CrusaderFrank
Diamond Member
- May 20, 2009
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"These two entitiesFannie Mae and Freddie Macare not facing any kind of financial crisis," -- Barney Frank
They were the swirling black hole at the epicenter of the disaster
No, they weren't Frank.
Fannie Mae and Freddie Mac were victims, not culprits
Theres a dangerous and misleading argument making the rounds about the causes of our current credit crisis. Its emanating from Washington where politicians are engaging in the usual blame game but this time the stakes are so high that we cant 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. Its 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. Thats right most subprime mortgages did not meet Fannie or Freddies strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrowers 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 wouldnt accept crazy floating rate loans, which required income verification and minimum down payments, were left out of the insanity.
Theres 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 dont 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 didnt understand.
-Credit ratings that didnt 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.
Youll note in the Feds five causes that theres some culpability for lenders, borrowers, investors and credit raters. Theres no blame for Freddie Mac or Fannie Mae which had little or nothing to do with the entire situation.
They set the underwriting standards for the paper they would guarantee, Dear.
Without googling, can you please explain the role and mission of Fannie and Freddie? Go ahead and Goggle, its OK