The Myth of Fannie Mae, Freddie Mac, Barney Frank, the Housing Bubble and the Recession

Jeff Dunetz at Big Government must have passed the right-wing media journalism test. He follows in the same hollowed ethical standards as Andrew Breitbart himself, James O’Keefe and Kevin Pezzi. Dunetz swears this is the truth, the whole truth and nothing but – Blame Barney Frank for the Recession, Not George Bush

Frank aggressively fought reform efforts by the Bush administration. He told The New York Times on Sept. 11, 2003, Fannie Mae and Freddie Mac’s problems were “exaggerated.” Exaggerated? Thanks to Fannie and Freddie the housing market collapsed and we fell into this “great recession.”

That paragraph is 99% meaningless nonsense. Republicans controlled the House in 2003 and Tom The hammer Delay of K-Street infamy was House Majority Leader. The House, unlike the Senate is ruled by simple majority. Delay controlled the agenda and Bush 43 was in the White House. Frank could have set himself on fire and still had absolutely zero effect on any Republican attempts to legislate new regulations or create regulatory reform. Fannie and Freddie did not cause the housing bubble or the Great Recession. The numbers don’t add up. In addition Fannie and Freddie did not have that kind of power. Most of their loans were not subprime.

Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That’s right — most subprime mortgages did not meet Fannie or Freddie’s strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.

Look at the numbers. While the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion. Meanwhile, in the private sector, the amount of subprime loans originated jumped to $600 billion from $335 billion and Alt-A loans hit $400 billion from $85 billion in 2003. Fannie and Freddie, which wouldn’t accept crazy floating rate loans, which required income verification and minimum down payments, were left out of the insanity.

Fannie and Freddie were not completely innocent they basically started having special sales Fannie’s “Expanded Approval” and Freddie’s “A Minus”- all under Bush’s watch and as Republicans controlled the House 1997 to 2005 ( the place where Frank has super duper legislative powers).

In the video below Frank sits in a 9/10/03 House Financial Services Committee hearing and says Fannie and Freddie are sound, and there is no housing disaster coming.

Rep. Barney Frank (D., Mass.): I worry, frankly, that there’s a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. ( from the BG piece)

Once again lots of words by Frank and possibly misguided, but no link between Frank and any action he took to stop regulation. He literally would have to have super powers to stop Republicans. Is the Big Government writer suggested that the Republican majority did not have the moral will power to to withstand Frank’s words. The Republican Congress of 2003 passed any bill it wanted with simple majority votes. If Fannie or Freddie were out of control they could have reigned them in. As a matter of fact the NYT article BG links to does not say Freddie or Fannie were in trouble over leading practices such as being extended beyond their collateral, but because of accounting shenanigans,

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

”There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,” Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.

Mr. Snow said that Congress should eliminate the power of the president to appoint directors to the companies, a sign that the administration is less concerned about the perks of patronage than it is about the potential political problems associated with any new difficulties arising at the companies.

The administration’s proposal, which was endorsed in large part today by Fannie Mae and Freddie Mac, would not repeal the significant government subsidies granted to the two companies. And it does not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enables them to issue debt at significantly lower rates than their competitors. Nor would it remove the companies’ exemptions from taxes and antifraud provisions of federal securities laws.

Here we are again with a right-wing ideologue either not reading the piece he linked to, not understanding what it says and/or hoping no one goes over to analyze what it says. Republicans controlled Congress. They held the committee chairs. Republicans made no objection to guaranteeing Freddie or Fannie against failure or against continuing to subsidize both entities. But based on the crackerjack evidence supplied by BG, Barney Frank is singularly responsible for the Great Recession because of some words that he uttered while in the minority party. In 2003 neither Fannie or Freddie looked like they were in much trouble. AIG, Goldman-Sachs and Merrill-Lynch all looked like they were in good shape too. Paul Krugman wrote in the summer of 2008,

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

Freddie Mac Fannie May fraction of loans held

As I mentioned before Fannie and Freddie may have cheated a bit with their discount loans, but enough to sink the entire economy and at Rep’ Franks direction? You have to be high on wing-nut loon juice to believe that. It is incumbent on BG to provide proof, not anecdotal sound bites out of context to make a case. Bloggers are not lawyers or logicians – at least most of us aren’t, but it is best practices to document one’s accusations.

