Insider's Game

Selected writings by David Fiderer

The Big Lie Mutated in NYT: More on AEI’s History of the Financial Crisis

First published in OpEdNews on January 14, 2014

There he goes again. The Big Lie’s head cheerleader is up to his old tricks, this time, inexplicably, in the opinion pages of The New York Times.


Of course there are many big lies. But The Big Lie about the financial crisis argues that the housing bubble and the mortgage crisis were caused by affordable housing policy and by Fannie Mae and Freddie Mac.


The Big Lie’s False Equivalency re: “Subprime”


The Big Lie is generally predicated on some kind of false equivalency, which takes the best performing mortgages in the marketplace, those financed by Fannie Mae and Freddie Mac, and conflates them with the worst performing loans, those financed through private label mortgage securitizations, in order to make the specious claim that Fannie and Freddie caused the housing bubble and the mortgage crisis.


Proponents of The Big Lie use two devices to lend their narrative verisimilitude. They present a few cherry picked factoids out of context to argue that Fannie and Freddie’s credit standards were seriously compromised.  Or they simply pander to class bigotry.


American Enterprise Institute scholar Peter Wallison repeats The Big Lie incessantly, and he is not shy about defaming others who challenge that lie.


Typically, he cites the discredited metrics devised by AEI scholar Ed Pinto.  Five years ago,  Pinto declared that about half of all were subprime or similarly risky, and most of those “default prone” mortgages were financed by Fannie and Freddie.  Pinto and Wallison keep repeating this mantra, notwithstanding themountain of data  (see more here) that debunks those risk categorizations. Pinto and his well known disciples–the mortgage “experts” who testify at hearings convened by House Financial Service Committee Chair Rep. Jeb Hensarling–have, for the most part, entered into a conspiracy of silence. They refuse to compare loan Fannie and Freddie’s loan performance with that of the rest of the market, and thereby concede that Pinto’s risk categories make no sense.


Wallison and his compatriots also invoke social stereotypes to create a different false equivalency, by suggesting that the terms “low-income,” “poor credit,” and “subprime,” are all interchangeable.


So that, by their definitions, affordable housing goals aimed at low income borrowers drove down credit standards for Fannie, Freddie, and the rest of the mortgage market.


The Big Lie’s False Equivalency re: The Housing Bubble


Now Wallison wants us to believe that the pre-2007 housing bubble was connected to affordable housing policy and Fannie and Freddie. He writes:


Both this [current] bubble and the last one were caused by the government’s housing policies, which made it possible for many people to purchase homes with very little or no money down. In 1992, Congress adopted what were called “affordable housing” goals for Fannie Mae and Freddie Mac, which are huge government-backed firms that buy mortgages from banks and other lenders. Then, as now, they were the dominant players in the residential mortgage markets. The goals required Fannie and Freddie to buy an increasing quota of mortgages made to borrowers who were at or below the median income where they lived.


The claim that the housing bubble was tied to Fannie and Freddie or affordable housing policy is demonstrably false.



We can compare home price appreciation, measured on home purchases financed by Fannie and Freddie, with home price appreciation indexes compiled by Case-Shiller, (see page 89 here) and the disparity is striking. As Mark Zandi told the FCIC, he was shocked that many bankers made the fatal mistake of relying on FHFA home price data in their investment analyses.


The Big Lie’s False Equivalency re: Low Down Payments


Wallison plucks out a tiny percentage of mortgages financed by Fannie and Freddie in order to create the illusion that they opened the floodgates to large volumes of low down payment mortgages.


Through the 1990s and into the 2000s, the Department of Housing and Urban Development raised the quotas seven times, so that in the 2000s more than 50 percent of all the mortgages Fannie and Freddie acquired had to be made to home buyers who were at or below the median income. To make mortgages affordable for low-income borrowers, Fannie and Freddie reduced the down payments on mortgages they would acquire. By 1994, Fannie was accepting down payments of 3 percent and, by 2000, mortgages with zero-down payments. Although these lenient standards were intended to help low-income and minority borrowers, they couldn’t be confined to those buyers. Even buyers who could afford down payments of 10 to 20 percent were attracted to mortgages with 3 percent or zero down. By 2006, the National Association of Realtors reported that 45 percent of first-time buyers put down no money. The leverage in that case is infinite.


In 2006, Fannie and Freddie financed about $71.5 billion  in mortgages that had a loan-to-value of 95%+. That represented about 2.6% of the $2.7 trillion in mortgages originated that year. According to the NAR, about 42% of all home purchase mortgages had an LTV of 95%+.


In other words, of $1.4 trillion home purchase mortgages financed in 2006, about $588 billion had an LTV of 95%+, or which the vast majority, about 88% were financed by somebody other than Fannie or Freddie.


The reality was that the GSEs never assumed the first loss credit risk on any mortgage with a loan to value in excess of 80%, for obvious reasons. It was illegal.


If a GSE loan had an LTV higher than 80%, then the first loss was, by law, covered by private mortgage insurance.  In other words, the amount of low-down payment loans available in the marketplace was never decided by the GSEs. It was decided by the private market, private mortgage insurers, which  were not regulated by the federal government. In addition, the GSEs’ policies prevented them from assuming 80% credit exposure on high LTV loans. So, for example, if a loan had an LTV of 85%, the minimum insurance coverage was 12%, so that Fannie’s net risk exposure would be no more than 73% of the total.


There are other types of false equivalency used to invoke The Big Lie. More on that soon.