So I’m just home from a road trip – got to give a talk on social media in Irvine, then fly to Chicago and give a talk, then fly to NYC for a convention. I apologize for not having a lot of time to engage on the blog, but it was kinda crazy (albeit fun – I walked from Central park to the Strand Bookstore, which was a major mistake in and of itself…I really shouldn’t be allowed in bookstores without adult supervision, and TG is exploring ways to block all my credit cards as soon as I cross a bookstore’s threshold). OTOH, there will be some interesting blog posts once I’ve read them…
I did check email, though, and had a kind of contentious email exchange with Dave Dayen (the D-Day who was on the radio show with me) as well as Brad Friedman and cohorts. Dave replied on his blog to my comments about Freddie and Fannie, and stated – not that we were disagreeing about analyzing a complex issue – that I was simply lying. Or because exact language seems important to him, that I “fabricated” a quote, which rendered my argument meaningless.
I want to have a longer post later on the meta-issue of the forms of argument enjoyed by folks like Dave and his colleagues on the progblogs, and why I have such immense issues with them and with their politics (since I see political style as being inextricably tied to political substance…).
But let’s address the specifics of the issue first, and see if we can cast a little light where there’s a lot of smoke right now.
From my point of view, the long post he attacks was only marginally about him and his claim. I think that I did him a courtesy by using shorthand not pointing out the obvious fallacies in his exact quote, which I’d hoped to do in person. Sadly, if you listen to the mp3, Brad jumps in and closes off the argument before I can respond to his astounding statement…but since it seems to matter to him…
Dave makes two key points which I take to be the meat of his argument:
1) That I stated that he asked if Fannie and Freddie “made” subprime loans, as opposed to “guaranteed and securitized” subprime loans. Here’s his specific language:
Well, let’s stop right there, because that’s a misstatement of what I actually said. I never said “Did Fannie or Freddie make subprime loans?” I said “Did Fannie or Freddie guarantee or securitize subprime loans?”
2) That Fannie and Freddie followed, rather than made the market – here’s his specific language:
In the first paragraph, you see that Fannie and Freddie were losing market share, and were basically forced into a subprime market that was already created and well underway. In fact, it was their foot in the free market that forced them into that. This weird hybrid of a “government-sponsored entity,” still responsible to shareholders, demanded that Fannie and Freddie chase the market.
Now, Armed Liberal uses the quote of mine he fabricated to “prove me wrong.” But there is a major difference between what I said and what he thinks I said. Fannie and Freddie “made” subprime loans, after the market was in place and the bubble was set (Armed Liberal even quotes a WaPo piece saying that they didn’t get into the market until 2006), but they didn’t guarantee and securitize them. They bought mortgage-backed securities as part of a broader investment portfolio.
There’s much more, go read it if you’re in the mood…but these are what I see as the substantive claims.
What follows is long and detailed, so let me hit the executive summary. D-Day wants to win by collapsing a policy debate, which is inherently about a broad and somewhat ambiguous set of facts, into exact meaning when it suits him and makes a good soundbite. So he wants to make the claim that because there was no Fannie or Freddie-sponsored loan program explicitly called “subprime,” that the credit quality issues that Fannie and Freddie ultimately collapsed from had nothing to do with subprime lending. That’s a complete misstatement of my argument about the role of Fannie and Freddie in the credit crisis, to begin with. And even if I’m playing on his terms, it is factually incorrect. Fannie and Freddie did in fact purchase securities made up from portfolios of subprime loans – lots of them – thereby facilitating the origination of subprime loans just as surely as they facilitated the origination of other kinds of loans. Fannie and Freddie are in the business of guaranteeing andsecuritizing loans – that’s what they do with every loan that comes in the door. So both because they explicitly purchased subprime securities and because they then guaranteed them and resecuritized them via GSE offerings of securities, it’s clear that this is just plain false.
Here’s a quote from a column in the Economist:
The heavy lifting on that side of the argument is done by Frannie’s involvement in the purchase of subprime MBS. This, it is said, provided crucial support to the market, helping it to become the beast that got us in this mess. The smoking gun is this:
Fannie and Freddie bought 25.2% of the record $272.81 billion in subprime MBS sold in the first half of 2006, according to Inside Mortgage Finance Publications, a Bethesda, Md.-based publisher that covers the home loan industry.
In 2005, Fannie and Freddie purchased 35.3% of all subprime MBS, the publication estimated. The year before, the two purchased almost 44% of all subprime MBS sold.
