I was asked to be more balanced in class, but instead I'm going to post a really good take down of one of the "other sides" golden calves. I'll also sort of missed an opportunity to expand on my philosophy about this. I know some of you in class disagree with me and that is 100% fine. However, I do not view it as my job to be impartial or objective, I view it as my job to be honest. I have been upfront about which way my views slant and that the extent to what I feel like I should do. I feel we live in a world where acting like you are "objective" is just a dishonest rhetorical device and that most of the reason you will be graduating into a miserable job market is because a whole bunch of people "objectively" said housing prices can increase forever.
Anyway, here's Mike...
But first, as always, Wallison brings out the same argument that blames the crisis on Fannie and Freddie that he’s been using since 2009. Introduction (my bold):
[G]overnment housing policies…fostered the creation of an unprecedented number of subprime and otherwise risky loans immediately before the financial crisis began….In March 2010, Edward Pinto, a resident fellow (and my colleague) at the American Enterprise Institute who had served as chief credit officer at Fannie Mae, sent the Commission a 70-page, fully sourced memorandum on the number of subprime and other high-risk mortgages in the financial system in 2008. Pinto’s research showed that he had found more than 25 million such mortgages (his later work showed that there were approximately 27 million). Since there are about 55 million mortgages in the U.S., Pinto’s research indicated that, as the financial crisis began, half of all U.S. mortgages were of inferior quality and liable to default when housing prices were no longer rising.
This usually leads to the conservative talking point: half of all subprime and other high-risk mortgages were held by the GSEs! But wait, what’s that “and other high-risk mortgages” doing there?
This zombie argument finally got fully dismembered by Center for American Progress’ David Min in his recent report taking apart Wallison’s FCIC dissent, Faulty Conclusions Based on Shoddy Foundations.
Wallison and Pinto claim that the GSEs were responsible for half of all subprime and subprime-like mortgages. They do this by making up a confusing definition of “subprime-like,” what above is mentioned as their “and other high-risk” mortgages.
The fun part of making up your own definition is that it can be whatever you want it to be. If we define a conventional loan made to a borrower with a FICO credit score between 620 and 660 as a “leprechaun” and a loan with a cash down payment of less than 10 percent as a “unicorn,” we can say that Fannie and Freddie was responsible for half of all leprechauns and unicorns under oath and while serving on the FCIC.
Now instead of a leprechaun they’ve created the definition of “subprime by characteristic” and instead of a unicorn they say “Alt-A by characteristic,” for the numbers mentioned above. This is a definition nobody in the financial markets use.
The three-card monte trick is pretty straightforward once you know where to watch. There’s a lot of statements that go: “Fannie and Freddie made a lot of subprime loans and other high-risk mortgages. And subprime loans had a 25% default rate!” And you naturally assume that the other high-risk loans must also have a gigantic default rate compared to regular mortgages. Except they don’t. From Min’s paper (p. 8):
That 8.45% and 10% are the “other high-risk loans” that they try and shoe-horn in with subprime. That’s a high default rate, but it’s nowhere near as scary as the nearly 7% default rate on regular mortgage loans. And this trick is even more apparent when you break it down by securitization (see below). These so-called high-risk loans are much closer to regular loans when it comes to defaults, which are high across the board given the housing bubble and subsequent recession and high unemployment.
Min’s document goes through the rest of their claims related to the CRA and securitization as well.
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