In the Beginning …

As the mortgage/stock market/credit meltdown continues, an old Times article is making the e-mail rounds. Yes, the mission is blame-assignation and yes, the villains are ones you’ve heard about from certain talking heads on TV (lately they’ve been more like shouting heads), but no matter whom you wish to blame for this mess — and there’s plenty to go around — it is sobering to read the first few paragraphs:

Fannie Mae Eases Credit to Aid Mortgage Lending

By Steven A. Holmes

The New York Times

September 30, 1999

In a move that could help increase home-ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions, and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings, and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

“Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. “Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

“Just a notch below what our underwriting has required,” eh?

Also, I noticed that my spellchecker doesn’t recognize “subprime” (nor, oddly, “spellchecker”). I am guessing that will be remedied soon.

F. Scott Berman

Anyone who believes an adjustable rate will adjust downward needs to have their head checked.


This is not very good journalism from a Freakonomics angle. There is not even an attempt to show what were the effects of this change in requirements. Were the foreclosure rates higher for these participant? And if so, how much did it contribute to the downfall of Fannie & Freddie? How did this relate to the collapses of Lehman, Wamu, Wachovia, etc.?


"Someone tell me why any of the parties involved in the process deserves to be rescued by tax payers?"

So businesses can resume securing capitol investment rather then relying on capitol reserves.

Andreas Raffel

Yes, all Clinton's fault to make it easier for lower income families to get a mortgage.

Also his fault to bid up the housing market over the past years, because of his greed.

Also his fault that in April 2004 he made a decision as president to deregulate the billions of dollars banks had to hold in reserve as a cushion against losses on investments. He unshackled those limits and those funds could be invested in mortgage-backed securities, etc.

Wait a minute: he wasn't president in 2004 (I forget who was).

But one of the investment banks that lead that charge was Goldman Sachs, headed by Henry Paulson, who became Treasury Secretary a couple of years later.

In simpler words:

Uncle Billy gives his nephew a soapbox car.

Uncle George puts a 500 hp engine in the soapbox car.

The kid crashes and kills himself.

Naturally, uncle Billy was to blame...

Peter L

June 2002 Whitehouse press release: President Bush Calls for Expanding Opportunities to Homeownership

At the very least, Bush continued and extended Clinton's program.


Whose fault? Not my problem.

Somebody tell me why any of the parties involved in the process deserves to be rescued by tax payers?

jane hedges

My husband and I couldn't buy a house until we saved for years to buy a fixer-upper. I agree with 66.RENT until you can save enough to own a home. It makes me sad that Frannie Mae and Freddie Mac did so much disservice to those who were duped by a government trying to get votes from the poor. How much did Frannie and Freddie donate to whom in the government? Please let me know.

Bryan Stark

Referring to 14 on this paragraph -

‘In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.’

Wow. Now that's a delicious morsel of foreshadowing. But I think the thing to keep in mind with this situation is the line, "which may not pose any difficulties during flush economic times." This one event nine years ago shouldn't be seen as a direct cause of Fannie and Freddie's demise, because the circumstances were obviously different during those "flush economic times". A consistent lack of oversight and proper management of these loans over the years, regardless of partisan issues, was the main contributor to the problems.

Also, to 42, I agree wholeheartedly. The banks should not take all of the blame. McCain declares that America has the best workers, but they obviously aren't the smartest when it comes to managing their own money.



Kick'm all out of office. We need social liberals and fiscal conservatives to govern the mixing bowl. Unfortunately the libertarian party has no worthy candidates either.


Plenty O' blame to go around, and it will. And the consequences will make the rounds too.

Who Pays?

The taxpayer pays. The taxpayer always pays. No. Matter. What.

Everyone pays taxes and everyone is the taxpayer. When a blowup happens, it's the taxpayer who will pay. When there is economic destruction, the taxpayer pays. (And, conversely, when we pay taxes there is economic destruction… generally.)

Now that we've dealt that, who should they pay?

Should they pay borrowers, who didn't realize that living expenses might go up but their wages wouldn't, so they might want to default?

Or lenders who didn't expect the borrowers’ wages to stay low and prices to go up, leaving them less to make payments with?

Should we pay the flipper, who bought houses, hopefully with the intention of improving them and quickly selling? He didn’t know costs would go up and home values would go down, decreasing the return on his now costly improvements.

Or should we pay the lenders, who loaned to flippers at low rates, but put a ballooning interest rate on the loan so that the flipper would sell to someone else if he didn’t improve the property fast enough? He didn’t know that improvement costs would go up and tightening budgets would cause home prices to go down.

Or should we pay the banks who bet that they would not see default risk go up, bet that they would receive sub-prime principal in lump sums, bet that they would not see sub-prime principal payments in installments after 2 years, bet that they would not see interest payments at ballooned rates, then borrowed on those bets and bet bigger?



Blaming Clinton for the current situation is like blaming Reagan for 911 because he didn't fund rebuilding efforts in Afghanistan after we helped throw out the Soviets. What we have going on is the RRHT (Reverse Robin Hood Theory). Take a program to help those with little; use it to make millions for those with much; then take more from those with little to build it up again after the house of cards created by those with much collapses, repeat.

B Hedges

The answer is simple and only four letters. Spellchecker not needed. RENT!!!


Blaming Clinton for the current situation is like blaming Reagan for 911 because he didn't fund rebuilding efforts in Afghanistan after we helped throw out the Soviets. What we have going on is the RRHT (Reverse Robin Hood Theory). Take a program to help those with little; use it to make millions for those with much; then take more from those with little to build it up again, repeat.

