Report: Don't blame Fannie, Freddie
McClatchy examines claims of GSEs' critics
By Inman News, Monday, October 13, 2008.Loosely regulated subprime lenders and investment firms that bundled loans into private-label mortgage-backed securities -- not Fannie Mae, Freddie Mac or banks subject to the Community Reinvestment Act -- were the main drivers of the housing boom and bust.
That's the assertion of a McClatchy Newspapers story published Sunday that examines the emergence of "a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans."
In 2005 and 2006, private-label lenders securitized almost two-thirds of all U.S. mortgages, the story noted, surpassing Fannie and Freddie for the first time. In 2006, more than 84 percent of subprime mortgages were made by private-label lenders, the story said, citing Federal Reserve data.
During the boom, Fannie and Freddie employed tighter underwriting standards than many private-label lenders, many of whom have since gone out of business. According to a study by researchers at UC Irvine, accounting and management scandals forced the government-sponsored entities, or GSEs, to cut back on purchases and guarantees of mortgages beginning in 2003, clearing the way for dramatic growth in securitizations by "aggresive" private-label lenders.
Today, Fannie and Freddie are once again securitizing the vast majority of mortgages because investors shun those that lack the guarantees provided by the government-chartered companies.
The story also questioned claims that the Community Reinvestment Act -- which requires federally regulated banks and financial institutions to demonstrate that they are lending money in underserved communities -- contributed to the subprime meltdown or put pressure on Fannie and Freddie to purchase risky loans.
Most loans made by lenders governed by the Act have not been higher-priced loans, and the law has "increased the volume of responsible lending to low- and moderate-income households," Janet Yellen, president of the Federal Reserve Bank of San Francisco, said in a speech in March.
The National Community Reinvestment Coalition and more than two dozen civil rights and housing groups today issued a statement calling attacks on the Act "an attempt to deflect attention away from the real problem affecting our financial system" -- failed regulatory policy and oversight.
Media Matters, a group that claims to monitor, analyze and correct "conservative misinformation in the U.S. media," has also challenged claims that the Community Reinvestment Act contributed to the subprime meltdown.
But if Fannie and Freddie maintained relatively conservative underwriting standards for mortgages they securitized, guaranteed and sold to investors, both companies also bought as investments billions in mortgage-backed securities issued by private-label lenders, in part to meet affordable housing goals set by Congress.
In August, Freddie held about $207 billion in private-label mortgage-backed securities in its $761 billion investment portfolio, while Fannie had $104 billion in such investments in its $760 billion portfolio. While those investments have contributed to mounting losses at both companies, they represented only a small fraction of securitizations by private-label lenders.
Now that they are under government control, Fannie and Freddie are expected to step up such investments as part of efforts to unfreeze credit markets.
Bloomberg News reported today that Fannie and Freddie -- which were placed under government conservatorship Sept. 7 -- have notified bond traders that each has been ordered to invest $20 billion a month in existing subprime, alt-A and nonperforming prime mortgage-backed securities.
***
What's your opinion? Leave your comments below or send a letter to the editor.
All rights reserved. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this content without permission is a violation of federal copyright law.
You must login or register to post a comment.
Submitted by Connie Clark on October 13, 2008 - 1:37pm.
I'm surprised you would even take the word of McClatchy Newspapers or Media Matters...as it's a well documented fact that both are liberal, biased groups who are totally in the tank for Obama and the Democratic Party and will say anything to make either one look good.
Fannie and Freddie, the CRA, and multiple congressman and Wall Street are all to blame...and those who say differently are just trying to cover the very obvious facts.
I would suggest that they take a closer listen to the congressional hearings and proposed bills regarding Fannie and Freddie over the past 7-8 years before they try to place the blame strictly at Wall Street's feet.
Submitted by Kris Simpson on October 13, 2008 - 1:58pm.
