Yes dear, the GSEs are a nightmare

Kanosians, like Barry Ritholtz, peddle Horse Manure. The Government Sponsored Enterprises are a disaster. Guaranteed to Fail:

On September 30, 1999, a New York Times reporter, Steven Holmes published a piece titled “Fannie Mae Eases Credit to Aid Mortgage Lending ”. The crux of the story was that Fannie Mae was lowering its credit standards, which in turn would increase home ownership. Franklin Raines, the then Chief Executive Officer (CEO) of Fannie Mae, is quoted in the article: “ Fannie Mae has expanded home owne rship for millions of families in the 1990's by reducing down payment requirements. Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so - called subprime market.'' Consistent with sound journalism, the story analyzed the potential consequences of Fannie Mae’s foray into riskier lending. Quite presciently, the author Steven Holmes sounded an alarm that Fannie Mae was taking on l arge amounts of new risk, which in good times would not cause problems, but in a downturn could lead to a massive government bailout. The article also quotes Peter Wallison, an American Enterprise Institute scholar and frequent critic of the government - spo nsored enterprises (GSEs), in particular, the two largest ones, Fannie Mae and Freddie Mac: “From the perspective of many people, including me, this is another thrift industry growing up around us...If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Even George Bush knew:
2001

    April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity."  (2002 Budget Analytic Perspectives, pg. 142)

2002

    May: The Office of Management and Budget (OMB) calls for the disclosure and corporate governance principles contained in the President's 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac.  (OMB Prompt Letter to OFHEO, 5/29/02)

2003

    February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market.


    September: Then-Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements.


    September: Then-House Financial Services Committee Ranking Member Barney Frank (D-MA) strongly disagrees with the Administration's assessment, saying "these two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."  (Stephen Labaton, "New Agency Proposed To Oversee Freddie Mac And Fannie Mae," The New York Times, 9/11/03) 


    October: Senator Thomas Carper (D-DE) refuses to acknowledge any necessity for GSE reforms, saying "if it ain't broke, don't fix it."  (Sen. Carper, Hearing of Senate Committee on Banking, Housing, and Urban Affairs, 10/16/03)


    November: Then-Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk."  To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE."  (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)

2004

    February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital and calls for creation of a new, world-class regulator:  "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore … should be replaced with a new strengthened regulator."  (2005 Budget Analytic Perspectives, pg. 83)


    February: Then-CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted."  Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator."  (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)


    April: Rep. Frank ignores the warnings, accusing the Administration of creating an "artificial issue."  At a speech to the Mortgage Bankers Association conference, Rep. Frank said "people tend to pay their mortgages.  I don't think we are in any remote danger here.  This focus on receivership, I think, is intended to create fears that aren't there."  ("Frank: GSE Failure A Phony Issue," American Banker, 4/21/04)


    June: Then-Treasury Deputy Secretary Samuel Bodman spotlights the risk posed by the GSEs and calls for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system.  Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs:  Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System."  (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)

2005

    April: Then-Secretary Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America … Half-measures will only exacerbate the risks to our financial system."  (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05)


    July: Then-Minority Leader Harry Reid rejects legislation reforming GSEs, "while I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process." ("Dems Rip New Fannie Mae Regulatory Measure," United Press International, 7/28/05)