Private Sector Loan Losses vs Fannie/Freddie

Thursday, October 23, 2008 | 09:00 AM

Joe Kernan on CNBC continues to get this not just a little bit wrong, but terribly, horribly, mind numbingly wrong.

His favorite NYT article comes form  1999 (he referenced it again this morning). This piece has become a right wing meme: Fannie Mae Eases Credit To Aid Mortgage Lending. The article discusses a 24 bank, 15 market pilot program -- teeny tiny in the overall total mortgage market -- as if its the Rosetta stone of Housing/Credit crisis.

The article states that "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." It was the lenders themselves who were pressing the GSEs to buy these loans. The private sector lenders were pursuing this market due to fatter potential profits -- not Fannie and Freddie.

These facts don't stop the pundits; nor does an apparent lack of understanding of the actual causes of the housing boom/bust and the credit crisis. Their cognitive dissonance has also prevented them from acknowledging the role deregulation had in these events.

Some people actually look at the data, while others foolishly parrot talking points. Consider this Federal Reserve Board data, compiled by McClathcy. It shows that:

  • More than 84% of the subprime mortgages in 2006 were issued by private lending institutions.
  • Private firms made nearly 83% 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 CRA;
  • Only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.
  • Mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.


The "Blame Fannie/Freddie/CRA" crowd, do provide a service: I know anyone who repeats this meme is an empty headed parrot, a mindless drone without an ability to think. This is a huge timesaver, as it has allowed me to dismiss many of the ditto heads I might have otherwise wasted time on.

So whoever came up with this silly talking point, despite your lack of concern for facts and your attempts at muddying the waters -- thanks! You've saved me an enormous amount of time in identifying people not to bother reading, and to ignore.

Hat tip Econbrowser

Private sector loans, not Fannie or Freddie, triggered crisis
David Goldstein and Kevin G. Hall |
McClatchy Newspapers  October 12, 2008

Thursday, October 23, 2008 | 09:00 AM | Permalink | Comments (73) add to | digg digg this! | technorati add to technorati | email email this post




Could banks satisfy their CRA requirements by buying such loans from the brokers? Could you fob off responsibility for an annoying law, much like towns in NJ used to be able to "buy off" Mount Laurel housing requirements by paying "credits" to other towns?

I think that's an imporant question to answer.

Posted by: Mongbat | Oct 23, 2008 9:22:03 AM

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