So what is my Official Editorial Position on the role played by Fannie Mae in fueling the housing bubble and the resulting financial collapse? Good question - I really ought to have one, and I am having a hard time swallowing the straight Republican line put out by the Republicans on the panel investigating this.
I am confident that the largest players in the US mortgage market played a role in distorting that market. However, the numbers don't tell that story very convincingly - the conservator's report on Fannie and Freddie from 2010 showed them losing market share during the housing boom. Left unmentioned by even astute observers - Fannie Mae was hamstrung by an accounting scandal and was battling the Bush Administration. However, per CNN the market had passed them by:
Another question that has been lost in the political wrangling is whether Fannie's business has changed permanently for the worse. Over the past 18 months the growth in Fannie Mae's portfolio has slowed sharply because of competition from banks and hedge funds, which are financing their mortgage purchases with cheap, short-term debt (a technique known as the carry trade). Back in 2002 the spread between the yield of Fannie's mortgage portfolio and its long-term liabilities was 63 basis points. In the second quarter of 2004 it had fallen to two basis points. To keep profits up, it looks like Fannie, which has disparaged the carry trade as too risky, may now be using the strategy itself, which would make it more vulnerable to rising interest rates.
And the Republican arguments can become hazy here. For examples, buyers may have proceeded with confidence in 2005, firm in the belief that Fannie would be back to bail them out in 2006. Even more importantly, not every bubble ends in a financial panic - for example, the tech collapse of 2000/2001 did not threaten to take down the banking system. So even if Fannie helped inflate the housing bubble, should they be blamed for the panic?
Well. This is a weekend for Christmas shopping. Joe Nocera of the Times tackles the Republican report and vexes me with this:
The Republican document issued earlier this week did little more than regurgitate this theory of the case. “Subsidizing mortgages through the G.S.E.’s was a particularly expedient way to increase the homeownership rate,” they write at one point. At the same time, they tread lightly over the culpability of other nongovernmental culprits like the credit ratings agencies and Wall Street itself.
The only problem with Mr. Wallison’s theory is that it’s not, as they say, reality-based. Anyone who has looked at the role of Fannie and Freddie will discover they spent most of the housing bubble avoiding subprime loans, because those loans didn’t meet their underwriting standards. (Indeed, for most of their existence, Fannie and Freddie didn’t so much meet their affordable housing goals as gamed them.)
Well, Fannie and Freddie couldn't underwrite subprime loans, so they bught them for their own investment accounts from others, and scored that as providing affordable housing. The WaPo has a chart from HUD (I think...) showing Fannie and Freddie buying 49% of the securities backed by subprime mortgages in 2003, 44% in 2004, 33% in 200, and 20% in 2006. (In 2006 the dollar amount was $90 billion). Even with declining market share, they were huge players.
On the other hand, the conservator reports don't show them with huge losses from their investment activity, despite holding a $700 billion portfolio of mortgages (all qualities, presumably). I presume I am missing something.
LOVE THESE TYPOS: An earlier version (and possibly this one, too) had discussion of the baking system and the hosing bubble. And I got no help from Spellchek, that uncertain ally.
IN BRIEF: My current leaning is that Fannie and Freddie contributed to the general moral hazard promoted by the Fed - a never heard of 'em hedge fund (Long Term Capital) was too big to fail back in 1998, Bear Stearns was too big to fail in early 2008, and surely the housing market was too big to fail and would be propped up by Fannie, Freddie and the Fed. Also important were the Basel capital requirements which gave banks around the world a special break on mortgage backed securities.
Easy money leaving investors scratching for yield, a regulatory structure encouraging banks to hold housing securities, huge government sponsored entities promising to buy anything in sight to keep the housing market humming - what could go wrong?