Franklin Raines, the Fannie Mae CEO from 1999 to 2004, decided to retire early, taking millions with him, under a cloud of accusations that he had cooked the books to make it appear the company was making money instead of going head-long into debt. Another player in this financial mess is Jamie Gorelick. That name should ring a bell with every American. She seems to surface right at the heart of every American disaster in the last 15 years. Ms. Gorelick was vice-chair of Fannie Mae from 1997 to 2003. Like all the others, she left with millions in her pocket while declaring that Fannie Mae is among the handful of top-quality institutions.'
The next year it was found that Fannie was $9 billion dollars in the red. Oddly, this $9 billion had been overlooked in the books Ms. Gorelick and Mr. Raines kept.
Lets put Mr. Raines and Ms. Gorelick on the stand. The American people deserve to hear how much they gave lobbyists to pass on to their friends in Congress to keep the blinders on. That number is a staggering $16.2 million dollars since 1997. That amount bought very large blinders. And, it bought time. It bought time for the likes of Raines and Gorelick to make their millions and bow out before the bottom fell out.
Submitted by Steve O on October 13, 2008 - 2:42pm.
Was this article scraped directly off DailyKos?
Amazing, simply amazing!
Just did some research for a client of mine in an area of town that appears to offer great opportunity for an investor. Did a 2 mile radius search. Out of 115 on the market 50% of the homes are currently in foreclosure. Most are currenly owned by FNMA. They were purchased 1-3 yrs ago for $135k - $165k and all are currently listed for $20k or less.
This area of town has been greatly impacted by the CRA (read redlined area prior to 1999).
Not sure where DailyKos (oops McClatchy News or Media Matters) get their numbers from. But the reality is that FNMA underwriting standards were definitely lax in this area of the USA.
Submitted by Stephen Richard Levine on October 13, 2008 - 3:20pm.
Excuse me, but didn't Acorn and other community activists statistically slice and dice the HMDA (Home Mortgage Disclosure Act) data looking for examples where lenders were not lending enough in certain geographical areas or might have been engaging in risk-based pricing which precluded lending to those who could not afford the fully-indexed monthly payments plus tax and insurance impounds? And then suing them for various and sundry reasons.
While I agree that the Wall Street Wizards exascerbated the problem because they thought that any degree of secondary market risk could be managed with buyback agreements, insurance and sophisticated hedges involving default swaps, it was the relaxation of lending standards, with the approval of both Congress and the regulatory agencies, which failed to prevent this fiasco.
Everyone was complicit, including Fair Isaac and the Ratings agencies who were relying on past statistical patterns and failed to account for rolling RE-FIs and HELOCS; each of which masked the growing default program while artificially strengthening the borrower's credit score. (After all, they paid off the previous mortgage in full and had little or no credit card debt because it was rolled into a mortgage).
There is plenty of blame to go around ... but the primary blame goes to those who started the ball on relaxed lending standards (accepting alimony and welfare payments as income, reduced document loans, etc.) rolling downhill until it reached snowball proportions.
Submitted by Bill Fooks on October 14, 2008 - 3:31am.
Bill FooksTFT realty Marketing ServiceWarwick, RI Fooksteam.com Half truths always make a good story. The whole truth can be boring. The whole truth also, not only , makes the government agencies look bad, but there leaders. This was a liberal idea gone bad, supported by good intentions and abused by politicians to gain votes. I guess the right term would be to "Buy Votes", if were being truthful. The "CRA", was the begining, supported by fines to the banks if they did not comply, supported by the government, (by lowering statdards by which they would buy mortgages),and now they all want to blame everyone except the government. They put the same bad deal makers back in charge of making the deal correct. How stupid!!
Submitted by Matt Carter on October 14, 2008 - 7:33am.
New study from University of North Carolina's Center for Community Capital, finds borrowers defaulted at higher rate when they got subprime mortgages than if they received loans made under CRA.
http://www.ccc.unc.edu/documents/RiskyBorrowers_RiskyMortgages_1008.pdf
Submitted by mortgage analyst on October 14, 2008 - 3:59pm.
