[RC] Freddie and Fannie and the crash of 2008 and beyond

[David R. Block]

Title: "Free speech is meant to protect unpopular speech

This is to answer some questions that some might have about my somewhat regular panning of Freddie and Fannie and their role in the Housing boom and bust. Full disclosure: I currently work for CoreLogic, the largest producer of housing market data and analytical products. CoreLogic also has a Tax Escrow Service (that's my piece), flood insurance, Relocation unit, and the currently growing Default unit (gee, I wonder why?). Derivatives and Credit Default Swaps: I don't think that derivatives (or Credit Default Swaps) stem from direct orders by Freddie and Fannie. I DO believe that if those sub-prime mortgages had not been so encouraged (by their interpretation of the Community Reinvestment Act) that their numbers would be lower and the attendant risk lower as well. The Derivatives and the Credit Default Swaps-both intended to be "ass covering" by the financial institutions-spread further and wider due to their volume. A volume that Freddie and Fannie encouraged to grow. Having the underlying mortgages government insured in the first place was an attempt to play down the risk. With hindsight the only thing that can reasonably be said about how that worked out is EPIC FAIL. It was not realized by the institutions or the regulators that instead of mitigating the risk, all that the Derivatives and Credit Default swaps did was amplify the damage. In most other areas, the volume and the corresponding dollar amount of the Derivatives and Credit Default Swaps is much lower. The Law of Unintended Consequences is a bitch. Housing Bubble: With more folks getting these relatively easy mortgages, buyers entered the market that otherwise strict credit standards would have kept out. So the price of housing steadily went up as the demand went up. Until, that is, the buyers could no longer afford the prices no matter how sweet that mortgage deal sounded. Then the prices came down a little, and builders quit building. Guess who the builders employ? Folks on the lower end of the pay scale. As their adjustable rate mortgage was adjusting upward, their jobs and income were adjusting downward. That's not a good thing. And the contraction fed itself, even to the point of endangering the very banks that had originated those mortgages-with a little government prodding. It all came crashing down and in some places continues to come down. The Dallas, TX market is a lagging indicator. Detroit is a leading indicator.  Blaming Freddie and Fannie exclusively: Saying that there is more bile and venom in the mortgage industry against Freddie and Fannie than Wall Street is not to exonerate Wall Street. In our business, our customers are the Banks and Mortgage companies, and only secondarily the people paying the mortgages. The people paying the mortgages get more attention from us if the bank has outsourced their escrow processing to us. We even have folks that answer the Phone with the Name of the bank that they support. I am not unsympathetic to their plight, but neither am I unsympathetic to the Bankers who were "following directions" and then kicked out in the morning when it came crashing down like the hooker who overstayed her welcome. Had the bankers just said "no," and taken their lumps, who knows where we would be today?? So they have the spine of a jellyfish. From the Viewpoint of the Bankers and the Mortgage industry: The banks see, with some reason, that Freddie and Fannie encouraged the extreme risk taking and then with the rest of the Obama and Bush administrations turned on them and demonized them for doing exactly what Fannie and Freddie encouraged that they do. This is not "Do as I say not as I do," but rather "Do as I say and if it works out you will not get sued for race discrimination in lending, and if it doesn't work out it is ALL your fault." Lord knows that with Franks over the oversight committee, it's not going to be Fannie and Freddie holding the bag. The bag will be put in the hands of the banks, post-haste. As the tour buses of protestors at AIG executives' houses demonstrated. Nice to see that the strategy of Obama and the Commiecrats to demonize Wall Street has been so successful. Or, you know, not. Chronology: Some may trace this back to the early 1970s, but the Community Reinvestment Act was passed under Carter in 1977. So to hang this Act on Johnson, Nixon or Ford does not fit the chronology. See Wikipedia.  http://en.wikipedia.org/wiki/Community_Reinvestment_Act There's that small matter of an election in 1976 won by Carter, so this baby, passed by an almost 2/3 Democratic House, belongs solely to the Democratic Party. Others may have pushed it for their own political ends, but it only traces back to Jimmy. This Wikipedia article lists some positions, pro and con, on the origination of sub-prime loans being primarily from unregulated mortgage companies vs those from CRA covered banks. Independent mortgage companies like Countrywide of Dallas (one of our "competitors" because they did their own tax service and offered it to others). Countrywide failed and was taken over by Bank of America (BofA went to Countrywide's Tax Service and left our Tax Service in 2010). So there was an apparent need for regulation of independent mortgage companies. No mention is made of any attempt, either successful or failed, at regulating these institutions. Seeing that Ron Paul agrees with me does give me pause.  :-) David -- "Free speech is meant to protect unpopular speech. Popular speech, by definition, needs no protection."—Neal Boortz   -- Centroids: The Center of the Radical Centrist Community <RadicalCentrism@googlegroups.com> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org