Did Fannie, Freddie, and the Community Reinvestment Act Cause the Meltdown? Uh uh.

November 5th, 2011

This meme has been shredded every which way from Sunday, but given that Michael Bloomberg promulgated it yet again just this week, I felt the need to share the facts for those who might not have seen them.

Let’s start with a picture:

Those two bars on the left are loans that American Enterprise Institute fellow Edward Pinto (the prime promulgator of this false meme) included in his own personal definition of “subprime.” Even if you adopt those false definitions, the default rates don’t even begin to compare to those for privately issued subprimes.

This demonstrates exactly the conclusions of the Financial Crisis Inquiry Commission: the default rate for “high-risk” Fannie and Freddie loans are marginally higher than those for fully conforming loans (as one would expect), while private subprime loans are off the charts. Mike Konczal:

Private label loans “have defaulted at over 6x the rate of GSE loans [and I would add, 3x the rate of Pinto’s Fannie/Freddie “high-risks”], as well as the fact that private label securitization is responsible for 42% of all delinquencies despite accounting for only 13% of all outstanding loans (as compared to the GSEs being responsible for 22% of all delinquencies despite accounting for 57% of all outstanding loans).”

Then we have Peter Wallison — another AEIer — on the FCIC, 1. trying to shoehorn Pinto’s false “conclusions” into the report, 2. lobbying other Republican members by email to falsify the committee’s conclusions with Pinto’s “data” to support killing the Dodd-Frank financial reform bill, and 3. with those other Republicans, seeking to ban the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report.

But what about the Community Reinvestment Act? Again, the FCIC conclusions:

Analyzing a database of nearly 14 million loans originated in 2006 … only 6% of such higher-cost loans were made to low- or moderate-income borrowers or in low- or moderate-income neighborhoods by banks and thrifts (and their subsidiaries and affiliates) covered by the CRA.

Of that 6%, how many were made because of CRA? Presumably — given the “lend to anyone with a pulse, especially if they’re high risk” culture of late-2000s private lending — somewhat less than 100%.

So the volume of shitty loans 2006-2008 was overwhelmingly from private issues, and largely unaffected by the CRA. And the default rate on those private-issue loans was 200-500% higher than even the “high-risk” Fannie/Freddie loans.

Any other questions? Start with the following, and have your way with it.

P.S. Yes: the Fannie/Freddie setup sucks. But it’s not what caused the meltdown.

Hey Bloomberg! Data Shows GSEs Did Not Cause Meltdown | The Big Picture.

  1. john f
    November 5th, 2011 at 17:02 | #1

    Long time reader of this site and first time comment. IIRC, Barry Ritholtz addressed these fallacies pretty thoroughly on his blog several years ago. He even referred to Fannie and Freddie as Phony and Fraudie and yet still did not hold those institutions responsible for the GFC. As a former registered Republican I got tired of these recycled fallacies years ago IRT the runup to the Iraq war, it just seems to be the modus operandi for any issue in the GOP these days.

  2. November 5th, 2011 at 19:20 | #2

    @john f

    Thanks for the comment, John. Yeah, like I said it’s been covered ad nauseum, but I just had to do my little part to help drive the stake…

  3. November 7th, 2011 at 12:49 | #3

    This also from Rithotlz just Saturday is a pretty good “just the facts” recounting:


    I keep looking for someone with money, power, and status with whom I have principled disagreements, but still, principled. Every time I think I might have found such a person, I am reassured my disposition to trust no such people at all is best practice….

  4. Olav Martin Kvern
    November 9th, 2011 at 02:31 | #4

    The reason this meme doesn’t go away is that the people saying it don’t care if it’s true or not. This puzzled me for a bit. Then I realized that it’s a code, a dog whistle. What it really means is “those shiftless brown people and their Democrat allies caused this whole mess.” They’ll keep on saying it, because the message is getting through–even if it doesn’t have anything to do with the words they use.



  5. November 9th, 2011 at 06:57 | #5

    @john f @Dave Raithel I’m pleased to see that Ritholtz’s piece was the #1 article for the Post that day, and #2 even the next day. 691 comments last time I looked. He’s got a followup coming specifically on the Fannie/Freddie/CRA thing.

    @Olav Martin Kvern “don’t care if it’s true or not. This puzzled me for a bit.”

    Still puzzles me profoundly. “Dog whistle,” definitely. But I think it’s really about ego and self-perception. Which makes me wonder again some more about that human propensity: why do we so much want to perceive ourselves as morally superior to others.

    What are you doing Monday?


  6. Olav Martin Kvern
    November 9th, 2011 at 14:21 | #6

    re: “But I think it’s really about ego and self-perception.”

    Really? I think that’s why it *works*, but I think it’s being said because of power and money. Pit the have-nots against the have-nots and shield the oligarchy from view (let alone blame). It works amazingly well.

    re: “why do we so much want to perceive ourselves as morally superior to others?”

    I think this has to do with our (hard-wired, probably) desire to infer causality to everything we encounter. “I’m not having those problems, therefore there must be something about me, or something I’ve done, that explains it.” This is easily extended to “Therefore, there must be something about *them* that caused their problems.”

    In low-data situations, or when the actual causes are obscure (or intentionally obscured) or random, we’ll always tell ourselves stories to explain reality. What’s interesting and weird is how we cling to those stories even when new information comes in. I think this is because, as I’ve always said, these stories exist so that we can *stop thinking about something*. New information about the causes of thunder in the sky? I’ve stopped thinking about that, and I don’t want to go back to the uncertainty of having to think about it again. It’s Thor, throwing his hammer.



  7. November 9th, 2011 at 14:51 | #7

    @Olav Martin Kvern “I think that’s why it *works*, but I think it’s being said because of power and money. Pit the have-nots against the have-nots and shield the oligarchy from view (let alone blame). It works amazingly well.”

    Right; I was puzzling on why have-nots fall for it.

    Yeah, our predilection to infer causality makes sense, but I also think we’re hard-wired to want to believe in our own virtue, and I’m not sure why that has evolutionary advantage. Maybe just cause it makes it easier for us to convince others that what we propose is good for all — because we *believe* it. That’s the Trivers explanation in brief. (Wanna go see him?)

    Also yeah: reprocessing explanations is expensive. But so is *not* reprocessing them! Though with thunder and politics, maybe not; we have no influence over them anyway…

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