Maybe just a coincidence but since the OWS protests have gained momentum Conservatives have been trying once again to blame working class Americans, Fannie May, Freddie Mack, Bill Clinton and Barney Frank for the housing meltdown. The reasons are obvious. The private sector of the economy are never to be blamed and never to be held accountable. Modern Repubitarians see the private sector of the economy the way a cultish religious zealot see their religion. Allowing that any part of the orthodoxy is wrong – like the earth in fact revolves around the sun, not the reverse is to admit that their dogma is not perfect. If we allow that the private sector is not perfect, the whole orthodoxy is not holy and inerrant. I love free market economies. They are the only way to go as far as I’m concerned. yet free markets are run by people. As long as people do not behave perfectly or rationally 100% of the time, those free markets will need regulation.
Myth #3: Fannie Mae and Freddie Mac Caused the Crisis
While some are attempting to scapegoat Fannie Mae and Freddie Mac, economist Dean Baker recently stated that while Fannie and Freddie “got into subprime junk and helped fuel the housing bubble,” they were “trailing the irrational exuberance of the private sector” and actually lost market share to private subprime lenders in the years 2002-2007, when “the volume of private issue mortgage backed securities exploded.” – In a 2006 Securities and Exchange Commission filing (available here) covering its activities in 2004, Fannie Mae stated: “We did not participate in large amounts of these non-traditional mortgages in 2004 and 2005.” In the report, Fannie Mae also noted the growth of subprime lending and reported, “These trends and our decision not to participate in large amounts of these non-traditional mortgages contributed to a significant loss in our share of new single-family mortgage-related securities issuances to private-label issuers during this period.” – Additionally, Lehman Brothers CEO Richard Fuld testified before the House Committee on Oversight and Government Reform on October 6, 2008, that Fannie and Freddie’s failure played a minimal role in Lehman’s demise.
And as the chart above show Fannie and Freddie do not even appear as sub-prime lenders. One of the Right’s biggest screw-ups in trying to sell their sub-prime fairy tale is that Freddie and Fannie don’t make loans directly to home buyers. What Fannie and Freddie did and they were sometimes not as diligent as they should have been was buy bulk loans from banks. Conservatives, Democrats and bankers loved this arrangment for years because it allowed banks to have more collateral on hand and make more loans.
Another myth: The Big Bad Gov’mint forced banks to make loans to people who could not afford them through the 1977 Community Reinvestment Act. Free market absolutists get it wrong again – Conservatives blame the housing crisis on a 1977 law that helps-low income people get mortgages. It’s a useful story for them, but it isn’t true.
Most analysts see the sub-prime crisis as a market failure. Believing the bubble would never pop, lenders approved risky adjustable-rate mortgages, often without considering whether borrowers could afford them; families took on those loans; investors bought them in securitized form; and, all the while, regulators sat on their hands.
The revisionists say the problem wasn’t too little regulation; but too much, via CRA. The law was enacted in response to both intentional redlining and structural barriers to credit for low-income communities. CRA applies only to banks and thrifts that are federally insured; it’s conceived as a quid pro quo for that privilege, among others. This means the law doesn’t apply to independent mortgage companies (or payday lenders, check-cashers, etc.)
The law imposes on the covered depositories an affirmative duty to lend throughout the areas from which they take deposits, including poor neighborhoods. The law has teeth because regulators’ ratings of banks’ CRA performance become public and inform important decisions, notably merger approvals. Studies by the Federal Reserve and Harvard’s Joint Center for Housing Studies, among others, have shown that CRA increased lending and homeownership in poor communities without undermining banks’ profitability.
But CRA has always had critics, and they now suggest that the law went too far in encouraging banks to lend in struggling communities. Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?
The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation’s Ellen Seidman (and by Harvard’s Joint Center), that activity “largely came to an end by 2001.” In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law’s toughest standards. Yet sub-prime lending continued, and even intensified — at the very time when activity under CRA had slowed and the law had weakened.
Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn’t even apply to most of the loans that are behind it. As the University of Michigan’s Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA.
Federal Reserve Board data show that:
More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.
The “turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007,” the President’s Working Group on Financial Markets reported Friday.
We’ve all heard of CDOs (Collateralized debt obligations) by now. These were and are financial instruments only Wall Street can create. They are basically bundles of loans. At the height of the housing bubble from the late 90s through 2007 they included home loans ( based on the idea that real estate prices would not only never go down, but would continue to increase). CDOs also came to include consumer credit card debt and even car loans. Wall Street sold these. Not Freddie or Fannie, not the CRA program. These CDOs were often not much safer than a rouleete wheel in Vegas. To add to this crazy idea CDOs were a safe bet the same traders in these securities bought derivatives ( a kind of securities insurance). This is where AIG’s financial products division figures in. They sold the derivatives also thinking they would never have to pay off because how could anyone ever possibly lose in real estate? Just as the big banks did not have enough collateral to pay off the CDOs if the housing bubble collapsed, the insurance companies did not have the collateral to pay off the derivatives.