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Posted at 8:53 AM ET, 02/11/2011

It's all about Dodd-Frank

By Ezra Klein

doddandfrankhousing.JPG

Fannie Mae and Freddie Mac will be wound down. The government will continue to use taxpayer money to make it cheaper and safer for Americans to take out mortgages on home purchases. The administration is offering a range of options for how that commitment will be structured in the future, as they don't want to commit to any one path only to see the Republicans tear them apart for it. Those, I think, are the headlines out of the Treasury Department's new report on the future of housing finance. But I'd add one more: The implementation of Dodd-Frank really, really matters.

Beyond the basically insane structure of Fannie Mae and Freddie Mac -- private institutions with lobbyists, profit motives, and the protection of an unarticulated but widely acknowledged government guarantee to cover their big losses -- the administration's diagnosis of what went wrong in the housing market speaks much more to issues dealt with in the financial-regulation law than issues included in their three options for reform of the government's system of housing finance and insurance.

The story they tell begins in the consumer market, where inadequate protections and incompetent regulatory oversight allowed the brisk trade in bad mortgages to people who couldn't afford them to take off. It then moves to the opaque and underregulated finance system, where the banks were packaging products they didn't understand into securitized bonds and selling them off so quickly that they stopped worrying about how risky they were, and where regulators didn't see what was going on and thus didn't demand the banks hold enough capital to protect themselves from the inevitable reckoning.

Fannie Mae and Freddie Mac were part of this story, of course. But they were late to the party. They only got into the riskier stuff in 2006, while the rest of the financial industry had been playing in the mud since 2001. Reforming them can help mitigate a housing crisis in the future. But given this chain of events, it can't prevent it.

The root causes will be fixed -- or not -- in Dodd-Frank. It's up to the Consumer Financial Protection Bureau to strengthen the weak consumer protections that allowed these mortgages to be sold in the first place. Regulators will have new powers to force financial players -- particularly the megafirms whose failure threatened the whole system -- to hold more capital as a buffer against bad times. Banks won't be able sell off all their risk because the law says they have hold five percent of the risk of any product they originate -- though as Bethany McLean notes, that's not true when the product consists of "qualifying residential mortgages," and it's up to the regulators implementing Dodd-Frank to define what a qualifying residential mortgage is.

That's not to say reforming the way the government structures its presence in the housing market doesn't matter. It does. But the government isn't looking to dramatically change the role they play in the housing market. They're just looking to get away from poorly designed institutions like Fannie and Freddie. The real action -- the work that could prevent another crisis -- is still in Dodd-Frank, where many of the questions central to how the housing markets works going forward haven't been answered, and where many of the rules that might stop it from blowing up again have yet to be written.

Photo credit: Susan Biddle/Washington Post.

By Ezra Klein  | February 11, 2011; 8:53 AM ET
 
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Comments

Fannie and Freddie is a perfect example why
private industry and government DON'T MIX.
The freemarket system actually works pretty damn well if you leave it alone.
Those people who had no business buying a house would never have been allowed to buy one, if our dysfunctional nanny government wasn't involved to begin with.

Posted by: ohioan | February 11, 2011 9:55 AM | Report abuse

Does Dodd-Frank directly address protecting against a run on the shadow banking system?

Posted by: jduptonma | February 11, 2011 9:56 AM | Report abuse

"private industry and government DON'T MIX"

Those are the most idiotic and naive words ever uttered online.

One can argue about specific instances of gvmt or private-enterprise failure, but anyone who doesn't understand that gvmt plays important and significant roles in a non-bartering economy should be banned from offering opinions.

Posted by: lauren2010 | February 11, 2011 10:19 AM | Report abuse

"The root causes will be fixed -- or not -- in Dodd-Frank. It's up to the Consumer Financial Protection Bureau to strengthen the weak consumer protections that allowed these mortgages to be sold in the first place"

NO EZRA. The root cause is the fact that many people got mortgages who had no financial right to have a mortgage. That's the fault of unscrupulous mortgage lenders but its also the fault of the system that is broken that allows individuals who don't have the means to repay these loans to take on these risks. That is what needs strengthening as much as anything else in Dodd Frank because if you don't have that problem at the onset you don't have the problem later on.

You've also got to have a "back door" that allows people out of a mortgage if they say lose their job or something but that doesn't take away from the fact that F&F and the government were complicit in making it too easy to qualify for a mortgage.

Posted by: visionbrkr | February 11, 2011 10:21 AM | Report abuse

What a mess.

In Canada, Government sets the strict rules for mortgages, term length and minimum down payment... and private banks sell the product and own all the risk - no resales allowed.

The result ? no "bundled" unmeasureable debt and associated risks... far fewer defaults.. and no financial meltdown.

Why not trash current system and adopt the sensible Canadian model ? where ownership is much higher than in America ?

