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Home Publications Blogs Beat the Press Washington Post Helps Senator Corker Spread the Big Lie on Fannie and Freddie

Washington Post Helps Senator Corker Spread the Big Lie on Fannie and Freddie

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Friday, 25 November 2011 09:16

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. 

Comments (9)Add Comment
...
written by ellis, November 25, 2011 10:13
The government might not have caused the bubble, but it sure did aid and abet the banks in profiting from it. And since the bubble collapsed, the banks depend on the government more than ever to heavily subsidize their profits by taking the bad mortgages off their hands and guaranteeing all the others at a cost of trillions of dollars. By the way, that is one reason why the government deficit is so huge.
birthers and GSE deniers...., Low-rated comment [Show]
Would 25% Unemployment be Good for the U.S.A.?
written by Paul, November 25, 2011 12:01
"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"

Hmmm, I know that the Great Depression was celebrated by economists like Joseph Schumpeter, but I thought purported Keynesians had a different view of government involvement in the economy.
...
written by diesel, November 25, 2011 2:55
"purported Keynesians had a different view of government involvement in the economy."

"government" "government", there's that word again. Too vague. Be specific. Specify which branch or better yet, function of government you are referring to. Otherwise your comments are (literally) senseless.

Ever since liberals let Reagan get away with equating "government" with any and all functions they have lost the debate--more "loser liberalism".
Is Corker a Stupid Person's Idea of What a Smart Person Sounds Like?
written by izzatzo, November 25, 2011 3:51
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.


Exactly. Absent GSEs and their equivalents free market lenders always raise price against their self interest during who-could-have-known asset bubbles in order to lose market share when facing fierce competition.

Otherwise there could be a massive market failure as they pumped evermore credit into the shadow banking sector at 40-to-1 leverage ratios - like they do anyway when the GSEs are there.

Any economist knows it's the counter-cyclical players behind the scenes betting the other way that really avoid bust and boom cycles. Thank God for the CounterPartiers who take the real risks so the rest of us don't have to.

As Senator Corker would say when staring at his navel to contemplate such wise declarations, for every Outty there is an Inny and every Inny there is an Outty to clear all markets. Read Econ 101 or at least listen to Dick Armey.

Stupid liberals.
...
written by Stephen, November 25, 2011 4:51
Funny how the people who blame everything on the GSEs never mention a single digit. They know the math does not support them.
FHA report statistics
written by AndrewDover, November 26, 2011 8:02
Some of you might have seen FHA headlines like

"FHA could need taxpayer bailout next year, report says."

"The federal agency that insures more than $1 trillion in mortgages may need as much as $43 billion from the U.S. Treasury to stay afloat if the housing market fails to rebound next year."

But of course, the headline omitted the economic assumptions behind the $43 billion number, which were "In the worse-case scenario — an 18.4% price decrease this year, followed by an 8.3% decrease next year — the agency would need $43 billion to stay afloat, the report said."


http://www.chicagotribune.com/business/la-fi-fha-funding-20111116,0,5863831,full.story


Here are some interesting quotes from the FHA report:

"As noted earlier in this report, all sources of data indicate that FHA is providing financing for at least one-third of all homebuyers requiring mortgage finance. FHA’s purchase mortgage business is a low-downpayment business, with 85 percent of loans insured in FY 2011 having downpayments of less than five percent." Page 20

"In summary, the independent actuarial assessments find that the MMI Fund capital ratio currently stands at 0.24 percent. That represents $2.6 billion in estimated economic net worth against an active portfolio of $1,078 billion. Last year the estimated capital ratio was 0.50 percent and the dollar capital position was $4.7 billion." Page 33

Page 46 says "the MMI Fund will pay out more than twice as much in claims in FY 2012 as in FY 2011, over $35 billion. After accounting for expected premium revenues and property-sale proceeds, core insurance operations will have a net cash outflow of over $19 billion, and the MMI capital resources at the end of FY 2012 would be $13 billion."

But don't worry, house prices will grow 6.1% in FY 2014, according to FHA table 16, page 49.

http://portal.hud.gov/hudporta...11No2.pdf


Somehow I doubt housing prices will exceed the levels reached in 2007 by 2017. If they don't, it looks like FHA will need more money.
...
written by skeptonomist, November 26, 2011 8:26
Fannie Mae worked just fine in the tremendous post WW-II housing boom when it was a real government agency. That did not result in a bubble. But it was gradually privatized, giving its executives the incentive to go after the quick bucks. Freddie Mac was created in 1970 to compete with Fannie Mae on the basis of a profit-making entity. Bubbles are a result of desire in the private sector for fast profits without real production, not anything government bureaucrats can do.
...
written by AndrewDover, November 26, 2011 8:51
The proportion of mortgage money which the GSE provided from 2000 to 2007 is their proportion of responsibility.

Saying they had nothing to do with the bubble is just as silly as saying they were the sole cause.

[url= http://research.stlouisfed.org..._Order.pdf

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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.

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