I think we can give Fannie and Freddie their due share of responsibility for the mess we’re in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. They may finance most of the home loans in America, but most of the home loans in America aren’t the problem; the problem is that very substantial slice of home loans that went outside the Fannie and Freddie box. But Krugman is right to focus on the fact that it was the regulatory and charter constraints of the GSEs that kept that box closed.

This report by the New York Federal Reserve also documents the much larger role of private lenders rather than GSEs ( Fannie and Freddie are government sponsored enterprises).

New York Federal Reserve and list of subprime private lenders

The primary thing to take away from the chart is it supports Krugman, Newsweek and Calculated Risks assessments that Freddie and Fannie were small fry in the housing bubble collapse. With so much documentation available on the web at sites like the NY Feds why didn’t BG use those sources. While Freddie and Fannie are odd ducks – being private, but government sponsored – they make great targets for the pro no bid contracts crowd. Those that think Halliburton and Blackwater worked out swell think any institution remotely related to government is a good place to lay off blame. They feel they get bonus points if they can somehow wrap up a Democrat in the mess even if most of the damage was accruing under a Republican Congress and president. Greenspan: Fed policy not to blame for crisis

Greenspan said demand from the government-backed mortgage giants Fannie Mae and Freddie Mac inflated the housing bubble. He said the government policy of encouraging homeownership pushed Fannie and Freddie to create demand for risky loans. Those firms play a vital role in the mortgage market by buying up mortgage loans and packaging them into bonds that are resold to global investors.

But Mark Zandi, chief economist at Moody’s Analytics, said the Greenspan Fed’s decision not to set national mortgage lending standards was a key factor in the housing bubble — far more so than Fannie and Freddie.

Zandi noted that countries like Canada and Germany with tighter regulations largely avoided the bust, while countries that followed the U.S. model of light regulation fell into crisis.

“The Federal Reserve had that authority,” Zandi said in an interview. “They just never acted on it. That was a clear policy decision.”

Zandi also rebutted Greenspan’s argument that his Fed’s low-interest-rate policy played no role.

“The aggressive monetary policy in the wake of the tech bubble contributed to the inflating of the housing bubble,” Zandi said. “There’s strong evidence that the Federal Reserve kept interest rates too low for too long.”

For those not acquainted with the religion of Conservonomics, the hierarchy of their gods goes from Milton Friedman near the top with Alan Greenspan at his right arm. To Greenspan’s credit – unlike Big Government and other far Right web dens spreading the Fannie/Freddie/Frank myth – he displayed some humility by admitting he had made some mistakes. Rep. Barney Frank did defend himself in this column not long ago, Is There an Antidote to the Republican Amnesia?

And as described in the most reputable published sources, in 2005 I in fact worked together with my Republican colleague Michael Oxley, then Chairman of the Financial Services Committee, to write a bill to increase regulation of Fannie Mae and Freddie Mac. We passed the bill out of committee with an overwhelming majority — every Democrat voted in favor of the legislation. However, on the House floor the Republican leadership added a poison pill amendment, which would have prevented non-profit institutions with religious affiliations from receiving funds. I voted against the legislation in protest, though I continued to work with Mr. Oxley to encourage the Senate to pass a good bill. But these efforts were defeated because President Bush blocked further consideration of the legislation. In the words of Mr. Oxley, no flaming liberal, the Bush administration gave his efforts ‘the one-finger salute.’

[  ]…Under Republican President George W. Bush, many federal agencies turned a blind eye to activities which would later precipitate the global financial meltdown. The Securities and Exchange Commission decided to allow the nation’s largest financial institutions to “self-regulate;” the Federal Reserve under Alan Greenspan declined to use its power to regulate subprime mortgages; the Comptroller of the Currency decided to preempt state consumer laws on subprime mortgages.

Meanwhile, President Bush himself demanded that Fannie and Freddie increase the percentage of subprime loans they purchased, supposedly because of his belief in an “ownership society.” Incidentally, increased lending to subprime borrowers would also fuel astronomical profits by the financial services industry. ( those would be the “Expanded Approval” and Freddie’s “A Minus”)

[   ]…Forgotten too is the significant progress that was made after the 2006 elections, when the Republicans in Congress were repudiated by American voters.

