The private market for mortgage-backed securities all but dried up in the aftermath of the Great Recession, so Fannie and Freddie are the only games in town. If they won’t buy a mortgage–or if there is any possibility that it could declare ex post that mortgage it purchased did not, in fact, meet its exceedingly strict standards and could be returned–a home loan will simply not be made in most instances.
Prior to 2008, politicians saw lenders as making type II errors, meaning that they did not lend to borrowers who probably would repay their loans. So they imposed “affordable housing goals” on lenders.
After 2008, politicians saw lenders as making type I errors, meaning that they made loans that borrowers did not repay. So they extracted “settlements” from big banks that were involved in lending prior to the crisis. And they made it known that Freddie and Fannie could force lenders to repurchase any loans that go bad, unless the underwriting file is pristine.
So now, the situation is what it is. It’s dangerous to make a loan with any chance of default. Brannon thinks that GSE reform will solve the problem. My guess is that what we have now, while not optimal, is better than what we would actually end up with if there were “reform.”
I also think that the reluctance to make loans that might default is due to more than just the possibility that Freddie and Fannie will make you buy back the loans. You have to somehow convince banks that they won’t be shaken down by attorneys general any time there is an opportunity.
Fundamentally, I would like to see a mortgage market free from political interference. I just don’t think we will ever see that.
Prior to 2008, politicians saw lenders as making type II errors, meaning that they did not lend to borrowers who probably would repay their loans.
I still don’t see strong evidence that Type II errors after 2002 were made by Countrywide, the worst credit buyer in the bubble, because of the government. The majority of the evidence I see is Countrywide was making lots of money, believed the market would never decline by 30 – 50%, and ignored their risk department. And didn’t CATO question the buying of mortgages by Frannie in early 2008? Reading about of the worst players sounds like the same thing until they saw the writing on the Wall in the summer of 2006 to early 2008. (Considering the most government of all agencies HUD had the best balance sheet in Fall 2008, is further evidence.) So I see a lot of Monday morning quaterbacking that it must be the government at fault. I still see standard capitalism bubble financial activity in which in 2001 the profitable business was housing and mortgages so it grew more than it should have.
And today, what is stopping financial players getting involved in buying the worst credits? (There is probably something with crowding out here.) Secondly, the single house mortgage amounts have been increasing annually by 1 – 3% the last four years so it is not like the markets are frozen here. It is probably wise that Fannie & Freddie are broken up into 6 companies each, but arguing the increasing Type 1 error is not a strong argument.
Agree that “the government made me do it” has a lot of holes as an explanation for the mortgage bubble. Greed combined with principle/agent problem seems the biggest cause.
I do think there was a bit of a cultural and policy push to give Hispanics with bad credit highly risky loans in the Sun Belt/California as part of the “ownership society”, but that’s still not enough to explain giving no doc reverse mortgages to fruit pickers.
Yes, there was a little of that.
However, I surprised you didn’t mention we built too many houses because of the cheaper Hispanic labor!
The major supply restriction is zoning, not labor cost. The major driver of zoning is keeping Hispanics and other undesirables out because their moving in cuts your property values dramatically due to the externalities of their behavior.
We’ve got plenty of white dudes willing to swing a hammer, most of the contractors I’ve dealt with lately were white. They aren’t making any more non-ghetto land in cities though.
There was none of that in any kind of substantial numbers. I love the idea that all of the hairdressers and fruit pickers in the US outsmarted Goldman Sachs.
They didn’t outsmart Goldman Sachs, who wasn’t in any significant hole in the crash. They didn’t even outsmart the people working at the big banks in the hole, because they people managing those banks didn’t lose money, they just went on to the next job and weren’t left holding the bag.
I guess you could say they outsmarted the “taxpayer”, which isn’t much of an accomplishment.
“The private market for mortgage-backed securities all but dried up in the aftermath of the Great Recession, so Fannie and Freddie are the only games in town.”
To me this is lending freely at punitive rates…just in really slow motion.
The idea that tripe like this is posted ten years down the road shows how ideology makes people believe things that are simply not true.
There is zero evidence of any kind that shows the government influenced the housing bubble and financial crisis at all. Notice you never see any kind of numbers that back up the ludicrous “affordable housing goals” claims? And when you do, they are done by hacks like Ed Pinto who just makes things up to fit his tale.
But by far the most hilarious claim in this cretin’s column is:
“And they made it known that Freddie and Fannie could force lenders to repurchase any loans that go bad, unless the underwriting file is pristine.”
First of all, that has been the law for a long, long time. And it is not just Fannie and Freddie that can do that, it is all investors. And that feature is totally necessary to protect investors from lenders. To imply this is something new, and or some horrible government overreach is stupendously stupid.
And that’s not all. It didn’t happen. And it easily could have happened. Read this testimony from a Citi Exec during the FCIC Hearings:
http://fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2010-0407-Bowen.pdf
And Citi was far from the only ones to do this. In fact, every single investment bank in the country could have been destroyed if F&F had followed the law and enforced the reps and warranties on these loans.
The idea that ten years after we still get garbage like this to protect the private banks that devastated the economy is mind boggling.