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KC native
09-22-2010, 11:27 PM
This is an excellent post that I saw on Ritholz' site but not authored by him. Oh, and nb4 ignorant assholes who will ignore the evidence.

Karl Smith is a Professor at UNC-CH and blogger at Modeled Behavior. He was a graduate fellow at the Institute for Emerging Issues, where his work was focused on state and local tax reform. Smith holds a BA and a PhD in economics from North Carolina State University.

The Conservator’s Report on Fannie and Freddie is out.

Fannie Mae and Freddie Mac are members of a long list of individuals and entities including Gary Condit, Tom Delay, Michael Jackson, Rod Blagojevich and JonBenet Ramsey’s parents. These are folks who were unjustly tried and convicted in the popular press essentially on the grounds that they were creepy or otherwise unsavory characters.

As I hope to continue to argue, being creepy, a bad person, or even a usual suspect does not make one automatically guilty of any particular crime. In this case government subsidies in the housing market are a bad idea for a host of reasons and have been for years. I will testify to this with vigor and passion.

However, that does not mean that Fannie or Freddie caused the housing bubble. Indeed, by my count they were among the biggest victims of it.

The proper question is not: What story is consistent with my general philosophy or worldview?

The proper questions is: What story is consistent with the facts?

Fact One: Fannie and Freddie’s primary business of subsidizing conventional loans was not a driver of the housing the bubble.

Indeed, conventional loans represented less than a third of all mortgage originations during the peak price acceleration years.

This was a phenomenon of private-label non-conventional loan securitization.
1.1 Peaking in 2006 at a third of all mortgages originated, the volume of Alt-A and subprime mortgages was extraordinarily high
between 2004 and 2007. In 2005 and 2006, conventional, conforming mortgages accounted for approximately one-third of all
mortgages originated

[ . . .]

1.2 Private-label issuers played a large role in securitizing higher-risk mortgages from early 2004 to mid-2007 while the Enterprises
continued to guarantee primarily traditional mortgages.

http://modeledbehavior.files.wordpress.com/2010/08/image6.png

Fact Two: Fannie and Freddie lost market volume during the boom.
That is, during the boom not only did the fraction of loans securitized by Fannie and Freddie fall, but the absolute number fell. At the same time the absolute number of private-label securitizations rose.

There is a simple and obvious reason for this. The development of structured products meant that for many consumers the free market offered a more attractive loan than the government subsidized one.

http://modeledbehavior.files.wordpress.com/2010/08/image7.png

Fact Three: The major losses to Fannie and Freddie came through their expansion into guaranteeing non-traditional loans, not through their portfolio.
That is, yes like every other financial entity Fannie and Freddie were buying subprime packages in the secondary market. However, these losses were relatively mild.
The Investments and Capital Markets segment accounts for $21 billion, or 9 percent, of capital reduction from the end of 2007 through the second quarter of 2010. Losses in the Investments and Capital Markets segment stemmed from impairments of private-label securities, fair-value losses on securities, and fair-value losses on derivatives (used for hedging interest rate risk).

Fact Four:The key change in the Fannie / Freddie business model was their expansion in the types of loans they willing to guarantee. In particular moving into the Alt-A and Interest-Only categories.
As we can see these loans began to seriously underperform as the economy deteriorated. These loans were not a part of the original “crap hidden by structure” subprime business. Fannie / Freddie borrowers on had on average credit scores above 710 and equity (or down payment) of above 25%.
http://modeledbehavior.files.wordpress.com/2010/08/image8.png
Also notice how loans with low credit scores and high loan-to-value had the largest delinquency rates in the beginning but then were eclipsed by Alt-A and Interest-Only loan categories as the economy deteriorated.
http://modeledbehavior.files.wordpress.com/2010/08/image9.png

Fact Five: The higher number of Alt-A and Interest Only loans combined with ultimately higher delinquency rates have meant that a plurality of losses have come from these two categories.
These loans were vulnerable not because the borrowers were poor low-credit individuals that the government was taking pity upon but because the loan concepts were predicated on rising or at least stable housing prices.
http://modeledbehavior.files.wordpress.com/2010/08/image10.png

Fact Six: Areas with the largest collapse in home prices have accounted for most of Fannie and Freddie losses.