Ironically, this is the period in which I and my Democratic colleagues actually did possess the magical power needed to make real change in Washington — we became the majority party. In March 2007, just two months after I became the Chairman of the Financial Services Committee for the first time, I moved quickly to forge a bill which would regulate Fannie Mae and Freddie Mac. The bill passed the House in May, with all 223 Democrats voting for it, and 103 Republicans voting against it. President Bush later signed that legislation into law.

Later in 2007, I introduced legislation to restrict subprime mortgages. The bill passed the Financial Services Committee and the House, but it did not pass the Senate, where because of the filibuster rule, the Republican minority actually does have the power to hobble the majority. The bill passed the full House with all 227 Democrats and 64 Republicans voting for it, and 127 Republicans voting against.

One last fact and logic question asked and answered, Fannie Mae-Freddie Mac Thought Experiment II

There certainly are legitimate criticisms of the GSEs — they were cesspool of fraud and bad judgment — which is why we told clients in 2007 to short Fannie Mae. And several academics and independent analysts have excoriated Fannie for its failings, separately from and long before the economic collapse.

But I digress. Here is my Fannie Mae thought experiment:

The Facts: Its 1995, and the private securitization market has developed on its own. Fannie Mae looks around, and notices that they are not really all that necessary anymore. Wall Street had become a securitizer of not just mortgages, but student loans, credit card receivables, auto loans.

The Hypothetical Counter-Factual: So the CEO of Fannie announces they were going to sell off their mortgage portfolio, dissolve,, returning their capital to shareholders.

Question: Would the Housing boom and bust have occurred? What about the credit bubble? Derivative crisis? Abdication of lending standards? Leverage increases to Wall Street? Misaligned Compensation packages?

Unless your answer is NO to all of these, than its impossible to blame Fannie Mae for the collapse . . .

Separately the housing bubble and the Great Recession are complicated. Though not so complicated that they cannot be understood. Lumping them together, throwing in a some spinlicous conspiracy along with Rep. Frank and the low information voters that troll Big Government get their daily dose of Pravda. The same low information voters who by their votes enabled the shoddy regulation, mindless deregulation and unenforced regulation which brought us the Great Recession. These are not a group of people known for their maturity about accepting responsibility so they’ll swallow whatever delusions are pushed in their way.

MYTH: Congressional Democrats, led by Barney Frank, opposed strengthening oversight over Fannie and Freddie

* In 2005, Frank, then the ranking Democrat on the House Financial Services Committee, worked with committee chairman Rep. Michael Oxley (R-OH) on the Federal Housing Finance Reform Act of 2005, which would have established the Federal Housing Finance Agency (FHFA) to replace the Office of Federal Housing Enterprise Oversight (OFHEO) as overseer of the activities of Fannie Mae and Freddie Mac. After voting for the bill in committee, Frank voted against final passage of the bill on the House floor, stating that he was doing so because an amendment to the bill on the House floor imposed restrictions on the kinds of nonprofit organizations that could receive funding under the bill.

* In early 2007, as chairman of the House Financial Services Committee, Frank sponsored H.R. 1427, a bill to create the FHFA, granting that agency “general supervisory and regulatory authority over” Fannie Mae and Freddie Mac, and directing it to reform the companies’ business practices and regulate their exposure to credit and market risk. Among other things, Frank’s legislation, titled the “Federal Housing Finance Reform Act of 2007,” directed the FHFA director to “ensure” that Fannie Mae and Freddie Mac “operate[] in a safe and sound manner, including maintenance of adequate capital and internal controls” and to establish standards for “management of credit and counterparty risk” and “management of market risk.” The FHFA was eventually created after Congress incorporated provisions that House Speaker Nancy Pelosi (D-CA) said were “similar” to those of H.R. 1427 into the Housing and Economic Recovery Act of 2008, which the president signed into law on July 30.

O’Reilly advanced falsehood that “the Democrats in charge of the finance committees” resisted regulating mortgage industry

On The O’Reilly Factor, Bill O’Reilly falsely claimed that “the Democrats in charge of the finance committees” resisted efforts by the Bush administration to regulate the mortgage industry and Fannie Mae and Freddie Mac in particular. In fact, it was only after the Democrats did gain control of both “finance committees” in Congress in 2007 that Congress passed legislation strengthening oversight of Fannie Mae and Freddie Mac.