Posted by: pvilso24 | February 11, 2011 10:21 AM | Report abuse

It seems fairly straightforward: All the players need some skin in the game.

Borrowers need to put down a 20% downpayment.

Mortgage originators need to hold on to some percentage of each loan they originate. If there is a default, they should lose some profit.

The government needs to limit its guarantees so that if there is a default, the investors aren't completely protected by government guarantees.

If everyone has some skin in the game, the market will work just fine.

Posted by: postfan1 | February 11, 2011 10:23 AM | Report abuse

Notably missing from this account: the first words of the housing bubble were written in 1977 within the Community Reinvestment Act.

The point of no-return (get it, "no-return" ;-) came in 2003 when Frank, Waters and others of their ilk blocked reform of Fannie and Freddie. See youtube video _MGT_cSi7Rs

Posted by: Basil_Cocksure | February 11, 2011 10:29 AM | Report abuse

"Fannie Mae and Freddie Mac will be wound down. The government will continue to use taxpayer money to make it cheaper and safer for Americans to take out mortgages on home purchases."

The government needs to get out of the business entirely.

The government can't make it cheaper for Americans to take out mortgages using taxpayer money. That's taking out of one pocket and putting it into another - in fact, it will boost demand and make houses more expensive than they otherwise be.

It can make mortgages cheaper for *some* Americans, but only at the expense of other Americans. As a whole, Americans will end up paying more for housing.

Posted by: justin84 | February 11, 2011 10:29 AM | Report abuse

The problem IS Dodd and Frank..they are big culprits in the financial collapse, especially Frank...that idiot was involved in sinking FM and FM with his idiotic socialistic views.

Posted by: cavatellie | February 11, 2011 10:52 AM | Report abuse

Mostly wrong Ezra!

There's nothing in Dodd that would have prevented the previous meltdown. It's the mildest form of regulation imagineable to the industry as a whole. Your statement about banks holding on to their risk assets is mostly incorrect except in the cases of QRM's which should be big moneymakers.

What occured in the real estate market was massive fraud, and it was as illegal then as it is now. Nothing in the regulatory system is set up to stop fraud committed by tens of thousands of people, any more than drug laws can stop people from using drugs on a large scale. When it becomes socially acceptable to cheat, as it was in the real estate industry (or during prohibition for that matter) all regulation breaks down.

What really took a localized real estate fraud centered in CA, NV and FL and made it a wordlwide blow up was the mispricing of risk. John Paulson understood that and made a billion dollars. The insurance against a statistically inevitable event was wildly underpriced, because doing so was an extremely profitable operation for the financial industry. Everyone involved assumed wrongly that they would be somewhere else when the bubble burst.

This statement in particular:

"It then moves to the opaque and underregulated finance system, where the banks were packaging products they didn't understand"

is compleltely incorrect and from the school of "nobody's at at fault because we're all at fault" school of thinking. The banks knew exactly what they were selling. They underestimated the counter-party risk in the system, and the amount of time they had before the inevitable.

Posted by: johnmarshall5446 | February 11, 2011 10:53 AM | Report abuse

Dodd Frank, the two biggest players in the mess together produced a POS bill that will do little but further raise costs to the consumers. Why both of these clowns are not in jail is beyond me.

Posted by: Pilot1 | February 11, 2011 10:53 AM | Report abuse

The same group of people who think people who make $250,000 is rich want to raise the conforming loan limits even higher. Right now they are as high as $759,000 is some places. How many working and middle class people do you know who can afford a $759,000 home?

So Democrats want middle and working class people subsidize the mortgages for the rich? Makes no sense.

Posted by: louisp3 | February 11, 2011 10:53 AM | Report abuse

"Fannie Mae and Freddie Mac were part of this story, of course. But they were late to the party. They only got into the riskier stuff in 2006"

More liberal lies, while Fannie and Freddie did not write risky loans until 2006, they were BUYING risky loans starting in 2003.

Posted by: louisp3 | February 11, 2011 10:59 AM | Report abuse

After what we have learned regarding Barney Frank and Fannie May et al I mistrust any bill he has his hand in. Frank was the staunch defender of what became known as the NINJA (no income-no job-no assets) loan which was a significant factor in the financial meltdown.

When I purchased my first home (I know, you think that was when dinosaurs roamed the earth)I had to put down 20% and demonstrate that I had a job and the income necessary to pay the loan. That still seems like a realistic approach to me;reduce the downpayment to 10% perhaps but even with a required downpayment the low interest rates should still allow even minimally qualified buyers to buy their house.

Posted by: TysonsTom | February 11, 2011 11:05 AM | Report abuse

Most of the people on this board today, Justin excepted, have absolutely no idea what they're talking about, esepcially Basil.

Rant if you want about liberals etc. but you simpley have no idea how the financial system works.

