Curbing intergenerational poverty cycles; the extended internet universe today; very briefly noted; Janeway on Kurz on techno-monopoly; journamalism: is there any value here other than that...
We assign monetary policy the role of cyclical stabilization because it can achieve that goal by acting in a timely manner. Fiscal policy is unable to do that except in emergencies. And here we are, beholding a monetary policy that waits for things such as the owner's equivalent rent to flow through the data stream. That's a price nobody pays. Waiting for what a sample of people thought they would pay as rent to live in their own homes 12-18 months ago should not strike anyone as a basis for timely monetary policy. The Fed's five-year review should seriously reconsider whether those types of imputed components of inflation indexes belong in the long-term inflation objective. They unnecessarily delay policy action. CPI ex housing has been running at a sub-2.0% annual rate or slightly above 2.0% for about nine months. Hello? But we must wait for the Owner's Equivalent Godot. I'm afraid this isn't timely monetary policy action.
I worked in credit modeling at Freddie, Fannie, a mortgage insurance firm, and Paulson & Co. The GSE's did take more risk and less return to hit their Congressionally set minority lending goals. Those ultimately lost money, but there weren't enough of them to lead to insolvency. So what destroyed them?
Both GSE's were run by neophyte CEO's (accounting questions had cleared the experienced executive ranks) who decided in 2008 that the housing market was just in a correction because employment remained strong, and so went all-in buying "Alt-A" (mostly low doc loans) at a 50 bps discount because the Wall St buyers had disappeared. Fannie & Freddie had lost market share to the Wall St securitizations in prior years, so this was also seen as a way to claw it back.
Alt-A loans did nothing for minority or income housing goals (if you exaggerate your income, you aren't going to qualify as low income). These mortgages were filled with fraud and not even originated with Fannie & Freddie in mind as investors. In short, the GSE's massively bought the riskiest crap at the worst possible time. On such deals, the GSE's would bully mortgage insurers to place pool insurance, which blew up, though the losses to the MI's were capped. Meanwhile, the GSE regulators were solely focused on the interest rate risk of the GSE investment portfolios, not on credit risk because credit risk losses had been laughably low - a common mistake.
This isn't an interesting tale of politics, intrigue, or evil. It is merely greedy mediocrities who gambled away empires. But never waste a crisis.
I'm retelling my memories from analyzing loan level data within Fannie Mae, and discussions with colleagues. I don't have access to the data anymore. Alt-A was generally ruinous (see pg 6 of https://www.fanniemae.com/media/26731/display). After looking at disclosures, I think the build up of Alt-A was just before 2008. Alt-A wasn't low downpayment and the borrowers exaggerated their incomes, so it wasn't rich in housing goals. It was most often state income & interest only, sometimes also cash-out refinance or investor occupancy. In other words, loan types that attracted speculators but didn't appear as risky as subprime - though its losses were more correlated to house prices than subprime. Alt-A loans weren't usually purchased through the regular 'flow' from traditional lenders; most Alt-A couldn't be scored by GSE underwriting engines. So they came in bulk deals with negotiated price and terms. Fannie & Freddie's market share had fallen from the high ~58% to 40% in the mid-00's, (https://www.fhfa.gov/Media/Blog/Pages/What-Types-of-Mortgages-Do-Fannie-Mae-and-Freddie-Mac-Acquire.aspx). The place they could get share back was in Alt-A bulk deals. Note that if Fannie & Freddie were driving the housing bubble, their market share should have risen in those years.
Economic history: Even "fragile by design mortgagees" were a problem, they should have had no effect on a prudentially well regulated financial system. Regulators would just require institutions to reduce leverage to compensate for the additional risk of the "fragile" mortgages.
But of course a Fed committed to maintain inflation at its target rate, and known to be so known, would have offset the crisis of a few financial firms. There is no way the Fed ducks the blame for TARP and other financial institution bailouts, the automobile industry bailout, a decade of under-target inflation and high unemployment, and Donald Trump.
