The Anti-Socialist Wealth Redistributors

George Will on Sunday furthered his valuable recent service to the nation by giving Republicans the kind of intellectual shock therapy they'll need if they are to learn anything both useful and objectively pro-freedom from their electoral drubbing earlier this month:

Conservatism's current intellectual chaos reverberated in the Republican ticket's end-of-campaign crescendo of surreal warnings that big government -- verily, "socialism" -- would impend were Democrats elected. John McCain and Sarah Palin experienced this epiphany when Barack Obama told a Toledo plumber that he would "spread the wealth around."

America can't have that, exclaimed the Republican ticket while Republicans -- whose prescription drug entitlement is the largest expansion of the welfare state since President Lyndon Johnson's Great Society gave birth to Medicare in 1965; and a majority of whom in Congress supported a lavish farm bill at a time of record profits for the less than 2 percent of the American people-cum-corporations who farm -- and their administration were partially nationalizing the banking system, putting Detroit on the dole and looking around to see if some bit of what is smilingly called "the private sector" has been inadvertently left off the ever-expanding list of entities eligible for a bailout from the $1 trillion or so that is to be "spread around." […]

Hyperbole is not harmless; careless language bewitches the speaker's intelligence. And falsely shouting "socialism!" in a crowded theater such as Washington causes an epidemic of yawning.

Whole thing, well worth a Monday morning read, here.

Comments

Russ 2000 | November 17, 2008, 11:08am | #

Good column except for this bizarre line: This is partly because Americans are an aspirational, not an envious, people.

An almost Mencken-like column of truthiness until that.

iTroll | November 17, 2008, 11:11am | #

screw the post with their logins required-ment!

nuts to them, when will they learn?

JW | November 17, 2008, 11:15am | #

Good column except for this bizarre line: This is partly because Americans are an aspirational, not an envious, people.

That line got me too. Are we supposed to read that with a straight face?

screw the post with their logins required-ment!

Bugmenot is your friend.

robc | November 17, 2008, 11:22am | #

The bizarre line to me was the reference to "false cried of Socialism!"

There was nothing false about the cries. Hypocritical, sure, but not false. Our choice was socialism, socialism, or "wasting our vote".

And, befire lmnop questions it - Yes, it is socialism.

Warren | November 17, 2008, 11:22am | #

And falsely shouting "socialism!" in a crowded theater such as Washington causes an epidemic of yawning.

What do you mean "falsely". Isn't the point that they aren't any more socialist than the Republicans but without the hardon for bombs and gay hate.

His list should include NCLB nationalizing education, and a couple of increasing nationalized Transportation bills.

robc | November 17, 2008, 11:23am | #

typing is hard. I really wish reason would add a damn preview button.

shrike | November 17, 2008, 11:24am | #

The Pharma Welfare Act was for me - strike three for the GOP and like Hannibal did for Rome --- I swore eternal hatred.

Meanwhile-- Good guy libertarian Mark Cuban has just been charged with insider trading by the SEC.

Those damned pesky regulations!

R C Dean | November 17, 2008, 11:27am | #

Whether you go for socialism-as-central-planning or socialism-as-state ownership-of-the-means-of-production, is there any doubt that the US is pointed in that direction, and the accelerator pedal has been mashed to the floor?

P Brooks | November 17, 2008, 11:28am | #

The Republican campaign boiled down to a weird exercise in disjointed babbling, much like an attempt to guess the magic phrase which will roll the boulder away from the entrance to the treasure-filled cavern.

P Brooks | November 17, 2008, 11:32am | #

Meanwhile-- Good guy libertarian Mark Cuban has just been charged with insider trading by the SEC.

This has nothing whatsoever to do with the fact that he is the proprietor of "bailoutsleuth" and don't you forget it!

BakedPenguin | November 17, 2008, 11:33am | #

...much like an attempt to guess the magic phrase which will roll the boulder away from the entrance to the treasure-filled cavern.

Speak comrade and enter...

JW | November 17, 2008, 11:36am | #

Whether you go for socialism-as-central-planning or socialism-as-state ownership-of-the-means-of-production, is there any doubt that the US is pointed in that direction, and the accelerator pedal has been mashed to the floor?

QFT.

If Americans were truly not envious, I suspect that there would be a different company's moving truck in front of 1600 Penn.