Posted by: johnmarshall5446 | February 11, 2011 11:06 AM | Report abuse

For people's protection, I think the CFPB should set a bar for consumers to qualify for a mortgage on their primary residence. The old standards (20% down), back when banks still had their heads on their shoulders, seem like a very reasonable place to start.

I don't know about banks having to retain some stake in notes they originate; this goes against the principles of transferability of capital and would have pretty bad record keeping consequences, I would imagine.

I do think though that there isn't a good reason these notes should be able to be securitized; sure, a group of multiple investors may be able to own one note together, but the process of chopping these notes up and combining them into generic shares effectively serves to obscure what they are made of.

Much of the culpability here belongs to the ratings agencies for passing off grade D "meat" as grade A. We wouldn't tolerate this in our food supply; how does this not amount to incredible, dangerous fraud in our financial world?

Posted by: arm3 | February 11, 2011 11:13 AM | Report abuse

Basil_Cocksure wrote: "Notably missing from this account: the first words of the housing bubble were written in 1977 within the Community Reinvestment Act."

Yea, right. The problems have to do with a law passed in 1977. Didn't it occur to you that the Community Reinvestment Act worked for 30 years without issue? DOH! The problem wasn't CRA, it was greed from both lenders, investors, and "flippers."

Posted by: gasmonkey | February 11, 2011 11:16 AM | Report abuse

John

You really got us there.

Or maybe you and Justin are the idiots.

Posted by: lauren2010 | February 11, 2011 11:34 AM | Report abuse

AAAH! There are too many zombies in this comment thread! They're overwhelming me!! AAHHrmph! mrph! mrph ...

Posted by: will12 | February 11, 2011 11:40 AM | Report abuse

"Fannie Mae and Freddie Mac were part of this story, of course. But they were late to the party. They only got into the riskier stuff in 2006"

Is this really true? Can anyone document it or refute it?

The standard ridicule of Barney Frank is that he stated that he though Fannie and Freddie were not in any trouble, but he said it in 2003. If the FMs only got into trouble in 2006, then what Frank said at the time was correct.

Posted by: DavidinCambridge | February 11, 2011 11:42 AM | Report abuse

Arnold Kling has a very nice post on his site about this topic and some good suggestions as to what should be done going forward.

Posted by: novalifter | February 11, 2011 11:48 AM | Report abuse

lauren:

Sorry I didn't see you!

No, notice I didn't call anyone an idiot (that would be Greg Sargent's board) I simply stated that judging from the comments, most had absolutely no idea how the financial system works, an inescapable conclusion.

I didn't tell anyone not to post. They're products of our educational system, where my child has learned more about "Heart of Darkness" than she has ever been taught about money and finance, except by her father. Mind you she goes to a very good school too.

Posted by: johnmarshall5446 | February 11, 2011 11:50 AM | Report abuse

lauren:

Left you a post on Wonkbook, BTW

Posted by: johnmarshall5446 | February 11, 2011 11:51 AM | Report abuse

No, I think the politicians don't know how the financial system works. Because evidently they belive someone with the means to buy a $759,000 home needs gov't help.

Posted by: louisp3 | February 11, 2011 11:54 AM | Report abuse

Well said, except for this:

"It then moves to the opaque and underregulated finance system, where the banks were packaging products they didn't understand .."

BS and executives should be going to jail for it. I know they're going after some of them but why Obama's Justice Department chose to show mercy to a large swath of Bush era supporters is beyond me. Their actions as heads of these bailed out financial institutions was treasoness.

The utlimate mission of F/F to provide stability to the very important nation's housing sector is still a worthy undertaking. As other's noted, mixing profit with that goal is a complete non starter. A home, whether owned or rented, is the biggest check most Americans write in their lifetime, not to mention all the checks for stuff they fill it with. Hopefully Congress will rise to the occasion and craft a worthy successor.

Posted by: tslats | February 11, 2011 11:56 AM | Report abuse

Dodd-Frank leaves too many questions. First, it leaves the Government involved, but to what extent? Secondly, the regulations have yet to be written and we do not know how the market will be affected. I agree that the Government needs to get completely out of the mortgage business. It can create conditions in which PRIVATE lenders can facilitate LEGITIMATE loans, but should not allow a lender to sell all interest in the loan, as their continued involvement would limit unscrupulous lending. It would also reduce problems in the event of a foreclosure as ownership of the loan would not be in doubt - paperwork would be clear as to the rights of all involved.

Posted by: bcullum1952 | February 11, 2011 12:11 PM | Report abuse

louisP wrote:

"Because evidently they belive someone with the means to buy a $759,000 home needs gov't help."