Some 2006 estimates put 15% of Fannie and Freddie’s mortgage exposure as subprime. The existance of a large single buyer of such securities (especially one markets belived could not fail) likely enabled the subprime market to grow in the manner it did.
Yes, there is evidence that GSE’s “guaranteed” subprime loans – they purchased securities made from subprime loans, although they believed they were buying the secure tranche of the security. No, it makes no difference whether you claim they “made” or “guaranteed and securitized” those loans, because all GSE’s do is guarantee and securitize loans. Yes, they did “securitize” these loans, by participating in secondary markets for the securities – as they did for prime and Alt-A securities – and providing liquidity to the loan originators. Yes, they did lower their own standards for loans to what was substantially below historic norms, creating a pool of loans that were not, as a term of art “subprime,” which could very well fit into a broader policymaker’s definition of the same.
Now for some detail. It’s been a while since I took classes in housing finance in grad school, but I think I can explain where he’s off-track pretty easily.
First, the GSE’s (“Fannie and Freddie” is a PITA to type) don’t “guarantee” any loans until they purchase them. Other entities originate them, and then Fannie and Freddie purchase those loans, based on their ‘conforming’ with the GSE’s then-current standards. Because originators know that GSE’s will buy certain types of loans, they set up loan programs designed to churn out mortgages that meet the GSE requirements, and well-run originators sell all or almost all of these program loans to one of the GSEs. Once they do, the GSE’s both guarantee and securitize them.
Here’s liberal economist Tanta, at Calculated Risk:
Fannie and Freddie had about as much to with the “explosion of high-risk lending” as they could get away with. We are all fortunate that they couldn’t get away with all that much of it. It is a fact that their market share dropped like a brick in the early years of this century, except of course for years like 2003, when fixed rates dropped to cyclical lows, refis boomed, and GSE market share shot up again, only to plummet in the years following during the purchase boom.
But they didn’t like losing their market share, and they pushed the envelope on credit quality as far as they could inside the constraints of their charter: they got into “near prime” programs (Fannie’s “Expanded Approval,” Freddie’s “A Minus”) that, at the bottom tier, were hard to distinguish from regular old “subprime” except–again–that they were overwhelmingly fixed-rate “non-toxic” loan structures. They got into “documentation relief” in a big way through their automated underwriting systems, offering “low doc” loans that had a few key differences from the really wretched “stated” and “NINA” crap of the last several years, but occasionally the line between the two was rather thin. Again, though, whatever they bought in the low-doc world was overwhelmingly fixed rate (or at least longer-term hybrid amortizing ARMs), lower-LTV, and, of course, back in the day, of “conforming” loan balance, which kept the worst of the outright fraudulent loans out of the pile. Lots of people lied about their income (with or without collusion by their lender) in order to borrow $500,000 to buy an overpriced house in a bubble market. They weren’t borrowing $500,000 from the GSEs.
Furthermore, both GSEs were major culprits in the growth of the mega-lenders. Over the years they were struggling so hard to maintain market share, they were allowing themselves to experience huge concentration risks. As they catered more and more to their “major partners”–Countrywide, Wells Fargo, WaMu, the usual suspects–they helped sustain and worsen the “aggregator” model in which smaller lenders sold loans not to the GSEs but to CFC or WFC, who then sold the loans to the GSEs. In large measure this was a function of pricing: the aggregators got the best pricing from the GSEs–the lowest guarantee fees, the best execution options–making it more attractive for a number of reasons for small lenders to sell to the aggregators.
The mentality at the GSEs seemed to many of us to have become too focused on letting these “deep pocket” mega-players continue to push the GSEs toward low doc, “near subprime,” interest-only ARMs, low-down loans with iffy subordinate financing, etc. If you were Podunk National, you weren’t going to get a master commitment with the GSEs to sell “fast and easy” doc-lite ARMs with a razor-thin guarantee fee. But if you were HSBC, you got that, and so Podunk either lost market share or made those loans and sold them to HSBC, who sold them to the GSEs. From the GSE’s side it looked like they had the balance sheet and servicer strength of HSBC–or CFC or WFC or BAC or whoever–on the other side of those loan sales. From Podunk’s side it often looked like you could take advantage of the GSEs’ power to keep the mortgage market liquid only by consolidating the gargantuan servicing portfolios of the 800 pound gorillas, whose seemingly endless appetite for higher and higher-risk products made it hard for you to compete with conservative vanilla offerings.
