Hoisted from Comments: Robert Waldmann on Principal Reduction, FHFA, and Ed DeMarco
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Karl Smith Watches Mark Zandi Join the HSRILL!!

Karl Smith:

Fannie, Freddie and Chewbacca « Modeled Behavior: Center-left intellectuals in America apparently have a serious problem comprehending the concept of Bullshit. The entire econ world has borne witness to Paul Krugman tearing out his hair over Zombie Lies. Now, Mark Zandi devotes some several thousands words to overturning the nonsense notion that 70 year old US Government Sponsored Enterprises sparked a 21st century global boom in raw material and land prices during a time in which their influence on the international credit markets was approaching a multi-decade low. He writes

Getting history right for this dark economic period is critical if we are to design a better mortgage finance system for the future. If Fannie Mae and Freddie Mac are responsible for the debacle, then perhaps government’s role in a future mortgage finance system should be minimal. But if private lenders deserve most of the blame, the case grows for giving government an important role in backstopping and overseeing the system.

Mark, Mark. Clonazepam. It’s a beautiful thing. Let go. I am betting that maybe five people in the US actually believe Fannie and Freddie caused the housing bubble. Maybe half a dozen more are actively lying about it. The rest are just Bullshitting. That is, they don’t really care what the truth is one way or the other. This is just a way to gesture in the general direction of the federal government and say Urrhh!!!

Mark Zandi:

Fannie and Freddie don’t deserve blame for bubble: There is plenty of blame to go around for the U.S. housing bubble, but not much of it belongs to Fannie Mae and Freddie Mac. The two giant housing-finance institutions made many mistakes over the decades, some of them real whoppers, but causing house prices to soar and then crater during the past decade weren’t among them. The biggest culprits in the housing fiasco came from the private sector, and more specifically from a mortgage industry that was out of control. These included lenders who originated home loans, investment bankers who packaged them into securities, rating agencies that misjudged these securities, and global investors who bought them without much, if any, study….

America’s mortgage securitization machine was fundamentally broken. It created millions of mortgage loans that, even under reasonable economic assumptions, stood little chance of being repaid — and were not. As a result, hundreds of billions of dollars were lost as defaults and write-downs brought the financial system, and the wider economy, to the brink, requiring a massive government bailout.

Also to blame, of course, were regulators, who gave the private mortgage market little, if any, oversight….

“If it grows like a weed, it probably is a weed.” This age-old banking adage aptly applies to the private mortgage lending business during the housing bubble. Between 2004 and 2007, private lenders originated three quarters of all subprime and alt-A mortgage loans. These were loans to financially fragile homeowners with credit scores under 660, well below the U.S. average, which is closer to 700. But only a fourth of such loans were originated by government agencies, including Fannie, Freddie and the Federal Housing Administration. The dollar amount of subprime and alt-A loans made during this period by the private sector was jaw-dropping, reaching nearly $600 billion at the height of the lending frenzy in 2006….

At the start of 2002, before the housing boom got going, the two agencies’ market share accounted for almost 54 percent of all mortgage debt. By summer 2006, the bubble’s apex, their share had fallen to only 40 percent. It is difficult to see how the agencies could have been responsible for inflating the housing bubble at a time when they were losing a full 14 percentage points of market share. Indeed, the opposite was true, as their position in the housing market rapidly diminished….

Fannie and Freddie couldn’t compete with rapaciously expanding private lenders. Securitization was in full swing, enabling private lenders to offer low rates and increasingly aggressive terms to borrowers. In 2006, almost half the loans made by private lenders required no down payment and no documentation. Fannie and Freddie simply couldn’t play in that league…. Fannie and Freddie did play a significant part in the financial panic…. [P]olicymakers hoped the agencies could keep the housing market from unraveling…. Despite Fannie and Freddie’s role in the panic, it is wrong to blame them for creating it; that distinction belongs rightly to the private mortgage market. Understanding this is critical to creating a stable, efficient mortgage finance system for the future….

Mark Zandi is chief economist at Moody’s Analytics, a subsidiary of Moody’s Corp. He is the author of “Financial Shock,” an book about the financial crisis. His column will appear regularly.