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September 17, 2013 7:11 PM
Peter Wallison: Five Years Later: Don't Mention the Feds
Washington and the media are peddling a narrative that discounts the government's role in the financial crisis.
By PETER J. WALLISON
With the fifth anniversary of the Lehman Brothers collapse, the media have been full of analyses about what happened in those fateful days. We hear plenty about Wall Street rapacity but any discussion of the government's central role in the disaster is neatly avoided. This historical airbrushing is something of a feat, given the facts.
At the time of Lehman's failure, half of all mortgages in the U.S.—28 million loans—were subprime or otherwise risky and low-quality. Of these, 74% were on the books of government agencies, principally the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
On their face, these numbers suggest that the government's housing policy had created the demand for these mortgages, and thus had something to do with Lehman's failure and the financial crisis. But in recent days nearly all articles have focused on the 26% of mortgages that were the responsibility of the private sector. It is as though the vast majority of the subprime mortgages that the government bought didn't exist.
Perhaps you haven't noticed, but since the 2008 meltdown, the government's housing specialist, the Department of Housing and Urban Development, has not been active in the debate over housing policy. That might seem odd, but given the department's role in the mortgage meltdown, it's no wonder the agency would prefer to stay out of the limelight.
There was a time when HUD was not so modest. In 1992, Congress adopted the ironically named Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act, giving HUD the authority to administer the legislation's affordable housing goals. The law required Fannie Mae and Freddie Mac, when they acquired mortgages from lenders, to meet a quota of loans to borrowers who were at or below the median income where they lived. At first, the quota was 30%, but HUD was authorized to raise the quota and over time it did, eventually requiring a quota of 56%. In those heady days, HUD was pleased with its work.
In 2000, for example, when then-HUD Secretary Andrew Cuomo was raising the quota to 50%, the agency actually sounded boastful about its role. Describing the gains in homeownership that had been made by low- and moderate-income families, HUD noted: "most industry observers believe that one factor behind these gains has been improved performance of Fannie Mae and Freddie Mac under HUD's affordable lending goals. HUD's recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable housing." Credit scores or down payments were not relevant; only income and minority status would satisfy the goals.
HUD was still at it in 2004, stating that "Millions of Americans with less than perfect credit or who cannot meet some of the tougher underwriting requirements of the prime market . . . rely on subprime lenders for access to mortgage financing. If the GSEs reach deeper into the subprime market, more borrowers will benefit from the advantages that greater stability and standardization create."
That statement is all you need to understand why, in 2008, 74% of the subprime mortgages outstanding in the U.S. financial system were on the books of government agencies, particularly Fannie and Freddie.
But then Lehman folded, and suddenly the government went silent on HUD's great work. Instead, in 2010, the new HUD secretary, Shawn Donovan, told the House Financial Services Committee: "Seeing their market share decline [between 2004 and 2006] as a result of a change of demand, the GSEs made the decision to widen their focus from safer prime loans and begin chasing the non-prime market, loosening longstanding underwriting and risk management standards along the way." In other words, as Fannie and Freddie plunged headlong into the subprime abyss, HUD was just a bystander.
There is no doubt what really happened. Between 1997 and 2007, HUD's affordable-housing policies under two administrations built an enormous mortgage bubble—nine times as large as any bubble in modern history—and when this bubble collapsed, it caused a 30%-40% decline in housing prices. This left homeowners who had limited financial resources and no equity in their houses unable to refinance or sell, causing an unprecedented number of mortgage defaults. Shocked by these numbers, investors fled mortgage-backed securities, making them useless for short-term financing by financial institutions like Lehman. The result was a panic and a financial crisis.
When it became obvious that government policy was at fault, even Barney Frank—at the time the chairman of the House Financial Services Committee and a principal backer of the affordable-housing goals—confessed that the policy had been misguided. On Larry Kudlow's CNBC show in 2010, Mr. Frank said: "I hope by next year we'll have abolished Fannie and Freddie. It was a great mistake to push lower-income people into housing they couldn't afford and couldn't really handle once they had it."
It is now 2013 and we haven't abolished Fannie and Freddie, and there are still interests that hope—despite the disaster of 2008—to keep the government in charge of housing finance. They may succeed because the public has been steered away from memories of the government's essential role in the financial disaster and instead encouraged to blame the crisis on the private sector.
