The Government Did Cause the Housing Crisis (2011) | Hacker News Reader

The Government Did Cause the Housing Crisis (2011)

theatlantic.com

4 pointsnickles7 comments

Here is some more on Fannie Mae and Freddie Mack and the housing crisis

http://useconomy.about.com/od/criticalssues/a/Fannie_Cause.h...

https://en.wikipedia.org/wiki/Fannie_Mae#2000s

The conservatives say the bubble and crash were caused by Fannie Mae, Freddie Mack, and the Community Reinvestment Act. But at the time the bubble was happening, they said housing prices were just great, and it was the liberals who said we were heading for a disaster. Then, after the bubble burst, the conservatives changed their story overnight.

For a good discussion, see: https://en.wikipedia.org/wiki/Causes_of_the_Great_Recession.

I think the underlying error for conservatives is assuming that the free market, left to itself, will always self-regulate and establish correct prices. That is generally true when you are talking about goods like refrigerators and also direct services like haircuts.

However, history has shown countless times that when it comes to financial markets, including investments like real estate, over the long term things often become highly unstable, with wild prices rises and crashes. Another example would be banking panics. A third example is insurance, where insurance companies have a strong tendency, left to themselves, of putting aside too little in the way of reserves to handle unusual expenditures. For these sorts of reasons, a good deal of governmental regulation is needed in the financial realm.

Snippets from NY Times, September 30, 1999, "Fannie Mae Eases Credit To Aid Mortgage Lending", by STEVEN A. HOLMES (http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-...):

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.

...

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.

...

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

"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."

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

But once Bush became President, the bubble started, and the Bush administration backed it because the recovery from the 1990 recession was slow, the conservatives stopped talking about Fannie Mae and Freddy Mac. They told us it was good home ownership was rising, the prices were sound, and there was no chance they would suddenly collapse, much less cause the economy serious financial harm.

I know because I am rather independent and think the conservatives have a lot of good points on economics, and so I listen to both sides.

Which leads me to ask you, rskar, what was your position during the boom, and what did you think when the conservatives suddenly changed their views immediately after the bubble burst?

I think the sort of people who ran (and run) the financial industry leveraged the political sentiments behind the Community Reinvestment Act for their own personal gains. It should be noted that the CRA got legislative changes in 1999 (enacted November 12, 1999, Gramm-Leach-Bliley Act, a.k.a. "Financial Services Modernization Act") that are co-incident with the repeal of the part of the Glass–Steagall Act which prohibited a particular bank from offering a full range of investment, commercial banking, and insurance services since its enactment in 1933.

It's quite eye-opening to see all that the Gramm-Leach-Bliley Act did (https://en.wikipedia.org/wiki/Community_Reinvestment_Act#Leg...) in terms of rolling back the standards for CRA compliance, forms of allowed banking under one roof, and failure to give to the SEC or any other financial regulatory agency the authority to regulate large investment bank holding companies.

I don't know the particulars about Fannie Mae's pilot program in 1999, but it and Freddie Mac, while both Government Sponsored Entities, were both expected to operate much the same as any commercial for-profit enterprise. The people who ran (and run) them come from the same talent pool that runs the rest of the industry.

Just my opinion, but it seems to me that much rides on how much "churn" a financial company can do. Churn as in sales in financial services which include the repackaging of other financial "products" into a new ones. Compensation for most of the people involved is a straightforward percentage of sales, independent of actual profitability or long-term sustainability for the company (let alone their clients).

By "the Conservatives" I'm (safely) assuming you mean mostly GOP politicians. I'm also assuming you well understand the connections between politics and money. Their apparent changes in their collective views are nothing more than the usual specious talking-points one has come to expect from political animals. Their choices of talking-points are regularly "re-balanced" with the political winds.

The political timeline is quite simple. Before the Gramm-Leach-Bliley Act, the CRA was doing no favors for the financial industry, hence the decries from representatives who "feel-the-pain" from that segment of their constituency. Then the Act is passed, regulations are dropped, allowable banking services expanded (CitiGroup is now legal!), subprime mortgages spur even more home ownership (that's what the CRA was about, right?), Wall Street gets to do the Fannie Mae/Freddy Mac thing but in their own inimical ways (liar loans anyone? but, shhh, nobody knows anything about that yet) - so it's churn! churn! churn!

So for a while the financial industry was making big bucks, banks can originate subprime loans profitably to "satisfy" CRA, poor people and minorities can now get houses - so what's not to love? So the Gramm-Leach-Bliley Act is a smashing success, and it is very much a GOP idea. What GOP type is going to make noises about Fannie Mae/Freddy Mac now when their buddies in finance are doing rather much the same thing?

And then the 2008 crash, and fingers are pointed at the culprits: It was the CRA! (a half-truth); It was the repeal of Glass–Steagall Act (3/4 truth). Mostly I see it as the consequence of rolling-back or repealing so many regulations, restrictions, and standards that have accrued over the decades in response to various crises of the past. The industry mostly wants to do as it pleases and will push to be as unfettered as it can get. I'm guessing we're in agreement here.

This is another one of those situations where people made non-obvious tradeoffs against systemic stability and resilience in favor of other goals (specifically, economic growth and home ownership).

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