It is one of my pet peeves, the seemingly insatiable dislike that the Wall Street Journal's opinion page constantly wages against Fannie Mae and Freddie Mac.
I can usually discount this, since they're in the newspaper business, albeit a business publication, and it would be too great a standard to expect business journalists to know everything, given how many different industries and markets they cover.
Its easy to chalk up their dislike of Fannie Mae and Freddie Mac to their conservative business philosophy which holds that any kind of government interference in the pure workings of capitalism is immoral, wrong and inefficient.
However, I just read an opinion written by Ethan Penner, currently a principal with Lubert-Adler and formerly of Nomura Capital where "he helped pioneer the application of securitization technology to real-estate finance". That is the WSJ's description of him. I could not find him listed on the Lubert-Adler website for additional information, but I probably just missed it, or found the wrong web site.
He says he's been in the business since 1983, which is a whole lot longer than me, but not as long as Angelo Mozillo.
Mr. Penner gives a nice bit of background on the S&L industry, and points out that with the securitization of mortgages, they, the S&Ls, were forced into looking into riskier ventures to replace this lost business. I'm hoping to hear back from Paul Muolo who covered the S&L crises first hand as a reporter for National Mortgage News, which at the time, I believe, was called National Thrift News. But, I suspect the cause of the S&L was greed and poor management.
Yesterday, the WSJ had a great cover story about the role of the rating agencies in working with Wall Street to sell AAA rate bonds composed of subprime mortgages. Certainly, there is enough blame to go around, and I hope that there is some reform that comes from the focus on their role.
But Mr. Penner is pinning the blame on Fannie and Freddie. And his reasoning is, in my estimation, weak. First, he says Fannie and Freddie, "whose unckecked growth into second mortgages, subprime loans and many other assets...has pushed other mortgage-market participants further out on the risk spectrum in search of a lifelihood".
Unchecked! Unchecked? Has he heard of FM Watch? Unchecked!
Granted, Fannie and Freddie have been active in expanding their mortgage related activities- and we can debate that. But, I don't think you can say their expansion has been unchecked.
But, that is a minor, trifling point.
The real issue is, if Fannie and Freddie have pushed into these other segments of the mortgage industry, does this crowd out participants and force them to do something stupid, like market NINJA loans (No Income, No Assets, No Job)? Not if they are responsible. They just get out of the business.
The second point that Mr. Penner makes, and this one has my blood boiling over, is this statement:
"In the free market, those that made bad credit decisions must be allowed to pay the price, and only by paing dearly can lessons truly be learned. Borrowers who were unwitting and took on too much debt must learn that there are consequnces for their actions....Wall Street firms that provided credit to all of these activities with too much laxity must also pay a price. This is all part of a healthy correction."
Where to start?
Lets start with punishing Wall Street. But Mr. Penner, Wall Street sold their MBS to a bunch of unsuspecting Pension Funds. The Wall Street firms are going to hurt a little. But they'll close a few desks and move on. No big deal to them, because once the credit market opens, they'll re-open desks and expand. PAINLESS!
But those darned pension funds. They're stuck with bad assets and they will pay the price. I guess this is like pay it forward, but like an evil twisted version. Your bad karma goes to your neighbor. Nice. Wall Street sure did learn a lesson. And the pension funds, they will never buy MBS again. Good. That is good for the market, good for homeowners, good for America!
Next, those borrowers. How dare they qualify for a loan they should have never gotten in the first place, one they could not pay off. Lets punish them. They're not mortgage professionals, and they were foolish for trusting the mortgage loan officer who said they could re-fi out of the 2/28 arm they had if rates went up. Lesson to borrowers- DON'T TRUST LOAN OFFICERS. Doesn't matter if they work for a bank or mortgage broker. Don't TRUST THEM! They may seem to be an expert, and they may seem to be trying to help you out, but this is your lesson. And the house you couldn't afford, we're taking that away from you.
And as for borrowers that took on too much credit. If it wasn't for Wall Street that funnelled the capital into real estate in the first places, values wouldn't have shot up so high in the first place forcing people into these unaffordable loans. Viscious positive feedback loop.
Fannie and Freddie might not be perfect, and they might pose a risk to the broader economy if they ever had trouble.
But they serve a role in making home ownership a possibility, and benefit consumers and the industry players that play in this space, so much so that it was earlier this year or last that Angelo Mozillo grew upset with the MBA that a committee had recognized the benefits that Fannie & Freddie provide, but the broard MBA did not want to get behind that statement. I apologize for the vague recollection, and if someone has a link or quote, please pass it to me.