While not exactly on point, I especially liked today's Candorville.

mark | November 17, 2008, 11:37am | #

Finally some talk about sugar quotas in this election! Aren't you glad they didn't nominate Ron Paul?

prolefeed | November 17, 2008, 11:39am | #

And falsely shouting "socialism!" in a crowded theater such as Washington causes an epidemic of yawning.

Take this line in context -- Will's point is that the R brand of "non-socialism" is suspiciously similar to the D brand of "socialism". And that while neither is completely socialist, they both advance closer to that ideology with recent steps such as the bailout.

The "falsely" bit was a rhetorical device to jar the reader into thinking about the cynicism and hypocrisy practiced by McCain and Palin when crying "socialism."

Great article. Will appears to be leaning closer and closer to libertarianism lately.

Matt Welch | November 17, 2008, 11:40am | #

The Republican campaign boiled down to a weird exercise in disjointed babbling, much like an attempt to guess the magic phrase which will roll the boulder away from the entrance to the treasure-filled cavern.

Thanks, I'll be using that.

Alan Vanneman | November 17, 2008, 11:42am | #

If George Bush had taken a principled stand against the tres shitty Democratic farm bill in 2002 he would have lost the farm states in the election.

If he had not pushed his own tres shitty prescription drug program he quite possibly have lost the 2004 election. And where, O where is the capitalist who doesn't demand a handout when the going gets rough?

"Creeping socialism," as the old-style Republicans used to call it, is what the American people, and the American businessguy demands. We do live in a democracy, and it's not surprising that "the people" get what they want.

Don the libertarian Democrat | November 17, 2008, 11:49am | #

"Hyperbole is not harmless; careless language bewitches the speaker's intelligence. And falsely shouting "socialism!" in a crowded theater such as Washington causes an epidemic of yawning."

That quote is so good I'm good to keep it posted on my blog. I sure wish I would have said it. Maybe someday, a few years down the road, I will.

J sub D | November 17, 2008, 11:54am | #

Meanwhile-- Good guy libertarian Mark Cuban has just been charged with insider trading by the SEC.

Good guy "libertarian" Mark Cuban's Dallas Mavericks play their home games in an arena that was partially funded by taxes.

Description: By 1998, the Dallas Mavericks and Dallas Stars were indicating their desire for a new facility to replace obsolete Reunion Arena. Dallas taxpayers approved a new hotel tax and rental car tax to pay for a new facility to cover a portion of the funding, with the two teams, the Mavericks and the Stars picking up the remaining costs, including cost overruns.

Not that I doubt the SEC will try to fuck him using dubious rationales. Just pointing out that Cuban's a rent seeker too.

Boston | November 17, 2008, 12:01pm | #

I thought Cuban bought the team in 2000. FWIW

robc | November 17, 2008, 12:02pm | #

J sub D,

It should be pointed out that Cuban didnt buy the Mavs until 2000, so he bought into an already rent-seeking situation.

rhywun | November 17, 2008, 12:03pm | #

The bizarre line to me was "The difference is in degree [...]." I don't see any difference, except each party is slightly more likely to throw money at their base.

JW | November 17, 2008, 12:07pm | #

Will appears to be leaning closer and closer to libertarianism lately.

Just because Hugh Grant likes tacky, black hookers doesn't mean that he'll be bringing one home to meet momma anytime soon.

R C Dean | November 17, 2008, 12:09pm | #

We do live in a democracy, and it's not surprising that "the people" get what they want.

Too true. This is what happens, inevitably, when the Constitution becomes a "living document" allowing the restriction to enumerated powers to be disregarded by legislators and courts without going to the bother of actually amending the thing.

Because if our national government was truly limited to the enumerated powers, we wouldn't be handing out taxpayer cash to much of anybody. No farm bills, no bailouts, none of that.

Lefiti | November 17, 2008, 12:23pm | #

objectively pro-freedom

That has a spooky stalinist echo to it.

joe | November 17, 2008, 12:41pm | #

"Creeping socialism," as the old-style Republicans used to call it, is what the American people, and the American businessguy demands. We do live in a democracy, and it's not surprising that "the people" get what they want.