On Fed cuts and shelter inflation:
We assign monetary policy the role of cyclical stabilization because it can achieve that goal by acting in a timely manner. Fiscal policy is unable to do that except in emergencies. And here we are, beholding a monetary policy that waits for things such as the owner's equivalent rent to flow through the data stream. That's a price nobody pays. Waiting for what a sample of people thought they would pay as rent to live in their own homes 12-18 months ago should not strike anyone as a basis for timely monetary policy. The Fed's five-year review should seriously reconsider whether those types of imputed components of inflation indexes belong in the long-term inflation objective. They unnecessarily delay policy action. CPI ex housing has been running at a sub-2.0% annual rate or slightly above 2.0% for about nine months. Hello? But we must wait for the Owner's Equivalent Godot. I'm afraid this isn't timely monetary policy action.
I worked in credit modeling at Freddie, Fannie, a mortgage insurance firm, and Paulson & Co. The GSE's did take more risk and less return to hit their Congressionally set minority lending goals. Those ultimately lost money, but there weren't enough of them to lead to insolvency. So what destroyed them?
Both GSE's were run by neophyte CEO's (accounting questions had cleared the experienced executive ranks) who decided in 2008 that the housing market was just in a correction because employment remained strong, and so went all-in buying "Alt-A" (mostly low doc loans) at a 50 bps discount because the Wall St buyers had disappeared. Fannie & Freddie had lost market share to the Wall St securitizations in prior years, so this was also seen as a way to claw it back.
Alt-A loans did nothing for minority or income housing goals (if you exaggerate your income, you aren't going to qualify as low income). These mortgages were filled with fraud and not even originated with Fannie & Freddie in mind as investors. In short, the GSE's massively bought the riskiest crap at the worst possible time. On such deals, the GSE's would bully mortgage insurers to place pool insurance, which blew up, though the losses to the MI's were capped. Meanwhile, the GSE regulators were solely focused on the interest rate risk of the GSE investment portfolios, not on credit risk because credit risk losses had been laughably low - a common mistake.
This isn't an interesting tale of politics, intrigue, or evil. It is merely greedy mediocrities who gambled away empires. But never waste a crisis.
Very interesting! References? Yours, Brad DeLong
I'm retelling my memories from analyzing loan level data within Fannie Mae, and discussions with colleagues. I don't have access to the data anymore. Alt-A was generally ruinous (see pg 6 of https://www.fanniemae.com/media/26731/display). After looking at disclosures, I think the build up of Alt-A was just before 2008. Alt-A wasn't low downpayment and the borrowers exaggerated their incomes, so it wasn't rich in housing goals. It was most often state income & interest only, sometimes also cash-out refinance or investor occupancy. In other words, loan types that attracted speculators but didn't appear as risky as subprime - though its losses were more correlated to house prices than subprime. Alt-A loans weren't usually purchased through the regular 'flow' from traditional lenders; most Alt-A couldn't be scored by GSE underwriting engines. So they came in bulk deals with negotiated price and terms. Fannie & Freddie's market share had fallen from the high ~58% to 40% in the mid-00's, (https://www.fhfa.gov/Media/Blog/Pages/What-Types-of-Mortgages-Do-Fannie-Mae-and-Freddie-Mac-Acquire.aspx). The place they could get share back was in Alt-A bulk deals. Note that if Fannie & Freddie were driving the housing bubble, their market share should have risen in those years.
Bob Avery has written how minority and income lending didn't drive the housing bubble. https://direct.mit.edu/rest/article-abstract/97/2/352/58241/The-Subprime-Crisis-Is-Government-Housing-Policy?redirectedFrom=fulltext
I believe you are 100% right. Brad
Economic history: Even "fragile by design mortgagees" were a problem, they should have had no effect on a prudentially well regulated financial system. Regulators would just require institutions to reduce leverage to compensate for the additional risk of the "fragile" mortgages.
But of course a Fed committed to maintain inflation at its target rate, and known to be so known, would have offset the crisis of a few financial firms. There is no way the Fed ducks the blame for TARP and other financial institution bailouts, the automobile industry bailout, a decade of under-target inflation and high unemployment, and Donald Trump.