There’s some Huffing over Sarah Palin’s remarks this morning:
the Republican vice presidential nominee claimed that lending giants Fannie Mae and Freddie Mac had “gotten too big and too expensive to the taxpayers.”
Numerous lefties have jumped on this, claiming that since they are private corporations, this is incorrect.  While true in theory, in practice this is not the case:
There is a wide belief that FNMA securities are backed by some sort of implied federal guarantee, and a majority of investors believe that the government would prevent a disastrous default. Vernon L. Smith, 2002 Nobel Laureate in economics, has called FHLMC and FNMA “implicitly taxpayer-backed agencies.”[11] The Economist has referred to “[t]he implicit government guarantee”[12] of FHLMC and FNMA. In testimony before the House and Senate Banking Committee in 2004, Alan Greenspan expressed the belief that Fannie Mae’s (weak) financial position was the result of markets believing that the U.S. Government would never allow Fannie Mae (or Freddie Mac) to fail.[citation needed]
So Sarah Palin is entirely correct: every time FNMA processed a mortgage security for a bad subprime loan, Uncle Sam was probably going to end up footing the bill.
Meanwhile, in a total non-gaffe Obama identifies one of those 57 states he’s been campaigning in:Â New Pennsylvania!Â
Some New Pennsylvania facts:
– Founded on September 31st, 1808 by Jebediah PennsylvaniaÂ
– Capital: North Haverbrook, welll-known for its progressive light rail system.Â
– Principal export: widgets.
– State bird: Purple-tailed snipe.
– State animal: Spotted yetiÂ
UPDATE: Mikeca in comments correctly points out FNMA wasn’t actually processing the bad subprime loans, but was instead affected by the overall downturn caused by them. It doesn’t affect the overall point (that FNMA was going to cost taxpayers money) but it’s an interesting detail.
UPDATE:Â Some guy named Hussein talks about his “Muslim faith.”
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So Sarah Palin is entirely correct: every time FNMA processed a mortgage security for a bad subprime loan, Uncle Sam was probably going to end up footing the bill.
This is totally false. FNMA did not underwrite subprime loans. The subprime loans were entirely in the private market.
Fannie Mae and Freddie Mac were prevent by government regulation from backing subprime mortgages. At the hight of the housing bubble Fannie Mae and Freddie Mac lost significant market share to the unregulated private lenders.
What has happened to Fannie Mae and Freddie Mac is that the subprime lenders created the housing bubble through reckless lending practices. This inflated housing prices. Although Fannie Mae and Freddie Mac were only backing loans where the borrowers had the income to pay back the loans, the collapse of the housing bubble has caused housing prices to fall by 20-30% in many markets. Many people who made 10-15% down payments in recent years are now looking at mortage balances that are larger than what their house is now worth. Many of these people will simple walk away from these houses, even if they have the income to make payments. Some will also lose their jobs and be forced to walk away from there house.
Fannie Mae and Freddie Mac were not the ones making the bad subprime loans that had no hope of ever being paid off unless housing prices kept going up so fast that people could flip their house at a huge profit. That was the unregulated private lenders that did that.
The government implicied backed Fannie Mae and Freddie Mac and in return the put regulations in place designed to make sure their lending practices were sound. Those regulations largely worked. They prevented Fannie Mae and Freddie Mac from entering the subprime loan market. But the regulations did not anticipate a 20-30% drop in US housing prices. That kind of a drop is going to hit all mortage lenders hard.
I suppose if it’s fair to joke constantly about Bush saying "Is our kids learning?" (which he actually didn’t, but who cares?) or that he "wants more arsenic in our water," then ribbing Obama for his "57 states" flub or "New Pennsylvania" is just as fair.
Mikeca,
Sarah’s still 100% correct, whether FNMA processed subprimes or not. But thanks for the detail.
The Left is so panicked by Sarah Palin that this is the sort of thing they are turning into a "gaffe" when Obama is out there talking about his "muslim faith" or forgetting how many states there are, etc. Obama is a walking gaffe machine, and people are starting to notice. I’m sure Palin will make her share of embarrassing public speaking errors, geez who doesn’t?
But to call this a "gaffe" is to seriously misunderstand what the term "gaffe" means.
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Dave,
You are absolutely right, there has been an attitude of ‘implied subsidy’ in the Freddie Mac, Fanny Mae situation for some time. This situation is NOT new, and has been smoldering since about 2002 or longer.