As a result, Washington has made or is on the way to making a number of wrong policy turns. In 2010, the Dodd-Frank Act became law, stifling financial innovation and impeding the recovery. More recently, a proposal for mortgage reform, jointly released two weeks ago by several administration agencies, eliminates any requirement for down payments or a solid credit record, a policy seemingly designed to reinflate the bubble.
If we ever hope to understand what led to the financial crisis five years ago—and how to avoid another one—we must start looking in the right places.
Mr. Wallison is a senior fellow at the American Enterprise Institute.
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BOOM WSJ -FNMA is not to blame-
"There is no doubt what really happened. Between 1997 and 2007, HUD's affordable-housing policies under two administrations built an enormous mortgage bubble—nine times as large as any bubble in modern history—and when this bubble collapsed, it caused a 30%-40% decline in housing prices."
http://m.us.wsj.com/articles/a/SB10001424127887324576304579073111289821626?mg=reno64-wsj
awesome... stryker rep here!
Long Titan
--------Huge------- our DD finally hits CNN Money. You may not see an initial gap up but America will see the big picture. FANNIE LONG
Check out this story on CNNMoney:
http://money.cnn.com/2013/08/29/investing/banks-mortgage-settlement/index.html
Really? That's an awesome gap up...
Could be due to this news!
http://mobile.reuters.com/article/idUSL2N0GS1GU20130828?feedType=RSS&irpc=43
Fairholme Fund May Increase Bet on Fannie, Freddie
http://on.wsj.com/1a9cQ5R
He stated Obama pushes to shutter FnF. Wiki definition of shutter is to protect home windows from future storms etc... Symbolism of not dismantling but of protective desires. Eloquent choice of words
Super DD...
http://wp.me/p3onFN-CW
Warrants on preferreds - state of FMAC being 2 yrs ahead of FNMA
Enjoy!
Goldman Sacs $1bln fraud in shorting after promoting MBS as high grade investment. Tourre found liable!
link -toady's news-
Looks like truth, wall street, housing crash & the big story is nigh.
Wish Obit would breakdown further (I respect his wisdom & insight)
Stryker IVS here... 13,500 locked and loaded avg 1.30. Let's nail quota good sir ??
I've narrowed down those people deemed credible on this site to one member. Mr.Obiteridctum! Being in the medical field, proof sources, non bias opinion with documentation in clinical studies, & high attention to detail in every input are vital to outcomes. I've watched the pump guys and emotional predictions and I am grateful to cross reference each piece relative to fnma.ob with Obiteridctum's eloquent due diligence and input with works cited.
#brilliant #thankyou
When 5-10 k clears that shift will take place. Until then it's a waiting game. Long hold
You as well... My Q is 'Would we benefit from a merger up-listing significantly more or less than so as an individual fnma.ob up-listing?'
Honestly? A merger would bring better return to investors than $34 up-listing? Can those credible posters advise #blue #obiteridictum #veterantrader thoughts?
My question is? Boom, news hits fnf go private, do we see the hypothetical $34 $54/share price the very next day?
When is Q2 results published.. Profits to be exact
Est time frame of this fnma volatility in SGRCF. I'm in on this as well
Living here in Miami I was quoting an international broker whom has been studying Berkowitz as he is local. To clarify "I am not sure" I have been following your details and diligence and I must say. I do follow your leadership in this. Your precision has been appreciated.
BOOM
It's from higher prices and offshore accounts.
US brokerage can't/aren't willing to short.
Plus that data is delayed. It's not 100% accurate
Hedgies use offshore accounts to short naked.
Please elaborate on churned?
Blue Sir... Can FMCC suddenly pass FNMA or will there always be a coats tail distance down relative to fnma's position.
Me too
#fnma $fnma Boom... great WSJ article. Fannie, Freddie Future Finds a Focus... http://on.wsj.com/19Hssgz
Timeline on lawsuit causing a stir in this deadlock sir? If we see Demarco replaced will that be the sign of an earlier than 12-18month release by the FHFA?
When is the trial date expected to be? Any forces pushing to expedite such a date?