Here’s an excellent analysis by Barry Ritholtz, at The Big Picture, on the multiple causes of the financial crises and how they contributed to the current disaster.
Fannie Mae and the Financial Crisis
Excerpt: "The Sunday New York Times has a very interesting article on Fannie Mae and the current financial crisis. They do a decent job at delving into the complexities of the GSEs, and the many factors that went into the decision making at the senior level of the company. This includes pressure from clients such as Coutrywide CEO Angelo Mozilla, pressure from Congress, and the demands from investors for the company to be more aggressive. Most of all, it looks at the ongoing competitive demands of the market place that Fannie was in.
The key to understanding the GSE story is grasping their role within the bigger picture of the economy and housing sector. While there are some pundits who prefer talking points over reality (Charlies Gasparino, Lawrence Kudlow, James Pethoukoukis, and Jeff Saut all toed the GOP line) I prefer to keep all of my analyses based on the data and facts. Rather than creating historical revisions for partisan reasons, I prefer to keep it reality based. (I’m an independant, and that’s how I roll).
The current housing and credit crises has many, many underlying sources. Its my opinion there were two primary causes leading to the boom and bust in Housing: A nonfeasant Fed, that ignored lending standards, and ultra-low rates.
This nonfeasance under Greenspan allowed banks, thrifts, and mortgage originators to engage in all manner of lending standard abrogations. We have detailed many times the I/O, 2/28, Piggy back, and Ninja type loans here. These never should have been permitted to proliferate the way they did.
The most significant element were the 2/28 APRs, and their put back provision. Just about all of these gave the securitizer/repackager the right to return the loans within 6 (or 12) months if they went into default. Hence, our proposition that the 2002-07 period was unique in the history of finance. If any of these mortgages went bad within 6 months, the undewriter was on the hook.
HOW DIFFERENT WERE LENDING STANDARDS IF YOU ONLY NEED TO ENSURE THE BORROWER WOULDN’T DEFAULT FOR 6 MONTHS VERSUS FINDING BORROWERS WHO WOULDN’T DEFAULT FOR 30 YEARS. 
In a rising price environment, 99% of the mortgages were not returned by the securitizers to the originator. From 2001 to 2005, the mortgage firms thrived. However, once prices peaked and reversed, things changed. From 2006-08, Wal Street began putting back mortgages to originators in greater numbers. This led to nearly 300 mortgage firms imploding.
We can blame the lenders, the securitizers, the borrowers, amd Fannie/Freddie, but it doesn’t matter much. By the time Fannie and Freddie began changing their mortgage buying rules, the Housing boom was already in full gear, and the crash was all but inevitable…
…As to the credit crisis, it too, has many many proximate causes, but the two I focus upon as having the greatest impact was exempting CDOs from any sort of regulatory scrutiny (Commodities Futures Modernization Act of 2000) and the payola scandal of the rating agencies Moody’s, Fitch, S&P slapping Triple AAA ratings on all manner of junk paper.
In order to fully understand the housing and credit crisis, one needs to understand a bit of history in the housing market. To that end consider this timeline:..
…Follow the timeline: Home sales and prices cycled up post ’87 market crash — they peaked in 1989, and for the next 7 years, they slid down to sideways. A 1989 house buyer did not get back to break even until 1996/97.
A few other factors impacted housing: In 1997, the Taxpayer Relief Act that dropped capital gains to 20% from 28%, and also exempted the first $500,000 for married couples selling house (allowable once every two years)…
The folks who want to place the entire crisis at FNM/FRE ‘s doorstep miss the point — and let me hasten to add that I was never a fan of the company, and we were short FNM from over a year ago, at $42+ — these people seem to miss all of the big picture issues, and are focsing on minor factor and outright irrelevancies. This was not a "social engineering" experiment, as the radical right has called it. This was extreme short sightedness.
Fannie Mae was not a government entity, they were an independent, publicly traded, private sector firm. They were allowed to borrow at better rates than banks as a GSE. They bought what they did in an attempt top grab share and profits. If they came under pressure from Congress — or Angelo Mozilla, or hedge fund investors — it was because they were trying to capture market share and profits and maintain an advantageous position in the marketplace…
Now consider the key points from the NYT article today:…
As I have said repeatedly, Fannie and Freddie were cogs in the great housing machinery, and they bear some responsibility for the current debacle. But to argue they were the most significant factor missed the true tale of the Housing and credit debacle…
…While I understand that reducing the complexities of economic history into bumper sticker phrases is politically expedient, it does not help us understand the root cause of the problems. And, it gets ibn the way of helping us fashion a solution for the future. Hence, why I hold the weasels who are attempting to obscure reality and rewrite history in such disdain."
Sources:
Pressured to Take More Risk, Fannie Hit a Tipping Point
CHARLES DUHIGG
NYT, October 5, 2008
At Freddie Mac, Chief Discarded Warning Signs
CHARLES DUHIGG
NYT, August 5, 2008
Full article here.