Alan Greenspan in 2004:
“The Fed chairman said both companies, which hold about $2 trillion worth of obligations tied to home mortgages, have grown much faster than their competitors because investors think the federal government will bail them out in a crisis.Mr. Greenspan said this ”implied subsidy” has been a boon to the companies’ shareholders but provided only modest benefits to homebuyers in the form of lower mortgage rates.”
”The scale itself has reinforced investors’ perceptions that in the event of a crisis involving Fannie and Freddie, policy makers would have little alternative than to have taxpayers explicitly stand behind the G.S.E. debt,” Mr. Greenspan said, referring to the debt of ”government sponsored enterprises.”
So while, yes, there is not an ‘absolute’ guarantee, there certainly is an implied one, and people have been treating it as factual, with good reason: the Gov’t will indeed bail them out.
It’s the same old story. When you owe the bank $10,000 the bank owns you. When you owe the bank $2,000,000,000,000 dollars, you own the bank.
This step the government took today absolutely vindicates Palin’s comments. As of now the taxpayer IS holding the bag.
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Mike and Dave,
Fannie and Freddie actually held about 10% of their holdings in Alt-A, which is a class between prime and subprime, and has accounted for about 50% of their losses.
Alt-A can be very much like subprime in that often times incomes and credit scores of the borrower are not documented, or there is some other credit risk such as no down payment (100% financing). From a practical standpoint, there really is no difference between Alt-A and subprime at this stage of the game.
What hurt most is that Fannie and Freddie got into the non-prime game in 2005, so timing was obviously horrible.
Two things I don’t hear anyone talking about.
1. There was some legislation passed a few years ago to encourage banks to lend to riskier borrowers. This was supposed to be a way for low-income people to become home-owners. The idea was that owning a home made people more responsible and that giving them a "hand up" was all that was necessary to get them out of living in subsidized housing.
2. Dropping the prime rate to historic lows flooded the market with cheap cash, and that had to go somewhere.
Combine 1 and 2 and you get a flood of money into risky loans.
Gee, is it really that simple?
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Anybody wanna know Obama’s military defense plans.
This how this guy got to be the demo-candidate.
CC,
I was going to mention it, but got busy at work. Also not mentioned are the GSE subsidies to the tune of 6 billion a year that they receive. Bottom line, at this point (and in my opinion) the two need to be broken up and sold off in about 10 or 15 sections. Together they are essentially a harmful monopoly.Â
Here is the offending bill, I think, which increased the limits, and here’s your list of house sponsors (it is a bit of an equal opportunity offender bill on both sides of the isle):
Rep Bachus, Spencer [AL-6] – 1/28/2008
Rep Becerra, Xavier [CA-31] – 1/28/2008
Rep Blunt, Roy [MO-7] – 1/28/2008
Rep Boehner, John A. [OH-8] – 1/28/2008
Rep Clyburn, James E. [SC-6] – 1/28/2008
Rep DeLauro, Rosa L. [CT-3] – 1/28/2008
Rep Emanuel, Rahm [IL-5] – 1/28/2008
Rep Frank, Barney [MA-4] – 1/28/2008
Rep Granger, Kay [TX-12] – 1/28/2008
Rep Hoyer, Steny H. [MD-5] – 1/28/2008
Rep Larson, John B. [CT-1] – 1/28/2008
Rep McCrery, Jim [LA-4] – 1/28/2008
Rep Miller, George [CA-7] – 1/28/2008
Rep Obey, David R. [WI-7] – 1/28/2008
Rep Rangel, Charles B. [NY-15] – 1/28/2008
Here is a link to the roll call vote and the senate results for the nays and no votes (and, surprise, surprise, guess who didn’t vote? McCain voted Yea.)
NAYs —16 Allard (R-CO)
Barrasso (R-WY)
Coburn (R-OK)
Corker (R-TN)
Craig (R-ID)
Crapo (R-ID)
DeMint (R-SC)
Ensign (R-NV)
Enzi (R-WY)
Gregg (R-NH)
Hagel (R-NE)
Inhofe (R-OK)
Kyl (R-AZ)
Murkowski (R-AK)
Sessions (R-AL)
Shelby (R-AL)
Not Voting – 3 Clinton (D-NY)
Nelson (D-NE)
Obama (D-IL)
Do nothing congress except when it comes to wasting the nations money in feel good legislation that turns out to be a boondoggle.
And now it looks like some folks have decided to go after Palin’s ex-pastor. Do they really want to go there??? http://www.cnn.com/2008/POLITICS/09/08/palin.pastor/  http://news.aol.com/elections/article/palins-church-promotes-gay-conversion/165471?icid=200100397×1208835546x1200532764
There’s a poem out there composed almost entirely of George W’s verbal gaffes:
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