Update: Article dated 08-21-10. Top Dems Break With Treasury Over Fannie, Freddie Losses

Congressman Barney Frank (D-Mass.), Chairman of the House Financial Services Committee, sent a letter to the White House Friday, demanding the Federal Housing Finance Administration [FHFA] use all the powers at its disposal to recover some of the roughly $150 billion taxpayers lost to Fannie Mae and Freddie Mac through bad loans purchased from private banks.

[   ]…Frank writes in his letter to Obama:

The losses suffered by Fannie and Freddie have created great cost for the taxpayers–almost $150 billion to date. These losses largely result from business decisions during the bubble years that were honest but flawed. Taxpayers have continued to suffer anew for poor underwriting by these companies during the bubble years.

However, some of these losses result from deception. Private companies sold Fannie and Freddie loans or securities based on fraudulent documents. These transactions created private profits at public expense, and they should be fought with every tool at the companies’ and the agency’s disposal. These deals must not be allowed to get lost in the shuffle.

I have been pleased at the steps both the FHFA and the companies have taken so far, but it must continue. The extraordinary measures taken to stabilize the financial system over the last two years were done for the benefit of ordinary Americans. We owe it to them to make every effort to make sure that the money is not diverted instead into the pockets of others. I hope you will continue to keep this in mind as you chart the future of FHFA and these companies.

Again, Freddie and Fannie are caught up in the storm, but it was the private sector that engaged in fraud and deception.

update II: Conservatives Can’t Escape Blame for the Financial Crisis

As the FCIC staff reports demonstrate fairly conclusively, it was the shadow banking system’s unregulated private securitization of mortgages that caused the financial crisis, not affordable housing policies. The FCIC staff has done an excellent job of compiling the facts, and we encourage you to check out the FCIC’s comprehensive reports to date. In our view, below are their most persuasive arguments,
Look at the market share

The market activities of the relevant parties clearly show the problem with the argument made by the minority FCIC members. The market shares of Fannie Mae, Freddie Mac, and CRA-regulated lending institutions dropped tremendously during the housing bubble. Meanwhile, the market share of private mortgage securitization, which the FCIC majority largely blames for the crisis, and which the FCIC minority completely ignores, grew in lockstep with the rise of the housing bubble.

The relative market share of Fannie Mae and Freddie Mac dropped fairly dramatically during the 2000s bubble, from a high of 57 percent of all new mortgage originations in 2003, down to 37 percent at the height of the bubble in 2005 and 2006. Notably, this decline occurred contemporaneously with the unsupported rise in housing prices and the deterioration in underwriting standards that virtually all observers blame for the collapse of the housing markets.

Mortgages originated for private securitization defaulted at much higher rates than those originated for Fannie and Freddie securitization



update 11-18-2012, Republican Federal Reserve Chair: Discriminatory Lending Made Housing Crisis Worse For Minorities

Discriminatory lending policies made the housing crisis worse for African-American and Latino borrowers, Federal Reserve Chairman Ben Bernanke told a financial summit held Thursday in Atlanta. The housing crisis and economic slump followed the “unfortunate pattern” of “disproportionately affecting” minorities, Bernanke said, pointing to the fact that black home ownership rates have fallen five percentage points in the last eight years, compared to just a two percent drop for the general population.

Two major discriminatory actions made the crisis worse for minorities, Bernanke said:

“One is redlining, in which mortgage lenders discriminate against minority neighborhoods, and the other is pricing discrimination, in which lenders charge minorities higher loan prices than they would to comparable nonminority borrowers,” Bernanke said.

“We remain committed to vigorous enforcement of the nation’s fair lending laws,” he added.

Studies have shown that blacks and Latinos were twice as likely to have been affected by the housing crisis as white borrowers, largely for the reasons Bernanke outlined. Many minority borrowers were pushed into riskier, more expensive subprime loans even though they qualified for lower-interest prime mortgages. Subprime loans, which can add $100,000 to the price over the life of the mortgage, were given to 30.9 percent of Latinos and 41.5 percent of blacks, compared to just 17.8 percent of whites.

Wells Fargo, the nation’s largest mortgage lender, paid $175 million to settle discriminatory lending charges in July, and other mortgage companies have been fined and ordered to pay settlements to homeowners they discriminated against.