That's what I wrote about above. The government isn't helping a person buy a house. What the government is doing is keeping alive the moribund housing market in the hope of recovery. The reason the government is currently guaranteeing 95% of all new mortgages is because the secondary market collapsed completely. Remove F&F from the equation and estimates vary, but my own guess is that a 30 year fixed would rise 2% initially and/or credit qualification would be even more stringent, if that's possible from today.

If you want to see your home values fall even further, foreclosures ramp up faster, construction jobs never come back, etc. then all you need to do is misunderstand what is going on at F and F currently . It has absolutely nothing to do with helping an individual buy a 759,000 house.

Posted by: johnmarshall5446 | February 11, 2011 12:33 PM | Report abuse

It all started when banks weren't allowed to redline. What is redlining? It's defining those areas where there is a high risk that people will default on their mortgage. The government decided that companies should not be allowed to discriminate against areas where people are more likely to not pay their mortgage. The government encouraged reckless lending. Eventually the reckless lending spread to all areas. In addition, no one recognized the risk inherent in securitizing these reckless mortgages.

Posted by: stevevan1 | February 11, 2011 12:40 PM | Report abuse

Yeah Frank and Dodd to the rescue. Look at the picture of those two stooges and you will instantly loose confidence. They look like a couple of old drunks you will find at any low end bar during happy hour. How many years have those guys been in congress sitting on housing and banking committees? Do you think we would have all these problems if they actually knew what they were talking about? As someone who will be upside down on their mortgage for the next ten years, I respectfully ask that if you are someone that votes for one of these two clowns please stop. They've done enough damage already.

Posted by: peterg73 | February 11, 2011 12:41 PM | Report abuse

No one knows how the financial system works

No one here anyway

Posted by: lauren2010 | February 11, 2011 12:41 PM | Report abuse

I think this is the crux of why we need finance reform. However, I fail to understand where credit card contracts and payday loans fit into this equation. Issues like these have featured in the CFPB's crosshairs so much that mortgage reform has gotten lost in the shuffle. The task of mortgage reform is so daunting, it seems like we're setting up for failure by overstretching reform into other areas that are not as critical to recovery.

Posted by: onexister | February 11, 2011 1:14 PM | Report abuse

Canada has a higher percentage of home ownership than the United States. The Canadian government stays out of the home loan business. Canada was the one so-called advanced nations that survived the latest financial mess with little or no problems. Maybe there is a lesson here. One might add the Canadians in the mid 1990s faced the structural problems with their financing government, their own long term debts crisis, and took the steps necessary to resolve them. Maybe we should look north for answers. Sadly, the special interests that run this country would never allow something so sensible.

Posted by: jeffreed | February 11, 2011 1:22 PM | Report abuse

Boy, Republicans must love Obama for this! They've been calling for the end of Freddie & Fannie for several years now and finally we have someone willing to shut it down! Even President Bush wouldn't do that, and he was a Republican!

I look for Obama's poll numbers with conservatives to skyrocket. (Unless, of course, our entire political discourse turns out to be a mindless cheerleading routine . . .)

Posted by: justin_timberwolf | February 11, 2011 1:36 PM | Report abuse

What's the point of being a journalist when, like Mr. Klein, you agree 100% with one party and wo it entirely without discretion, while disagreeing 100% with the other party?

That's not a commentator, that's a cheerleader.

Posted by: tom75 | February 11, 2011 1:37 PM | Report abuse

The Bankers own the Congress.
By their own admission the MBA (Bankers) through their lobbyist gave the Congress over a Billion dollars in the decade ending 2010.

As I read in this decade there were 10 million foreclosures. It was reported today on the business page of the Cleveland Plain Dealer that as of December 2010 that there were 2.2 million foreclosures in process.
There are 15.7 million homeowners under water at this time.
Unless you are wealthy enough or powerful enough you do not have access to the Congress.

Congress until last year has never legislated any Consumer protection.
Elizabeth Warren’s Consumer Financial Protection Bureau housed under the FED will probably be diluted to the point it will be of no protection to the average person since it will affect the adversely affect the profits of the wealthy and the powerful.

The Government who licenses and regulates the Banking industry is a complicit partner in the pillage and plunder the American economy by since they financially benefitted from the Bankers at the expense of the American people who lost their homes, jobs, pensions and well being.

The Banking Industry therefore is corrupt and it corrupts those who are and were responsible for protecting those who use those Banking services that are licensed and regulated by the government.

Since the Fed who will house the Consumer Financial Protection Bureau has admitted it was remiss in their Banking oversight point now points to the fox watching the hen house story.

Before we can have an honest Mortgage Banking system we must have an honest government.

That is the heart of the problem- an honest government who is operating by Honest Politicians and is absolutely answers to the voters- not the Bankers.-
For those Americans that lost their jobs -homes and pensions they have also lost their faith and trust in the government.