Refer to the same graph above. This is further evidence that it was the collapse of the bubble and not betting on people who were poor credit risks that induced major losses at Fannie and Freddie.

My Conclusion
The wave of housing price increases was kicked off by changes in private label securitization. These changes left Fannie and Freddie with a smaller market share and lower absolute level of securitizations. Fannie and Freddie attempted to adjust their basic business practices to stay competitive in bubble markets and among aggressive borrowers.

These adjustment left Fannie and Freddie exposed to a large decline in housing prices. This is exactly what happened and Fannie and Freddie reaped enormous losses because of their exposure.

Had Fannie and Freddie stuck to their traditional role of guaranteeing low value traditional loans rather than trying to stay competitive in bubble areas their losses would have been substantially less.

In short, attempting to subsidize the American dream for low and moderate income families may be a fundamentally bad policy. However, it does not appear to be either the origin of the housing bubble or the source of Fannie and Freddie’s trouble.

~~~

Originally published at Modeled Behavior

Ebolapox
09-23-2010, 06:29 AM
Ok.

Amnorix
09-23-2010, 06:34 AM
There's plenty of blame to go around, and I think everyone has a slice -- borrowers, mortgage companies, loan originators, regulators all the way up to Congress and the President, and the underwriters.

Everyone got greedy or make choices based on expediency or self-interest, without a care for long term ramifications. "Everyone else is doing it". etc.

The Mad Crapper
09-23-2010, 08:11 AM
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KC native
09-23-2010, 08:44 AM
So....where are all the gas bags who kept blaming Fannie and Freddie while I maintained (correctly) that fannie and freddie were small potatoes?

stevieray
09-23-2010, 08:45 AM
someone give nutive a cookie.

The Mad Crapper
09-23-2010, 08:48 AM
So....where are all the gas bags who kept blaming Fannie and Freddie while I maintained (correctly) that fannie and freddie were small potatoes?

ROFL

KC native
09-23-2010, 08:51 AM
someone give nutive a cookie.

ROFL

Awesome. Keep tucking your tails. ROFL

The Mad Crapper
09-23-2010, 08:52 AM
Awesome. Keep tucking your tails. ROFL

Wha...?

You're an idiot.

Cave Johnson
09-23-2010, 09:00 AM
Good post, Native.

I guess this isn't much of a shock, but there was huge growth in subprime, Alt-A (another type of subprime), and home equity during the main bubble years (2003-2007). Loan to borrowers who are depending on unsustainable 6%/yr real estate growth, and you'll get massive losses when the bubble bursts.

The bottom line is, Fannnie/Freddie shouldn't have been backstopping the first 2 categories.

BigChiefFan
09-23-2010, 10:28 AM
They continue to LOSE money at the TAXPAYER'S expense. So anybody that railed against Fannie and Freddie were/are correct. Just because it isn't the MAJOR problem, doesn't mean it isn't still isn't a losing entity.

Wa9erfan
09-23-2010, 10:36 AM
You conveniently left out the fact that they were investing on the premise that these loans would fail, thus making the top officers in Freddie/Fannie obscene amounts of money.

KC native
09-23-2010, 11:36 AM
You conveniently left out the fact that they were investing on the premise that these loans would fail, thus making the top officers in Freddie/Fannie obscene amounts of money.

No, you are confused. Fannie/Freddie did no such thing. That was Goldman Sach.

ROYC75
09-23-2010, 12:00 PM
They were a part of the pie, a slice, maybe 2, at least the fruit that's in it.

ROYC75
09-23-2010, 12:01 PM
The fact that the D's wanted to make housing available to people who couldn't pay or were great risk is the biggest factor...... poorly regulated.

stevieray
09-23-2010, 12:14 PM
You conveniently left out the fact that they were investing on the premise that these loans would fail, thus making the top officers in Freddie/Fannie obscene amounts of money.

Franklin Raines... 90 mill
F&F 96% of mortgages...

but hey, nutive posted a colorful op and thinks he has the final say.

someone give him another bone.

AustinChief
09-23-2010, 12:31 PM
