June 21, 2013
Fannie Mae and Freddie Mac’s investors have sued the federal government in Washington Federal v. United States, No. 1:13-00385 (June 10, 2013), for how it bailed out the two companies and thereby the nation’s housing market at the expense of the two companies’ shareholders. Plaintiffs claim that they have been damaged to the tune of $41 billion.
The complaint contains one of my favorite myths about the two companies. It states that its regulator “directed that, to support the economy, the Companies purchase subprime and other risky securities.” (1) Its evidence for this assertion is that in 2007 the two companies’ “lending standards were adjusted to allow them to purchase more subprime securities” and “Congress and regulators encourage” the companies to “buy subprime and other risky securities — products that did not meet either Company’s own prior lending standards.”(1-2) The misleading nature of these statements is two-fold. First, Fannie and Freddie had been investing in non-prime securities before 2007; and (2) being ‘allowed’ or ‘encouraged’ to invest is not the same as being ‘directed’ to invest. This points to a fundamental myth about Fannie and Freddie — being allowed to do risky things is the same as being made to do so.
This myth has come up in discussions about their affordable housing goals as well. When Congress increased these goals, the two companies would buy risky products not because they had to, but because they wanted to keep overall growing market share. To the extent the goals were expressed as a proportion of their total portfolio, the companies could reduce the purchase of risky loan products by risking the overall size of their portfolios. But no one ever considers this to be a legitimate option — of course growth is more important than managing credit risk!
More on this complaint anon.| Permalink