When politicians that you elected lives better than you do on any given day because of their perks, pay, pensions and benefits - the solution of Honesty is simple-the reality maybe nearly impossible.
Micahel LittleBig
Cleveland Ohio
Foreclosure Case 584018

Posted by: MichaelLittleBig | February 11, 2011 1:47 PM | Report abuse

"What's the point of being a journalist when, like Mr. Klein, you agree 100% with one party and wo it entirely without discretion, while disagreeing 100% with the other party?"

First, Klein does not agree 100% with the Dems. He has, for example, agreed with Repubs to cut unneeded or outdated regulations.

Second, when in the course of human events ONE party gets so out of kilter (like the GOP sine I left it in 1992) that most objective and reasonable people disagree with it. it does not mean they are unreasonable or partisan.

Posted by: lauren2010 | February 11, 2011 1:56 PM | Report abuse

"No one knows how the financial system works"

Would absolutely agree, Lauren. It is far too complex for any one individual or small group of individuals to understand.

Posted by: justin84 | February 11, 2011 1:57 PM | Report abuse

justin:

You're not giving yourself enough credit. The things you pay attention to, you know thoroughly!

Posted by: johnmarshall5446 | February 11, 2011 2:22 PM | Report abuse

One thing I have no recollection of seeing in either articles or comments is the immense transaction cost associated with real estate. Mortgage points, transfer taxes, realty fees, title searches, etc. add between 10 and 12 percent to the cost of turnover transactions (buying and selling a house). This is over 30K on a 300K dwelling. That's bad enough but ...

All of this money is motivation for the "industry" (I include states and counties in this) to want property to turnover and fleece the consumer big time in the process.

As bad, this makes it far more difficult for folks who own to relocate to get a better job (or perhaps any job). These aren't the days when IBM employees were moved all over the country. (IBM stood for I've been moved and IBM picked up the entire moving tab).

There are some ways to fix this mess. First, legislate limits on real estate transaction costs that reduce the 10 to 12 percent to 2 or 3 percent (yeah, I know, when pigs fly). Two, stop permitting tax deductions for real estate taxes and mortgage interest. This should shift much more housing to the rental market. Three, for a few years create economic incentives to assist in growing the rental market.

We've been sold a bill of goods regarding home ownership. Very often its not the greatest thing, its the worst thing. The cost of this fantasy in terms of poorer employment and in terms of the money spent to turn over housing is debilitating.

Posted by: billsecure | February 11, 2011 3:02 PM | Report abuse

bill:

The most interesting take I've read all day, even though I think the resulting disruption to the current system would be more profound and damaging than you do.

Posted by: johnmarshall5446 | February 11, 2011 3:19 PM | Report abuse

"You're not giving yourself enough credit. The things you pay attention to, you know thoroughly!"

Thanks John.

I'll agree that I know quite a bit for an individual person - a lot of general knowledge - but the system as a whole is very complex, and its difficult to understand cause and effect precisely, or to consistently predict crises.

For example, consider a single structured mortgage backed security. How do you value it accurately? There are so many assumptions about prepayments, default rates, losses given default, delinquencies, interest rates, economic conditions, etc. that when combined with a complex cash flow structure makes it more or less impossible. Now, how can you understand the mortgage backed security market, when it's a Herculean task to value even one security? Now combine that with a certain policy - how do you judge the effects of a particular policy or institution on one market?

I often make the claim that the big rating agencies are in a government-backed cartel, and between that and requiring borrowers to pay for the ratings on their own securities, lots of moral hazard was created. Did this contribute to the crisis? Absolutely. How much? Honestly we can't be sure (though we can be sure that in a free market with investors paying for ratings, rating agencies which don't perform will go under, a positive feedback mechanism, and there is a possibility agencies under such a market structure would have refused to rate very complex securities - which would have sent an important signal about the risk). So when someone says "prove your claim", I really can't. All I can do is marshall many seperate examples, work through the economic logic, and hope that it is persuasive.

In the end, this is why I like markets, and why I like Arnold Kling's phrase - "markets fail, use markets".

Markets allow for information to be processed at a very granular level by individuals with an economic stake in the analysis, and there are positive feedback mechanisms throughout. Bad economic models fail and are replaced by more efficient ones as time goes by, much like species which aren't adapted to the environment fail to survive.

Posted by: justin84 | February 11, 2011 4:57 PM | Report abuse

The effect of "affordable housing" or government forced lending of money to people that cant afford to pay it back has brought about the housing crisis.. If the Democrats did not block the investigations into Fannie and Fredie in 2005 by calling Republicans "racists" maybe we could have averted this crisis...


