Joe Nocera rejects Morgenson's thesis, that Fannie gutted its credit standards in the 1990s.
When Joe Nocera wrote his op-ed piece, "An Inconvenient Truth," challenging the notion that Fannie and Freddie were central to the financial crisis, a retort showed up on the Facebook page of Reckless Endangerment:
I count many references to Fannie and Freddie but no mention of the book which could have been quite useful to Mr. Nocera. Many of his points fly in the face of what the much more non-partisan Ms. Morgenson suggests, meaning he might have more of a political axe to grind, rather than an intellectual axe to grind.It's obvious why Nocera made no mention of the book by Gretchen Morgenson and Joshua Rosner. Nocera co-wrote, with Bethany McLean, All The Devils Are Here: The Hidden History of the Financial Crisis. All The Devils Are Here takes direct aim at the primary thesis of Reckless Endangerment, which contends that former Fannie Mae CEO James Johnson seriously reduced his company's credit standards. All The Devils Are Here, released seven months before the Morgenson/Rosner book, says he did no such thing.
To be fair to Morgenson/Rosner, it's a vast understatement to say, from their perspective, that Johnson reduced Fannie's credit standards. They see James Johnson as the chief villain in the financial crisis, because, according to them, he led the way in relaxing credit standards for residential mortgages everywhere. They write:
Under Johnson, Fannie Mae led the way in encouraging loose lending practices among the banks whose loans the company bought. A Pied Piper of the financial sector, Johnson led both the private and public sectors down a path that led directly to the financial crisis of 2008.According to unnamed colleagues who were not quoted directly, "[Johnson's] stewardship of the company not only opened the door to the mortgage meltdown, it virtually guaranteed it."
Wow. It’s a provocative thesis, given that Johnson ended his employment at Fannie Mae--and his career in mortgage finance--at the end of 1998. Yet, remarkably enough, the financial sector kept walking down that same path, without Johnson’s guidance, under a different Presidential administration, for another 10 years.
Johnson's influence must have been truly remarkable, since the financial instruments that triggered the 2008 crisis— credit default swaps for mortgage bonds, and CDOs holding only nonprime mortgage securities—had not yet been invented in 1998. And Fannie never purchased those types of investments.
What Nocera/McLean Report
Nocera and McLean examine Johnson’s career at Fannie in great detail. They are unsparing in their criticism of Johnson, whom they portray as a smooth but ruthless political operator, willing to steamroller critics and regulators who got in his way. Most importantly, Nocera and McLean identify a pivotal event that, years later, would contribute to Fannie’s insolvency. In 1990, Johnson and his lobbyists applied political pressure to thwart a legislative proposal to increase the GSEs’ levels for minimum regulatory capital, which were, and remained, razor-thin. Similarly, Johnson took steps to neuter the GSEs’ safety-and-soundness regulator. In that sense, the two books are report similar findings.
But Nocera and McLean went further. Being business journalists, they drew distinctions between words, actions, and results. They found that Johnson’s lip service to affordable housing initiatives belied his unwillingness to follow up with meaningful action. In response to criticism that the GSEs were not doing enough to finance low-income borrowers, Fannie started a few pilot programs, but, overall, Johnson remained unwilling to loosen Fannie’s credit standards in any material way. They write:
Here’s the great irony of the mortgage market in the 1990s: to the extent that lower- and moderate-income Americans were being swept along in the rising tide of homeownership in the 1990s, it was happening not because of Fannie and Freddie, but despite them. The replacement of the S&L industry by the new mortgage origination companies; the toughening, in the 1990s, of the Community Reinvestment Act, which forced banks to make loans to people in poorer neighborhoods; even the rise of the subprime industry (though it was more focused on refinancings than new home loans)—these were all factors in helping poorer people own homes. Fannie and Freddie may have been given a federal mandate to help lower- and moderate-income Americans buy homes, but the GSEs were cautious about the credit risk they took.More than four years after Johnson’s departure, in 2003, HUD Secretary Mel Martinez, a Bush appointee, affirmed this point. Martinez testified:
They preferred to game their housing goals rather than meet them, using methods that Fannie referred to internally as “stupid pet tricks.” They wanted nothing to do with subprime. Subprime loans didn’t conform. And anyway, there was so much money to be made elsewhere.
Many affordable housing activists found this infuriating. For all its sanctimony about its mission, they complained, the GSEs did very little for those who truly needed help. Both John Taylor, the CEO of the National Community Reinvestment Coalition, and Judy Kennedy, the former Freddie lobbyist in charge of the National Association of Affordable Housing Lenders, complained bitterly about Fannie and Freddie. Repeated studies by HUD showed that the GSEs’ purchases of loans made to lower-income borrowers lagged the market.