Yup. The Reagan era was a backlash against excesses of the modern liberal state, and it served its purpose. The number of people who want to live in the Gilded Era is under 10%.

mike farmer | November 17, 2008, 12:43pm | #

Socialism will soon be referred to as the "S" word, not spoken in polite society.

JW | November 17, 2008, 12:43pm | #

Let's just call it "ponyism" and be done with it.

J sub D | November 17, 2008, 12:46pm | #

It should be pointed out that Cuban didnt buy the Mavs until 2000, so he bought into an already rent-seeking situation.

Then I humbly retract my criticism. He paid for what he received, it was the previous owner(s) who dipped into the public purse.

joe | November 17, 2008, 1:19pm | #

The socialists at the Orange County Register shred the "blame the poor for the mortgage meltdown" lie.

http://www.ocregister.com/articles/loans-subprime-banks-2228728-law-lenders

But...but...but...the Wall Street Journal editorial page said it was all Barney Frank's fault!

Pro Libertate | November 17, 2008, 1:44pm | #

I don't blame the poor; I blame those who falsely claim to speak for the poor. And to know what's best for the poor. Homeownership is a divine right!

joe | November 17, 2008, 2:00pm | #

...and however you want to phrase it, the evidence proves otherwise.

Freddie and Fannie did not lead in the purchase of subprime loans, or the securitization of them. They tried to keep up with the private sector, as shareholders demanded performance similar to the mortgage companies.

Freddie and Fannie did not push or entice the mortgage lenders to make riskier loans; in fact, they were subjec to stricter requirements in the loans they could purchase than the private-sector secondary mortgage market.

Which is probably why they bought a whopping three (3) percent of subprime loans sold on the secondary market between 2004 and 2007, with the rest purchases by the private sector.

Freddie and Fannie got sucked up into a system-wide failure to correctly price risk. They were followers in a system led by the private sector, who succumbed to the same failures as their private-sector brethren.

There is no zero zip nada connection between efforts to make home loans more available to the poor and the mortgage meltdown. None. This was a problemcaused by mortgages and refis on loans on big houses in the suburbs. To the limited extent in which Freddie and Fannie were implicated in that problem, they were acting to bolster their profitability, not expand homeownership for the poor.

Hazel Meade | November 17, 2008, 2:42pm | #

joe, You have your facts wrong.
http://online.wsj.com/article/SB122212948811465427.html

They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion.

Your 3% figure is flat out false.

the innominate one | November 17, 2008, 2:50pm | #

epistemological query: how do you know the WSJ's figures aren't the false ones?

joe | November 17, 2008, 2:55pm | #

Hazel,

Look carefully at the following statements, one from the OC Register (not, as you say, "my figure") and one from the WSJ:

Which is probably why they bought a whopping three (3) percent of subprime loans sold on the secondary market between 2004 and 2007, with the rest purchases by the private sector.

vs.

They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion.

Alt-A mortgages are significantly less risky than subprime mortgages. Alt-A is the category immediately below "Prime."

Knowing that, what does it mean that Freddie and Fanne bought 3% of subprime mortgages, but 70% of "subprime and Alt-A mortgages" during those years, in terms of the risk-level of the loans bought by Freddie and Fannie vs. the rest of the private sector?

Hazel Meade | November 17, 2008, 3:03pm | #

Oh, so you're saying that Alt-A mortgages had nothing to do with the crisis, only subprime mortgages count?

Here's another analysis from, of all places, The Villiage Voice:
http://www.villagevoice.com/content/printVersion/541234

In 2000, Cuomo required a quantum leap in the number of affordable, low-to-moderate-income loans that the two mortgage banks—known collectively as Government Sponsored Enterprises—would have to buy.
...
Cuomo's predecessor, Henry Cisneros, did that for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the "very-low-income."

...
After this initial uptick, the two banks purchased $434 billion in securities backed by subprime loans between 2004 and 2006. The Washington Post noted this June that the GSEs' aggressive acquisitions "created a market for more such lending" by others, feeding the fire.
....
That June Post story focused its critical reassessment of HUD's affordable-housing goals on the department's 2004 decision—during the Bush re-election campaign—to juice them up again, pushing the target to 56 percent by 2007.
...
But raising the affordable-housing goals was only half the Cuomo story.