William Harrison


I’ll take that blame. It is my privilege and a responsibility to choose my representatives and leaders.

But, I recall when watching the debate having that dark looming thought that we were on the precipice of the worst global economic meltdown since the dark ages, all I wanted was someone to directly address the pressing issue.

What will the $700bn do? How are we going to account for that money? How will we hold those accountable…accountable? How will each candidate approach this ongoing crisis throughout their presidency? Are there alternatives?

And what did I get? The same ol’ “he” squandered tax dollars, “she” earmarked pork-barrel spending, and “who” is getting what tax breaks.

I laughed out loud when Obama said “…$700 bn, potentially, is a lot of money.” Uhm, $700bn is ALWAYS a lot of money. Debate transcript:

I hope that before I die we will again have competent representation and strong leadership. Don’t you feel that we revisiting that period between Martin van Buren and James Buchanan?



What this article didn't mention-- and what started off the first wave of foreclosures-- is that the subprime loans weren't marked only be being given to less qualified borrowers (or minorities, as Fox so likes to point out), but by the fact that their interest rates weren't fixed. Where is the justification for poorly disclosed terms and interest rates? Wouldn't it be easy to predict that someone with a more strict budget would also be more adversely affected by sudden changes in rates?

This isn't about renting to minorities, it's about predatory lending. And Clinton was not advising they hand out mortgages without fixed rates.


Sure, there were lots of factors in the chain of causation (including unsupportable ratings for the mortgage derivatives and the excesses of the CDS market), but it appears that the ultimate cause of this mess was a political policy decision.

jim @2:30 - The banks wanted to be able to lend to low income (i.e., black and hispanic) borrowers to get HUD off their backs, just like Fannie Mae wanted to get HUD off its back. "HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants." The investigations were prompted by the CLINTON administration's pandering to advocates for those voter groups. There was a reasonable correlation between bad credit risk, ability to pay, lower income and ethnicity - and the CLINTON administration (acting through HUD) demanded that lenders ignore the credit risk or be sued for discrimination in loan origination.

It seems that all of the other factors contributed to a problem which stemmed from that affirmative action lending policy decision - one which continued through Democrat and Republican administrations and Congresses.



The problem was not "bad risk" being lended to(though there certainly was some of that). It's that risk went up. Over the last several years oil prices have gone up ~100%. Gas prices went ~50%. Other commodities went up in response. Prices on everything consumable went up. Incomes did not.

It's this simple:

Expenses/Income went up. A lot.

There's your new default risk.


In case anyone cares, the Washington Post ran a terrific expose of the many failures that led up to the Fannie Mae and Freddie Mac debacles. Among the many dismal points in this sorry history are the failure in 1992 to change Fannie & Freddie's oversight agency, and a similar failure to rein them in 2000.

Note that in '92 we had a GOP president (Bush Sr) and in '00 we had a Dem president (Clinton).

Slate also ran a story on this affair, the title of which says it all: Fannie Mae and the Vast Bipartisan Conspiracy, and it's subtitled "A list of villains in boldface." These succinctly sum it all up.

In brief, any claim that one party or the other caused this, is wrong. BOTH parties colluded to let Fannie & Freddie run amok. That's BOTH parties. And the collusion took place over DECADES, not just one predidential administration.

Of course, the ideologically-obsessed among the electorate and blogosphere will not accept this. They will either ignore the long parade of minions of both parties who personally benefitted from this scheme, or else decide that one party or the other somehow had "more" to do with it than the other. Buth the fact is ... party control of the White House and both chambers of Congress has changed hands over that time. NEITHER party has any excuse for doing nothing to stop Fannie & Freddie. NEITHER party is more or less culpable in this affair.

Anyone in Washington with even an ounce of maturity and integrity would stand up, admit this, accept responsibility for his/her role in it, and stop the blame game. But they won't, because everyone is too caught up in their sanctimoniousness and feigned outrage, and too irrational and immature, to do so. And the blogosphere will march merrily on, blaring away with the trumpet of ideological obsession, pointedly ignoring the truth of the matter, because they're too emotionally caught up in it all to care.



The problem is not that subprime loans were made but that they were made in great volumes. Same with option mortgages - you know, the ones that allowed low payments up front; it wasn't that some were made but that gazillions were made. It's also not that mortgages were made to homeowners on the edge of cities and towns, but that so many were made. Some subprime loans were a great idea; they did help stabilize communities and particularly helped single mothers.

The volume of the loans reflects changes in the capital provision industry. If we were back in 1999 - or 1977 or whenever - the volume of capital dumped into these markets would have been much less. The failure to react to the changes in the capital markets was the true failure. That is regulatory.

Regulators also failed to address the derivatives market and that is the real problem. We say, for example, that there are many subprime and other mortgage loans at risk of default but those mortgages support vast amounts of derivative instruments. These dwarf the mortgage market and there remains a question whether they will be worth anything because they were priced with what is now obviously a misunderstanding of risk. The bailout plan intends to shore up the foundations by taking on the bad mortgages directly, but they are trying to shore up the vast derivative (from CDO's on) market that amounts to trillions. It is an open question - obviously - whether we can shore up markets that were based on wrong fundamentals, but there is no real choice - other than perhaps some regulatory move that would essentially wipe out whole classes of these things without requiring any settlement. (And wouldn't that be weird.)


Paul K

The problem is that the initial subprime lending did not cause any real problems. The problem is that banks were moving to pushing these for "investment homes" and time-based scams (interest only for a few years with a huge bump up after), etc.

Note that when this was 1st proposed, it was intended to be a small percentage of the mortgage holdings. That obviously changed in a big way and therein lies the problem.