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Contrary to what many believe, Reckless Endangerment never applied the fact-checking and full disclosure standards used at The New York Times.

Reckless Endangerment is a bit of a bait and switch. The book became a bestseller because of Gretchen Morgenson's platform, as an esteemed financial writer at The New York Times. But the Times has very rigorous standards for full disclosure and fact checking, which Morgenson disregarded while moonlighting on her book about the mortgage crisis. Consequently, some of her fans cite her good work at the Times as a defense for the litany of deceptions put forth in her book.

Here are two examples illustrating the disconnect between the Times' standards and those used in the book.

The Former Fannie Executive Who Had No Idea What He Was Talking About

The Times is big on fill disclosure, especially if withheld information might leave readers with a false impression. One excerpt from Reckless Endangerment illustrates the stark contrast between reporting standards in the book and those in the Times. From the book:

Former colleagues say that [James] Johnson, during his years running Fannie Mae, was the original, if anonymous, architect of what became the disastrous homeownership strategy promulgated by William Jefferson Clinton in 1994. Johnson, after becoming chief executive of Fannie Mae in 1991 and under the auspices of promoting homeownership, partnered with homebuilders, lenders, consumer groups, and friends in Congress to transform Fannie Mae into the largest and most influential financial institution in the world.

“Clinton was clearly coordinating with him—they had the same goals at the same time,” said Edward Pinto, former chief credit officer at Fannie Mae, who is a consultant. With the other high-level Democrats on his side, Johnson beat back all attempts to rain in Fannie Mae's operations or growth plans.

Although Johnson left Fannie Mae's executive suite in 1999,  his stewardship of the company not only opened the door to the mortgage meltdown, it virtually guaranteed it, former colleagues said.

Here we see artful dissembling at work. The first paragraph refers to claims by some unnamed "former colleagues," with no direct quotes. The third paragraph refers to claims by some unnamed "former colleagues," with no direct quotes. The second paragraph quotes Pinto, identified as a former Fannie executive, who appears to confirm the statements of  Johnon’s “former colleagues.”  

Yet Pinto was never a former colleague of Johnson's, nor was he a corporate insider who had any knowledge of what he was talking about. Pinto left Fannie Mae in 1989, before well before Johnson joined the company and changed its strategy. Nor would the casual reader know that Pinto, who claims he was fired by Fannie, may bear a grudge against his former employer. Nor would the reader know that, since 2008, Pinto is paid by The American Enterprise Institute to write articles that mimic narratives set forth in Reckless Endangerment. Nor would the casual reader know that Pinto’s credibility had been damaged by the Financial Crisis Inquiry Commission, which publicly examined, and eviscerated, his research.

The New York Times insists on full disclosure, as shown in an article dated December 11, 2010, wherein Morgenson quotes Pinto and identifies him as a, “former chief credit officer at Fannie Mae in the late 1980s and a real estate finance consultant and resident fellow at the American Enterprise Institute, a conservative think tank.”

Rewriting The 1992 Federal Housing Enterprises Financial Safety and Soundness Act

Never in a million years would the editors at the Times allow Morgenson to describe the 1992 Federal Housing Enterprises Financial Safety and Soundness Act the way she did in her book. If, for some reason, her transgression slipped through the vetting process. A correction would have been printed immediately.

“Johnson had to get involved in the writing of the 1992 law,” write Morgenson and Joshua Rosner, who claim that the 1992 Act promoted low down payment loans without regard to credit quality:

The Federal Housing Enterprises Financial Safety and Soundness Act actually encouraged unsafe and unsound activities at both Fannie and Freddie by assigning them a new affordable housing mission…

Down-payment requirements were the first to go. Traditionally, banks required that borrowers put 20 percent of the property price down to secure a mortgage loan, but the 1992 act encouraged Fannie and Freddie to buy mortgages mortgages where borrowers put down a nominal amount—5 percent or less--of the total loan amount. Never mind that the risks associated with these loans were far greater; history showed that the more money, or equity, borrows had in their homes, the less likely they would be to default on their mortgages.

With lower down payments blessed by the 1992 legislation, Fannie and Freddie were suddenly far more likely to buy riskier loans from banks. And if those loans help the companies meet their affordable housing targets, well, all the better.

None of that is true. The statute [12 USC Sec. 4601] directed the GSEs to study their underwriting guidelines and examine, among other things, the implications of low down payment loans:
Each of the enterprises shall conduct a study to review the underwriting guidelines of the enterprise. The studies shall examine, [among other things] the implications of implementing underwriting standards that establish a downpayment requirement for mortgagors of 5 percent or less.
There is no way to reconcile a study, "of the implications of implementing underwriting standards that establish a downpayment requirement for mortgagors of 5 percent or less," with  "Down-payment requirements were the first to go... Never mind that the risks associated with these loans were far greater." Even the claim that, "the 1992 act encouraged Fannie and Freddie to buy mortgages mortgages where borrowers put down a nominal amount," is the kind of stretch that would ever pass muster with editors at the Times .

