Dean Baker
CEPR
November 25, 2011
When a newspaper abandons journalistic standards in its
news pages one hardly expects to find much commitment to
truth on its opinion pages. Therefore it is not
surprising that the
to Tennessee Senator Bob Corker to spread the story that
government support for homeownership through Fannie Mae
and Freddie Mac was the cause of the housing bubble.
Corker tells readers:
"During the boom years, the GSEs' affordable
housing goals were coupled with a Congress and
an administration that saw only the bright side
of rapidly increasing homeownership rates. That
meant that as housing prices began to spike, it
was impossible to make credit slightly more
expensive. Without countercyclical market
mechanisms able to operate naturally, as housing
prices went higher, the GSEs simply raced each
other to lower guarantee fees, out of fear that
they might lose business from mortgage
originators such as Countrywide and
Mutual. The result, we now know, was a
government-induced bubble followed by a painful
collapse."
Okay, maybe Senator Corker really never heard of
Citigroup, Goldman Sachs, Lehman Brothers, Bears
Stearns, and the other Wall Street investment banks. He
may not know that they were making tens of billions of
dollars during these years securitizing the worst of the
sub-prime mortgages, without any government guarantees
except their implicit too-big-to-fail insurance. News
may take a long time to reach
But surely the Post knows about privately issued
mortgage-backed securities and their role in the bubble.
It even published a very good column
by Barry Ritholz a couple of weeks back outlining the
story. So why does it allow Corker to publish something
that it knows is not true? Would it print an opinion
column blaming President Bush for actually doing the
There is a ton of data showing that the blame-Fannie-
and-Freddie story is nonsense, but my favorite entry in
this debate is a contemporaneous assessment from that
well-known promulgator of left-wing propaganda, Moody's:
"Freddie Mac has long played a central role
(shared with Fannie Mae) in the secondary
mortgage market. In recent years, both housing
GSEs [Government Sponsored Enterprises] have
been losing share within the overall market due
to the shifting nature of consumer preferences
towards adjustable-rate loans and other hybrid
products. For the first half of 2006, Fannie Mae
and Freddie Mac captured about 44 percent of
total origination volume - up from a 41 percent
share in 2005, but down from a 59 percent share
in 2003. Moody's would be concerned if Freddie
Mac's market share (i.e., mortgage portfolio
plus securities as a percentage of conforming
and non-conforming origination), which ranged
between 18 and 23 percent between 1999 and the
first half of 2006, declined below 15 percent.
To buttress its market share, Freddie Mac has
increased its purchases of private label
securities. Moody's notes that these purchases
contribute to profitability, affordable housing
goals, and market share in the short-term, but
offer minimal benefit from a franchise building
perspective." (Moody's, "Federal Home Loan
Mortgage Corporation, Analysis
http://www.freddiemac.com/investors/pdffiles/fm2006_moodys.pdf
" December 2006, p.8)
So here we have Moody's expressing concern about the
ongoing viability of Freddie Mac because they are losing
out in the subprime and Alt-A market to the investment
bank. This is its assessment at the time, before it was
apparent (to them) that this market was a disaster in
the works.
When someone claims that the bubble was the fault of
Fannie and Freddie, they are either ignorant or lying.
And, I am saying this as someone who was harshly
critical of both at the time and would happy to see the
euthanasia of these mortgage giants-at least if the
alternative is to see them returned to some sort of
public-private hybrid.
Both companies deserve tons of blame, they could have
possibly stopped the bubble cold if either of them had
done something radical like announcing that they would
require appraisals of rental values and only buy
mortgages with a purchase price below some prce to rent
ratio (e.g. 18 to 1). However, their failure to be heros
does not make them the prime villians. That would be the
Wall Street boys, end of story.
Btw, if anyone is interested in knowing what happens to
a public agency committed to homeownership in the middle
of a housing bubble, that is not run for profit, then
they should look to the Federal Housing Authority (FHA).
While far from perfect, the FHA did not get caught up in
the irrational exuberance of the bubble years. Its
market share fell from around 10 percent in the late
1990s to 2 percent in 2005.
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