The New York Times published a piece by Reuters' BreakingViews.com that attacked the Dodd-Frank financial reform law for not sufficiently regulating Fannie Mae and Freddie Mac, which the piece suggested were central causes of the economic crisis. This claim echoes a right-wing talking point, but as economic experts -- including Nobel Prize-winning economist and Times columnist Paul Krugman -- have explained, it has no basis in reality.
Times Piece Suggested Fannie, Freddie Were Central Causes Of Economic Crisis
New York Times Piece: Lax Mortgage Lending Was “Central” To Financial Crisis, But Financial Reform Law Did Not Focus On Fannie And Freddie. From a July 18 piece by Reuter's BreakingViews.com published by The New York Times:
A year after passage of the Dodd-Frank act, the $10.5 trillion American mortgage market remains in limbo. One big reason is that the law scarcely touches Fannie Mae, Freddie Mac and the Federal Housing Administration -- the government-run lenders that dominate the home loan market.
The consequences of lax mortgage lending were central to the crisis that Dodd-Frank was intended to make unrepeatable. But rather than tackle the huge and highly political issue of Fannie, Freddie and the F.H.A., the law narrowly focused on one part of the market. That's the private-label mortgage-backed securities area, source of more than $3 trillion of mortgage bonds from 2002 to 2007.
The most significant new rule could require private sector financial institutions to hold at least 5 percent of securities they create by repackaging loans. Giving them some incentive to ensure the securities are creditworthy isn't a bad idea, but it reinforces the notion that the private sector is at a competitive disadvantage to government lenders if it returns to the mortgage-backed business. That's because Fannie and other government-run programs would be exempt from this requirement.
In short, the reform effort so far seems to make it harder for the private sector to re-establish itself while entrenching the cost, and risk, with taxpayers. Congress and regulators must assess housing finance as one market. Until the future of the hulking government mortgage finance companies is mapped out, the worthy goals of Dodd-Frank don't mean much. [The New York Times, 7/18/11]
Piece Was Published In Business Section Of NY Times Print Edition. As stated on the Times website, "[a] version of this article appeared in print on July 19, 2011, on page B2 of the New York edition with the headline: Mortgage Market Due for Overhaul." [The New York Times, 7/18/11]
Reports Reject Claim That Fannie And Freddie Were Root Cause Of Financial Crisis
David Min: Fannie And Freddie “Did Not Buy Enough” High-Risk Mortgage-Backed Securities “To Be Blamed For The Mortgage Crisis.” In a report about the causes of the housing crisis, David Min, the Associate Director for Financial Markets Policy at the Center for American Progress, wrote that while “Fannie and Freddie were responsible for some actual high-risk loans, primarily through their purchases of high-risk private-label securities for their investment portfolio as well as through purchases of actual high-risk loans for their core securitization business,” the “actual high-risk activity by Fannie and Freddie was neither sufficient in volume nor did it come at the right time to persuasively argue that the two mortgage finance giants drove the surge in actual high-risk lending we saw in the 2000s.” Min also wrote that Fannie and Freddie “did not buy enough of [high-risk mortgage-backed securities] to be blamed for the mortgage crisis.” From Min's July 2011 report:
It is of course well known, including by their regulator, the Federal Housing Finance Agency, that Fannie and Freddie were responsible for some actual high-risk loans, primarily through their purchases of high-risk private-label securities for their investment portfolio as well as through purchases of actual high-risk loans for their core securitization business. Yet as Wallison knows, this actual high-risk activity by Fannie and Freddie was neither sufficient in volume nor did it come at the right time to persuasively argue that the two mortgage finance giants drove the surge in actual high-risk lending we saw in the 2000s.
Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis. Highly respected analysts who have looked at these data in much greater detail than Wallison, Pinto, or myself, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.
Indeed, it is noteworthy that Wallison's fellow Republicans on the Financial Crisis Inquiry Commission -- Bill Thomas, Keith Hennessey, and Douglas Holtz-Eakin, all of whom are staunch conservatives -- rejected Wallison's argument as well.
