Who Were the Leaders in Lowering Credit Standards?

Interesting article in today’s WSJ discussing one of our favorite talking points: The actual causes of the housing boom and bust and of the credit crisis:

"Fannie and Freddie do share some of the blame for the mortgage and housing bust. They recorded a combined $14 billion of losses in the 12 months ended June 30, largely because they lowered their credit standards and purchased or guaranteed dubious home loans."

I would clarify this by noting that the change in loan standards by Fannie Mae and Freddie Mac occurred in 2005 — by that time, housing sales (but not prices) had peaked, and the die was already cast.

Some more factual details"

"But "they weren’t the leaders in lowering credit standards," said Andrew Davidson, a mortgage industry consultant in New York who has done work for Fannie and Freddie and also criticized them for taking excessive risks. He noted that the worst-performing mortgages are those that were originated by subprime lenders and packaged into securities sold by Wall Street, rather than by Fannie and Freddie. And while loans for low-income people — programs championed by Democrats as well as many Republicans — have contributed to Fannie and Freddie’s losses, they aren’t the biggest part of the problem."

OIt goes far far beyond subprime and Alt-A: Much of the problem is a combination of over building and terrible lending standards. (I’m unsure which came first). Consider the areas where there was enormous excess capacity — now huge unsold inventory — aimed at wealthy exurbs. These include SoCal, South Florida, Arizona, and Las Vegas.

Dan Gross points out that:

"Many of the biggest flameouts in real estate have had nothing to do with subprime lending. WCI Communities, builder of highly amenitized condos in Florida (no subprime purchasers welcome there), filed for bankruptcy in August. Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities. The multi-year plague that has been documented in brilliant detail at IrvineHousingBlog is playing out in one of the least subprime housing markets in the nation."

None of these were Fannie/Freddie related — and they are now the biggest housing problem areas in the nation.

As I have been writing here for many years now, there were a 1,000 things that led to the current crisis. However, I have chosen to focus on, in priority of significance, causation and impact, items # 1-10.  Other people seem to wish to focus upon items #67, 219, and 467.

As Hagery correctly notes in the Journal piece, the GSEs are targets in a political, not economic debate. My motivation is a desire to get to reality — what actually caused the mess,a nd how we can clean it up. The people focusing on the 96th causative factor seem to be motivated by something much less honorable . . .



Fannie, Freddie Share Spotlight in Mortgage Mess
WSJ, OCTOBER 16, 2008

Subprime Suspects
Newsweek, Oct 7, 2008


Real Estate and the Post-Crash Economy
Thoughts from the Frontline, December 29,  2006

The Ongoing Impact of the Housing Sector   
Investor Insight, Aug 27 2007, 11:50 AM

A Memo Found in the Street
Uncle Sam the enabler
Barron’s MONDAY, SEPTEMBER 29, 2008

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