The HUD secretary is also required to produce voluminous rules that govern how the GSEs meet those goals, and the 187-page rules Cuomo issued opened the door to abuse.

The rules explicitly rejected the idea of imposing any new reporting requirements on the GSEs. In other words, HUD wanted Fannie and Freddie to buy risky loans, but the department didn't want to hear just how risky they were.

...


Justr read the whole article.

Hazel Meade | November 17, 2008, 3:09pm | #

Here's a direct quote from the Washington Post:
In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion -- 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals.

http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_2.html

That's specifically subprime loans.
The 3% figure is false.

joe | November 17, 2008, 3:19pm | #

Oh, so you're saying that Alt-A mortgages had nothing to do with the crisis, only subprime mortgages count?

No, Hazel, I'm saying what I actually wrote. Which is, once again, that Freddie and Fannie were trading in LESS RISKY loans than the entirely-private sector.

Alt-A loans were LESS RISKY than subprime loans. I'm not making any argument that Alt-A loans "don't count," but that the mortgage-buying of the GSE was LESS risky than that of their counterparts, so it makes to sense to single them out, and ignore the more-irresponsible actors, when discussing the causes of the proliferation of risky loans.

Hazel Meade | November 17, 2008, 3:25pm | #

Did they REALLY buy the less risky loans?


http://www.bloomberg.com/apps/news?pid=20601109&sid=a.6kKtOoO72k&refer=home

Fannie Mae of Washington and McLean, Virginia-based Freddie Mac held $114 billion of subprime and $71 billion in Alt-A securities as of June 30, according to the companies. Subprime mortgages were given to people with poor credit scores. Alt-A loans, which rank between subprime and prime, were made to borrowers with better credit who provided no proof of income, bought property for investment or took out so-called option adjustable-rate mortgages.

`Big Players'

``We've heard a lot of people stand up and say, `Fannie and Freddie really did not promulgate the problems; they weren't big players,''' said Joshua Rosner, an analyst with Graham Fisher & Co., an independent research firm in New York. ``Actually, they were.''

So they have more dollars in subprime than Alt-A. Doesn't sound like your facts are straight, joe.

joe | November 17, 2008, 3:26pm | #

That's specifically subprime loans.

No, it's not. The quote you provided was about SECURITIES, not LOANS.

This is a complicated issue, Hazel, and it behooves people looking into it to read carefully. There are a lot of distinctions that are easy to skim over, but which matter a great deal.

The GSEs bought very few subprime LOANS. They bought SECURITIES, because they and their regulators fell into the same trap as the rest of the financial industry - they overestimated the degree to which securitization of such loans was an effective way of managing risk.

joe | November 17, 2008, 3:29pm | #

So they have more dollars in subprime than Alt-A. Doesn't sound like your facts are straight, joe.

Now I have to explain to you what the term PERCENTAGE means?

Are you deliberately working to misunderstand the issues here, Hazel, or does it come naturally?

You haven't disproven a single statement I've made, just fudged - either deliberately or through error - some terminology. You can knock off the end-zone dance.

Hazel Meade | November 17, 2008, 3:29pm | #

Darn tags....

joe | November 17, 2008, 3:33pm | #

What your latest quote demonstrates, Hazel, is that the subprime market was a much larger segment of the overall mortgage market than the Alt-A market.

So?

joe | November 17, 2008, 3:35pm | #

Did they REALLY buy the less risky loans?

Did I say they did?

Why, no. I wrote that they were a bit player in the most risky loans, with the private sector owning more of them.

Not a statement about their internal books, but about their impact on the larger mortgage market and economy.

Hazel Meade | November 17, 2008, 3:36pm | #

No, joe, you're trying to confuse the issue. Fannie Mae and Freddie Mac don't finance loans directly. Buying securities is what they do.

Pulling a number like "they only own 3% of the subprime market" out of your ass to try to claim they weren't big players, and then defending it on terminology is disingenuous.

The fact is that Fannie Mae and Freddie Mac were huge players in the mortgate market on all levels, subprime, Alt-A, securities, EVERYTHING. You can't just take one tiny slice of the market and then misrepresent it as the whole deal.

More data:
About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland.

http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=arb3xM3SHBVk

Okay, so $114 billion out of $855 billion - thats about %12 percent of the subprime market. And $71/$1 trillion is 7% of the Alt-A market.

