Obvious Culprits and the Untold Stories of Fannie Mae

Whenever I hear people speak of the beginning of our dour and intricate financial crisis, I cringe.  Because most just miss the whole point. Democrats choose to blame the Bush Administration.  Republicans point at the Community Reinvestment Act and the Democrats.  Both are, interestingly enough, correct (I’m no fan of Rep. Barney Frank).  However they leave out some key factors.  And many of them have to do with my favorite pejorative…

The Perverse Incentive

That’s a great name for a truth that somehow never quite surfaces: the role of HUD Housing Goals.  You see, my old pal Barney loves to blame “Wall Street greed” for, well, everything.  And Wall Street was greedy, no doubt.  But without the incentive — the search to do the impossible (namely securitizing loans that had unsound foundations) — caused by a very simple order: from the Department of Housing and Urban Development (yet more of my favorite people).

They gave that order to us at Fannie and Freddie.  A simple set of numbers; a set of arbitrary figures that told us how many loans we had to make that year to minorities and to the poor.  Not the deserving, not the responsible — but just to someone based on their skin color and their income.  No one considered the human cost to them and to their families for being misled by products no one in their right mind would use outside of seasoned real estate professionals with nerves of steel.  Perhaps the most offensive thing about this was not the rubble that it made of Wall Street firms and high-flying careers, but that it victimized those who it claimed it would help.  That is what is truly monstrous — and something few are willing to speak of.

These “HUD Housing Goals” created an artificial incentive.  Fannie and Freddie would buy those loans, sometimes at a significant loss even before the house price correction (I won’t say downturn… that would imply they were reasonably priced to begin with).  And that artificial incentive meant money to those on Wall Street and around the world.  But it was a false incentive; and in the final accounting it was false profit as well.  The derivatives and tranching schemes designed to make these losing loans halfway profitable proved to be too fragile for the combo of plummeting house prices and the money market run that spawned the original TARP.  Like a house of spun straw, it simply blew away in the wind.

And the people who sold you that straw house? They are still in power.  And honestly, they will never pay for what they did.  I’ve made my peace with that.

So, who’s really responsible for the mortgage mess?  Well, really, it was everyone whose policies distorted the housing market.  (Although I’m not above saying that it was mostly Democrats.  I’m petty that way). Regardless of party, the truth is that this is what you get when the Feds run just about anything.  Particularly anything with an unfunded liability as a mandate.

Gosh, I can’t wait to see what they’ll do with my healthcare!

R. Caine

March 18, 2009