Fannie, Freddie, Financial Crisis

A party that needn't be named
Made GSEs chiefly to blame
For the mortgage collapse,
Though inquisitive chaps
Say the data don't back up this claim.

Writing in The Big Picture blog, Roosevelt Institute fellow Mike Konczal brings out the data to refute the oft-heard claim that the cause of the mortgage crisis was Congress' pushing Fannie Mae and Freddie Mac to make imprudent loans. Among the key facts:

• More than 83% of subprime loans issued to 2006 were from private firms, and went into the private label securitization market. 
• From 2002-2005, the GSEs (government-sponsored enterprises, such as Fannie and Freddie) saw their share of US mortgage originations drop from 50% to 30%. 
• Before the crash, conservative think tanks such as the American Enterprise Institute were arguing that the GSEs were were blocking the issuance of subprime mortgages, by purchasing too few of them. 

Obama Harps on his Refi Program

"Since Congress won't do as they oughta
For folks who have homes underwater,
As Lender-in-Chief, I
Will back ev'ry refi
Allowed by executive order."

With an eye toward the 2012 election, President Obama has evidently decided that half measures taken on one's own are better than whole measures frustrated by House Republicans. Thus, the Administration announced with great fanfare a loosening of restrictions on its HARP (Home Affordable Refinance Program), which would actually benefit only one out of eleven underwater homeowners. For those mortgagors with loans taken out before May 2009 and guaranteed by Fannie Mae or Freddie Mac, the new HARP will allow a refi at any loan-to-value ratio, doing away with the former 125% limit. Indications are however that only about a million homeowners qualify for this "expanded" program, and it does not appear that the pace of refinancing will pick up, so the most telling impact of the new HARP may be on the campaign trail, when the President runs against the "do-nothing Congress."

MBS Q&A

Tell me how can we state with finality
When the mortgage bond crisis finale be?
When loans finish tanking
In ledgers of banking
To prices reflecting reality.  

Freddie Mac has inspired the foregoing Q and A with the news of its first quarterly profit in over 3 years. The $676 million profit stems from FHLMC's having arrested the slide in the collective value of the mortgages and foreclosed homes on its balance sheet, begging the question of whether the valuation is realistic, and whether it may yet fall further. As Freddie Mac CFO Ross Kari cautioned: "We're encouraged by the trends, [but] we're not putting up a 'mission accomplished' sign on the front of the building either."

Financial Crisis Post-Mortem

Economists noted the fact
That the big banks continue intact
By taking on debt,
Which, lest we forget,
Is implicitly government-backed.

At the 2011 American Economic Association annual meeting, leading economists - including MIT's Simon Johnson, co-author of "13 Bankers" - opined that financial reform had not done much to reduce the dangers posed by "too big to fail" banks.  Such banks maximize the amount of their debt financing because, due to the market's inference of a government guarantee, it is unnaturally cheap.  Similarly threatening are Fannie Mae and Freddie Mac which, Johnson said, "should be euthanized as soon as possible."

Random Mortgage Musing

One's own home, the American Dream
Was held in the highest esteem;
In support of this end,  
We came to depend  
On many a dubious scheme.

Dear Uncle Sam...

Fannie Mae wrote the Treasury a letter
For a bailout that's eight billion better;
Although Fannie and Fred
Were both presumed dead,
It turns out she's quite a bit debtor.