So Fannie Mae and reddie Mac STILL have a larger share of the subprime market than the alt-A market.

Joe, your facts are wrong. Admit it.

Cubbie Nation | November 17, 2008, 3:39pm | #

Meanwhile-- Good guy libertarian Mark Cuban has just been charged with insider trading by the SEC.

NOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO!

Invisbile Finger | November 17, 2008, 3:46pm | #

Alt-A mortgages are significantly less risky than subprime mortgages. Alt-A is the category immediately below "Prime."

The category imemdiately below prime is "subprime" by definition. Alt-A is a marketing bullshit euphemism for "B".

And so many loans lumped into Alt-A are Interest-Only loans with payment options that could increase the prinicpal; those loans are probably riskier than the typical subprime loans.

Paul | November 17, 2008, 3:46pm | #

But...but... republicans have been shrinking government. Progressives told me so.

Hazel Meade | November 17, 2008, 3:48pm | #

More from the same article above ...
By 2005, the credit score required for an Alt-A loan fell as low as 620, traditionally the definition of a subprime borrower, said Steve Donlin, a former mortgage broker who's now vice president of operations at Loan Safe Solutions Inc. in Corona, California, which helps people negotiate changes to loans they can't afford.

So many of the Alt-A mortgages held by Fannie Mae and Freddie Mac should be classified subprime anyway.

Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg show.

Hence Alt-A classified mortgages are a significant factor in the crisis.

So what are we arguing about? Technicalities? If that?

You guys are just on an agenda to twist the facts to shift the blame away from Fannie and Freddie. Claiming they weren't big players in the "let's sell stupid risky loans" mortgage market is just a fucking lie.

joe | November 17, 2008, 4:00pm | #

Hazel,

Buying securities is what they do. Well, since they managed to own 3% of the subprime mortgage market, that's clearly not all that they do.

There's a common theme to all of your comments: none of them have anything to do with what I wrote, except as an attempt to justify yelling GOTCHA!!!! at me.

Pulling a number like "they only own 3% of the subprime market" out of your ass... Actually, I didn't pull that figure from my ass, but quoted from the OC Register. Which you don't seem to have bothered to read before deciding it must be wrong.

and then defending it on terminology is disingenuous. I haven't defended it on terminology, but on accuracy. Fannie and Freddie owned 3% of subprime loans. That is a true statement. It does not cease to be true because you misread the quote you provided, and are now covering your posterior.

The fact is that Fannie Mae and Freddie Mac were huge players in the mortgate market on all levels, subprime, Alt-A, securities, EVERYTHING. They are large institutions, yes, but by looking at the pattern of their activity and comparing it to the rest of the industry, we can draw conclusions about where they were leading the industry and where they were following it. If their exposure to a certain type of debt was lower than that of the entirely-private sector industries that were in the same business, then we can conclude that they were not driving the industry in that direction. If they moved into a certain area later than the rest of thte industry, we can conclude that they were a follower, not a leader.

About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland.

Sigh, more sloppy reading. This quote is about the dollar value of loand that are OUTSTANDINIG, while the figure from the OC Register report is about the number of loans purchased. Once again, you need to read closely, and not skim in the hope of being able to yell GOTCHA at me.

Joe, your facts are wrong. Admit it. If you can demonstrate any of my facts are wrong, I'll be happy to. So far, all you've demonstrated is that your reading is as sloppy as your thought.

joe | November 17, 2008, 4:02pm | #

Invisible Finger,

"Subprime" is not a catch-all term for everything below "Prime," but refers to a specific segment of the mortgage market. It is not a category that includes "Alt-A," but a segment distinct from what are called "Alt-A" loans.

joe | November 17, 2008, 4:07pm | #

Wow, Hazel, you're starting to swear a lot. Surely a sign that the argument is going well for you, eh? Or should I say, Alt-eh?

By 2005, the credit score required for an Alt-A loan fell as low as 620, traditionally the definition of a subprime borrower...Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg show.

These figures would only be meaningful in distinguishing between the levels of risk in "Alt-A" and "subprime" loans if we had the comparable figures for subprime loans.

I find it highly unlikely that, as credit scores for Alt-A loans were plummeting, those for subprime loans were holding steady.

