CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press David Brooks Discovers That It Was All Fannie Mae's Fault

David Brooks Discovers That It Was All Fannie Mae's Fault

Friday, 17 June 2011 05:01

"Night is day," "slavery is freedom," okay David Brooks edited those lines out of his column on Fannie Mae today, but this is pretty much how the rest of it reads. He tells us that the economic crisis was the result of Fannie Mae pushing bad mortgages and buying off everyone who tried to stand in their way.

There's a small problem in this story. The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers.

The trillions of dollars that the geniuses at the private investment banks funneled into the housing market were the force that inflated the bubble to its 2006 peaks. Fannie and Freddie were followers in this story, jumping into the subprime and Alt-A market in 2005 to try to maintain market share. They were not the leaders.

Just to be clear, Fannie and Freddie were serious bad actors. They are both huge companies that do nothing else but deal with housing. It is incredible that they did not recognize the housing bubble and take steps to try to deflate it, and protect themselves, before it grew to such dangerous levels.

Suppose that Fannie and Freddie started demanding appraisals of rental values and refused to buy any mortgage where the ratio of sale price to annual rent was higher than 20. This action by itself likely would have shaken some sense into the housing market. I said this back in 2002, when I first warned of the housing bubble and predicted the collapse of Fannie and Freddie. I also frequently criticized Fannie and Freddie in public forums, including debates with their chief economists. Unlike Brooks, I wasn't worried about non-issues as economic disaster loomed on the horizon.

As much as Fannie and Freddie deserve blame for incompetence and corruption, no serious person can make them the main culprits in this story. The Wall Street crew made hundreds of billions on pushing fraudulent mortgages. Furthermore, if we had competent economists running the Fed, they would have been shooting at the housing bubble as early as 2002 also. This does not mean raising interest rates in an economy that was struggling to recover from the collapse of the stock bubble. (I'll say that again, since people have a hard time understanding "do not raise interest rates." The Fed should not have raised interest rates.)

If Greenspan had paid attention to the economy he would have had the Fed's staff devoted full-time to documenting the evidence for the housing bubble and he would have used every public appearance (e.g. congressional testimonies, public speeches, international forums) to warn of the risks posed by the housing bubble. He also would have used the Fed's full regulatory authority to police the mortgage issuing practices of the banks under its supervision. He also would have prodded other regulators to use increased scrutiny for the institutions under their control. (Greenspan was never shy about making suggestions to others.)

My guess is that these actions would have by themselves crashed the bubble and done so long before it grew to such dangerous levels. They would be essentially costless, so it is difficult to see why a vigilant Fed chair would not have followed this route.

It is difficult to believe that these actions would not have been sufficient to deflate the bubble. After all, the David Brooks of the world can ignore Dean Baker warning of the housing bubble, they cannot ignore the Fed chair issuing such warnings, backed up by endless Fed papers documenting the case.

It is incredible, that even after the collapse of the housing bubble has wrecked the economy and wiped out the life's savings of tens of millions of middle class and moderate income families (this loss of wealth is why people are not spending, it has little to do with "pessimism"), there is still so little effort to re-examine the fixation on homeownership in this country.

Why on earth is President Obama looking to push a renewed Fannie and Freddie type system? Does the public really need to subsidize mortgage interest rates through a government guarantee system, in addition to the mortgage interest deduction?

Brooks might devote some of his fire to these loonie schemes. He might also shoot at the whiners who think no one will issue a mortgage if they have to maintain a 5 percent stake in it. And, he might also call for some criminal investigations of the banks that pushed and securitized fraudulent mortgages. But none of this seems to fit Brooks' agenda.



I had occasion to quote from this 2006 Moody's assessment of Freddie Mac. It does a great job of putting Fannie and Freddie's subprime dealings in context:

Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume -- up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective. (p 6)

Comments (13)Add Comment
Low Hanging Fruit Crowded Out Fannie and Freddie, Low-rated comment [Show]
Stupid Conservatives
written by kye, June 17, 2011 8:20
In response to izzatzo:
Fannie and Freddie were not allowed to underwrite loans that were considered unaffordable, and rightly so. But Bush's HUD changed the definition of "affordable, as the WaPo reported:
"How HUD Mortgage Policy Fed The Crisis"
Washington Post June 10, 2008

"In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers."

