I am so tired of people saying that the current mess is a failure of free markets. The housing bubble was caused by Fannie Mae and Freddie Mac, two government sponsored enterprises that have been virtual piggy banks for politicians for years. If you really want to know why anyone with a pulse could get a mortgage, you need look no further than the nexus of Congress and Fannie/Freddie (HT: Q&O)
From the New York Times September 30, 1999:
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.
Free market advocates were against this from the start. This is from the same article:
”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
After expanding this lending, Fannie Mae got caught cooking the books (from the SEC):
The Commission’s action alleges that Fannie Mae misstated its financial statements from at least 1998 through 2004. In settling these charges, Fannie Mae has agreed to pay $400 million, the lion’s share of which will be paid to the Commission, who will in turn return it to defrauded shareholders through our Fair Fund program. Fannie Mae also agreed to be permanently enjoined from future violations of the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws.
The significance of the corporate failings at Fannie Mae cannot be overstated. The company has said that it estimates the restatement of its financial statements for the years ended December 31, 2003, and 2002, and for the quarters ended June 30, 2004, and March 31, 2004 will result in at least an $11 billion reduction of previously reported net income. In all likelihood this will be one of the largest restatements in American corporate history.
The accounting scandals just led to more hanky panky. After the accounting fraud was revealed, they feared that regulators would crack down so they made a deal with Congress. Lay off more regulation and we’ll expand sub prime lending (via WSJ):
How did we get here? Let’s review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of “affordable housing.” They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.
It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them. By late 2004, Fannie and Freddie very much wanted subprime and Alt-A loans. Their accounting had just been revealed as fraudulent, and they were under pressure from Congress to demonstrate that they deserved their considerable privileges. Among other problems, economists at the Federal Reserve and Congressional Budget Office had begun to study them in detail, and found that — despite their subsidized borrowing rates — they did not significantly reduce mortgage interest rates. In the wake of Freddie’s 2003 accounting scandal, Fed Chairman Alan Greenspan became a powerful opponent, and began to call for stricter regulation of the GSEs and limitations on the growth of their highly profitable, but risky, retained portfolios.
All these grandstanding politicians, including the asshole Sherrod Brown, who asked Bernanke and Paulson today if Wall Street owed America an apology. I think it is Sherrod Brown who owes us an apology – for taking campaign contributions and carrying water for Fannie Mae. According to Open Secrets, Brown got $10,000 from Fannie Mae in this election cycle. He also got $3000 from Freddie Mac. What favors did they expect from him for accepting their money?
In fact, Brown maybe should recuse himself. He’s taken in his career $1,432,581 from Real Estate/Insurance/Finance industries. The man is a walking conflcit of interest.
This scandal may have something to do with Wall Street greed, but it’s also about political greed. If anyone owes the American public an apology it is people like Sherrod Brown (D-OH).