Sunday, July 27, 2008

Is William Poole kidding?

He gets some things right in his op-ed piece in today's New York Times. Fannie and Freddie should have higher capital requirements and they should stop lobbying. Beyond this, I think something should be done about executive compensation for senior management at both institutions. But when Poole says:

In fact, there has already been a test case for how the mortgage market would function without Fannie and Freddie. After an accounting scandal in 2005, regulators severely constrained their activities. The nation’s total residential mortgage debt outstanding rose by $1.176 trillion in that year, even though Fannie’s and Freddie’s stakes rose by only $169 billion, just 14.4 percent of the total. In essence, the market barely noticed that the two agencies’ private competitors were providing 85 percent of the increase in mortgage debt in 2005.

The market barely noticed???? I think we have been noticing quite a lot about mortgages generated in the "pure" private market over the past 18 months or so. And of course, the non-conforming (i.e., private) market for 30-year fixed rate mortgages is, shall we say, problematic at the moment.


Judge Glock said...

I think Poole's point is that most of the relavent trend lines were stable before and after the OFHEO changed Freddy and Fannie's standards, especially as regards to Freddie and Fannie's main mission: providing liquidity to the mortgage market. Post-2005 showed there was certainly a cornucopia of that. Freddie and Fannie's core purpose was never to create higher standards for mortgage underwriting, since that would undermine their central goal of increasing homeownership(especially since the 1995 affordable-housing credit for subprime securities insured by F&F was implemented), and any attempt to create higher lending standards only pushes more people, by definition, into the subprime market, where again we saw that there's plenty of pure market demand.

So Freddie and Fannie cannot provide extra liquidity since the market is already willing to supply plenty of it, and they cannot prevent the private market from indulging in bad mortgages that it rejects. It's enough to make one reconsider their formerly implicit guarantee....After this disaster has passed of course.

Anonymous said...

Mr. Poole also makes the size and therefore taxpayer exposure assertion about the GSEs. Certainly they have more exposure total notional UPB exposure than any other single entity. But what about the fact that so many commercial banks and investment banks behaved similarly in buying high risk "private" label securitized mortgages ? The lemmings analogy from long ago about bank behavior comes to mind. So, the Feds still come to the rescue in the form of loan guarantees to Bear because a break in the chain can break the whole system. In the unregulated derivatives markets(mortgage, commercial, or numerous other risks on the expanding menu)the banks and dealers are counterparties to eachother and buy & sell the same solid-or-poor performing instrumewnts. It doesn't matter. As long as they are all essentially buying and selling the same risks. How does one measure exposure in such a inter-dependent system and what are the appropriate policy prescriptions ? Not to get the GSEs off the hook. Size and exposure still matter. Perhaps a federal plan that would allow the sale of GSE in pieces, with temporary loan guarantees (like JP Morgan received) in the event the GSEs blow it.