Mark Zandi: Fannie and Freddie don’t deserve blame for bubble

[flpoljunkie]

Fannie and Freddie don’t deserve blame for bubble


Amid a period of major upheaval in the GOP primary race comes the Republican presidential debate in Tampa — the 17th showdown to date, and the first since former House speaker Newt Gingrich’s (R-Ga.) come-from-behind win Saturday in South Carolina.

By Mark Zandi, Published: January 24, 2012

There is plenty of blame to go around for the U.S. housing bubble, but not much of it belongs to Fannie Mae and Freddie Mac. The two giant housing-finance institutions made many mistakes over the decades, some of them real whoppers, but causing house prices to soar and then crater during the past decade weren’t among them.

The biggest culprits in the housing fiasco came from the private sector, and more specifically from a mortgage industry that was out of control. These included lenders who originated home loans, investment bankers who packaged them into securities, rating agencies that misjudged these securities, and global investors who bought them without much, if any, study.

In other words, America’s mortgage securitization machine was fundamentally broken. It created millions of mortgage loans that, even under reasonable economic assumptions, stood little chance of being repaid — and were not. As a result, hundreds of billions of dollars were lost as defaults and write-downs brought the financial system, and the wider economy, to the brink, requiring a massive government bailout.

Also to blame, of course, were regulators, who gave the private mortgage market little, if any, oversight. The market’s watchdogs were lulled to sleep by a misplaced view that self-interested private financial institutions would regulate themselves. This flawed thinking was most pervasive at the nation’s most important financial regulatory agency, the Federal Reserve.

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[zbdent]

1. but ... but ... but ... reality doesn't fit into a bumper-sticker zinger

that blames liberals!!!

[abelenkpe]

2. thank you! nt

[Festivito]

3. It's a Republican talking point. Truth is irrelevant. /nt

[customerserviceguy]

4. May I add something else to blame for the bubble?

For starters, housing was strongly favored over all other 'investments' a person could make. The deductability of home mortgage interest and real property taxes was a direct subsidy to the real estate market. But the thing that really pumped the hot air into the balloon was the complete removal of capital gains taxes from the sale of any house which generated less than $250K PROFIT for a single person, and $500K for a married couple, EVERY TWO YEARS.

It happened in the mid-90's, during the Clinton Administration. I had quit my tax practice some years earlier (I used to be enrolled to practice before the Internal Revenue Service), but I recognized that this was a tax break like no other ever offered before. Before that, you always had to "buy up" to get a deferral of capital gains taxes, and you could get a forgiveness of that only if you held the house until you were 55 or older, and it was a one-shot deal. I realized that a married couple (if they could find the right houses to invest in) would be able to shield $2.5 million dollars from taxes in a decade.

That way overheated the bubble, and it had to pop, and pop hard. Usually, a housing recovery is evident a year or two after the bottom of a recession, but we're still in free-fall, so great did that bubble rise. I really don't see the bottom of it, but I know it will not happen until the backlog of foreclosures is worked through.

[Neue Regel]

5. This guy is full of shit

It only takes him a few paragraphs to contradict the premise of his own article:

Between 2004 and 2007, private lenders originated three quarters of all subprime and alt-A mortgage loans. These were loans to financially fragile homeowners with credit scores under 660, well below the U.S. average, which is closer to 700. But only a fourth of such loans were originated by government agencies, including Fannie, Freddie and the Federal Housing Administration.

The dollar amount of subprime and alt-A loans made during this period by the private sector was jaw-dropping, reaching nearly $600 billion at the height of the lending frenzy in 2006. For context, this is about equal to the total amount Americans currently owe on bank credit cards. By contrast, government lenders made just over $100 billion in subprime and alt-A loans in 2006.

All this can be seen in the share of total residential mortgage debt insured or owned by Fannie Mae and Freddie Mac. At the start of 2002, before the housing boom got going, the two agencies’ market share accounted for almost 54 percent of all mortgage debt. By summer 2006, the bubble’s apex, their share had fallen to only 40 percent. It is difficult to see how the agencies could have been responsible for inflating the housing bubble at a time when they were losing a full 14 percentage points of market share. Indeed, the opposite was true, as their position in the housing market rapidly diminished.

Fannie’s and Freddie’s originations of sketchy loans actually peaked near $160 billion in 2008, the year regulators placed them into conservatorship. The two agencies had jumped back into the housing market at precisely the wrong time.


Fannie and Freddie certainly didn't cause the housing bubble all by themselves, but to claim that they "don't deserve blame for the bubble" at all, while they insured or owned between 40 - 54% of all mortgage debt, is patently absurd. Mark Zandi "is chief economist at Moody’s Analytics, a subsidiary of Moody’s Corp." Remind me again, what rating did Moody's, S&P, and Fitch assign to all of the subprime mortgage backed securities? I'll give you a hint: AAA, equivalent to US Treasury bonds. If he was so wrong then, why should we assume he is right now?

[flpoljunkie]

6. It is Republicans who want to lay all the blame on Fannie, Freddie

That's the problem and almost no one in the media bothers to set the record straight. It was banks and lenders who pushed subprime loans and a reckless and greedy Wall Street who bundled and securitized these mountains of 'shitty' loans.

[True Earthling]

8. It started with Clinton's HUD director Henry Cisneros...

“In the Spring and Summer of 1994, Secretary Henry Cisneros met with leaders of major national organizations from the housing industry to solicit their views about establishing a national homeownership partnership.”
- HUD, "Partners in the American Dream", May 1995

“In 1994, at the President’s request, the U.S. Department of Housing and Urban Development (HUD) began work to develop a National Homeownership Strategy with the goal of lifting the overall homeownership rate to 67.5 percent by the end of the year 2000. While the most tangible goal of the National Homeownership Strategy was to raise the overall homeownership rate, in presenting the strategy HUD pointed explicitly to declines in homeownership rates among low-income, young, and minority households as motivation for these efforts.” - U.S. Department of Housing and Urban Development Office of Policy Development and Research website

"At the request of President Clinton, HUD is working with dozens of national leaders in government and the housing industry to implement the National Homeownership Strategy, an unprecedented public-private partnership to increase homeownership to a record-high level over the next 6 years.” - Urban Policy Brief Number 2, August 1995

“Federal institutions, policies, and programs alone cannot meet President Clinton's goal of record-high levels of homeownership within the next 6 years. HUD has forged a nationwide partnership that will draw on the resources and creativity of lenders, builders, real estate professionals, community-based nonprofit organizations, consumer groups, State and local governments and housing finance agencies, and many others in a cooperative, multifaceted campaign to create ownership opportunities” - The National Homeownership Strategy

http://theaffordablemortgagedepression.com/2010/03/11/origin-of-the-housing-bubble-the-national-homeownership-strategy.aspx

[flpoljunkie]

9. Not true. The Federal Reserve noted in 2007 that sub-prime CRA loans had low default rates

Fannie and Freddie, however, didn't pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market.

What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.

These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.

In a speech last March, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today's problems. "Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans," she said. "The CRA has increased the volume of responsible lending to low- and moderate-income households."

In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, "that this new lending is good business."

http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html

[bullwinkle428]

7. Wasn't Zandi McCain's "main man" on economics on his campaign? I wonder why

he didn't come out and state this back in 2008?