearly the Federal Reserve, Treasury and its afflated Banks which continued to take in large Foreign money from various countries and the corrupted leaders of those countries.
It is very clear that the above instiutions needed to keep this money away from the respective Foreign Governments ($300 Billion from Russia, $1.5 Trillion from China, $600 Billion from Arab etc).
That Geo-political requirement needed America to have some place to invest in. But the growth in foreign economy was so fast that American Industries could not take on more investments. that was the reason for creating suddenly assistance for poor Americans to purchase Homes. Democratic fools were simply used by these American Financial elite. That is also the reason why they cannot afford to have people like the Maverick McCain become President and MAYBE default on Fannie or Freddie.
The most important question is, So why not let Fannie collapse and make all these foreign depositors go Bankrupt.
Why Paulson added word in the Bailout Bill to also guarantee foreign Banks who purchased Fannie's mortgages?
Why no media or political parties bring out this question?
The answer to these questions will show you the real reason for Fannie's problems.
But the answer will also expose America's economic tricks and strategies and also its weaknesses.
A HINT : That foreign money is actually equal to American "Investment" in all those countries. The American Financial wizards need China and Russia to release their currency to be floated on money markets. But they failed to achieve that. The American Financial crisis is the result.
GAME OVER.
Mark, thank you for your commentary. If you read these comments, would you please clarify, if Freddie Mac (FDMC) and Fanny Mae (FNMA) at their inception (1933) were 100% government agencies, or were they always quasi-government agencies? If the former, what Bill (Law) converted them to Quasi-Government agencies, and when was it passed? Was this part of the deregulation of the Financial Industry? Danka. AFN
Not the borrowers
Not the lenders and their agents
Not Wall Street
Not the home builders
Not the local governments
Not the state governments
Not the fed government
(because of all those tax $)
But the primary responsibility for all of this imo are our federal
legislators who pushed for easier lending, took lots of campaign money
from most of the above list, and failed to enable proper regulation
of all those more than stupid financial instruments.
There are reasons why Congress is held in such low esteem.
Please remember that when you vote in November.
The agency’s were not the core cause; instead they were arguably reluctant participants. In the slash and burn capitalism practiced and perfected by bankers here in the US; the cheap money created by the Fed presented the opportunity and the vendors/bundlers of the CDOs were the perpetrators.
The CDO bundler/vendor knew that many subprime loans would default, as did the mortgage brokers. The kool-aid these two sold the unqualified home buyer (aka sucker) was that house prices would keep going up indefinitely, while full-well knowing this to be impossible. Mortgage brokers went gang-busters originating loans they then sold to the CDO bundlers/vendors. That’s the supply side. Mortgage brokers got rich while it lasted.
Now for the sell side. To make the scam work, the CDO bundler/vendor needed a market and a bullet proof story for the buers of these CDOs. Their story to the buy-side suckers was that by creating mortgage-backed securities with various tranches the securities were AAA. The rating agencies complicity was key. Just as the CDO bundler/vendor had the complicity of the mortgage brokers on the front-end or buy-side; on the back-end or sell-side the rating agencies vetted the CDO/vendor’s story. The CDO bundler/vendor raked it in while the naive buyer (aka sucker) bought triple A rate garbage.
As the scam grew additional markets for these CDO’s needed to be found. These Wall Street guys really are greedy. One of these additional markets ended up being the agencies, who jumped on the bandwagon and started buying, bundling and selling these toxic securities. Another market was the hedge funds and the investment banks. Yes, the wise guys who were running the CDO scam started selling the toxic waste to their own institutions.
Of course the smart money didn’t rely on just the rating agencies opinion, they also covered themselves by buying insurance in the form of credit default swaps. This is really where the whole scam broke down, shaking the world economy to its bones. I’m guessing they were all so punch drunk from all the money they were making, but the smartest of the smart forgot about counter-party risk and got caught in their own scam.
The smart aklecs on wall street thought they had a sure thing; making fees bundling and selling CDOs then making money owning these CDOs while protected themselves with default swaps.
How do we prevent such things from happening again? In my opinion this was a scam perpetrated by criminals who should be treated as such.This wasn't all an innocent mistake, we've all been victimized by these scoundrels. We have to realize we are dealing with criminal enterprise and take appropriate preventive measures to protect ourselves in the future.