This is why neither Wallison nor Pinto try to make the argument that the federal government was responsible for the proliferation of actual high-risk lending that occurred in the past decade, as such a claim would be quickly rejected as ridiculous. Instead, what Wallison and Pinto do--the key to their argument--is to expand the definition of “high risk” and “subprime” to include new categories of loans not ordinarily understood to be high risk. This expansion of “high-risk” lending is essential to the Wallison/Pinto argument that the mortgage crisis was caused by federal affordable housing policies. [Ritholtz.com, The Big Picture, 7/13/11]
Min also included this chart, which shows that the loans Fannie and Freddie were making were largely not high-risk:
Experts Agree With Min's Assessment That Fannie And Freddie Did Not Cause The Financial Crisis.
- Krugman: “The Supposedly High-Risk Loans That [Fannie And Freddie] Were Making Or Buying Were, Demonstrably, Not Actually High-Risk.” In a blog post, Nobel Prize winning economist Paul Krugman praised Min's report as “a terrific takedown of the claim that Fannie and Freddie caused the housing bubble.” Krugman also wrote: “Every time you hear or read someone claiming that Fannie and Freddie were responsible for large amounts of subprime/risky lending, you should remember that this is based on essentially phony numbers: people at AEI invented their own definition of subprime, which isn't the standard definition, and, more important, doesn't work: the supposedly high-risk loans that F&F were making or buying were, demonstrably, not actually high-risk[.]” [The New York Times, 7/14/11]
- DeLong: “We Would Have Had The Housing Boom, The Housing Crash, The Financial Crisis, And Our Current Little Depression Even Had” Fannie And Freddie “Not Made Any Mistakes At All.” In a post on his blog, Brad DeLong, a professor of economics at the University of California at Berkeley, wrote that “we would have had the housing boom, the housing crash, the financial crisis, and our current Little Depression even had James Johnson never set foot inside Fannie Mae, and even if the GSEs had not made any mistakes at all,” adding: "[T]he 'it's all Fannie Mae's fault!' meme is back on the menu. It should not be." DeLong then excerpted from Min's report and wrote: “David Min does the trash pickup.” [DeLong.TypePad.com, 7/14/11]
Financial Crisis Inquiry Commission: Fannie And Freddie “Contributed To The Crisis, But Were Not A Primary Cause.” From the majority report by the Financial Crisis Inquiry Commission:
Second, we examined the role of the GSEs, with Fannie Mae serving as the Commission's case study in this area. These government-sponsored enterprises had a deeply flawed business model as publicly traded corporations with the implicit backing of and subsidies from the federal government and with a public mission. Their $5 trillion mortgage exposure and market position were significant. In 2005 and 2006, they decided to ramp up their purchase and guarantee of risky mortgages, just as the housing market was peaking. They used their political power for decades to ward off effective regulation and oversight -- spending $164 million on lobbying from 1999 to 2008. They suffered from many of the same failures of corporate governance and risk management as the Commission discovered in other financial firms. Through the third quarter of 2010, the Treasury Department had provided $151 billion in financial support to keep them afloat.
We conclude that these two entities contributed to the crisis, but were not a primary cause. Importantly, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis.
The GSEs participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders in the rush for fool's gold. They purchased the highest rated non-GSE mortgage-backed securities and their participation in this market added helium to the housing balloon, but their purchases never represented a majority of the market. Those purchases represented 10.5% of non-GSE subprime mortgage-backed securities in 2001, with the share rising to 40% in 2004, and falling back to 28% by 2008. They relaxed their underwriting standards to purchase or guarantee riskier loans and related securities in order to meet stock market analysts' and investors' expectations for growth, to regain market share, and to ensure generous compensation for their executives and employees -- justifying their activities on the broad and sustained public policy support for homeownership.