So what are we arguing about? I don't know what you're arguing about. I'm making the argument that the GSEs were, in the aggregage, trading in less-risky loans compared to the purely-private sector. You seem to be mainly arguing that the data I provided was wrong, by presenting other data that you think demonstrates that point, but only because you didn't understand it.

joe | November 17, 2008, 4:26pm | #

You guys are just on an agenda to twist the facts to shift the blame away from Fannie and Freddie.

Well, I do contain multitudes, but I'm most commonly spoken of in the singular.

Look, that YOU have a passionately-felt agenda regarding Freddie and Fannie, and that I make arguments which are inconvenient for that agenda, does not add up to MY having some agenda about them.

What I wrote was To the limited extent in which Freddie and Fannie were implicated in that problem, they were acting to bolster their profitability, not expand homeownership for the poor. I can certainly agree that the GSEs engaged in overaly-risky behavior, and that because of their size, they actions influenced the broader mortgage market.

My point is that the leve of risk they furthered was in no way unique - they followed the rest of the industry, which was acting (in the aggregate, especially the other lending/non-deposit institutions) in an even riskier manner;

and also that their acceptance of furtherance of this risk was not driven by an agenda of providing loans to low-income people, but like their entirely-private brethren, the profit motive. The institutions who, collectively, owned more of the risky loans, and more-risky loans, than the GSEs weren't knowingly exposing themselves to risk in an effort to help the poor; they thought that the housing market was going to continue to rise, and that the mortgages and securities they bought were safer than they actually were. So did the GSEs. So did the regulators. So did a lot of people.

Hazel Meade | November 17, 2008, 4:37pm | #

Well, since they managed to own 3% of the subprime mortgage market, that's clearly not all that they do.

The 3% figure is false, as I've pointed out over and over, and just from flat out math.
What you think the Orange County Register is some kind of sacrosanct bastion of accuracy?

As opposed to the Washington Post, Bloomberg, and the Wall Street Journal?

This quote is about the dollar value of loand that are OUTSTANDINIG, while the figure from the OC Register report is about the number of loans purchased.

I'm demonstrating that the alt-a merket is not smaller than the subprime market, fool. As you alleged in attempting to defend the 3% figure.
And that Fannie and Freddie own larger slices of the subprime market than the alt-A market (which is really questionable in itself whether that's any different from subprimae anyway), which calls into question your allegation that they attempted to purchase less risky loans.

If you can demonstrate any of my facts are wrong, I'll be happy to.

Do the math. $114 billion in subprime loans owned, divided by $885 billion in total subprime loans outstanding = they currently own 12% of the subprime market.

To the limited extent in which Freddie and Fannie were implicated in that problem, they were acting to bolster their profitability, not expand homeownership for the poor.

Which is flatly contradicted by the numerous statements I linked to that Fannie and Freddie were repeatedly and directly pressured by officials from HUD to Congress to the Whitehouse to provide more loans to very low income borrowers.

Secondly, that that behavior created a market that other lenders followed. After all, Fannie and Freddie would buy anything. You could always sell your junk loan portfolio to them, so why NOT lend money to everyone?

joe | November 17, 2008, 5:06pm | #

The 3% figure is false, as I've pointed out over and over, and just from flat out math.

joe | November 17, 2008, 5:10pm | #

Hazel, if you wanted to figure out the relative sizes of the Alt-A and Subprime markets, why didn't you just Google it?

Doug Duncan, chief economist for the Mortgage Bankers Association in Washington, D.C., said that Alt-A mortgages made up a small share of the U.S. market at about 6 percent of outstanding loans. Loans to prime customers, who are the most creditworthy, make up 74 percent; those to subprime borrowers are about 11 percent.

Alt-A = 6%

Subprime = 11%.

joe | November 17, 2008, 5:16pm | #

The 3% figure is false, as I've pointed out over and over, and just from flat out math.

No, Hazel, you didn't. Although I'm now confident that your confusion about the figures you were providing was genuine. Every single bit of data you thought refuted that point, you misunderstood. Percentages vs. abolute numbers. Numbers of mortgages vs. dollar value. Outstanding amounts vs. purchases amounts. These are meaningful differences, and you don't understand them.

As opposed to the Washington Post, Bloomberg, and the Wall Street Journal? You might have noticed, but didn't, that I didn't contradict any of those figures. They are all perfectly accurate - they're just not apples-to-apples.

