Democrat's GSE Denial or, "We didn't do it, nobody saw us!"

A liberal friend of mine recently sent me some material repeating the Democrat talking points that Fannie Mae and Freddie Mac, enabled by congressional Democrats, are not to blame for the finanical crisis, and that Republicans pointing at the GSE's are only trying to deflect blame from a failure of deregulation. The sources provided included a column from BusinessWeek, an op-ed by liberal economist and New York Times columnist Paul Krugman, and a piece from The Huffington Post.

The problem with The Huffington Post, besides the anger and hate, is that stuff gets thrown out there un-cited or cited from dubious sources that is for the consumption of the left who mostly just shout “Amen” - with no critical thinking. It is actually quite amusing how many of the featured articles on The Huffington Post are from "political pundits" such as Barbara Streisand and Alec Baldwin. Unfortunately, the NYT’s is getting more like The Huffington Post every day, with Frank Rich (dubious and spurious "facts") and Bob Herbert (anger) leading the charge. No respectable journalist is going to look to The Huffington Post for a factual discourse. But I digress.

In The Huffington Host piece, written by a Mr. Abromowitz, he actually cites Wikipedia as a source for what Fannie and Freddie can and can’t do. You’ve got to be kidding me. As I’ve explained to my kids, Wikipedia is useful for quick access to information, but it is not a valid source for a school paper (or an op-ed in this case). Anyone can put something out on Wikipedia, or edit a piece that is already published. For all I know Abromowitz placed the entry there himself. Abromowitz writes:

“Now, as even Wikipedia will tell you, "the term 'subprime' refers to loans that do not meet Fannie Mae or Freddie Mac guidelines." So how can Republicans point to Fannie and Freddie to lay blame when asked about the current housing crisis?”

I looked at the author’s bio, and he is an attorney whose work focuses on “affordable housing”, So he has to know what he is writing is not true. Krugman repeats the falslehood that Fannie and Freddie can’t touch sub-prime paper (un-cited). Krugman should know better. In addition, Krugman writes:

“Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco.”

I don’t know anything about Aaron Pressman in BusinessWeek, so I don’t know if he should know better or not. He does cite a Federal Reserve study that recounts the causes of the crisis and does not mention the GSE's. The Fed study is accurate, but focuses only on the scope of the Fed’s mission, which does not include the GSE's, but does focus on what in my opinion is the other root cause – the incompetence (or worse) of the rating agencies. He goes on to state the following (un-cited), which is demonstrably false.

“All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.”

The most in-depth and factual analysis I have found is an overview paper from the American Enterprise Institute written by Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at AEI, and Charles W. Calomiris, the Henry Kaufman Professor of Financial Institutions at Columbia Business School. The were assisted by Edward Pinto, a former chief credit officer of Fannie Mae, who helped decipher the GSE's Enron-like disclosures. It is scrupulously cited and footnoted. Mr. Walllison testified before Congress yesterday as an expert on the subject.

http://www.aei.org/publications/pubID.28704/pub_detail.asp

It is a very long piece, but I’ll highlight a few points.

• In 1994, Fannie Mae Initiated a $1 trillion affordable housing initiative, and both Fannie and Freddie announced new $2 trillion initiatives in 2001.
• In the early ‘90’s the Democrat-controlled Congress lowered the capital requirement for the GSE's from 10% to 2.5%% in order to increase funding for “affordable housing”.
• In 1995, the Clinton administration approved the GSE's purchase of sub-prime loans in order to meet their affordable housing targets (pre-OFEHO, there was no GSE egulatory agency at the time), but did not provide any rules about lending practices that needed to be followed for these loans.
• In 2004, the House Financial Services Committee developed a GSE oversight reform bill that was so badly weakened by GSE lobbying that the Bush administration refused to support it. The Senate Banking Committee, then under Republican control, adopted much stronger legislation in 2005, but unanimous Democratic opposition to the bill in the committee doomed it when it reached the floor, including opposition from Barack Obama.
• On June 30, 2008, Fannie held or had guaranteed subprime and Alt-A loans with an unpaid principal balance of $553B, plus $25B of Alt-A and $36.3B of subprime loans purchased as private label securities That’s a grand total of $619B – or 23% of its single-family mortgage book.
• In August of this year, Freddie reported that 52% of its entire single-family credit guarantee portfolio was from the problematic book years 2005-2007. It further reported that these mortgages had the following subprime characteristics: option ARM - 72%, interest only - 90%, credit scores fo less than 620 - 61%, loan to value greater than 90 - 58%, Alt-A - 78%.
• Freddie’s total junk, Alt-A and subprime loan exposure in August was $392B, or 20 percent of its entire single-family mortgage book.
• Fannie Mae and Freddie Mac became the biggest buyers of the AAA tranches of subprime pools in 2005–07. Without their commitment to purchase the AAA tranches of these securitizations, it is unlikely that the pools could have been formed and marketed around the world.
• The AEI paper also dissects what it charitably calls Krugman's "confusion” about his misstatements that the GSE's were prohibited by law from purchasing sub-prime loans, and that the GSE's exposure to sub-prime loans was zero, neither of which is true.
  
• On September 23, in Congressional testimony, regulator James Lockhart said the following as reported in the Washington Post:

Fannie Mae and Freddie Mac purchased and guaranteed "many more low-documentation, low-verification and non-standard" mortgages in 2006 and 2007 "than they had in the past." He said the companies increased their exposure to risks in 2006 and 2007 despite the regulator's warnings.

Roughly 33 percent of the companies' business involved buying or guaranteeing these risky mortgages, compared with 14 percent in 2005. Those bad debts on mortgages led to billions of dollars in losses at the firms. "The capacity to raise capital to absorb further losses without Treasury Department support vanished," Lockhart said.