Bloomberg: Don’t Blame Banks for Mortgage Crisis
Did Congress cause the mortgage crisis by mandating loans to poor people? No.
New York City mayor and media mogul Michael Bloomberg says Congress, not the banks, is responsible for our current mess.
Speaking at a business breakfast in midtown featuring Bloomberg and two former New York City mayors, Bloomberg was asked what he thought of the Occupy Wall Street protesters.
“I hear your complaints,” Bloomberg said. “Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.
“But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and congress certainly isn’t going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for.”
This was a popular and perfectly plausible argument a year or so ago. I joined many in making it. It was a perfectly understandable mistake for informed laymen to make, since it starts from a true premise: there was indeed pressure on lenders to make loans to disadvantaged people and communities seeking to become homeowners.
But, as Paul Krugman notes, it has long since been debunked in the popular debate and therefore “for any public figure to go with the Congress-did-it argument at this stage is for him to reveal both that he is grossly ignorant about the central policy issue of the day and that he gets his ‘analysis’ from right-wing flacks.”
Krugman points to a May essay by the Roosevelt Institute’s Mike Konczal which debunks a piece by Peter Wallison ironically titled “The True Story of the Financial Crisis.” I actually find that post rather in the weeds. But a brand new piece by Konczal written in direct response to Bloomberg’s remarks is more illuminating:
1. The first thing to point out is that the both the subprime mortgage boom and the subsequent crash are very much concentrated in the private market, especially the private label securitization channel (PLS) market. The GSEs were not behind them. That whole fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the 2000s mortgage market was a Wall Street creation, and that is what drove all those risky mortgages.
For some data, start here: ”More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions….Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.”
As Center For American Progress’ David Min pointed out to me, the timing doesn’t work at all: “But from 2002-2005, [GSEs] saw a fairly precipitous drop in market share, going from about 50% to just under 30% of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10% to about 40% over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans.”
2. The next thing to mention is that the “affordability goals” of the GSEs, as well as the Community Reinvestment Act (CRA), didn’t cause the problems. Randy Krozner summarized one of the better studies on this so far, finding that “the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” The CRA wasn’t big enough to remotely cause these problems.
For the GSE’s, I’d recommend checking out Jason Thomas and Robert Van Order, A Closer Look at Fannie Mae and Freddie Mac: What We Know, What We Think We Know and What We Don’t Know, which, in addition to explaining how their affordability mission is a distraction, argues that subprime was only 5% of the GSEs losses and the GSEs bought the highly-rated tranches of mortgage bonds for which there was already a ton of demand.
There’s much more but those are the salient points for a lay audience (of which I’m decidedly a part). This chart, which appears in both of the Konczal posts, is also worth a gander:
Conservatives were right to be skeptical of the Community Reinvestment Act, which did indeed lead to riskier loans being made. The default rates on those were indeed higher than on conventional loans. But simple logic would tell you that an act passed in 1977 is unlikely to be the proximate cause of something that happened in 2007–three decades later.
In fact, the vast majority of subprime loans (around 80% of them) were issued by private institutions not covered by the CRA at all. Here’s Krugman again from three years ago:
Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.
Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.
In that case, however, how did they end up in trouble?
Part of the answer is the sheer scale of the housing bubble, and the size of the price declines taking place now that the bubble has burst. In Los Angeles, Miami and other places, anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point, even if he or she originally put 20 percent down. The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines.
Also, Fannie and Freddie, while tightly regulated in terms of their lending, haven’t been required to put up enough capital — that is, money raised by selling stock rather than borrowing. This means that even a small decline in the value of their assets can leave them underwater, owing more than they own.
And yes, there is a real political scandal here: there have been repeated warnings that Fannie’s and Freddie’s thin capitalization posed risks to taxpayers, but the companies’ management bought off the political process, systematically hiring influential figures from both parties. While they were ugly, however, Fannie’s and Freddie’s political machinations didn’t play a significant role in causing our current problems.
High finance is outside my expertise and so I’ve had to learn about most of this on the fly as the crisis unfolded. Plausible arguments based on half truths that fit into my pre-existing worldview were naturally attractive to me. But, at some point, facts ought to prevail in honest debate.
Bloomberg, frankly, doesn’t have that excuse. Not only was he mayor of New York City–otherwise known as the financial capitol of Planet Earth–at the time all this was going down but he’s a mega gazillionaire who made his mega gazillions (okay, around $19 billion) in the financial sector. He’s got an MBA from Harvard Business School and was a general partner at Salomon Brothers, where he headed equity trading, way back in 1973. Let’s just say that, contrary to Krugman’s charitable interpretation, he’s no ignoramus on these matters.