The Commission also probed the performance of the loans purchased or guaranteed by Fannie and Freddie. While they generated substantial losses, delinquency rates for GSE loans were substantially lower than loans securitized by other financial firms. For example, data compiled by the Commission for a subset of borrowers with similar credit scores -- scores below 660 -- show that by the end of 2008, GSE mortgages were far less likely to be seriously delinquent than were non-GSE securitized mortgages: 6.2% versus 28.3%. [Financial Crisis Inquiry Commission, Conclusions Of The Financial Crisis Inquiry Commission, accessed 7/20/11, emphases added]
Federal Housing Finance Agency Found That Fannie, Freddie Loans Posed Less Credit Risk Than Those Financed With Private-Label Mortgage-Backed And Asset-Backed Securities. According to a September 2010 report by the Federal Housing Finance Agency, single-family mortgage loans originated from 2001 through 2008 and financed by Fannie and Freddie had higher credit scores, which are “associated with” lesser “mortgage credit risk,” than did mortgages financed with private-label mortgage-backed securities. The report further found that loans financed by Fannie and Freddie were more likely to be fixed-rate -- which means they performed better than adjustable-rate loans in the analyzed data -- and were less likely to ever be “90-days delinquent” than mortgages financed with private-label mortgage-backed securities. [Federal Housing Finance Agency, Data on the Risk Characteristics and Performance of Single-Family Mortgages Originated from 2001 through 2008 and Financed in the Secondary Market, 9/13/10]
Report: “Fannie And Freddie Did Not Cause The Subprime Boom And Bust.” From a November 2010 draft report by Robert Van Order, the Oliver Carr Chair in Finance and Real Estate at George Washington University, and Jason Thomas, a doctoral student in the Department of Finance at George Washington University:
[I]t is difficult to believe GSE purchases of AAA tranches of subprime PLS had any material impact on pricing or issuance volume. To acquire AAA subprime PLS, the GSEs issued agency debt, another AAA instrument. Thus, the net effect of these acquisitions was to leave the global supply of AAA rated securities unchanged.
It is also important to note that the duration of the top tranches of these securities was exceptionally short. As Gorton (2008) explains, the expectation was for the underlying mortgage collateral to be refinanced in two years with any amortization of principal prior to the refinancing generally directed to the AAA tranches purchased by the GSEs. Although Fannie and Freddie combined to purchase nearly $600 billion of subprime PLS between 2000 and 2007, their combined holdings of subprime PLS did not likely exceed $200 billion at any given time. At the end of 2008, the GSEs reported combined subprime PLS holdings of $154.6 billion, another $62.5 billion of Alt-A PLS, and $19 billion of residential mortgage PLS not otherwise classified.
Would the housing market have developed differently had these goals been less stringent? It is hard to tell, but unlikely. This is not only because demand for AAA securities would have continued to provide an incentive to securitize subprime mortgages, but also because the market's development was endogenous to the affordable housing goals themselves. That is, Fannie and Freddie were not leaders in share of low income lending.
Fannie and Freddie did not cause the subprime boom and bust. They did have a role in buying senior pieces of structured deals, but these were the easy AAA parts that lots of investors wanted. They were not involved in the crucial CDO market or other vehicles for selling the important junior pieces of the deals.
