July 14, 2008 5:00

The history of American mortgage lending in pretty colors

Who dominates the U.S. mortgage market? Well, depends when you're asking. I spent some time today playing with the Federal Reserve's Flow of Funds data on home mortgage lending. Here's what I found. First, the long-term picture:

Graphic by Feilding Cage/TIME.com

As you can see, thrifts (savings & loan companies and savings banks) were the biggest mortgage lenders until the early 1980s, when their troubles paved the way for the rise of Fannie Mae and Freddie Mac (a.k.a. the government-sponsored enterprises, or GSEs). Fannie and Freddie remained dominant until about five years ago. For a better view of that, here's the picture over the past decade:

Graphic by Feilding Cage/TIME.com

The quarterly data are a little noisy, I realize (it's actually significantly more work to get the annual numbers, and I don't have time for that right now). That huge mirror movement--banks up, thrifts down--in the fourth quarter of 2006, for example, was the result of several thrifts becoming banks. (For example: Wachovia swallowed up Golden West that quarter and switched it to a bank charter.) But the basic picture is pretty clear: Fannie and Freddie have dominated U.S. mortgage lending since the early 1980s--except from 2004 through 2006, when the asset-backed securities issuers, a.k.a. Wall Street, took over. And that's when the craziest excesses of the mortgage boom happened.

The thing that's most amazing in retrospect is the fact that alarm bells didn't go off all over the place when private securitizers began muscling Fannie and Freddie (and the FHA) aside in 2004. Because of their formerly implicit government guarantee, the GSEs can usually easily outbid their private ABS competitors for mortgages. That's always been the complaint--that the guarantee makes it impossible for truly private companies to compete against them. So when a bunch of private companies were suddenly able to steal market share from the GSEs right and left, shouldn't everybody have been able to sense that something was terribly wrong in mortgageland?

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July 14, 2008 3:54

Harper's beats the Onion to the bubble story

The new Onion article "Recession-Plagued Nation Demands New Bubble To Invest In" is all over the Internets this afternoon. What I haven't seen mentioned is that Eric Janszen of iTulip already made the same point more or less seriously in the pages of Harper's in February.

First, the Onion:

WASHINGTON—A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

"What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future," said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. "We are in a crisis, and that crisis demands an unviable short-term solution." ...

And then Harper's:

The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.

That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle. ...

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July 14, 2008 2:30

Answering five questions about Fannie, Freddie and the financial crisis

Why didn't the Fannie-Freddie semi-rescue-plan announced over the weekend reassure the stock market?
It wasn't really meant to reassure the stock market. It was meant to keep the investors around the world who buy the bonds and mortgage-backed securities issued by the two companies from freaking out, and seems to have succeeded on that front so far. But if the government actually has to step in and cover Fannie Mae's and Freddie Mac's losses, shareholders in the two companies will be wiped out. And even the partial bailout envisioned by Treasury Secretary Hank Paulson, in which Congress allows Treasury to buy stakes in the two lenders to improve their capital positions, would mean current shareholders would have to cede much of their stake to the government.

That explains why Fannie's and Freddie's shares are down. But what about the rest of the stock market?
Two things spring to mind. One is that the dramatic actions of the weekend have made clearer than ever that we're still in the midst of a big-time financial crisis that won't leave the economy untouched. The other is that the failure of California thrift IndyMac Friday--which left shareholders with zilch--has made investors at other regional banks and thrifts with big mortgage exposures extremely nervous.

What are Fannie and Freddie again?
The two "government-sponsored enterprises," as they're called, buy mortgages from lenders (banks, thrifts, and mortgage brokers), hold on to some, and repackage the rest as mortgage-backed securities. Between them the companies have about $5.1 trillion in debt and MBSes outstanding, about $1.4 billion of it (as of last summer; the number's probably higher now), in the hands of foreign investors. Fannie was founded as a federal agency, the Federal National Mortgage Association, in 1938, then privatized in 1968 to get its debts off the federal government's books. Congress created the Federal Home Loan Mortgage Corp. (Freddie Mac) as a private company in 1970 so Fannie wouldn't have a monopoly. The debt issued by the two companies is explicitly not guaranteed by the federal government, but because of their origins investors have long acted as if it more or less was, demanding interest rates only slightly higher than those on Treasury bills and bonds. Since the savings & loan industry collapsed in the 1980s, clearing the way for Fannie and Freddie to become dominant players in the U.S. mortgage market, the assumption has grown that they're also just too big and important to be allowed to fail. Turns out it was a correct assumption.

