[quote=SK in CV][quote=investor] Barney frank was also having an affair with the head of either freddie or fannie at the same time they were being pressured to allow low income people (minorities amoung them) access to mortgages that they could not pay back. [/quote]
In debate we’d say that begs the question. In court we’d say you are presuming facts not yet in evidence.
Frank acknowledged his relationships, it wasn’t an affair. Both were single, and it lasted most of the ’90s. How was that relationship even related to the subprime crisis? (It ended many years ago.)
I’m reasonably sure there is no evidence that either Fannie or Freddie were ever “pressured to allow low income people (minorities amoung them) access to mortgages that they could not pay back”. Who is “they” that applied the pressure for that specific action? Precisely when do you believe this happened? Was it when Frank was sponsoring legislation to limit that very thing in 2004? Or was it in 2002 when the foreclosure rate on almost all loans was close to zero? Or was it even earlier, while he was voting against Gramm–Leach–Bliley and he actually had a relationship with a Fannie employee?[/quote]
I am also of the belief that Fannie, Freddie, and the CRA had very little to do with the “mortgage crisis”/credit bubble. They’ve all been around for a long time, and we’ve never had a credit bubble like the one in 2001-2006.
Fannie Mae was established as a federal agency in 1938, and was chartered by Congress in 1968 as a private shareholder-owned company.
Freddie Mac, one of America’s biggest buyers of home mortgages, is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing.
The Community Reinvestment Act (CRA), enacted by Congress in 1977 (12 U.S.C. 2901) and implemented by Regulations 12 CFR parts 25, 228, 345, and 563e, is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate.
Personally, I think the causes of the credit bubble are due to a few things:
1. The creation and widespread use of derivatives (credit default swaps, to be more specific) hid the price of risk from the more transparent bond market, and transferred it to the much more opaque derivatives market — which can also be far more leveraged. CDSs hide the price of risk which is usually visible in the bond markets. The low interest rates that resulted from unprecedented growth in the CDS market forced normally conservative investors further out on the risk curve. When that wasn’t enough, even these investors (like pension funds) had to get into the CDS market because it was the only way for them to more effectively manage the risk and earn greater returns.
Some interesting info…
From 2006:
Calculating this package of risk, which is likely to be correlated, still presents the market with
a challenge. With 30% of users taking risk on margin the question that remains unanswered is
whether the dealers could unwind fast enough following a severe market shock.
Credit Event Preparedness
As the universe of traded names grows into the thousands, the credit derivative market meets
a new challenge; how to monitor credit events? Whilst a default by a large well known
corporate is unlikely to be missed, a restructuring or even a failed payment by a smaller
corporate could be overlooked by the main-stream media sources. The solution for an
increasing number of users has been the use of electronic news feeds and intelligent search
engines. Nevertheless, this still throws out a considerable amount of data that will have to be
further filtered by human intervention.
This past five years of historically low risk spreads was essentially caused by redefinition of ‘acceptable leverage’ in a post Sarbanes-Oxley world, where off balance sheet opaque bond derivatives positions became the de facto method of amping up revenues for insurers and financial institutions of all sorts.
[For these reasons, I personally think we need to ban credit derivatives, or have a highly regulated — and very small — derivatives market that has strict capital requirements and very low leverage. It’s questionable as to whether or not we really need a CDS market, as risk is **supposed to be accounted for via higher interest rates.**]
2. The Fed’s monetary polcies (lowering interest rates well below where they “should” be…and holding them there for a prolonged period of time) also forced normally conservative investors further out on the risk curve, and encouraged ever-greater leverage.
3. The growth of the financial industry — to a point where excess capacity in the financial industry forced everyone to take on more risk in order to compete. This was exacerbated by the Fed’s actions when they lowered rates to 1% (and less, as they’re currently doing). IMHO, the growth of the derivatives markets is a direct result of this overcapacity.
A simple general equilibrium model is developed in order to separate
demand and supply factors in the market for financial intermediation. The demand
parameters accord well with historical evidence on the importance of entrants during
technological revolutions. The supply parameters suggest financial regress in the 1930s
and progress in the 1990s. The model accounts for much of the variation in the income
share of the financial sector from 1860 to 2001. Only the period 2002-2007 appears
puzzling.
4. The repeal of Glass-Steagall also coincides with the beginning stages of the bubble.
5. …and the “Taxpayer Relief Act of 1997” also likely had a hand in it, as it encouraged more investors to turn their sights toward real estate as an investment…right before the relaxed lending standards set off a frenzy.
IMHO, it’s this confluence of events that really fired up the housing/credit bubble. Fannie, Freddie, and the CRA are easy scapegoats that likely had very little to do with it.
