2008 October 05 Sunday
Political Pressure Turned Fannie Mae Into Drunken Lending Fool

The New York Times, liberal bastion, documents the liberal political pressure to make Fannie Mae into a drunken lending fool. (and what does Roger Mudd think of his son's involvement in this debacle?)

“Almost no one expected what was coming. It’s not fair to blame us for not predicting the unthinkable.“— Daniel H. Mudd, former chief executive, Fannie Mae


When the mortgage giant Fannie Mae recruited Daniel H. Mudd, he told a friend he wanted to work for an altruistic business.

An altruistic business! No wonder it was a disaster. He claims almost no one saw it coming. Just who is included in that almost exception? His own staff warned him.

But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.

I think Mudd's comment reflects the stars he looked to for navigation on the political and financial seas. Almost no Democrat politicians warned Mudd that problems were brewing. In fact, Barney Frank only saw trouble emanating from those who opposed low lending standards.

Why did Fannie Mae and Freddie Mac behave so recklessly? Because they came under intense political pressure to do so--often from the chairman of the House Committee on Financial Services, Barney Frank. In the name of "affordable housing"--a term, we now know, that refers to putting people into homes they cannot afford--Frank leaned on Fannie Mae and Freddie Mac repeatedly. Ignoring credit risks, he declared, was their "mission." When analysts questioned Fannie Mae and Freddie Mac's solvency, Frank exclaimed, in effect, "How dare they?"

"The more people exaggerate a threat of safety and soundness," he said. "Then the less I think we see in terms of affordable housing."

The invisible hand of Adam Smith didn't create this mess. That honor belongs to ham-fisted politicians such as Barney Frank.

Liberal Barney Frank and liberal diversity advocate George W. Bush were on the same side in this debacle: promoting it vigorously.

Republicans joined with Democrats in promoting home ownership for low income people with low credit ratings. Fannie and Freddie showed the way. Keep in mind that private lenders were able too issue so many dodgy mortgages in large part because Fannie and Freddie were willing to buy the mortgages. Fannie and Freddie could do that using their ability as government-sponsored enterprises (GSEs) to borrow money at low rates.

Under political pressure to make home loans easier to obtain, Fannie and Freddie let down the standards of the loans they made and bought subprime loans from private lenders, said Mike Rosser, a 43-year veteran of the mortgage-banking and insurance industries and co-chairman of the Colorado Foreclosure Prevention Task Force.

Private lenders followed Fannie's and Freddie's lead, he said.

"Word gets around. If Fannie Mae is doing it, it must be all right," he said. "They pushed very strongly on these affordable-housing goals."

Read this collection of quotes of prominent House Democrats in 2003 and later trying to prevent restraint on Fannie and Freddie lending practices. Maxine Waters, Barney Frank, and others of their ilk defended lending to people who are too poor and irresponsible to pay a mortgage. Said Barney:

These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing . . . I think it is clear that Fannie Mae and Freddie Mac are sufficiently secure so they are in no great danger. . . I don't think we face a crisis; I don't think that we have an impending disaster. . . . Fannie Mae and Freddie Mac do very good work, and they are not endangering the fiscal health of this country.

We are coming near the end of the Lost Decade. Steve Sailer says the financial disaster demonstrates ideas have consequences.

In retrospect, the basic political-economic idea of the decade was that the financial elites would wind up with all the financial assets while the masses would be kept pacified with lots of nice consumer gadgets and big houses paid for by borrowing from the financial elites. A foolproof plan!

The key issue is that there was nothing going on in America in this decade that would suggest that below, say, the 75% percentile that human capital -- and thus the ability to earn income and to repay debt -- was increasing. Or was ever likely to increase.

In fact, the signs pointed toward a declining per capita ability to pay as the U.S. became increasingly Hispanic. But, no, you couldn't talk about that in polite society. Instead, we had an increasingly diverse, vibrant society so we must have an increasingly diverse, vibrant economy.

Ideas have consequences.

This disaster shows the utter irrelevance of the US Presidential campaign. The real causes of the financial crisis don't even get discussed by the candidates. The conventional wisdom of America in the year 2008 is very unwise.

Update: Steve Sailer says no major figure in Washington had the courage and understanding to oppose the insanity of reckless lending as it was happening.

Now, over the last couple of weeks there has been a lot of fingerpainting over who is to blame. And that's a good thing. But the efforts to pin the positive blame on one party or another seem fairly hopeless, since they were all in on it. Sure, the Bush Administration raised qualms about Democrat-infested Fannie Mae in 2003, but Bush was simultaneously pushing zero down payment mortgages to promote minority homeownership, so the Bushies were not interested in dealing with the real problem, just in fighting Democrats over the spoils.

More realistically, there's a lot of negative blame to hand out because nobody in a position of power or influence -- Bush, Clinton, Greenspan, Frank, Dodd, etc. -- was willing to be seen as to stand athwart history, yelling Stop. What if the federal government had imposed a minimum 5% down payment on mortgages right after the 2004 election? That doesn't seem like too much to ask, but it was, because the "promoting minority homeownership" narrative was crucial in dissuading anybody from yelling Stop because that would be, in effect, yelling that minorities were lousier credit risks on average. And that's racism (because it's true, which is what make it so intolerable to mention in public), so that's unthinkable, so nobody thought about it.

So, here we are.

Share |      By Randall Parker at 2008 October 05 01:58 PM  Economics Housing

Ned said at October 6, 2008 8:18 AM:

What's a Washington scandal without a little sex, even the perverted variety. From today's Fox News:

WASHINGTON — Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank’s efforts to deregulate Fannie Mae throughout the 1990s.

So did Frank’s partner, a Fannie Mae executive at the forefront of the agency’s push to relax lending restrictions.

Now that Fannie Mae is at the epicenter of a financial meltdown that threatens the U.S. economy, some are raising new questions about Frank's relationship with Herb Moses, who was Fannie’s assistant director for product initiatives. Moses worked at the government-sponsored enterprise from 1991 to 1998, while Frank was on the House Banking Committee, which had jurisdiction over Fannie.

Both Frank and Moses assured the Wall Street Journal in 1992 that they took pains to avoid any conflicts of interest. Critics, however, remain skeptical.

"It’s absolutely a conflict," said Dan Gainor, vice president of the Business & Media Institute. "He was voting on Fannie Mae at a time when he was involved with a Fannie Mae executive. How is that not germane?

"If this had been his ex-wife and he was Republican, I would bet every penny I have - or at least what’s not in the stock market - that this would be considered germane," added Gainor, a T. Boone Pickens Fellow. "But everybody wants to avoid it because he’s gay. It’s the quintessential double standard."

Randall Parker said at October 13, 2008 6:15 PM:


We need those houses to go into foreclosure to drive housing prices back down. Instead this sort of nonsense will make the adjustment take many years.

Stephen said at October 13, 2008 10:35 PM:

Exactly Randall.

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