Posted by: 2010Rout | February 11, 2011 5:01 PM | Report abuse

"You're not giving yourself enough credit. The things you pay attention to, you know thoroughly!"

gag me with a spoon

Posted by: lauren2010 | February 11, 2011 5:17 PM | Report abuse

justin:

I like markets too, but in my opinion they have a tendency toward capture, rather than freedom. For instance in retrospect, it was sheer insanity for financial firms to load up on MBS and CDO's to the proportion they did, however the herd mentality of chasing returns, no matter how illusory, made it inevitable.

Posted by: johnmarshall5446 | February 11, 2011 5:20 PM | Report abuse

"First, Klein does not agree 100% with the Dems. He has, for example, agreed with Repubs to cut unneeded or outdated regulations."

***

Agreeing with something that *everyone* agrees upon doesn't clear the partisan label, sorry.

Posted by: charlesbakerharris | February 11, 2011 6:07 PM | Report abuse

Get an apartment if you can't afford a house.

Posted by: bal503 | February 11, 2011 7:21 PM | Report abuse

The system worked perfectly well as it was. Realtors, Builders, Construction Trades, Lenders and all those involved in the Financial affairs of buying and selling homes and these mortgages got great value for every penny of fees they paid their lobbyists. Sure some homeowners who were foolish, if not outright stupid, and thought that housing prices would continue to go up at 20% a year forever ended up getting burned, but everyone will get over it all soon enough, and then we will do it all over again. We always do.

The more the government tries to control and regulate the housing market, and give its implicit guarantee, the more people will gamble with it and end up in need of being bailed out again.

Posted by: droberts57 | February 11, 2011 9:54 PM | Report abuse

F&F were victims of deregulation just as any other bank. Raines ran the bank like an investment banker and played all his advantages. F&F got in trouble around 2002 and 2003 buying mis-rated derivatives.

Mortgages are not often held to maturity, people move or refinance. The average duration was about 12 years. When the Fed lowered rates, people refinanced giving them money to spend. When you trade a 7% mortgage for a 5% mortgage, your profits decrease. Private lenders often charge a fee up to 20% as a pre-pay penalty. F&F didn't do that. When the stockholders complained about declining profits and stock value, F&F responded that they were going to supplement earnings with AAA rated derivatives paying high interest (toxic waste) from the shadow banks and they were going to increase the number of mortgages held. They started bringing crap through the backdoor courtesy of the private sector. Much later they took on defective Alt-A and option ARMs loans again courtesy of the non-agency private sector. Regardless, the default rate of F%F loans were only a third of the private sector. A lot of F&F problems were caused by trying to act like an investment bank. As a government bank, they would have avoided the mortgage mess much like the regulated community banking sector did.

Posted by: Beacon2 | February 11, 2011 10:27 PM | Report abuse

beacon:

I withdraw what I wrote earlier. You my friend DO know what you're talking about!

You must come back and visit us more often.

Posted by: johnmarshall5446 | February 11, 2011 10:35 PM | Report abuse

Common Ezra, do your investigative homework first. This is one of the most naive posts I've read from you in a long time. I would suggest you start with Michael Lewis' The Big short. I would follow that up with Jo Nocera and Bethany NcLean's All the Devils are Here. I'd throw in Michael Lewis again with Liar's Poker. The fraud perpetrated on the American public is astounding.

Posted by: shangps | February 11, 2011 10:41 PM | Report abuse

Come on Ezra, do your investigative homework first. This is one of the most naive posts I've read from you in a long time. I would suggest you start with Michael Lewis' The Big short. I would follow that up with Jo Nocera and Bethany NcLean's All the Devils are Here. I'd throw in Michael Lewis again with Liar's Poker. The fraud perpetrated on the American public is astounding.

Posted by: shangps | February 11, 2011 10:42 PM | Report abuse

"I like markets too, but in my opinion they have a tendency toward capture, rather than freedom. For instance in retrospect, it was sheer insanity for financial firms to load up on MBS and CDO's to the proportion they did, however the herd mentality of chasing returns, no matter how illusory, made it inevitable."

A few comments:

1) It's not as if regulators and various government interventions weren't in play in the 2000s.

Examples include:

There was a ton of Fed induced liquidity sloshing around.

Having bond issuers pay for ratings from a select set of approved agencies is the result of government intervention.

The 30 year fixed mortgage with zero prepayment penalties likely wouldn't exist without government.

Home prices in low income areas soared from 1997-2003, more so than in high income areas - much of this boom is probably related to F&F.

F&F supported the bubble by providing liquidity to the mortgage market throughout.

Tax law provides incentives to choose debt financing over equity.

Land use restrictions helped force prices higher in certain markets - the bubble mentality then spilled over into other areas.

People generally trust the government to look out for them, and in doing so they have a false sense of security.

Capital regulations favored AAA rated debt, which means that banks could look at the excess returns on AAA MBS and put it on balance sheet - no credit analysis required (after all, it's AAA).

As an aside, the government has taken on so much that it appears to have trouble performing basic functions (e.g. prosecuting fraud).

