From Mike Walker, Col. USMC (retired)
Fannie Mae RIP?
To the relief of many, the President recently announced that Fannie Mae is going away.
Before the celebrations begin, we need to remember that understanding the “why” is more important than the “whom” in figuring out what caused the collapse of the home mortgage industry that ushered in the Great Recession.
Yes, Fannies Mae is a “who” as in it played a critical role in the collapse.
But why an organization that had worked well for nearly six decades helped to destroy the home mortgage industry and itself in the process is the real lesson we must learn.
To understand the “why we need to explode a few myths.
Myth #1: Home Ownership is the Only Solution
Somehow we uncritically assumed that the “American Dream” demanded home ownership. While home ownership certainly is good thing, renting can also be a good thing, especially in today’s mobile society.
Germany never adopted the home-ownership dogma (only 42% of Germans buy their homes) yet Germany is universally regarded as one of the best nations in the world to live. Conversely, Bulgaria leads the world with a 97% homeownership rate.
That only proves that quality of life should never be tied to a one-dimension inanity called “wealth” and the radicals be damned (for them, renters do not acquire “wealth” through home ownership creating an “unjust” society).
Lesson: We should be wary of any social policy that pursues home ownership as an end in itself.
Myth #2: Fannie Mae is the Root of the Problem
That is not true. During most of its first sixty years of existence, Fannie Mae established what was often referred to as the “gold standard” in setting home lending criteria. Fannie Mae provided great liquidity and the home mortgage marketplace relied on Fannie Mae underwriting guidelines and from the 1930s into the 1990s Fannie Mae kept us all on safe, firm ground.
The subprime market was not for Fannie Mae. While it had always existed, it was a back-alley operation for investors with a taste for high risk that earned high returns but could end with a big loss.
That changed in 1993 when the Boston Fed decided to play God by successfully pushing for the destruction of the Fannie Mae “gold standard” underwriting guidelines.
The Boston Fed, using nothing but convoluted financial hypothesizing worth no more than the fairy dust in a kid’s cartoon, declared that subprime mortgages were all high returns while ignoring the associated risk. Heck, argued the wonks at the Boston Fed, Fannie Mae has it all wrong as there is virtually no reason to turn anyone down for a home mortgage.
The back-alley subprime market entered the Washington Beltway and Wall Street at the head of a marching band led by the clowns from the Boston Fed touting “Closing the Gap” underwriting standards as the way to a new nirvana.
The minions in Washington and Wall Street injected “Closing the Gap” standards into the system that were pure poison while packaging it as the nectar of the Gods and Fannie Mae, who dominated the home mortgage industry, became the leader of the pack. Risk managers of any ilk who could see the train wreck coming were brushed aside by the parade.
After little more than a decade, anyone who could scribble their name could get a home loan and everyone in the mortgage industry was making oodles of money.
No risk and high returns overwhelmed the better angels in us who knew the fantasy could not last as we understood at some level that we were doing the wrong thing.
Lesson: Fannie Mae took center stage as the enforcer of the bogus home mortgage underwriting standards to its everlasting shame, but it did not create the poison.
Myth #3: Eliminating Fannie Mae will fix the Home Mortgage Financing Problem
Fannie Mae became a problem because it was huge and a Government Sponsored Enterprise making it a pliable tool to do the bidding, for good and bad, of the Federal Government backed by powerful lobbyists and when “Closing the Gap” was introduced it became very bad indeed.
Failing to understand that Fannies Mae is about power and reach, not policy-making, is to miss the critical cause of the collapse of the home mortgage industry that led to the Great Recession.
Eliminating Fannie Mae will diffuse power thereby making it harder to poison the home mortgage market in the future. That is a prudent safeguard but it is not enough as it ignores the abusive risk-taking that led to the collapse in the first place.
Lesson: Introducing or keeping the poison of a “Closing the Gap” underwriting policy in place without a Fannie Mae is NO CURE; all it means is that it will take longer for the poison to bring down the home mortgage industry in the future.
Mike
