WHY ARE WE IN THE DUMPER THAT WE ARE IN, OR, "THANK YOU AGAIN FEDERAL GOVERNMENT"

There have been a number of critiques written about how greedy bankers, deregulated financial markets, capitalism run amok caused the current economic holes in which we find ourselves. A few brave souls have also hinted around the edges that maybe, just maybe the federal government through it's sponsorship of Fannie Mae and the repurchase of mortgage debt from private lenders had a huge part in the debacle. Now there is a new book on the subject called "Reckless Endangerment" that blows the lid off Fannie's real role in causing all of this world wide pain and suffereing.

More about this in a future blog, but here is a quote from a July 1 column by George Will.

The 1977 Community Reinvestment Act pressured banks to relax lending standards to dispense mortgages more broadly across communities. In 1992, the Federal Reserve Bank of Boston purported to identify racial discrimination in the application of traditional lending standards to those, Morgenson and Rosner write, “whose incomes, assets, or abilities to pay fell far below the traditional homeowner spectrum.”

In 1994, Bill Clinton proposed increasing homeownership through a “partnership” between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized.

There was a torrent of compassion-speak: “Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-income, and nontraditional consumers.” “Lack of credit history should not be seen as a negative factor.” Government having decided to dictate behavior that markets discouraged, the traditional relationship between borrowers and lenders was revised. Lenders promoted reckless borrowing, knowing they could off­load risk to purchasers of bundled loans, and especially to Fannie Mae. In 1994, subprime lending was $40 billion. In 1995, almost one in five mortgages was subprime. Four years later such lending totaled $160 billion.

As housing prices soared, many giddy owners stopped thinking of homes as retirement wealth and started using them as sources of equity loans — up to $800 billion a year. This fueled incontinent consumption.

Fannie Mae became, the authors say, “the largest and most powerful financial institution in the world.” Its power derived from the unstated certainty that the government would be ultimately liable for Fannie’s obligations. This assumption and other perquisites were subsidies to Fannie Mae and Freddie Mac worth an estimated $7  billion a year. They retained about a third of this. (John Herreid comment, translation - they passed about 2/3 of this debt onto bankers, who probably should have known better, but didn't. However, if Fannie and Freddie had not made it possible for the loans to be made, this "Investment Bundle" would not have been made possible)

Morgenson and Rosner report that in 1998, when Fannie Mae’s lending hit $1 trillion, its top officials began manipulating the company’s results to generate bonuses for themselves. ...... Fannie Mae’s political machine dispensed campaign contributions, gave jobs to friends and relatives of legislators, hired armies of lobbyists (even paying lobbyists not to lobby against it), paid academics who wrote papers validating the homeownership mania, and spread “charitable” contributions to housing advocates across the congressional map.

By 2003, the government was involved in financing almost half — $3.4 trillion — of the home-loan market. Not coincidentally, by the summer of 2005, almost 40 percent of new subprime loans were for amounts larger than the value of the properties.

“Reckless Endangerment” is a study of contemporary Washington, where showing “compassion” with other people’s money pays off in the currency of political power, and currency. Although Johnson left Fannie Mae years before his handiwork helped produce the 2008 bonfire of wealth, he may be more responsible for the debacle and its still-mounting devastations — of families, endowments, etc. — than any other individual. If so, he may be more culpable for the peacetime destruction of more wealth than any individual in history.

Morgenson and Rosner report. You decide.

georgewill@washpost.com


Now, here is another tidbit you might find interesting.

If the Fannie/Freddie policies of pressuring lenders to make loans "... appropriate to the economic culture of urban, lower-income, and non traditional consumers" really had an impact, one could logically expect that the impacts of these policies would be greatest in states where there was more opportunity to implement these policies and lesser in states where the opportunity was smaller. Well lo and behold, there is a recent report from our federal government that gives us some insight into just that.

A recent Freddie Mac summary of 5/4/2011 showed Home Price changes by state from June 2006 through March of 2011. According to Freddie, the national average home price decline was -27%.

Taking a swath through the Middle of our country shows the following price changes by state: North Dakota, +11%; South Dakota, -1%; Nebraska, -7%; Kansas, -8%; Oklahoma, -4%; Texas, 0%.

Contrast that with the more densly populated states like: California, -45%; Florida, -49%; Minnesota (right next door to the Dakotas), -31%; Georgia, -31%; Nevada, -59%; Oregon, -32%; Washington, -24%.

HMMMMMM!!!! Like one prominent news network says, We Report, You Decide"