The NYT has a piece that lays out how Fannie became over-extended in buying up risky mortgages. It implies that there was some failing with their computer models, which could not accurately capture the risks the company faced. Actually, it's problem was much simpler, they assumed that the housing bubble would not deflate. Recognizing that there was a bubble and that it would deflate did not require any complex modeling. It was actually a very simple exercise. It is remarkable that a huge financial institution like Fannie Mae (or Freddie Mac) failed to see the bubble and/or to take account its collapse in its planning. The purchase of risky mortgage was very much a secondary issue. If houses prices had not tumbled, the default rates on these mortgages would have been manageable and the losses would not have bankrupted the institutions. This piece also could have been somewhat more careful in distinguishing between types of loans. While many of the high-risk loans bought by Fannie were made to African Americans and Latinos, the Alt-A category of loans including a very high percentage of investment properties, the vast majority of which were not purchased by blacks and Latinos. Also, there were many institutions, such as the South Shore bank in Chicago, that have a long history of lending to moderate income people of color, with very low default rates. If Fannie had only been interested in increasing the availability of mortgage loans to under-served communities, it could have focused its efforts on those institutions with solid track records. (Although encouraging anyone to buy a home at a bubble-inflated price was not a good idea.) Clearly its dealings with the major issuers of risky mortgages were driven by profit, not a desire to aid minorities. [Thanks to Yves Smith of Naked Capitalism for reminding me of the blame the poor aspects of this article.]
--Dean Baker
--Dean Baker