The data do not provide empirical support for the notion that Fannie and Freddie were building up to a collapse. It happened quite quickly-almost entirely via loans originated after 2005 (especially 2006 and 2007). [Research.StLouisFed.org, Housing Policy, Subprime Markets and Fannie Mae and Freddie Mac: What We Know, What We Think We Know And What We Don't Know, November 2010]
Baker: Claim That Fannie And Freddie Are “Responsible For The Financial Disaster Is Absurd On Its Face.” Economist Dean Baker reported in September 2008 that the accusation that “the financial crisis is attributable to the close government relationship with Fannie Mae and Freddie Mac” is “obviously not true.” He added:
Fannie and Freddie got into subprime junk and helped fuel the housing bubble, but they were trailing the irrational exuberance of the private sector. They lost market share in the years 2002-2007, as the volume of private issue mortgage backed securities exploded. In short, while Fannie and Freddie were completely irresponsible in their lending practices, the claim that they were responsible for the financial disaster is absurd on its face -- kind of like the claim that the earth is flat. [Media Matters, 4/23/10]
Krugman: "[W]hile Fannie And Freddie Are Problematic Institutions, They Aren't Responsible For The Mess We're In." Krugman wrote on July 14, 2009, that “while Fannie and Freddie are problematic institutions, they aren't responsible for the mess we're in.” He also wrote that “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.” [The New York Times, 7/14/08]
Thoma: "[B]est Behavior Of Fannie And Freddie Would Not Have Been Enough To Stop The Bubble From Inflating In Other Parts Of The Financial Sector." University of Oregon economist Mark Thoma wrote on October 5, 2008, that “Fannie and Freddie followed the shadow banking sector downward.” He added that while "[t]here is lots to fault in the behavior of Fannie and Freddie and in government oversight of them," the “best behavior of Fannie and Freddie would not have been enough to stop the bubble from inflating in other parts of the financial sector, and then turning into a full fledged financial crisis as housing prices plunged.” [Seeking Alpha, 10/5/8]
Mankiw: Fannie, Freddie “Were Only One Element” Of The Financial Crisis. Economist N. Gregory Mankiw, who served as chairman of President Bush's Council of Economic Advisors, wrote on March 27, 2010, that the government is not good at “regulat[ing] financial institutions,” noting that Congress did not reform Fannie Mae and Freddie Mac during the Bush administration even though economists had voiced concerns. Mankiw added, “I recount this story not because Fannie Mae and Freddie Mac were the main cause of the recent financial crisis -- they were only one element -- but because it shows the kind of problem we'll encounter on a larger scale as we reform oversight of the financial system.” [The New York Times, 3/27/10]
Former Lehman Brothers CEO Richard Fuld: Fannie And Freddie Played “De Minimis” Role. In an October 2008 Newsweek article, Daniel Gross reported that the following happened during testimony by Lehman Brothers CEO Richard Fuld before the House Committee on Oversight and Government Reform:
At Monday's hearing, Rep. John Mica, R-Fla., gamely tried to pin Lehman's demise on Fannie and Freddie. After comparing Lehman's small political contributions with Fannie and Freddie's much larger ones, Mica asked Fuld what role Fannie and Freddie's failure played in Lehman's demise. Fuld's response: “De minimis.”
From Fuld's testimony:
MICA: And one of your big com -- well, one of the big packagers, or the competitor, so to speak, was Fannie Mae, which was deep into this. And you were -- you were dealing in some of the paper, I think, for secondary markets and other securitized mortgage paper, to basically package it and make money off it. Is that right?
FULD: Yes, sir.
MICA: What was Lehman Brothers' exposure to the debt of Fannie Mae and Freddie Mac, and what role did their collapse play in precipitating some of your financial troubles?
FULD: Our --
MICA: It didn't matter or you --
FULD: Our exposure to both Fannie Mae and Freddie Mac was de minimis, sir. [Media Matters, 4/23/10]
Times Echoed Right-Wing Talking Point That Fannie, Freddie Caused The Economic Crisis
Times Piece Echoed The Right-Wing Claim That Fannie And Freddie Were The Main Cause Of The Economic Crisis. The Reuter's BreakingViews.com piece published by The New York Times echoed the popular right-wing myth that Fannie and Freddie caused the economic crisis. Here are just a few examples of right-wing media pushing the false talking point:
- Fox's Special Report Aired Repeated Claims That Fannie And Freddie Caused Economic Crisis. From the April 22, 2010, edition of Fox News' Special Report with Bret Baier:
JIM ANGLE, CHIEF WASHINGTON CORRESPONDENT: The financial legislation working its way through Congress leaves out one factor many critics say started the whole mess.
SEN. ORRIN HATCH (R-UT): Wonder why Fannie and Freddie aren't in this bill. I mean actually it all began with them.
REP. JOHN BOEHNER (R-OH) How you can attempt to fix it without going to the root of the problem -- Fannie Mae and Freddie Mac -- is really beyond me.
