Thursday, January 07, 2010

The Risk Culture at Freddie Mac pre-2003

I am in the middle of writing a default paper (I know, who isn't); in the course of looking up references, I Googled (Bob) Van Order and (Chet) Foster, who wrote two of the seminal papers on mortgage default modeling. The first entry that shows up is this very good blog post from Arnold Kling from about a year ago. He finishes the post with:

I was "present at the creation" of Freddie Mac's risk management culture--all of those people who had absorbed the Foster-Van Order approach to pricing mortgage default risk. That was the culture that Syron rejected. I was proud to be part of that culture, and I would have felt hurt no matter how Syron's new policy turned out. But the new policy drove Freddie Mac to the brink of bankruptcy, if not beyond. As a result, I believe that the risk-assessment models that we so proudly developed will die along with the company.

I read the post when Arnold first wrote it, but it struck me as especially poignent now. As it happens, when I was at the ASSA meetings, the people I went to dinner with on both nights all either once worked at or currently still do work at Freddie. This was not by design--they were just all people I like hanging out with, because they are all caring and exceedingly competent people. They are the sort of people that led me to want to work at Freddie during my brief absence from academia. That culture that Arnold writes about was pretty special, and it would be nice if somehow we could get it back.


Anonymous said...

AK..."To implement the model, you have to specify a probability distribution for the path of future house prices."

Which is nothing more than a wild guess. No mortal knows the future. That's why the rest of the world uses 20% down payments, or more.

A small number of 3% down loans as charity to the poor is doable (as long as $70,000 homes are involved). The taxpayer can pay for the small number of charity defaults. Scaling up this model to the entire nation is unworkable, especially if enormous McMansions are mandated by the local zoning board.

The losses from scaling up this program are beyond taxpayer ability to bail out.

3d tutorials said...

We will probably slide by this time on this crisis, but just barely. Unfortunately, we are facing two more crises that are just as bad if not worse than this one - energy and Social Security. said...

I would love to read more about this topic.

Anonymous said...

The big future crises is Medicare/Medicaid, and private sector health care costs. Unfortunately, this bank bailout has used up so many resources that there is nothing left to deal with anything else. If a true national emergency comes up, there will be nothing that can be done.

kanishk said...

Scaling up this model to the entire nation is unworkable, especially if enormous McMansions are mandated by the local zoning board.


Anonymous said...

What a great resource!