In 2004 "President Bush's HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and "must do more." "

In other words Bush forced Fannie and Freddie to compete with the Big Banks on buying subprime, not the other way around.
written by uwo, June 17, 2011 12:08
This is just a friendly reminder that Izzatzo is usually writing satire.
written by ed ericson, June 17, 2011 12:47
crashing the housing bubble in 2002 would have been "essentially costless?" Then where would have the "Bush Recovery" come from? All those awesome $30k-per-month mortgage broker jobs for coked-up frat boys--gone! All those Rinker 30s with twin 350 mags--unbought! All those tasteful McMansions unbuilt, and all those work crews--wherever they came from--unemployed at their $15-an-hour, 80-hour weeks! Ya know, $1200-per-week cash under the table is a pretty good living for a guy with no schoolin' and (maybe) no green card. You kill the bubble in 2002 and there's no end to the misery you cause for everyday idiots. To say nothing of the productive hedge fund and banker quant jobs you'd kill in their cribs. Stamford CT would have been ruined. Not on Greenspan's watch!
complete misread of the column, Low-rated comment [Show]
And let's not forget
written by BH in MA, June 17, 2011 1:59
And let's not leave out the fact that in their haste to bundle these crappy mortgages nine different ways from Sunday, the private mortgage system cut every corner, violated the law, committed fraud, violated the the terms of trust agreements, etc. to the point where it is unclear who owns the note on millions of properties. Who can foreclose if a loan goes bad? Were the mortgages transferred into trusts properly? If not can the securities be considered "mortgage backed"? If not, did the bank selling them commit fraud? My mortgage is current and way above water, but do I have clear title and can I sell my house? How do we fix this mess and figure out who owns what without collapsing the system and/or violating 200 years of legal precedent involving real estate law?
Three cheers for Izzatzo!
written by Elliot, June 17, 2011 9:00
I know we are not supposed to feed the trolls, but I have to say I am in awe of the latest post by Izzatzo.

I espcially enjoyed the line,"It was expectations of this threat of government interference that drove the investment banks to push bad loans before the government could displace them."

This is cutting edge stuff that will lead to a whole new defense strategy in rape trials: I assaulted her because if I didn't someone else would have.

As Pres. Obama said to Donald Trump, "Well played, sir. Well played."
Brooks is so genteel
written by Binky the disconsolate bear, June 18, 2011 4:38
Brooks is so genteel that he managed not to say that "Banks collapsed because gays like Barney Frank made them loan money to ni@@@@@ like they were real people."
That's about it for Brooks' defense.
as someone who lives in Frank's district
written by ezra abrams, June 18, 2011 5:32
It's true Brooks emphasis on Fannie as the main agent causing the great slum is silly, but lets not forget the Frank is corrupt to the core - Fannie Mae was the revolving door between politics and money at its worst
And 1st as ranking member, then as chair of house banking, not only did Frank not thunder against this, he tried to feed at the trough.
I wonder if Mr Baker or any of the readers or posters on this blog remember the story this winter, that Fannie (thats u and me, taxpayers) is footing the legal bills of the disgraced ceo to the tune of 10s of millions.
Frank could have held hearing on this
He is corrupt.
..., Low-rated comment [Show]
written by trf, June 19, 2011 7:21
"btw, please stop repeatedly congratulating yourself on having been bearish on housing before most people. (MANY people were bearish in 03.)"

Right. There were so many bearish people that we ended up with the biggest financial bubble in the history of mankind.
written by FoonTheElder, June 20, 2011 10:40
The right wing apologists never let the facts get in the way of their propaganda. Subprime mortgages were created and promoted by private companies to skim their profit off the top and then pass the problem to other investors. Even then if the rating agencies had properly rated these investments, then there could be no excuse for the market to not price them properly. This is a failure of the free market along with the accompanying fraud.

The right wingers are already propagandizing that ACORN is going to steal the next elections, even though they no longer exist.
"How Fannie’s Silence Opened Way to $3B Fraud"
written by AndrewDover, June 30, 2011 6:10


"Fannie Mae officials never reported the fraud to law enforcement or anyone outside the company."

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.