I'm demonstrating that the alt-a merket is not smaller than the subprime market, fool. Well, you're trying to, but because you don't really understand the data you're providing, you keep getting tangled up in it.

And that Fannie and Freddie own larger slices of the subprime market than the alt-A market Which they don't. You merely confused percentages with aboslute numbers, and loan amounts with numbers of loans again.

Which is flatly contradicted by the numerous statements I linked to that Fannie and Freddie were repeatedly and directly pressured by officials from HUD to Congress to the Whitehouse to provide more loans to very low income borrowers. No, not really. You would have to show actual behavior on the part of Freddie and Fannie demonstrating that they engaged in particularly risky behavior, which you haven't been able to do. The statements you linked to show intent on the part of public officials to accomplish something, which does contradict a statement based on data about the GSEs actually did. Shall I start providing quotes about what lawmakers wanted the military to do in Iraq, to prove that it was done?

After all, Fannie and Freddie would buy anything. Except this isn't true. Freddie and Fannie had higher standards for purchasing mortgages than entirely-private companies.

You have an ideology-based narrative, and you really don't need to keep explaining what that narrative is. It just isn't actually, you know, backed up by the facts.

joe | November 17, 2008, 5:17pm | #

For example, Hazel, do you know what the term "conforming mortgage" means?

It refers to the standards required for Freddie and Fannie to purchase mortgages.

Do you know who is allowed to purchase nonconforming mortgages? That's right - everyone else.

Hazel Meade | November 17, 2008, 5:50pm | #

Let me rephrase: Of Fannie and Freddie's loan portfolios, a larger percentage is made up of subprime loans than of alt-A loans.
Of the total mortgage market, Fannie and Freddie's portfolio makes a larger percentage of the subprime market than it does of the alt-A market.

These two facts call into question your claim that Fannie and Freddie were attempting to buy less risky loans. If they were attempting to buy less risky loans, why do they own more subprime loans (in dollar terms), and a bigger percentage (in dollar terms) of the subprime market than the Alt-A market?

Moreover, I would really like to see you back up the 3% figure with something other than a quote from the OC register. Can you trace that figure to it's source? Cause it doesn't mathematically make sense.

If the 3% figure turns out to be accurate, it would have to be based on a very narrow definition of what constitutes engagement in the subprime market (otherwise the math doesn't work). As others have already pointed out, they were buying 44% of the mortgage backed securities in 2004. If you're trying to claim that only buying loans whole and directly counts, that's just plain disingenuous. Surely you realize that overall participation in buying up subprime loans - whether as securities or not, is what matters.

I see no real evidence, nor have you actually provided any, that Fannie and Freddie's purchase of risky loans (and securities based on them) was driven by attempts to compete with the private sector.
According to this report (http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf), the run-up in the subprime market started in 1995, which coincides with the increased quotas. By 2003, FMAE and FMAC held 48% of all subprime loans. The private sector didn't start catching up until 2005-2006. Which indicates that FMAE and FMAC were leaders, not followers.

joe | November 17, 2008, 5:54pm | #

Google is also useful to figuring out comparative levels of risk between Alt-A and Subprime loans.

"The share of loans that were at least 90 days late, in foreclosure or on property that had been seized rose from 12.4% in May and 6.88% in June 2006, according to the report by Michael Youngblood, an analyst at securities firm Friedman, Billings, Ramsey Group Inc.

The default rate for alt-A mortgages packaged into bonds climbed to a record 3% from 2.69% in May and 0.94% in June 2006, according to Youngblood, who made use of data from First American Corp.’s LoanPerformance unit."

joe | November 17, 2008, 6:18pm | #

Here's the source, Hazel. From the article:

Beginning in 2004, federal regulators also have required lenders to report on high-priced loans – those with rates at least three percentage points higher than U.S. Treasury notes of comparable maturity. While the mortgage industry defines subprime loans by credit scores, Federal Reserve Board analysts believe that subprime and Alt-A loans fall into their high-priced loan category.
The Register used that database for its analysis. During the four years covered by our analysis, lenders made 55 million home loans, including 12 million subprime loans.

I can't explain why Bloomberg's numbers are different.

