Kevin Hall: Mortgage companies Fannie Mae and Freddie Mac did not cause the financial crisis
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay, coming to you again from the McClatchy Newspaper offices, where our Washington studio is. And joining us is Kevin Hall. He’s the national economics correspondent for the McClatchy Newspaper chain. Thanks for joining us again.
KEVIN HALL, ECONOMICS CORRESPONDENT, MCCLATCHY NEWSPAPERS: Thanks for having me.
JAY: So when [Ben] Bernanke a few days ago spoke at Congress, he floated a bit of an idea of turning Fannie Mae and Freddie Mac—which, if I understand correctly, were originally government institutions for loaning money for housing, later turned into private for-profit institutions under a congressional charter, but essentially for-profit companies. And he said, well, maybe make them more like a public utility, very regulated; which raises a whole ‘nother question: if that makes some sense, why not go another yard, which is, why not give some of these institutions straightforward public-interest mandates, perhaps make them non-profit? And what about something like AIG, which the government owns, has massive amounts of capital now, all public money? Why not use that to insure all these small business loans instead of insuring Goldman Sachs?
HALL: Well, that’s a thought that’s been raised in some quarters. I think the first part of the question, on the GSEs, the Fannie Mae and Freddie Mac, it’s the 800 pound gorilla in the room. We’ve had a lot of proposals now in front of Washington for a couple of years about overhauling the financial reform—regulation of finance. It’s moved through the House; it’s now moving—at a glacial pace, but moving—through the Senate. Nowhere in any of these is what to do about Fannie and Freddie. And they do something called “securitization”. They have been the originators of securitization. They basically buy top-rated mortgages, or the safest mortgages, package them together, and sell them as a security to investors. They dominated the market for a long period of time. They’ve been very successful. It’s a model that proved very successful. Where things went wrong in the housing market was after about 2001. Wall Street, during the boom, began to issue what’s called private-label mortgage-backed securities to compete with Fannie and Freddie, and within four years was eating Fannie and Freddie’s lunch. So the bad origination of subprime loans, the weakened lending standards, that didn’t happen at Fannie and Freddie; it happened with the Wall Street firms. And all the bad actors are gone—Lehman Brothers, Bear Stearns, New Century, what were called non-bank lenders. They also exploited a regulatory loophole, so they weren’t regulated by the federal government but just by state governments. So all those bad actors are gone. Fannie and Freddie are the good guys in this story. It’s funny that it’s been turned on its ear.
JAY: Yeah, ’cause usually if someone raises this idea that I am about using AIG for public-interest purposes and all that, it’s, “Oh, look at Fannie and Freddie. Look, that’s what happens when you have these publicly engineered companies.”
HALL: Yeah, when in fact Fannie and Freddie are the only game in town. If it were not for them, there would be almost no mortgage lending happening, because for the last 15, 20 years, a lender doesn’t give you a mortgage and then sit on that loan. That’s called a “whole loan”. That very seldom happens anymore. It’s now sold into a secondary market. The idea is that you’re spreading risk far and wide—a mile wide and an inch deep is the old joke. But for it to work—and credit card debt is handled the same way, student loans, car loans, all of this stuff doesn’t sit on a bank’s books; it gets sold into a secondary market and packaged. That has frozen up. The only game in town for mortgages is Fannie and Freddie. Going forward, the question is: what do you do with it? The Federal Reserve has purchased $1.25 trillion, or will have by the end of March, $1.25 trillion worth of these mortgage-backed securities, top-rated stuff. As bad as our housing crisis is, most Americans are still paying their bills. And so if you’ve got the safest elements of that package together sold as a security, it’s given some stability. But going forward, [if] the Fed stops buying these, the market has to come back to life on its own. Will that happen? Bernanke seemed to suggest at the hearing that in fact he’s not worried that once that purchase stops, that you’ll have a spike in rates. He thinks it will have kept the market alive, and now it can stand on its own feet. But going forward, what do you do with these massive entities?—which used to be, as you rightly noted, government entities; then they were chartered in a way that they became private entities but congressionally chartered—that meant there was an implicit guarantee the government would come in and save them if things really got bad. As things really did get bad on Wall Street—again, not Washington; Wall Street—was these things started to fall apart, that put pressure on Fannie and Freddie, because the whole housing structure, both mortgages and mortgage finance, were coming apart. That put pressure on the government to give it an explicit guarantee, to tell investors—. Investors were clamoring: we want to know that the government backs this. So, absent that explicit guarantee, there was a run—investors were bailing out of Fannie and Freddie. The government decided, instead of explicitly backing them, if we’re going to do that, we might as well just take them; and they put them into receivership. They’re operating much like they did before, but now there’s a much stronger—there’s obviously the explicit government link. Going forward, what do you do? What does the utility look like? They didn’t get a lot into that in the hearing. Barney Frank, the chairman of the House Financial Services Committee, is planning a hearing on this. It was supposed to be in early March; it’s now been pushed back, but they are going to look at it. I think the feeling is you have to get the system back on its feet before you mess with mortgage finance, which is a much bigger animal. Going forward, you know, Bernanke said you can privatize it, you can downsize the amount of the holdings. And I think even if it stays in government hands or as a public institution, the feeling is they were over-leveraged in a way that they had so much on their books and not enough capital required in reserve. In that sense you could make the criticism they were like Wall Street, but it wasn’t as speculative as Wall Street—it was simply the growth in housing. So I think, going forward, what would a public utility look like? It wouldn’t—it’ll probably be a for-profit mandate, but it would have much stricter controls. If it operated like an electric utility, you could be profitable, but only so profitable.
JAY: You’d have regulated margins.
HALL: Exactly. So I think that’s—.
JAY: And you have to provide a certain level of service.
JAY: So in theory you’d have public-interest mandate.
HALL: And you could pursue low-income housing as part of that in a structured way. There’s a perception that has been fueled by the right that somehow Fannie and Freddie are behind this whole collapse because of the Community Reinvestment Act and the forcing [of] banks to lend to minorities. The truth could be nothing farther than that, and we’ve written stories about that and proved it, yet it seems to take on, you know, this national lore as if it just has to be true. The CRA loans are the best-performing loans. The subprime loans—in fact, the majority of subprime loans weren’t given to minorities; they were given to white folks who were buying second homes and vacation homes and flipping homes. Nobody cared what the interest rate was on a subprime loan, because you weren’t going to stay in the house; you were going to flip it in two years. That was the idea behind the teaser rates.
JAY: And nobody in the end cared whether they could get repaid, ’cause they were all creating all this pyramid scheme of mortgage subsidies insurance.
HALL: Exactly. There was a great joke at the time that—the great joke at the time was “a rolling loan gathers no loss” and it just got kicked up the food chain.
JAY: Thanks for joining us.
HALL: Thanks for having me.
JAY: Thank you for joining us on The Real News Network.
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