Plan B: The Mortgage Investment Bill
for Reviving the Economy
by Stan Muse
The Federal Reserve is out of Federal Funds rate options and now the Congress is about to pass legislation which will be the largest bailout bill in the history of the world. Fannie Mae and Freddie Mac are now penny stocks with perhaps over 1000 bank failures yet to come. The American taxpayer will be told that they and their children will be writing big checks to rescue the Wall Street crooks and congressmen that caused all the problems, while receiving nothing in return.
Anyone who has been following recent congressional hearings knows by now that this is unacceptable to Main Street, the voters who will be firing their congressmen for turning the USA into a socialist country. It is also widely believed that this bailout bill may not be embraced by Wall Street because of its onerous terms even if passed. Finally, it will not provide sufficient liquidity for improving the rest of the economy.
A much more effective and fairer way to end our economic crisis is easily attainable. To state it simply, all Congress has to do is to pass a Mortgage Investment bill which allows individuals a one-time option to use some of the funds in their IRAs to pay off their mortgage balance in full, without any penalty, interest, or taxes for doing so. In return, individuals choosing to exercise this option give up their mortgage interest tax deduction for life. This bill could be passed quickly and independently of any other economy-related legislation currently being debated, or included in the current bill. Individuals choosing this option would need sufficient IRA funds to pay mortgage balance in full. The actual payment to the individual’s mortgage company would be done by the IRA managing institution to avoid fraud.
As one senator recently stated, ‘for most people their home is their IRA’. For many others, their 401-K plans hold many trillions of dollars, much of which by now is parked in money market funds or T-bills as mine is. If these IRA funds could be released to pay off mortgages, we could possibly avert, or at least significantly shorten, the economic recession we now find ourselves in. In fact, no other bailout legislation may even be necessary, although more regulatory legislation is certainly needed.
I asked Allan Meltzer, Arthur Segel, and Ellen Zentner to review this proposal and received some positive responses. Ellen said it seemed to be fool-proof and better than a reverse mortgage. In fact, it is a no-brainer for the homeowner with a large 401-K balance, and for the government. The only people who might object, as Ellen stated, are the bankers who want to keep homeowners dependant on them, especially those in the upper-income group. But even the bankers can not want the government to own a large stake in their business for a multitude of reasons.
It makes sense to allow people to use their IRA money, which they earned, to invest in the best and safest investment they could ever make, their home. Presumably they will need a place to live in retirement on a fixed income. It makes no sense for someone with more than enough IRA funds to cover their mortgage balance to loose their home because they lost their job and can not pay their mortgage. It also makes sense because it is not some form of government bailout which rewards the bad behavior of mortgage companies and unqualified borrowers. Instead, it rewards the good behavior of those who have saved and invested in the economy
If only 5 million people chose this option, for an average of only $200,000 each, the result would be $1 Trillion in paid-off mortgages, providing liquidity to the mortgage industry. By executing the option, an individual’s annual mortgage payment would become disposable income to put back into the economy or back into IRA accounts. To the individual, the effect is the same as lowering taxes. If only 5 Million people were able to put back $20,000 per year into the economy, the result would be a $100 Billion per year stimulus package for many years to come.
In my case, with $800K in IRAs and a secure pension, I would increase disposable income by $1600 per month while reducing the IRA balance by only $160K, but saving over $120K in future interest payments. I could retire, which I can not afford to now, and leave my six figure job to someone else. I could also quickly replenish the IRA money used to pay off my mortgage with the extra income.
Adding a further provision to delay receiving Social Security payments for a year in order to exercise the option would be a baby step towards privatization of Social Security. Anyone financially able to exercise the option should be able to delay the payments. For every 5 million people choosing the option, approximately $100 Billion would remain in the Social Security fund. This could fix our problems with Social Security for good.
Some of the benefits of this plan would be to:
• Immediately increase an individual’s or married couple’s disposable income by tens of thousands of dollars each year while enabling them to become debt free, helping families to stay together
• Save homeowners hundreds of thousands of dollars in mortgage interest payments
• Encourage individual IRA savings by many who have never saved
• Allow many people to retire earlier than they otherwise could
• Create demand for housing, reducing inventory, and stopping the decline in home prices
• Stimulate the overall economy, creating and saving jobs
• Not cost the government anything, and actually Increase federal, state, and local tax revenues by eliminating individual mortgage interest tax deductions, without raising tax rates
• Force the banks to sell their good loan assets to cover their bad loan losses, instead of forcing the taxpayer to buy their worst loans, and increase liquidity for new loans to those who need them
• Allow the free market economy to work through the crisis rather than resorting to socialism
• Not increase the national debt nor the money supply as a bailout would do and contribute to inflation
• Allow the individual home owner to the freedom to become their own banker with the money they earn, reducing America’s dependence on bankers, and changing America from renters and borrowers to homeowners and savers
The merits of this simple plan, the Mortgage Investment bill, for saving the economy, instead of trillions of dollars for a Wall Street bailout which will socialize the finance industry, are obvious and would benefit everyone involved. The individual gets more disposable income and a chance to live debt free, the capital markets get needed liquidity, the government collects more taxes and collects them sooner at the expense of the bankers, the housing market gets more demand, and the general economy gets a much needed boost for the next few years.