So who's to blame for Fannie's and Freddie's troubles?
That's a topic for much debate. Critics on the right have long lambasted the two companies as dangerous corporate/government hybrids that use their "implicit" taxpayer guarantee to sideline competitors and take big risks. There's surely something to that--Megan McArdle has a good summary of these arguments here. But during the binge of truly insane lending from 2003 through 2006 that brought on the current housing crisis, Fannie and Freddie were mostly sidelined by government rules that restricted the sizes and kinds of loans they were allowed to make. They're in trouble because they never anticipated a 20% drop in house prices nationwide, not because they caused the housing bubble and crash. I sort of made that argument Friday; Paul Krugman does it more elegantly today. Tanta at Calculated Risk, a former mortgage lender, splits the difference in highly educational fashion.

What happens now?
For now, Fannie and Freddie will keep the U.S. mortgage market going as semi-nationalized institutions (after seeing their market share squeezed down to 10% in 2005, they now account for the vast majority of mortgage lending in the country). Once things calm down it seems inconceivable that they'll be allowed to continue to exist in their pre-crisis form. But Congress is a funny place when it comes to Fannie, Freddie, and mortgage lending in general, so who knows. The bigger question at the moment may be whether the Bear Stearns shotgun marriage, the Fannie-Freddie rescue, and the IndyMac collapse presage a more widespread nationalization of an insolvent U.S. financial system. If that happens you'd have to start worrying a bit about the creditworthiness of the U.S. government--and if foreign investors were really to start worrying about that, the dollar decline and financial angst we've seen so far might turn out to be a mere prologue. Chances are this isn't quite over yet, folks.

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July 14, 2008 10:51

Fannie, Freddie, Ginnie now account for 130% of mortgage lending in U.S.

Here's a fun fact for the day, derived by Harm Bandholz of Unicredit from the Fed's latest Flow of Funds data:

Since the beginning of the financial crisis in mid-2007, ... 130% of
all newly issued home mortgages were financed by GSEs.

GSEs mean government-sponsored enterprises, which mean Fannie Mae, Freddie Mac, and the explicitly government-sponsored duo of the Federal Housing Administration and Ginnie Mae (which buys FHA-insured loans). How can they possibly have a 130% market share? A lot of refis into GSE-backed loans.

The numbers are even more dramatic if you just look at the most recent period for which data are available, the first three months of this year. Total home mortgage lending increased by $313 billion. GSE lending increased by $539 billion. That's a 172% market share! Private asset-backed securities issuers, meanwhile, reduced their lending by $281 billion.

By contrast, in the peak year of the mortgage boom, 2005, the asset-backed securities issuers accounted for $560 billion in new loans, or 51%. The GSE market share was just 10%.

I've said it before and I'll say it again: Fannie, Freddie and the FHA are all getting caught now in the shock wave from the housing collapse. But they certainly aren't to blame for it.

Update: Tanta at Calculated Risk makes the important point that Fannie's and Freddie's relatively small role in the housing bubble wasn't for lack of trying:

Fannie and Freddie had about as much to with the "explosion of high-risk lending" as they could get away with. We are all fortunate that they couldn't get away with all that much of it. It is a fact that their market share dropped like a brick in the early years of this century, except of course for years like 2003, when fixed rates dropped to cyclical lows, refis boomed, and GSE market share shot up again, only to plummet in the years following during the purchase boom.

But they didn't like losing their market share, and they pushed the envelope on credit quality as far as they could inside the constraints of their charter: they got into "near prime" programs (Fannie's "Expanded Approval," Freddie's "A Minus") that, at the bottom tier, were hard to distinguish from regular old "subprime" except--again--that they were overwhelmingly fixed-rate "non-toxic" loan structures. They got into "documentation relief" in a big way through their automated underwriting systems, offering "low doc" loans that had a few key differences from the really wretched "stated" and "NINA" crap of the last several years, but occasionally the line between the two was rather thin. Again, though, whatever they bought in the low-doc world was overwhelmingly fixed rate (or at least longer-term hybrid amortizing ARMs), lower-LTV, and, of course, back in the day, of "conforming" loan balance, which kept the worst of the outright fraudulent loans out of the pile. Lots of people lied about their income (with or without collusion by their lender) in order to borrow $500,000 to buy an overpriced house in a bubble market. They weren't borrowing $500,000 from the GSEs.

Update 2: Now I've got charts!

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