2) In a free market, firms which make poor decisions (e.g. loading up on bad debt) are gone forever.

Posted by: justin84 | February 11, 2011 11:13 PM | Report abuse

Ezra, Dodd and Frank were the root causes of the problem. Nothing that has anything to do with either of them will fix it.

Posted by: mike85 | February 12, 2011 12:51 AM | Report abuse

Ezra, Dodd and Frank were the root causes of the problem. Nothing that has anything to do with either of them will fix it.

Posted by: mike85 | February 12, 2011 12:52 AM | Report abuse


Refinance mortgage rates going to go up for sure. Any body still thinking should just make use of the low rates. Do not wait and regret it is not that difficult to make it happen. Online is very easy check out either 123 mortgage refi or any of the major banks

Posted by: betsyclark | February 12, 2011 7:28 AM | Report abuse

johnmarshall5446 is right (I'd go so far as to say I've never seen so much disinformation in my entire life).

This was a global credit bubble. As much as I don't like Frank and Dodd or Fannie and Freddie, if they didn't exist, this still would have happened. Fannie and Freddie can't explain the bubble in Ireland, Australia, Spain, Canada, etc., nor can the explained how Norwegian pension systems were fleeced.

Posted by: steve1231 | February 12, 2011 8:08 AM | Report abuse

It was Carter who brought us the Community Reinvestment Act. It was Clinton who brought us the Community Reinvestment Act on Steroids. It was Barney Frank who told us there was absolutely nothing wrong at Fannie Mae and Freddie Mac. It was Chris Dodd who told us the housing market was the safest investment out there. It was Al Sharpton who told us owning a home was a "Constitutional Right". It was again Chris Dodd and Barney Frank who brought us "no income", "bad credit", "zero down", "no SSN" mortgages. It was ACORN and their attorney Barack Obama who intimidated lenders into making high risk sub-prime loans by picketing at their homes.

In September 2003, Barney Frank, then the ranking Democrat on the Financial Services Committee, opposed the Bush administration proposals for transferring oversight of Fannie Mae and Freddie Mac by creating an independent agency to supervise the GSEs.

His reasons were more regulations would make it harder to buy homes for those who could not afford to pay back the loans, the poor. His argument was, "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

Three months before the economic crash, Barney Frank publicly announced that concerns over Freddie & Fannie were unfounded.

Rather than admitting that this was the cause of the economic crash, the Democrats condemned Wall Street and big business and the previous administration, claiming that Bush's administration opposed regulation.

Posted by: hunter340 | February 12, 2011 8:08 AM | Report abuse

Dodd and Frank are the problem.

Posted by: joeortega4 | February 12, 2011 8:14 AM | Report abuse

hunter340: F&F were not the cause of the economic collapse: the shadow banking system was.

Posted by: steve1231 | February 12, 2011 8:33 AM | Report abuse

One can argue about specific instances of gvmt or private-enterprise failure, but anyone who doesn't understand that gvmt plays important and significant roles in a non-bartering economy should be banned from offering opinions.

Posted by: lauren2010 | February 11, 2011 10:19 AM | Report abuse<<<<<

"important and significant roles" do not always equate to beneficial roles. Those who think so - well, see above.

Posted by: nanonano1 | February 12, 2011 8:45 AM | Report abuse

Dodd and Frank....take Fannie and Freddie and leave NOW......get out of our lives and government....you have done enough damage!

Posted by: SeniorVet | February 12, 2011 10:30 AM | Report abuse

hunter:

Everythng you have written is demonstrably wrong, not about what Frank said, but the general idea that Frank in any way ran the markets. Wall Street owns the Congress and gives them orders, not the other way around. If you want to look for the true genesis of where a localized housing bubble based on large-scale fraud in CA, NV, and FL became a worldwide near dperession, you have to look at Gramm-Leach-Blilley, and the CFMA for the primary causes.

Please understand that the blame gets spread around to both parties. Bill Clinton whose understanding of money and finance was and is on a high school level, was lead around by the nose by Robert Rubin and Larry Summers to do monumentally stupid things (in addition to the signing the above, NAFTA and reappointing Greenspan come to mind). So the Dems don't get off the hook either.

Posted by: johnmarshall5446 | February 12, 2011 11:33 AM | Report abuse

Folks let's start with a basic premise.

If your comment is foolish and uninformed enough to mentions the Community Reinvestment Act in any way, then just please give us the link to Fox News where you learned to ape their words. No doubt the original was much more entertaining!

Posted by: johnmarshall5446 | February 12, 2011 11:37 AM | Report abuse

justin wrote:

"2) In a free market, firms which make poor decisions (e.g. loading up on bad debt) are gone forever."

Ah, here's where we part ways. The "free markets" never allow the creative destruction of which you speak to happen because they control the government.

