Debate About The FCIC Conclusions
Economist Paul Krugman wrote in January 2010 that Fannie Mae, Freddie Mac, CRA, or predatory lending were not primary causes of the bubble/bust in residential real estate because there was a bubble of similar magnitude in commercial real estate in America.
A second counter-argument is that the definition of "non-traditional mortgages" used in Pinto's analysis overstated the number of risky mortgages in the system by including Alt-A, which was not necessarily high-risk. Krugman explained in July 2011 that the data provided by Pinto significantly overstated the number of subprime loans, citing the work of economist Mike Konczal: "As Konczal says, all of this stuff relies on a form of three-card monte: you talk about “subprime and other high-risk” loans, lumping subprime with other loans that are not, it turns out, anywhere near as risky as actual subprime; then use this essentially fake aggregate to make it seem as if Fannie/Freddie were actually at the core of the problem."
In their book on the crisis, journalists Bethany McLean and Joe Nocero also argue that the GSEs (Fannie and Freddie) followed rather than led the private sector into subprime lending.
"In 2003, Fannie Mae's estimated market share for bonds backed by single-family housing was 45%. Just one year later, it dropped to 23.5%. As a 2005 internal presentation at Fannie Mae noted, with some alarm, `Private label volume surpassed Fannie Mae volume for the first time.` ... There was no question about why this was happening: the subprime mortgage originators were starting to dominate the market. They didn't need Fannie and Freddie to guarantee their loans ... As Fannie's market share dropped, the company's investors grew restless ...
Citigroup had been hired to look at what Citi called `strategic alternatives to maximize long term ... shareholder value` . Among its key recommendations for increasing ... market capitalization: ... begin guaranteeing `non-conforming residential mortgages`"
"Non-conforming" loans meaning not conforming to prime lending standards.
According to McLean, "the theory that the GSEs are to blame for the crisis has been thoroughly discredited, again and again." She referred to the theory as a "canard." The Commission met with Ed Pinto — Fannie’s chief credit officer until the late 1980s, and along with Wallison a leading proponent of the theory that affordable housing policies and the GSE's caused the subprime crisis — to analyze his figures and according to McLean "Pinto’s numbers don’t hold up". Along with the FCIC and David Min, the Government Accountability Office gives a far smaller number for subprime loans outstanding than Pinto. Pinto states that at the time the market collapsed half of all U.S. mortgages — 27 million loans — were subprime. The GAO estimates that only 4.59 million such loans were outstanding by the end of 2009, and that from 2000 to 2007 only 14.5 million total nonprime loans were originated.
The New York Times writes that in addition to political pressure to expand purchases of higher-risk mortgage types (moving the goal of mortgage purchases from mortgages to low- or moderate-income families from 50% in 2005 to 55% in 2007) the GSE were also under significant competitive pressure from large investment banks and mortgage lenders. For example, some analysts estimate that Fannie's market share of subprime mortgage-backed securities issued dropped from a peak of 44% in 2003 to 22% in 2005, before rising to 33% in 2007.
By some estimates, more than 84 percent of the subprime mortgages came from private lending institutions in 2006 and the share of subprime loans insured by Fannie Mae and Freddie Mac decreased as the bubble got bigger (from a high of insuring 48 percent to insuring 24 percent of all subprime loans in 2006). Despite criticism for government lending programs as the main cause of the crisis, much of the crisis was independent of government home loan programs.
Pinto's data, included in Wallison's FCIC dissenting report estimated Fannie and Freddie purchased $1.8 trillion in subprime mortgages, spread among 12 million mortgages. However, according to journalist Joe Nocera, Pinto's mortgage numbers are "inflated", by classifying "just about anything that is not a 30-year-fixed mortgage as `subprime.`"
According to David Min, a critic of Wallison at the Center for American Progress,
as of the second quarter of 2010, the delinquency rate on all Fannie and Freddie guaranteed loans was 5.9 percent. By contrast, the national average was 9.11 percent. The Fannie and Freddie Alt-A default rate is similarly much lower than the national default rate. The only possible explanation for this is that many of the loans being characterized by the S.E.C. and Wallison/Pinto as “subprime” are not, in fact, true subprime mortgages.
In December 2011, after the Securities and Exchange Commission charged 6 ex-executives of Fannie and Freddie with Securities Fraud, Wallison stated that the full extent of GSE subprime purchases was not known until after the crisis and that the SEC alleged that Fannie and Freddie held, in reality, over $2 trillion in subprime loans as of June 2008. However Nocera points out the "SEC complaint makes almost no mention of affordable housing mandates" and instead alleges the executives bought the subprime mortgages "belatedly ... to reclaim lost market share, and thus maximize their bonuses."
Read more about this topic: Government Policies And The Subprime Mortgage Crisis, Fannie Mae and Freddie Mac