Democrats should like this plan because they can claim that it lets the wealthy pay for this mess. Republicans should like it because it increases disposable income, which has the same effect the same lowering taxes. The average voter should like it because it addresses all segments of the economy with a huge economic stimulus package, not just Wall Street, and costs nothing while helping to pay off the national debt and potentially fixing Social Security.
sounds good, but I don't know how many of these 'high-risk' borrowers or simply someone that no longer can afford their mortgage... do they really have 401k's?
I do like the thinking outside the box though. There were and are several measures that wouldn't castrate and demonize capitalism
It started with the passage of the Community Reinvestment Act in 1977 under Carter. Like many Democratic initiatives, the intent was noble - try to make home ownership more affordable for low income people. By 1994, groups like ACORN were demanding quotas from banks seeking to merge. Clinton pushed through broader CRA mandates and Fannie and Freddie were used as vehicles to accomplish the goals by purchasing subprime loans. That is the root cause and Democrats like Barney Frank and Christopher Dodd stopped all efforts at reform in 2001, 2003 and 2005 and warnings about systemic risk from Greenspan and the Bush Administration. It's all on video tape too. The 2005 bill was co-sponsored by John McCain.
Of course, there was complicity from unsavory mortgage brokers, to the Fed which kept rates to low for too long, to Wall Street that sold what it likley knew was junk paper, the ratings agencies, to hedge funds looking to make a quick buck, to real estate investors including flippers, speculators and home buyers and to the widespread availability of new mortgage products such as interest only, payment option ARMs (e.g. pick your own payment), no doc loans and ARMs with low teaser rates. All of this helped create the perfect storm.
However, none of this would have happened or if it happened it would have been on a much smaller and manageable scale if government interference had not distorted the marketplace with the CRA and Fannie and Freddie.
One of the many problems with the TARP legislation is that the root causes were never addressed. Everyone is afraid of the racism charge. The CRA, while noble, needs to be modified to include sound uinderwriting standards. The GSEs (Fannie and Freddie) need to be cleaned up, slimmed down and sold back to the public with NO implicit or explicit government guarantee.
None of this will happen with Obama as President. It will only get worse.
I could go on, but this summaries the issues.
I will see your VA loan and raise you one VA loan that I borrowed from Richard Noggin, who received the same largess you did, but was endowed with a greater sense of gratitude for the assistance it provided a working man.
Cybercorrespondent should keep his creepy (I won't even disgrace the word political) comments buried in the deep recesses of his troubled mind.
It is wonderfull all the world understand who were investor in AIG: Russain 300 Billion,Chaina 287 Billion,South Korea 256 Billion and .......? It is meaning might be this crisis is polotical play to shut them?i
On Oct 05 11:05 AM John Preston wrote:
> Fannie and Freddie are 100% at the center of the mortgage mess...and
> the process began in the early to mid-1990's. To say anything else
> is to deny the actual facts and shift all accountability from the
> top of the financial/governmental... ladder.
>
> Every lender in the system looks at F/F and either based their lending
> on the F/F AUS system, ot they design their business model to operate
> just outside of the F/F AUS model.
>
> Fannie and Freddie are at the heart of the issue. Their lack of true
> transparency as the real breadth of their underwriting model is the
> ultimate in veiled business.
>
> As for the supporters of Fannie and Freddie...James Johnson, with
> big tie to the democratic party, is perhaps the first of the villlians
> who needs to be examined. What ever his current role is Obama, his
> initial inclusion in Obama's team illustrates 2 key items: First,
> that Obama cannot really make good decisions on hiring personnel
> and in his associations; Second, that the decision to work with Johnson
> may be the result of the amount of payments made by Fannie and Freddie
> influence peddlers to Obama. Obama is #2 on the "I own your soul
> list"...that is not a good list to be #2 on...