The Subprime Mortgage Crisis
The housing market is still bad. And hindering our economic recovery. The Federal Reserve sees problems inherent in the system. They don’t want to rehash the blame game for the housing collapse that triggered the worst recession since the Great Depression. But they do (see Federal Reserve board member: U.S. investigation into mortgage servicing has found ‘widespread weakness’ by Ariana Eunjung Cha posted 2/11/2011 on The Washington Post).
While [Sarah] Bloom Raskin [Federal Reserve board of governors member] said in her speech that she did not want to dwell on how the industry came to such a crisis and instead focus on solutions, she did take some time to issue a harsh reprimand to mortgage brokers, loan originators, loan securitizers, sub-prime lenders, Wall Street investors and ratings agencies whose “selfish free-for-all,” she said, “ultimately led to an economic slide the effects of which are still visible in the boarded-up houses and sheriffs’ foreclosure notices posted all over America.”
Missing from this list is the government. For it was their policies and threat of legal action that made lenders create all of those risky loans. Those subprime mortgages. That put people into houses. Even if they couldn’t afford to buy a house. And why did they do this you ask?
U.S. Economic Policy: Put as many People into Homes as Possible
Well, I’ll tell you. It’s pretty simple really. The housing market drives our economy. Good housing sales equate to a prosperous economy (see Home prices fell in almost half of U.S. cities in fourth quarter, Realtors say by Kathleen M. Howley, Bloomberg News, posted 2/12/2011 on The Washington Post).
Federal Reserve policymakers described the U.S. real estate market as “depressed” in a Jan. 26 statement after the end of a two-day meeting in Washington. The central bankers said declining home values continued to stymie the consumer spending that accounts for about three-quarters of the world’s largest economy.
Three-quarters of the economy. That’s why government wants to put as many people as possible into houses. Houses are built with lumber, brick, concrete, linoleum, ceramic tile, plastic plumbing pipe, garbage disposals, electrical wiring, light fixtures, carpeting, paint, ceiling fans, air conditioners, furnaces, etc. Once we buy a house we have to furnish it. Stoves, refrigerators, furniture, televisions, stereos, computers, washing machines, dryers, dishes, cutlery, curtains, blinds, beds, sheets, pillows, blankets, coffee makers, etc. And that’s a lot of consumer spending.
Building and furnishing one house stimulates a lot of economic activity. That’s why official government policy for decades has been to get as many people to become home owners as possible. When they extended this to those who couldn’t afford to buy a home, though, we ended up with the subprime mortgage crisis. And because of Fannie Mae and Freddie Mac, the problem of those subprime mortgages ricocheted throughout the world.
The most Expensive Government Rescue of the Financial Crisis
And speaking of Fannie and Freddie, just how much have their risky behavior cost the American taxpayer? A lot. And we’re still counting (see Fannie, Freddie bailout: $153 billion … and counting by Chris Isidore posted 2/11/2011 on CNNMoney).
When the dust settles, the federal bailout of Fannie Mae and Freddie Mac will be the most expensive government rescue of the financial crisis — it already stands at $153 billion and counting…
The Federal Housing Finance Agency, the government body that oversees the two mortgage giants, has estimated that losses through 2013 will require Treasury to pour another $68 billion to $210 billion into the firms on top of the money already used to prop-up the firms and the housing market.
That’s a lot of money. But at least we may have learned our lesson about putting people into houses they can’t afford.
Friday the Obama administration unveiled its plan to slowly wind down Fannie and Freddie and have banks and the private sector provide the financing for home loans. But the administration plans call for some continued role for the government in promoting mortgage lending and home ownership.
Perhaps not. Let us not forget what Fannie and Freddie were. Government Sponsored Enterprises (GSE). The government provided oversight for these GSEs. They wrote the laws that they must operate under. They encouraged them to buy more of those risky loans. All in the name to put more people into houses. Because the housing market drives consumer spending that makes up three-quarters of the economy.
The Greed of Fannie Mae and Freddie Mac
Even the Obama administration recognizes their role in the subprime mortgage crisis. In a report that summarized some ideas about how to proceed post Fannie and Freddie, they clearly point a finger of blame in their direction (see Obama’s Plan: Fannie Mae and Freddie Mac Go, but What Replaces Them? by David C. John posted 2/11/2011 on Heritage’s The Foundry).
The report makes it very clear where the fault for Fannie and Freddie’s failure lies, saying that “as their combined market share declined—from nearly 70 percent of new originations in 2003 to 40 percent in 2006—Fannie Mae and Freddie Mac pursued riskier business to raise their market share and increase profits. Not only did they expand their guarantees to new and riskier products, but they also increased their holdings of some of these riskier mortgages on their own balance sheets” (page 7).
And yet the Federal Reserve blames mortgage brokers, loan originators, loan securitizers, sub-prime lenders, Wall Street investors and ratings agencies. But if Fannie and Freddie weren’t buying these risky loans, no mortgage banker would have approved these risky loans. Because no banker would want these on their balance sheets. But if Fannie and Freddie were buying these, what did these bankers care? They had zero risk. It all went to Fannie and Freddie. And then to the American taxpayer.
If Fannie and Freddie did not buy those risky loans, the problem ends before it begins. This is an important point that many tend to gloss over. And here we are. While still bailing them out of their mess they’re already talking about a continued government role in the mortgage markets.
I guess we’ve learned little from subprime mortgage crisis. Pity. For it was an expensive lesson.
Tags: economic activity, Fannie Mae, financial crisis, Freddie Mac, government rescue, government-sponsored enterprises, GSE, housing market, mortgage servicing, subprime mortgage crisis, subprime mortgages