Monday, July 04, 2011

Mark Thoma and Dean Baker are correct: Fannie Mae and Freddie Mac did not start the crisis.

Rather they followed it.  The data showing how private label securities led us into the mess is here.  Mark Thoma and Dean Baker take down the Will-Brooks-Morgenstern-Rosner meme that in the absence of Fannie and Freddie, we would not have had a financial crisis.

Did Fannie and Freddie behave admirably?  In many respects no, but they did maintain underwriting discipline longer than most of the rest of the mortgage market.  On the other hand, their bad behavior from early in the decade prevented them from leading the market: accounting scandals (Freddie understated earnings while Fannie overstated them) led the companies' regulator, OFHEO, to require both companies to improve their capital ratios, which meant they needed to shrink their share of the mortgage business.

The most disturbing part of the attacks on the GSEs is that it is an indirect method for blaming minorities and the poor for the financial crisis, an argument that is at once ludicrous, disingenuous, and reprehensible. (Once again, I should disclose that I worked for Freddie from September 2002 until January 2004.  I should also note that the fact that I stayed there for such a short period reflects in part a lack of particularly warm feelings for the company.  I do own a few hundred worthless shares of Freddie Mac stock).


6 comments:

Kurt Paulsen said...

Richard - I think there is at least one additional and important piece of data in support of your argument which, to my mind, has been underplayed in this whole discussion.

FHFA released a research report in Sept. 2010 entitled "Data on the Risk Characteristics and Performance of Single-Family Mortgages Originated in 2001 - 2008 and Financed in the Secondary Market."

Of particular importance is Figure 8 (page 16), entitled "Ever 90-Day Delinquency Rates on Higher Risk Single-Family Mortgages Originated from 2001 through 2008 and Sold into the Secondary Market, by Origination Year." While not a great title, the graph shows that for Higher Risk loans, PLS default rates were ALWAYS higher than GSE loans for vintage 2001-2007 loans.

A frequently repeated claim is that the GSEs (whether or not through their "affordable" goals) caused a reduction in underwriting standards and therefore caused the crisis. As you point out, this is false - despite some bad actions by the GSEs. What this Figure 8 demonstrates is that it PLS defaults for similarly situated borrowers were substantially higher. Private securitization cannot be blamed entirely for the crisis: but it cannot be excused. These data seems to suggest that PLS underwriting was worse than the GSEs.

The report and data can be found at: http://www.fhfa.gov/Default.aspx?Page=313 (but I can't seem to link to the Figure itself).

jj said...

Duh, of course PLS performed worse than the GSEs. The GSEs cherry picked the market. The comp is not to PLS but relative to their own prior years underwriting standards. Moreover, the GSEs as the largest buyers of PLS in RMBS supported a market that would have otherwise collapsed of its own weight in 2005.

Jacoblrishly said...

Richard - I anticipate there is at atomic one added and important section of abstracts in abutment of your altercation which, to my mind, has been underplayed in this accomplished discussion.

Property Management

Melrose-Sovereign said...
This comment has been removed by the author.
Melrose-Sovereign said...

Oh Fannie Man/Freddie Mac RIP...

Hoa Management

Janice Miller said...

The trouble in Europe has actualy help US housing market as mentioned by Ed Butowsky in his video, "Fannie & Freddie Restructure Bailout Pay Back"