Fannie and Freddie - Not Their Fault?

Thursday, February 17, 2011

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on The Brian Lehrer Show Phil Angelides, Financial Crisis Inquiry Commission chairman, disussed the role of Fannie Mae and Freddie Mac in the lead-up to the housing bubble and bust. Angelides is a weekly guest during the month of February. Each week he unpacks the Financial Crisis Inquiry Commission findings on the economic meltdown.

Last Friday President Obama laid out three options for winding down Fannie Mae and Freddy Mac, the faulty tax-payer owned institutions that have been condemned for irresponsibly backing lame sub-prime mortgages. While Angelides isn't about to let Fannie Mae and Freddy Mac off the hook for worsening the financial crisis, but he rejects the argument that they were the main cause of it.

From the Depression era creation of Fannie Mae in 1938, in an effort to bolster and create a market for home loans, up to the year 2000, Angelides says the program worked remarkably well. It was only in 2005 and 2006, when Fannie and Freddie saw they were losing market share because they were not engaging in the risky practices of Wall Street firms, that they started approving sub-prime loans. Soon, like much of the financial industry, they went down the toilet.

Ultimately because they were a profit making organization they decided to try to regain market share, drive up profits, drive up compensation. They joined the party late and unfortunately in the late stages of the crisis they bought a significant amount of sub-prime securities. But even then they peaked, they never bought more than 28 percent of the sub-prime mortgage backed securities on the market. So they helped inflate the housing boom, they added helium to the balloon, but they were not the primary drivers.

Fannie Mae was originally  set up as a government agency during the New Deal, but was transformed into a privately held publicly traded corporation in 1968. That turned out to be a very dangerous model, because even though they were essentially tax-payer owned, they became driven by profits and resisted regulation in their competition with Wall Street firms like Ameriquest. In essence, they were "privatising gains and socializing losses." Angelides believes it was the lack of regulation, "a bipartisan problem," that was the culprit.

There's no doubt that Fannie and Freddie were disasters. They're going to cost the taxpayers—to date they've cost $150 billion. No one should argue that this was a well run set of institutions. In fact one regulator said they were the worst run financial institition they've ever seen.

Yet the worst of the worst mortgages were not backed by Fannie and Freddie. The default rate for loans created by Wall Street firms was much higher—28 percent versus six percent. 

So what now? The Obama administration has laid out a variety of options to change the way home loans are financed—the most extreme would be for the government to have no part at all in private sector loans. Angelides disagrees with that.

I do think there's a legitimate role for some form of government guarantee to help people at the margins—I mean there's just some folks who don't have the income and capacity to own homes and won't be able to. So we shouldn't be stretching in ways that are imprudent, but to provide some stability, some support for the housing market, particularly when private mortgage lending dries up.

The Financial Crisis Inquiry Commission's report is making waves—it's on the New York Times bestseller list. People want to know what went wrong—how 27 million Americans are out of work, four million lost their homes, and yet Wall Street and Washington continue to function.


Phil Angelides


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Comments [11]

Eugenia Renskoff from Brooklyn

Hi, Brian. The government should help homeowners stay in their homes. Now people are focused on renting, but I think that is not a good thing in the long run. If you buy a home, you’ll stay there a long time (most probably). Renters usually tend to move about a lot unless they are very lucky. Finally, those of us who had homes foreclosed should get our day in court and get our money back. Nobody seems to care about us; the banks don’t need a break. We do. Eugenia Renskoff

Feb. 17 2011 01:43 PM


This American Life with Planet Money had a very good segment -- The Pools of Money.

These "pools" were created as the result of the profits created by labor arbitrage -- products created with cheap labor and sold in high-price markets like the US.

The Fed keeps the interest rate low because as a debtor nation we don't want to pay for our debt. Thus, these "pools of money" created (and continue to create) a demand for high(er) interest product.

However, there is no place in this country to invest this paper money -- there is no industry. We don't produce -- we consume!

So, the subprime (ninja,liars) loans were created to fuel the bubble in housing -- one of the industries that is impossible to outsource. The housing was the source of income for a lot of people. Then the bubble popped...