That’s not to say Fannie and Freddie did nothing. When Countrywide ginned up its program to provide low-income mortgages, it sold them to Fannie through a special program Fannie had set up to handle such loans. But back then, programs like Countrywide’s were small and highly controlled—experiments, really, and valid ones at that, because they sought an answer to an important question. As Dan Mudd would later ask, “Do you want to live in a country where someone who has a blemish on their credit, or someone who happens to be a minority, can’t get a home? Where do you draw the line?”
Mostly, though, Fannie Mae made no apologies for its stance. “I used to say that the goal at Fannie was to have a seamless yes to anyone who wants to do anything for housing,” Johnson later said. “But we didn’t say yes to crap, to fraud. We were probing the boundaries, but it was carefully circumscribed.”
Says a former Fannie executive: “About 98 percent of our mortgages were done at market rates. We were giving away a little at the edge of the big machine.” This person adds: “Johnson’s attitude was, ‘I am not going to let the government define what affordable housing is to this company.’”
[N]umerous HUD studies and independent analyses have shown that the GSEs have historically lagged the primary market, instead of led it, with respect to funding mortgages loans for low-income and minority households. The GSEs have also accounted for a relatively small share of first-time minority homebuyers.Follow The Money
So who is right, Nocera/McLean or Morgenson/Rosner? You can measure Johnson’s legacy via loan performance--rates of delinquency and credit losses--incurred during Johnson’s tenure and years afterward. The Federal Housing Finance Agency’s Annual Report to Congress tracks Fannie’s loan performance going back to 1971 (see page 124).
When Johnson headed the company, from 1991 to 1998, Fannie’s credit losses, as a percentage of on the mortgages that it owned and guaranteed, ranged between three and six basis points. During the years following his departure, from 1999 through 2007, Fannie’s annual credit losses dropped, ranging between one basis point and five basis points. Throughout this 16 year period, Fannie’s serious delinquency rates on single family mortgages, (loans that were at least three months delinquent), stayed well below 1%.
And then in 2008 things got really bad. Fannie’s credit losses shot up to the unprecedented level of 23 basis points. In 2008 and the years that followed, credit losses and delinquencies shot way up.
But one metric has remained remarkably stable since the 1990s. The rest of the mortgage market, the segment that does not include Fannie and Freddie, invariably performs three to four times worse.
In April 2010, the Financial Crisis Inquiry Commission published a preliminary report demonstrating how Fannie’s standards began their downward slide in 2004, six years after Johnson left the company. For instance, by year-end 2004, Fannie held $36 billion in interest only mortgages. Three years later, that number increased to $207 billion. Though this loan product represented only 8% of the single-family mortgage book, it represented 33% of all credit losses in 2008 and 2009. By definition, interest only mortgages would be considered to be “contrary to good lending practices,” and therefore ineligible for affordable housing goals. Interest only and Alt-A loans represented, together, about 16% of Fannie and Freddie’s mortgage portfolios, but they contributed the majority of the credit losses.
When Nocera and others refer to The Big Lie about the GSEs causing the mortgage crisis, this is the data they point to. When The New York Review of Books asserted that the book's "bold claim, however, is not substantiated by persuasive analysis or by any hard evidence," this is the data they point to. The evidence tying Johnson to the financial crisis seems weaker than the evidence that tied Saddam to a nuclear bomb in 2003.
The Marker of Those Who Cannot Handle The Truth: This point cannot be overstated. The one defining characteristic, the one indelible marker--shared by Morgenson, Rosner, the American Enterprise Institute, Republican politicians, other shills for rightwing think tanks--is their adamant refusal to discuss loan performance data on a comparative basis. Everyone else in the financial world follows this simplest of economic concepts, ranking organizations according to their results, the same way baseball fans rank teams in the major league tables.
The problem with Reckless Endangerment is that almost none of it is true. Not the part about Fannie’s credit standards under Jim Johnson, not the part about the 1992 Federal Housing Enterprises Financial Safety and Soundness Act, not the part about the Urban Institute study, not the part about the Boston Fed study, really, nothing that the book has to say about the mortgage markets in the 1990s, is true. And we haven’t gotten to the false claims about Andrew Cuomo, Barney Frank, the subprime markets in the 2000s, or the quality of Fannie and Freddie’s mortgage portfolios in 2008. This is about the fact that no one, ever, asks Morgenson or Rosner to respond to the broadside in The New York Review of Books, or the FCIC Report that strongly disputes their claims, or explain where their numbers came from. This isn't about Morgenson or Rosner; this is about using The New York Times platform to promote The Big Lie.
What data do Morgenson/Rosner cite to support their thesis? That's a story unto itself.