This may be the single biggest waste of space of an article I have ever read...

I will replicate it...

FACT 1 The sky is blue
FACT 2 Water is wet


Nothing stated in the article has ever been a point of contention.. everyone KNOWS that Fannie Mae and Freddie Mac's TRADITIONAL low risk loans weren't the issue... it is the FACT that they started to follow the trend into the higher risk markets that caused the problem...

The FACT is.. it is their FAULT for changing their own rules and trying to "stay competitive".. they played a MAJOR part in feeding the fire.

Donger
09-23-2010, 12:34 PM
This may be the single biggest waste of space of an article I have ever read...

I will replicate it...

FACT 1 The sky is blue
FACT 2 Water is wet


Nothing stated in the article has ever been a point of contention.. everyone KNOWS that Fannie Mae and Freddie Mac's TRADITIONAL low risk loans weren't the issue... it is the FACT that they started to follow the trend into the higher risk markets that caused the problem...

The FACT is.. it is their FAULT for changing their own rules and trying to "stay competitive".. they played a MAJOR part in feeding the fire.

Ummm, they were acquitted. Didn't you read that? KC native said so.

They did nothing wrong.

KC native
09-23-2010, 11:03 PM
This may be the single biggest waste of space of an article I have ever read...

I will replicate it...

FACT 1 The sky is blue
FACT 2 Water is wet


Nothing stated in the article has ever been a point of contention.. everyone KNOWS that Fannie Mae and Freddie Mac's TRADITIONAL low risk loans weren't the issue... it is the FACT that they started to follow the trend into the higher risk markets that caused the problem...

The FACT is.. it is their FAULT for changing their own rules and trying to "stay competitive".. they played a MAJOR part in feeding the fire.

Where the fuck have you been? The RW has been blaming Fannie and Freddie from the start.

At this point, Fannie and Freddie have cost us $145 Billion and will more than likely cost us around $400 Billion. That is a fraction of the wealth that has been destroyed by the financial system implosion that was caused by the big banks and the IB's. Fannie and Freddie were late to the party and if it weren't for the implied (now explicit) guarantee of their securities they would have been allowed to fold. In the future, I can guarantee that in the future the government guarantee will disappear.

KC native
09-23-2010, 11:04 PM
Ummm, they were acquitted. Didn't you read that? KC native said so.

They did nothing wrong.

I said no such thing.

AustinChief
09-23-2010, 11:43 PM
Where the fuck have you been? The RW has been blaming Fannie and Freddie from the start.


And they ARE to blame! The article simply states that had they stuck to their traditional role.. they wouldn't have been much of a problem.

I am actually mostly in agreement with you on this subject but the article doesn't really add much to the subject...

Fannie Mae and Freddie Mac jumped in to the free wheeling unregulated bad loans situation and got burned... now, that said... they didn't start the problem, nor were they the biggest part of it... but they were a definite part of it... they bought hundreds of millions of dollars in bad loans that they had no business being involved in.

And if you are looking for someone to blame.. Look no further than Barney Frank and Herb Moses... Frank LED the charge to relax policies concerning "affordable" loans...

This goes all the way back to the early 90s... it just didn't come to roost until recently.

I have no problem at all with Fannie Mae as it existed before Frank and Moses dismantled the policies that would have kept it completely out of the bad loan business. AND if not for those policy changes... the private lenders would have burned themselves out faster and with a much less violent effect on the overall market. Instead Fannie Mae and Freddie Mac kept them propped up long enough to enable a complete breakdown of the system.

go bowe
09-24-2010, 12:46 AM
Wha...?

You're an idiot.it's your and idiot...

The Mad Crapper
09-24-2010, 08:09 AM
it's your and idiot...

Shut up you moran!

:jester:

Donger
09-24-2010, 08:47 AM
I said no such thing.

You didn't write the thread title?