So when he tries to suggest that I somehow weakened his argument when I said that he claimed GSE’s “made” subprime loans – as opposed to Alt-A or prime loans?.- he’s being sophistic or misunderstanding how GSE’s work. In fact, to the extent they “guaranteed” any loans – i.e. they used their credit to lower the interest rates and facilitate liquidity and thereby facilitate other entities originating loans – they clearly guaranteed subprime loans – not the truly crappy 105% of value ‘stated-income’ loans that the mortgage mills in California created (although some of those loans were products created by ‘stacking’ loans, including GSE-conforming first loans), but loans to less creditworthy buyers on properties whose value certainly wasn’t solidly appraised.
Let me take a side bar here before I finish with D-Day’s inane argument.
One claim made by progblogs in defending GSE’s is that those criticizing them want to “blame the credit crisis on loans to poor black people.” And in fact, some right blogs have made versions of that claim – which I hoped I had put a small dent into when I pointed out that the Milken economists (who D-Day accuses me of being “spun” by) presented statistics that put a lie to that claim. It’s more than possible to make loans to less creditworthy borrowers who are middle- or even upper-income. And the pattern of foreclosures that – again – I pointed to in the post that sent D-Day off frothing into the ozone, supports a claim that it was middle-income borrowers in fast-appreciating regions whose loans are tanking, not borrowers in the inner cities. So no, I’m not making the claim that “loans to poor black people” caused the crisis, and the people who are making that claim are as fatuously wrong as D-Day is.
So let’s go to his next claim, that GSE’s didn’t securitize subprime loans. D-Day, you magnificent idiot, that’s all GSE’s do – they securitize loans. If D-Day was willing to do 30 seconds of actual research, he’d have found Fannie Mae’s “Introduction to Fannie Mae” (pdf) document (at their site) where he could have read this:
Our job is to serve America’s housing finance system. Our three primary business units each contribute to this mission, and together serve to increase the total amount of funds available to our lender partners. We make mortgage funding available at all times and under all economic conditions, so lenders all across the country will have funds available for home buyers.
We make funds available to mortgage lenders in two primary ways. First, we purchase mortgage loans from lenders for cash and hold those mortgages in our portfolio. These lenders, in turn, can use those funds to provide mortgage financing for more home buyers. In order to finance the mortgages we purchase along with other business activities, we borrow funds by issuing debt securities in the domestic and international capital markets. We offer our debt products, through dealers, to a diverse group of investors, thereby expanding the total amount of funds available for housing in the United States.
A second way we make funds available is by issuing mortgage-backed securities (MBS) in exchange for pools of mortgages from lenders. These MBS provide lenders with an asset that is typically viewed as more liquid to hold or sell than their whole loan mortgages. Fannie Mae MBS are considered highly liquid investments and are traded through securities dealers. When we issue MBS, we guarantee to each MBS trust that we will supplement mortgage collections as required to make timely payments of principal and interest on the MBS.
I added the emphasis for D-Day.
So, I think it’s fair to say that GSE’s “made” subprime loans – to the extent they “made” any loans at all, and certainly that they gusranteed and securitized subprime loans – because in one way or another, they guaranteed securitized every loan or loan-backed instrument they purchased.
D-Day’s second point would make all kinds of sense if in fact I was suggesting that GSE’s created or were somehow to blame for the subprime market. They weren’t – and I didn’t say they did.
What I did say was that the scale of mismanagement of the GSE’s – which included incredibly high leverage against a loan portfolio systematically declining in quality – combined with the size of the GSE’s and the ability of other institutions to treat GSE securities as cash to take what should have been a one-sector collapse and turn it into a systemic one. That is the “key role” the GSe’s played in the current crisis, and the core insight I took away from the Milken presentation, and if D-Day wants to make an argument about why that’s wrong, I might be willing to keep playing. I’d love to see him try.
But he just needs to pay more attention to be worth debating with. And – maybe – know enough about what he’s discussing to match the tone of absolute certainty with which he bullshits.
And, as a freebie, let me explain to him why I have such a “hard-on” on this issue. We’re going to see increased involvement by the government in finance in the next couple of years as we work through the problems we’re facing now. If that involvement looks like the GSE’s in the last few decades – under both Democratic and Republican oversight – where we have crony capitalism at it’s worst – we’re well and truly f**ked. I’d like us to look carefully at what went wrong with the GSE’s (which again did not include – according to any data that I’ve seen – loans to poor people in inner cities), and make some effort to make sure we don’t do it again.
And as a final, kind of pissy question, was D-Day mistaken or lying – about the point of my post and about the mortgage markets – in his post?