Hazel Meade | November 17, 2008, 6:33pm | #

Joe, I'm looking for a source for THIS figure:

Fannie and Freddie, the federally sponsored mortgage buyers, were bit players in this market. Together they bought about 3 percent of all subprime loans issued from 2004 through 2007, most of that in 2007 alone.

That's the part that's just false.

Invisible Finger | November 17, 2008, 7:03pm | #

joe,

The Alt-A "craze" started late 2004 so choosing June 2006 would skew the default and deliquencies data toward subprime. Also, Alt-A loans were not packaged into bonds at the same rate as subprime loans were - in part because they have negative amortization options, so even more skewing toward subprime in your example.

http://calculatedrisk.blogspot.com/2008/08/subprime-and-alt-the-end-of-one-crisis.html

There is no evidenace that the Alt-A loans are in any better shape than subprime loans, if anything the data shows they are in worse shape. Because Alt-A loans were seldom securitized, Fannie and Freddie have little exposure to them.

Hazel,

Fannie and Freddie historically stayed away from subprime. They started getting in when their share price in 2003 wasn't keeping up and their largest shareholders (government pension funds) demanded they increase market share - they had little choice but to start buying subprime. Anyone buying subprime loans in 2007 was a fool because the housing market peaked in 2006.

Invisible Finger | November 17, 2008, 7:08pm | #

A decent write-up on what "Alt-A" and "subprime" mean:

http://calculatedrisk.blogspot.com/2008/08/reflections-on-alt.html

SHort version: Alt-A is the best subprime.

joe | November 17, 2008, 7:12pm | #

Yes, Hazel, that's the source of that figure: the Treasury's analysis of the reporting that the lenders were required to start doing in 2004.

I.F.,

Thanks for the data.

Hazel Meade | November 17, 2008, 7:16pm | #

IF:
If they historically stayed away from subprime, how is it that in 2004 they owned 48% of all subprime loans sold on the secondary market?

http://www.mcclatchydc.com/251/story/53802.html

joe | November 17, 2008, 7:34pm | #

Maybe it's different datasets, Hazel.

All subprime loans made between 2004 and 2007.

Subprime mortgages (no timeframe specified, so apparently, all subprime loans outstanding at the time of the article) sold into the secondary market.

Hazel Meade | November 17, 2008, 7:55pm | #

3% still doesn't make sense. Something like 70% of all subprime loans were sold into the secondary market, often in the form of securities, and FMAE and FMAC were buying up 20-44% of the securities.

In 2007, they accelerated buying up those securities, because the banks were trying to unload them.

Hazel Meade | November 17, 2008, 8:12pm | #

Wikipedia:
The securitized share of subprime mortgages (i.e., those passed to third-party investors via MBS) increased from 54% in 2001, to 75% in 2006.

Yes, it's a sourced reference. The source requires a subscription though.

I suspect purchasing mortgages in the form of securities have enabled FMAE and FMAE to evade lending restrictions that were preventing them from meeting the quotas set by the government.

That's basically what's in the Reason article here:
Fannie and Freddie then went on a subprime bender. They made it clear that they wanted to buy all the subprime or Alt-A mortgages that they could find, eventually acquiring around $1 trillion of the paper. The market responded. In 2003 subprime mortgages made up less than 8 percent of all mortgages. By 2006, they were over 20 percent. Banks knew they could sell subprime products to Fannie and Freddie. Investments banks realized that if they laced ever increasing amounts of subprime mortgages into the MBSes, they could juice the returns and so earn bigger fees.

I.e. even if they were staying away from directly purchasing alt-A or non-conforming loans, they could buy those loans if they were packaged as securities and still count them towards their quotas.

joe | November 18, 2008, 11:19am | #

A couple problems with that, Hazel: the "quotas" weren't for subprime and Alt-A mortgages, but for mortgages in low-mod neighborhoods. As Ron Paul said in his criticism of the 2006 bill, most of what Freddie and Fannie held were refinances. Alt-A includes mortgages for investment properties. So we're not talking about loans to lower-income people making up a disproportionate share of those Alt-A and subprime loans.

Also, there was a lot more driving the production of shoddy lending in the years you mention than Freddie and Fannie buying them. That was also the period of the proliferation of MBSs in the private sector, and derivatives of those derivatives.