Financial Crisis Commission Too Dumb to Recognize Housing Bubble Even Now!

This would have been a better headline for the Washington Post article on the testimony before the crisis commission of Fannie's former chief executive as well its top regulator. The discussion before the commission was apparently whether Fannie and Freddie were motivated by profit when they moved into Alt-A mortgages in 2005 and 2006 or whether they were trying to fulfill their mission of increasing homeownership.

While there may be some debate over individual motivations, the obvious point that apparently went unmentioned in this article was that if the executives at Fannie and Freddie were not totally clueless about the housing market, they would have been cutting back on buying mortgages altogether in 2005 and 2006, when house prices were at levels badly inflated by the bubble. It was guaranteed that prices would drop and a high percentage of even traditional prime mortgages would go bad.

In this environment, the responsible route for Fannie and Freddie would have been to only issue mortgages that could be justified by appraisals of rental values. If a house price exceeded a multiple of 15 of its appraised annual rent, then F&F should not have purchased it. This action, along with its public justification by F&F executives and economists, likely would have had a substantial impact in dampening the bubble. This action would have best filled both the institutions' responsibility to promote homeownership and also likely kept them out of conservatorship.

Fannie and Freddie's executives should have been questioned on why they did not see the bubble. This was their biggest failing in the crisis. After all, these are both huge institutions and housing is all they do. The commission failed badly in its task and the inept reporting helped to conceal the commission's failure.

--Dean Baker

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