When a newspaper abandons journalistic standards in its news pages one hardly expects to find much commitment to truth on its opinion pages. Therefore it is not surprising that the Washington Post opened its pages to Tennessee Senator Bob Corker to spread the story that government support for homeownership through Fannie Mae and Freddie Mac was the cause of the housing bubble.
Corker tells readers:
"During the boom years, the GSEs’ affordable housing goals were coupled with a Congress and an administration that saw only the bright side of rapidly increasing homeownership rates. That meant that as housing prices began to spike, it was impossible to make credit slightly more expensive. Without countercyclical market mechanisms able to operate naturally, as housing prices went higher, the GSEs simply raced each other to lower guarantee fees, out of fear that they might lose business from mortgage originators such as Countrywide and Washington Mutual. The result, we now know, was a government-induced bubble followed by a painful collapse."
Okay, maybe Senator Corker really never heard of Citigroup, Goldman Sachs, Lehman Brothers, Bears Stearns, and the other Wall Street investment banks. He may not know that they were making tens of billions of dollars during these years securitizing the worst of the sub-prime mortgages, without any government guarantees except their implicit too-big-to-fail insurance. News may take a long time to reach Tennessee.
But surely the Post knows about privately issued mortgage-backed securities and their role in the bubble. It even published a very good column by Barry Ritholz a couple of weeks back outlining the story. So why does it allow Corker to publish something that it knows is not true? Would it print an opinion column blaming President Bush for actually doing the World Trade Center bombing?
There is a ton of data showing that the blame-Fannie-and-Freddie story is nonsense, but my favorite entry in this debate is a contemporaneous assessment from that well-known promulgator of left-wing propaganda, Moody's:
"Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs [Government Sponsored Enterprises] 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." (Moody’s, “Federal Home Loan Mortgage Corporation, Analysis,” December 2006, p.8)
So here we have Moody's expressing concern about the ongoing viability of Freddie Mac because they are losing out in the subprime and Alt-A market to the investment bank. This is its assessment at the time, before it was apparent (to them) that this market was a disaster in the works.
When someone claims that the bubble was the fault of Fannie and Freddie, they are either ignorant or lying. And, I am saying this as someone who was harshly critical of both at the time and would happy to see the euthanasia of these mortgage giants -- at least if the alternative is to see them returned to some sort of public-private hybrid.
Both companies deserve tons of blame, they could have possibly stopped the bubble cold if either of them had done something radical like announcing that they would require appraisals of rental values and only buy mortgages with a purchase price below some prce to rent ratio (e.g. 18 to 1). However, their failure to be heros does not make them the prime villians. That would be the Wall Street boys, end of story.
Btw, if anyone is interested in knowing what happens to a public agency committed to homeownership in the middle of a housing bubble, that is not run for profit, then they should look to the Federal Housing Authority (FHA). While far from perfect, the FHA did not get caught up in the irrational exuberance of the bubble years. Its market share fell from around 10 percent in the late 1990s to 2 percent in 2005.
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