On 10/26/2010 1:54 PM, Chas. Chan wrote:
If you listen to Rep. Barney Frank (D-MA), defend his role in the
meltdown of Fannie Mae and Freddie Mac, he was just as blindsided as
the rest of us when the two government sponsored enterprises
collapsed, triggering the financial crisis.LOL


LOL!

Fannie Mae and Freddie Mac were victims, not culprits

Posted by: Aaron Pressman on September 26, 2008

There’s a dangerous — and misleading — argument making the rounds about
the causes of our current credit crisis. It’s emanating from Washington
where politicians are engaging in the usual blame game but this time the
stakes are so high that we can’t afford to fall victim to political
doublespeak. In this fact-free zone, government sponsored mortgage
giants Fannie Mae and Freddie Mac caused the real estate bubble and
subprime meltdown. It’s completely false. Fannie Mae and Freddie Mac
were victims of the credit crisis, not culprits.

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.

There’s a must-read study by staff members of the Federal Reserve Bank
of New York analyzing the roots of the subprime crisis that came out in
March. I don’t think it got much attention then as the conclusions
seemed uncontroversial at the time. But now that Washington politicians
are trying to rewrite history, it should be mandatory reading for every
American interested in knowing how we got here.

The study identifies five causes of the subprime meltdown:
-Convoluted loan products that consumers didn’t understand.
-Credit ratings that didn’t do a good job highlighting the risks
contained in subprime-backed securities.
-Lack of incentives for institutional investors to do their own research
(they just relied on the credit ratings).
-Predatory lending and borrowing (which I think means fraud perpetrated
by borrowers).
-Significant errors in the models used by credit rating agencies to
assess subprime-backed securities.

You’ll note in the Fed’s five causes that there’s some culpability for
lenders, borrowers, investors and credit raters. There’s no blame for
Freddie Mac or Fannie Mae which had little or nothing to do with the
entire situation.

It’s certainly fair to criticize Fannie and Freddie over real issues
that contributed to their downfall. The companies had numerous
accounting problems and inadequate safeguards covering their own
investment portfolios. Those weaknesses came home to roost when the real
estate market cratered. Fannie and Freddie purchased billions of dollars
of subprime-backed securities for their own investment portfolios and
got hit just like every other investor. But it’s some kind of crazy,
politically inspired CYA to blame for the mess we’re in.

(For a more fair and balanced — and detailed — recounting of Fannie and
Freddie’s subprime investing forays, see this post from the excellent
Calculated Risk blog.)

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