Ed Pinto labeled 27 million mortgages as "high risk," but showed no curiosity about how those loans performed. A guy who lacked the skills of a junior analyst is touted as an "expert" in the media and by the GOP.
In April 1987, Edward Pinto got a big promotion. Fannie Mae moved him out of his marketing and product management position, and made him executive vice president and chairman of the credit policy committee. In 1989 he was fired. On May 2, 2011, American Banker published a 2000-word profile on Pinto, who says he was never given an explanation for his termination. Nonetheless, he thinks that his conservative credit stance had something to do with it.
Perhaps. But Pinto's “reports” for The American Enterprise Institute suggest something else. Pinto seems pretty clueless about the basic rules of credit analysis. At Fannie Mae, and at every other lending institution in the capitalist world, the key metric for success or failure is loan performance over time. What percentage of the overall loan portfolio is delinquent? What percentage has defaulted, and what is the loss severity on the loan defaults? What were the risk concentrations that drove these defaults and losses? And how does one loan portfolio’s performance compare with that of the rest of the market? Given the cyclical nature of housing, you need to look at the trends that span many years; otherwise you don’t know what you are talking about.
Pinto ignores those questions in his AEI reports (here, here, here, and here) which is why Barry Ritholtz says that Pinto writes, "under the theory of keep throwing shit against the wall until something sticks." Listen here to get a sense of how well he articulates issues and addresses the questions posed by staffers from the Financial Crisis Inquiry Commission. The FCIC interviewed Pinto six times, which is no small accomplishment, since, if the recorded interview is any indication, Pinto has a tough time cutting to the chase.
Which is why I doubt that any of the executives who read American Banker would waste more than 10 minutes listening to this guy. Why the big profile? Because the American Enterprise Institute and its rightwing media platform, the op-ed page of The Wall Street Journal, touted Pinto as an "expert" to validate their preexisting narrative.
Dr. Allan Mendelowitz, the former Chairman of the Federal Home Loan Board, put it this way back in November 2008:
There were two big lies in the past eight years. One is that there are weapons of massive destruction in Iraq and Saddam Hussein was associated with Al-Qaeda. That was one. That one got a lot of coverage. The other big lie, that hasn't received quite as much coverage is that somehow Fannie Mae and Freddie Mac were the cause of the crisis that we faced.
Just as the Journal's editorial page touted the far-fetched story offered up by Curveball, the supposed insider who said that Saddam had WMD, it touted the "analysis" of Edward Pinto, the supposed "insider" who confirmed that the financial crisis was caused by affordable housing policies, and not by the abuses on Wall Street.
Pinto’s main thesis is that of the 55 million mortgage loans outstanding, almost half, or about 27 million, were “high risk.” Of that high risk segment, about 12 million mortgages were owned or guaranteed by Fannie Mae or Freddie Mac. But Pinto’s unique categorizations for high risk loans illustrate yet another failure of credit competence. No single risk factor exists in isolation. A borrower’s low FICO score may be offset by a very low loan-to-value ratio, and vice versa. Similarly, if a single loan has a combination of high risk factors, known in the business as risk layering, the expected outcome may be significantly worse. This is really basic stuff, which Pinto doesn’t consider.
So how have those high risk loans performed? Pinto offers up nothing, which is why his work has been derided by the Center for American Progress, among others. Pinto says that loans to borrowers with FICO scores below 660 are nine times more likely to default. But he doesn’t show the actual loan performance to back it up. (Actual data shows that it's more like three times higher.) So staffers at the FCIC looked up the information, which showed by Pinto’s categorizations make no sense because, in terms of loan performance, there is almost no overlap between Pinto's categorizations and everyone else's categorizations.
To anyone with a passing familiarity of the mortgage business, it's obvious that Pinto’s analyses do not pass the laugh test. Let’s start with some basics. Since the 1990s, before and during the real estate bubble and continuing through the crash up to the present time, one metric has remained remarkably steady. Fannie and Freddie’s loan performance has been exponentially better than the rest of the residential mortgage market. All of the loans held by and guaranteed by the GSEs, including all those Pinto-designated “high risk” loans, show serious delinquency rates that are one-third that of the rest of the entire market. (See slide 4 from a presentation by James Lockhart, who was appointed by Bush to regulate the GSEs.) The GSE’s hold the majority of mortgage loans in the U.S., but the majority of seriously delinquent loans are held by everyone else. Ergo, the mantra at American Enterprise Institute, that Fannie and Freddie led the race to the bottom in credit standards, cannot be supported by the data.
(Yes, Fannie and Freddie became insolvent, as did virtually every other residential mortgage lender or mortgage lending unit. But, as discussed here and elsewhere, the primary reasons for F&F's failure had almost nothing to do with affordable housing goals.)
It's all explained, with great clarity, in Chapter 11 of the FCIC report, which refers to Pinto's, "written analyses [which were] reviewed by the FCIC staff and sent to Commissioners." When FCIC Chair Phil Angelides was questioned under oath as to whether Pinto's information had been sent to the Commissioners, he testified that, "Mr. Wallison distributed that information to all commissioners -- including members of the housing working group." FCIC Commissioner Peter Wallison, Pinto's colleague at The American Enterprise Institute, acknowledges that, "over time I tried to make sure that the other Commission members were at least aware of some of the material Pinto had furnished to the Commission." In the age of emails, the distinction between, "made aware of" and "sent to," seems pretty flimsy. But, even though he was caught red handed, Wallison seems unwilling to admit that he lied to Congress when he wrote, "Pinto's memos were never made available to the other members of the FCIC, or even to the commissioners who were members of the subcommittee charged with considering the role of housing policy in the financial crisis."
Why would Wallison commit a felony so brazenly? Because The American Enterprise Institute, The Wall Street Journal Editorial Board, and the Republican Party are heavily invested in maintaining the facade of credibility for their Curveball, Edward Pinto.
For the record, the FCIC concluded:
The GSEs contributed to, but were not a primary cause of, the financial crisis. Their 5 trillion mortgage exposure and market position were significant, and they were without question dramatic failures. They participated in the expansion of risky mortgage lending and declining mortgage standards, adding significant demand for less-than-prime loans. However, they followed, rather than led, the Wall Street firms. The delinquency rates on the loans that they purchased or guaranteed were significantly lower than those purchased and securitized by other financial institutions.