The posts here against Fannie and Freddie don't address the facts. The Private Label Securities market drove the housing bubble and the subsequent collapse. The Private Label Securities loans have current delinquency rates of around 40%, Fannie and Freddie are around 1%. The non-agency loans were the majority of the market in 2006 & 2007. Those are the facts. It's not the Fannie and Freddie loans that are defaulting in vast numbers nationally.
It's also interesting to compare the FHFA/Treasury takeover of the GSE's to the kid glove treatment that Goldman and others got. Goldman gets a nice 5% preferred, Fannie gets 10%, Goldman can buy out the gov't, Fannie has a warrant to Treasury for 79.9% of the company for 20 years, Goldman gets all its debt guaranteed, Fannie gets no debt guaranteed, Goldman gets access to the Fed window, Fannie has to pay Libor +50. American should be outraged, Paulson is stealing and giving to his friends...
Submitted by Matt Carter on October 16, 2008 - 10:43am.
Another take on this issue, by the Wall Street Journal's James Hagerty, who cites Andrew Davidson, "a mortgage industry consultant in New York who has done work for Fannie and Freddie and also criticized them for taking excessive risks." -- "Fannie and Freddie do share some of the blame for the mortgage and housing bust ... but weren't the leaders in lowering credit standards." -- The "worst-performing mortgages are those that were originated by subprime lenders and packaged into securities sold by Wall Street, rather than by Fannie and Freddie." -- While "loans for low-income people -- programs championed by Democrats as well as many Republicans -- have contributed to Fannie and Freddie's losses, they aren't the biggest part of the problem."Submitted by Matt Carter on November 18, 2008 - 5:22pm.
Orange County Register weighs in with another analysis of 12 million subprime mortgages: Nearly 75 percent of subprime loans made from 2004 through 2007 were made by lenders who were exempt from the Community Reinvestment Act. Fannie and Freddie were "bit players," purchasing about 3 percent of all subprime loans issued from 2004 through 2007.Submitted by Matt Carter on November 19, 2008 - 2:02pm.
Press release issued today by the Office of the Comptroller of the Currency, which regulates national banks. "Comptroller of the Currency John C. Dugan said he categorically disagrees with suggestions that the Community Reinvestment Act is partly responsible for the ongoing credit crisis. 'CRA is not the culprit behind the subprime mortgage lending abuses, or the broader credit quality issues in the marketplace,' Mr. Dugan said in a speech to the Enterprise Annual Network Conference." Dugan, who was nominated by President Bush to serve as comptroller in 2005, said banks subject to CRA originated or purchased only 6 percent of high cost loans made to lower-income borrowers within their CRA assessment areas in 2006.Submitted by Matt Carter on December 5, 2008 - 12:10pm.
Dec. 4 speech by FDIC Chair Sheila Bair: "I want to give you my verdict on CRA: NOT guilty. Point of fact: Only about one in four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending (2004-2006). The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules."Submitted by Matt Carter on December 12, 2008 - 12:36pm.
The Center for Responsible Lending has rounded up a number of links to stories and studies that dispute claims that CRA was the cause of the meltdown. One of the most strongly worded defenses of CRA comes from Daniel Gross, writing in Newsweek: "Let me get this straight. Investment banks and insurance companies run by centimillionaires blow up, and it's the fault of Jimmy Carter, Bill Clinton, and poor minorities? These arguments are generally made by people who read the editorial page of The Wall Street Journal, and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice. Let's be honest. Fannie and Freddie, which didn't make subprime loans but did buy subprime loans made by others, were part of the problem. Poor congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem. But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd."Submitted by Matt Carter on December 12, 2008 - 12:42pm.
Why this debate matters: it will largely determine what the mortgage lending landscape looks like when we finally emerge from the financial crisis. Click here for opposing views of what to do with Fannie and Freddie now that they're in gov't conservatorship.