(This is not the only time that Reckless Endangerment transformed "This subject requires further study," into "Let's lower credit standards!" See the authors treatment of an Urban Institute Study, here.)

Anyone who followed the GSEs would know right away why the book's claims were, to put it charitably, highly misleading. All large banks, like all large investment portfolios, have different sub-limits for different levels of risk. Bank underwriting guidelines invariably impose much smaller sub-limits for higher-risk loans, so that the overall credit portfolio remains safe. As noted before, a standard right wing ploy is to ignore proportionality and insinuate that every small pilot program at the GSEs opened the floodgates to bad loans throughout the marketplace. (More on this later.)

Finally, the book's claims about the 1992 Act are misleading because they overlook other laws, and other market forces, which nullify the purported narrative. The authors fail to mention that Fannie and Freddie could not, by law, assume the primary credit risk on any mortgage loan in excess of 80% of the home’s appraised value. If a loan had an LTV higher than 80%, then the first loss was covered by private mortgage insurance.  

In other words, the amount of low-down payment loans available in the marketplace was never decided by the GSEs. It was the private market--private mortgage insurers and second lien lenders—who decided the availability of low down payment loans. And since the mortgage insurers were not regulated by the federal government, the 1992 Act had no impact on the business risk appetites of these companies.

Finally, GSE’s policy was that, whenever a mortgage was supported by mortgage insurance,  then the insurance coverage must reduce GSE’s direct credit exposure to an amount well below 80%. For instance, in 2005 Freddie's special product for high LTV loans, Home Possible 100 Mortgage, required mortgage insurance to cover a minimum 25% of the loan, so that Freddie's uninsured credit risk could never exceed 65% of the appraised value of the property. Neither the government nor the GSEs could compel insurance companies to finance the riskiest slice of a high LTV loan.

So where did Morgenson, and her co-author Joshua Rosner, come up with the idea that the 1992 Act opened the floodgates to low-down payment mortgages? More on that later.

Originally posted to Times Truth Teller on Wed Jun 13, 2012 at 09:06 AM PDT.

Also republished by Trolls.

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Comment Preferences

  •  One horse Diarist Strikes again (4+ / 0-)

    We get it, you don't like Gretchen Morgenson, take your vendetta elsewhere.

    If you play Microsoft CD's backwards, you hear satanic things, but that's nothing, because if you play them forwards, they install Windows.

    by Unit Zero on Wed Jun 13, 2012 at 09:16:45 AM PDT

    •  perhaps they'll point on the doll (2+ / 0-)
      Recommended by:
      Unit Zero, twigg

      where Morgenson touched them?  I've got a bunch of Rahm dolls that can be repurposed.

      Diarist is entitled to write about anything, but I find such navel-gazing over a book distracting when no solutions are presented, especially in light of the questionable influence of a single book.

      "Hey Joe Walsh, when did you stop deadbeating your wife?"

      by wretchedhive on Wed Jun 13, 2012 at 09:33:54 AM PDT

      [ Parent ]

  •  This really has to stop. (2+ / 0-)
    Recommended by:
    cassandracarolina, Unit Zero

    Using Daily Kos to wage what increasing seems like a personal vendetta, is simply abusive.

    I hope that the quality of debate will improve,
    but I fear we will remain Democrats.

    by twigg on Wed Jun 13, 2012 at 09:27:12 AM PDT

  •  I seem to be missing some of the background on (0+ / 0-)

    this issue, but I don't understand why this diarist stirs up so much controversy.

    Morgenson and Rosner have written a book which supports the right-wing meme that Fannie and Freddie bear primary responsibility for the housing bubble and collapse.

    The diarist does a decent job of debunking their hypothesis. I would have liked to see some more links in support of the diarist's arguments, but I found the diary to be interesting and informative as to the contents of the book.

    I am puzzled by the fact that several kossacks, who I very much respect, come to such different conclusions.

    Here's my take on it - the revolution will not be blogged, it has to be slogged. - Deoliver47

    by OIL GUY on Wed Jun 13, 2012 at 11:14:21 AM PDT

    •  Please let me know re: suporting links... (0+ / 0-)

      Please let me know what supporting links or clarification you would like to see.

      The issue, the way I see it, is not about Gretchen Morgenson, but about the way that Reckless Endangerment, because of its NYT imprimatur, has become the Bible of those who propagate The Big Lie, http://www.ritholtz.com/....

      The Big Lie is espoused constantly. The Big Lie is debunked every once in a blue moon.

      When you actually begin to fact check the book, or read it carefully, it becomes staggering how many lies and distortions are packed in to the volume. Too many to explain in a single Diary.

      When the book was slammed in the New York Review of Books, http://www.nybooks.com/...
      which said that the authors presented no hard evidence to back up their case, the authors responded with a deafening silence.  From what I can tell, the authors of the book seem more insulated from criticism than Mitt Romney.

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