Business/Finance

False conservatives lie that Fannie and Freddie caused the subprime mortgage crisis

Some conservatives have been blasting Fannie Mae and Freddie Mac, as well as the Community Reinvestment Act, as the source of the mortgage crisis and subsequent financial meltdown. On Tuesday, October 7, Daniel Gross wrote a commentary on Slate titled Subprime Suspects in which he names (with quotations so they can’t claim otherwise) some of the people responsible for this: John McCain, Charles Krouthammer of the Washington Post, and Neil Cavuto of Fox Business. Gross’ proposition in his Slate piece is that, when Cavuto says “Loaning to minorities and risky folks is a disaster.”, Cavuto is blaming the poor and brown among us for the financial meltdown. And if that’s not racism, Gross doesn’t know what else it is.

Unfortunately, the general tone of Gross’ commentary is a bit too confrontational in order to convince most non-liberals that he’s right (even though, if you can get past the tone, he clearly is). That’s where a new piece (Private sector loans, not Fannie or Freddie, triggered crisis) out of McClatchy comes in.

Federal Reserve Board data show that:

  • More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
  • Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
  • Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.

That law would be the aforementioned Community Reinvestment Act (CRA).

Furthermore, the article goes on to show that, while Fannie and Freddie were a small part of the problem, the mortgage failure actually happened as Fannie and Freddie were reducing their holdings of subprime mortgages by a factor of 2, from 48% to 24% between 2004 and 2006. In fact, in 2005 and 2006, private investment banks stopped using Fannie and Freddie for 2/3rds of all the mortgages they initiated, preferring instead to package them into questionable mortgage-backed securities. And now about 70% of all mortgages are in this secondary, non-Fannie or Freddie market.

Furthermore, the article shows that not only were Fannie and Freddie not pressuring banks, they were prevented from their regulator, the Office of Federal Housing Enterprise Oversight (part of the Executive Branch), from effectively competing against the private securities.

As far as conservative attacks on the CRA, those hold even less water than the attacks on Fannie and Freddie. The article points out that private investment banks, non-bank lenders, and the mortgage brokers who originated the subprime loans aren’t subject to the CRA rules – only commercial and thrift banks are. Instead, state regulators were responsible for monitoring mortgage brokers and, in states with extremely lax regulation like Colorado, huge numbers of subprime loans were originated. And two members of the Federal Reserve have found that CRA loans were very responsible loans that commercial banks made money off of, not lost money.

Daniel Gross calls the conservative attack on Fannie, Freddie, and the CRA racist and wrong. McClatchy calls the charges lies. While the McClatchy approach will probably win more converts, it’s clear that bigots like Rush Limbaugh are using racist language in an attempt to win political points. Real conservatives who don’t want to become extraneous should step forward and call for a stop to the lies and race baiting.

12 replies »

  1. “More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.”

    Those mortgages were then sold to Fannie Mae and Freddie Mac, which packaged them up into the “mortgage based securities”, which they resold to wall street banks and foreign investors.

    It’s clear that you’re out of your depth here. Fannie and Freddie aren’t loan originators, they are companies that provide a market for reselling mortgages.

    The chief culprit here is of course the Federal Reserve, but trying to make Fannie and Freddie out to be innocent is utterly absurd.

  2. According to the article, the securities that Fannie and Freddie packaged up accounted for 30% of all mortgage securities. So at most they’re responsible for 30% of the problem. And when you compare the sizes of the bailouts, that also makes it clear that Fannie and Freddie aren’t the problem – out of a total $900 billion in bailouts for Fannie, Freddie, and private companies with mortgage-backed securities, only $200 billion is for Fannie and Freddie (about 22%). The rest, 78%, is for the private companies who are the root of the problem.

    According to the article, and they make a very good case (that you really should read before commenting, BTW), the chief culprit is all the private companies that originated the loans. Regardless, however, the point is that the people who are blaming Fannie and Freddie, along with the CRA, entirely are either woefully misinformed, being manipulated by people with agendas, or are lying in an attempt to manipulate others.

  3. The McClatchy article is misleading. It’s true that Fannie/Freddie didn’t originate a majority of loans or hold a majority of loans. But they GUARANTEED a huge number of loans that they didn’t own. The aggregate of loans loans they either owned or guaranteed was about half of all US mortgages.

  4. Brian, it’s going to be very difficult to find a single “culprit” in this mess. Fannie and Freddie are significantly large so, even though they’re not the largest, they certainly have a significant impact. The current thinking by economists is that the US government’s failure to bail AIG out caused massive knock-on effects as interbank lending fell apart – but that doesn’t mean that AIG is at fault either.

    In the end, there has been widespread moral hazard of an equivalence to the dotcom disaster of eight years ago. Pundits genuinely believed that this was a “new” economy and that the old rules didn’t apply and that profits could only ever go up.

    I remember columns here a year ago where people complained that property prices would keep going up and that no one would ever be able to afford to buy again. The existence of a contradiction of this magnitude implies a nasty bubble about to correct. The banks (both private and state guarantors) certainly facilitated the mess, but it couldn’t have happened without a large number of individuals who convinced themselves that the bills they incurred would never have to be paid.

  5. Playing the “Race and/or ethnicity card” is, to me, a sure sign that scapegoating is sought.
    Even the parties directly involved–including Gov. officials had not the slightest clue as to whether or when the “Bubble” would break. A random citizen, Race notwithstanding, who
    no doubt thought the Bubble would not break for a while into the future did buy a more expensive dwelling than otherwise might be considered appropriate. This does not qualify any Race or Ethnic group for much beyond being a sort of normal U.S. citizen in topsyturvey economic times.

  6. misguided “Shills” of some media outlets advance the notion that the opposition partisan party was secretly in charge of the procedures resulting in the economic crisis. To the extent this is true it is an admission of incompetence by the “Scaspegoating” party in power.

  7. Great pointless data! It might have been a better article if you had actually included support of your accusations. Yet another liberal attempt to blame the conservative party. And you wonder why you’re called the liberal media. What ever happened to truth in reporting?

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