The rest is history, BUT the underlying facts remained. Both Democrats and Republicans were selling the outsourcing to the American public, and no one wants to walk about it. The FCIC report is just one example.

Lack of jobs and high unemployment are not the direct result of the financial crisis. It is the free movement of capital (with the jobs, technology, know-how) elsewhere that is the problem.

Feb. 17 2011 01:29 PM
Fafa from Harlemworld

...subprimes were a place to put excess profits from...outsourcing?...

Feb. 17 2011 12:12 PM

Some questions are better remained unanswered....

Feb. 17 2011 12:07 PM
Fafa from Harlemworld

SANYCH, bless you for reading that report, and for your analysis...

BRIAN, can Mr. Angelides clarify WHY the banks were feverishly granting subprime mortgages (before Fannie Mae)?

Feb. 17 2011 11:41 AM
economist-lawyer-actuary from Montreal, autre terre de housing buble

The goal of economically rational consumer/man is to achieve as much happiness or utility as possible.

He has a limitation on wealth because he only lives so long, is only so healthy, only so smart, only so lucky to inherit the amount he has.

Thus is PRICES of the goods (cars, movies, candy, recreation drugs, sex toys, books, sporting events, radio shows, broadway plays) and services goes DOWN, it is an UN-alloyed "good thing".

Housing is a service that economic-man must purchase.

It is an UN-alloyed good if the price of housing services drops.:

Rooting for housing prices to climb and climb even faster than the rest of the economy is akin to rooting for OIL prices to soar.

It is merely CRAZY

Feb. 17 2011 11:38 AM

Please always say that the American dream is dead.

You are kinda of responsible, you never asked the really tough questions. This country is on the brink. You need to step up or maybe have your funding taken away.

The good thing is if NPR goes away is Fox News will fill in that hole.

Sonofthenation has spoken.

Feb. 17 2011 11:38 AM

I think it's long past time we stopped fetishizing home ownership in the United States. As the saying goes, "A man's home is his castle." You want a château? Pay for it.

Feb. 17 2011 11:36 AM
Zachary Stern from New York

First off, we need to clarify what Fannie and Freddy do: they DO NOT provide mortgages. They buy mortgages from bank and other institutions that issue mortgages on the secondary market. When you get a mortgage from a bank, the often sells that mortgage so they have more money on hand to lend out. Fannie and Freddy were created to facilitate this process. The Federal Housing Administration (FHA) is the government agency that provides the backing for mortgages. If you get an FHA loan, which is still provided by a bank or credit union, you pay mortgage insurance to the FHA who then guarantees that the bank gets paid.

Feb. 17 2011 11:36 AM
jgarbuz from Queens

Absolutely, the government should STOP backing mortgages with taxpayer guarantees, started after WWII in order to spur employment and housing as millions of troops were coming home from overseas. The fear of falling back into Depression and the need for housing and for construction jobs is what created the suburbanization boom, fueled by cheap petroleum to boot. But that whole era is over and DEAD. The "American dream" is now the American nightmare. We have far too many private homes as is, and what is needed are millions of apartments to house the millions who are leaving, and will be leaving suburbia to go back to the cities in the not too distant future.

Feb. 17 2011 11:35 AM

I have a question for Mr. Angelides.

I finished reading the report and find it very detailed and, yet, shallow.

"Widespread failures in financial regulation and supervision" are claimed to be the number one reason for the financial crisis by the report.

The descending opinion points to capital surpluses' build-up by "China, other developing countries, and the oil-producing nations."

The simple fact is that the underlying reasons for BOTH statements can be traced to ONE source -- outsourcing (moving of jobs from "expensive" to "cheaper" locations) and "insourcing" (replacing "expensive" local workers with cheaper temporary non-immigrant workers) of jobs.

This decoupling of consumer markets in the US and Europe from its production base, which was moved elsewhere, resulted in record foreign debt, the surplus of capital elsewhere and in the fact that financial industry was the only major industry remaining in the developed countries. Thus, this industry could dictate the rules, as it was the only source of revenues and growth, but when it also collapsed, there were no jobs left.

Thus, the question -- why this reason -- outsourcing/insourcing -- was never mentioned in the report ???

Feb. 17 2011 10:07 AM

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