It's not that I don't believe in free market capitalism in theory, it's just that I never see them operate this way in the real world.

Posted by: johnmarshall5446 | February 12, 2011 11:41 AM | Report abuse

I think the 20% rule is too strict, the metric should be the size of the payment and ability to pay over the life of the loan (not a low initial payment that balloons later.)

For instance, we bought our house with only a 5% down payment, but the mortgage is small enough that we were able to put it on a 15-year note and still have a mortgage payment that is less than rent would be in our area.

If we had to put 20% down, we would have had no cash on hand to buy the appliances the house was missing or do needed plumbing repairs. We would have had to put all those appliances/building supplies on a credit card and ended up with more debt and bigger monthly payments for no good reason.

Posted by: julie18 | February 12, 2011 12:56 PM | Report abuse

The Consumer Financial Protection Bureau will do nothing to prevent future credit crises, because it has nothing to do with the safety and soundness of lending.

"Consumers" who couldn't meet their mortgage payments and ended up defaulting did and do not need to be protected from mortgage lenders - mortgage lenders need to be protected from such deadbeats, instead of being encouraged to lend to them! And they were encouraged to lend to them, by mandates that the GSEs allocate increasing amounts of credit to borrowers with submedian incomes, by minimal down-payment requirements, and by social-engineering legislation like the Community Reinvestment Act.

The regulatory emphasis of Dodd-Frank is at best misguided, and at worst will aggravate rather than ameliorate future financial cycles. More emphasis should be placed on traditional bank regulatory concerns such as ensuring high loan underwriting standards and adequate levels of bank capital - and expanding the purview of such oversight to the non-bank/"shadow banking" financial system. It would not hurt to repeal the Community Reinvestment and Home Mortgage Disclosure Acts entirely, since they have nothing to do with safety and soundness, but rather everything to do with strong-arming lenders into making loans to dubious borrowers against insufficient collateral.

If the government wants to subsidize low-income borrowers it should do so directly. The current financial condition of the country should be an object lesson in why it's a bad idea to try to route such subsidies through the private sector or through hermaphrodite entities like Fannie Mae or Freddie Mac.


Posted by: crawfurdmuir | February 12, 2011 9:16 PM | Report abuse

Myth1: "basically insane structure of Fannie Mae and Freddie Mac"

Prove to me, Ezra, that they are more "insane" than the standard agency problem facing any public corporation.

Myth2: "Reforming them can help mitigate a housing crisis in the future"

Not in evidence at all, whatsoever, right? Not even _argued_! LOL.

Myth3: "It's up to the Consumer Financial Protection Bureau to strengthen...The real action -- the work that could prevent another crisis -- is still in Dodd-Frank"

Really? You honestly believe that there is some regulatory and oversight regime that is a substitute to ALL the hugely beneficial functions of Fannie and Freddie? (They have intangible impacts on the lending markets, too, right?).

Here, try this thought experiment: take your blithely assumed robust "oversight" visions for sound lending for all private institutions and simply apply them to Freddie and Fannie.

Put another way, if you *assume* that you know how to regulate/do oversight, then you ought to actually be able to run the "ideal" company, right?

Myth4: "But the government isn't looking to dramatically change the role they play"

Nothing could be farther from the truth.

With these sweeping changes, they will merely have laid the foundation for the next crisis being far worse and the clean-up of it far less efficient.

Dodd-Frank has no increased "resolution authority". We have no solutions - NONE - to "too big to fail".

Therefore, the key issues remain and this lackadaisical, care-free approach to a radical restructuring of the primary and secondary mortgage markets is breathtakingly irresponsible and bizarre.

Posted by: Amphigory | February 13, 2011 11:13 AM | Report abuse

crawfurdmuir, lenders didn't make those bad loans because the government strong-armed them, they did it because they knew they could sell them to Wall Street to become part of mortgage-backed securities. Wall St. knew they were buying junk, but they could collect big bonuses if they suckered investors into buying them, so what did they care? Even better, they could bet against the toxic crap they were selling their investors and get filthy rich.

Posted by: julie18 | February 13, 2011 6:46 PM | Report abuse

QRM (Qualifying Residential Mortgages)

This is simply another scam to give the largest 4 lenders in
America (Wells Fargo, JP Morgan Chase, Bank of America and Citgroup) all the business so that they can become even larger too big to fail entities. If you need to have $5,000 reserves for every $200,000 mortgage loan you make, you can say goodbye to all local and community bankers, credit unions and any other mortgage lender since only the big 4 have enough accounting cheating guidelines and procedures to make the American Public believe the reserves will be there. Congress and Senate keeps slowly selling parts of America to big crooked businesses.

Posted by: ALEXIUS12 | February 14, 2011 6:06 PM | Report abuse

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