PETER WALLISON, AMERICAN ENTERPRISE INSTITUTE: Fannie and Freddie's role was extraordinarily important in the financial crisis. In fact, they were one of the major reasons we had a financial crisis.
ANGLE: Fannie Mae and Freddie Mac, as they're called, are what are known as government-sponsored entities, federally-backed institutions that bought mortgages from others injecting money into the housing market. And then the Clinton administration gave them a new mission: Expand home ownership to those who had not been able to buy, which meant making loans to people with bad credit and with no money down. [Fox News, Special Report, 4/22/10, via Media Matters]
- Perino Falsely Claimed Fannie And Freddie “Led To This Crisis In The First Place.” During a discussion of proposed financial regulatory reform on the April 20, 2010, edition of Fox News' Hannity, Fox News contributor Dana Perino stated:
PERINO: If you look at the poll yesterday from Pew Research Center, 80% of the American people don't trust the government, nor do they trust the other big institutions that are in their lives, including the banks. And at the end of the day, when they step back and you start peeling back the layers, anybody paying attention, they might watch President Obama's speech on Thursday and be impressed, but then also they might realize that he was the one who was defending Fannie Mae and Freddie Mac that led to this crisis in the first place. [Fox News,Hannity, 4/20/10, via Media Matters]
- WSJ's Fund: Fannie And Freddie “Got Us Into This Housing Mortgage Mess.” On the April 19, 2010, edition of Fox News' Happening Now, co-host Bill Hemmer asked whether “Republicans take a risk in opposing” financial regulatory reform. Wall Street Journal columnist John Fund responded:
FUND: Sure. With 60 percent supporting more financial regulation, it is a risk. But I think if they say a few things that'll -- people might look a different way. Fannie Mae and Freddie Mac, which are the two federal entities that got us into this housing mortgage mess and led the other banks into making stupid mistakes, they're not reformed by this bill. They get off scot-free. [Fox News, Happening Now, 4/19/10, via Media Matters]
- Limbaugh Listed Fannie And Freddie Among Those Who “Are The Literal And Real Architects Of The Financial Meltdown.” On the April 20, 2010, edition of his radio show, Rush Limbaugh said that “the premise of this whole financial-regulatory reform bill” was that “Wall Street's to blame for the financial meltdown, and it's not.” He continued:
Let's go back to the premise of this whole financial-regulatory reform bill. The whole premise of this is that -- is based on the fact that Wall Street's to blame for the financial meltdown, and it's not. Government is to blame for the meltdown. ... It was these subprime mortgages that were required by the government to be lent -- Community Redevelopment [sic] Act, or what have you. ... So here, once again, we have people on Capitol Hill -- Chris Dodd, who's being shamefully retired from his seat in the Senate, Barney Frank over in the House, and any number of other people -- Fannie Mae and Freddie Mac -- who are the literal and real architects of the financial meltdown of last year. [Premiere Radio Networks, The Rush Limbaugh Show, 4/20/10, via Media Matters]
- Fox's Doocy: “Fannie And Freddie Did Fan The Flames Of The Original Ignition In The Financial Meltdown, And It's Not Even In The President's Idea.” On April 23, 2010, Fox News' Fox & Friends hosted Gov. Chris Christie (R-NJ) to discuss the financial regulatory reform proposal, and co-host Steve Doocy stated, “Fannie and Freddie did fan the flames of the original ignition in the financial meltdown, and it's not even in the president's idea.” Christie responded: "[T]here's no question that Fannie and Freddie played a huge role in that, and I think that the more people look into this and investigate it, as I know they're going to, the more evident that's going to become. And so if you want to regulate, you should regulate everything that contributed to the crisis and look at all that and see what's appropriate." During the segment, Fox & Friends aired on-screen text stating, “Dems Want to Reform Wall St: Don't See Problems W/ Fannie & Freddie?” [Fox News, Fox & Friends, 4/23/10, via Media Matters]