Alternative realities

I just did a Google search and found that the right-wing has created an entirely different fictional alternate reality for what caused the housing crash in just eight months.

In our reality, an affordable housing group called ACORN was complaining to Congress about sub-prime lending into poor neighborhoods as early as 2000 and lobbying for it to be strictly regulated or banned. Note that this is a link into the 2000 Congressional Record, i.e., a matter of historical fact. I remember ACORN regularly holding protests outside the offices of sub-prime lenders during those years, which was covered in the mainstream press as well as the left-wing press (but for some reason never covered in the right-wing press, hmm? Yes, I was reading World Nut Daily even then).

In their fictional alternate reality, ACORN lobbied Congress to expand sub-prime lending into poor and/or minority neighborhoods. Note that none of the articles they use to "prove" this were written more than eight months ago, and none of them are supported by, like, the actual Congressional Record or any other document from outside their right-wing echo chamber. The actual reality, as vs. their fictional alternative reality, is that ACORN lobbied Congress to expand *prime* lending into poor and/or minority neighborhoods -- i.e., lending with strict income requirements that conformed with Fannie/Freddie requirements. They were concerned that poor or minority borrowers were getting suckered into loans they could not repay and losing their homes, and wanted fewer of those risky sub-prime loans and more "traditional" loans that conformed with traditional income requirements. ACORN testified to this before Congress multiple times between 1996 and 2006, easily confirmable by reading the Congressional Record.

In this reality, Fannie/Freddie were minor players in the sub-prime market -- Fannie Mae was only allowed to hold $5B of sub-prime loan out of the $727B of loans in its portfolio, and lobbied Congress to be allowed to expand its sub-prime lending. (Note: Above is a Fannie Mae document entered into Congressional Record). I.e., sub-prime accounted for less than 1% of Fannie Mae's portfolio in 2006, and of those, only 35% were allowed to be "liar loans". Freddie had the same limits. As Alan Greenspan admitted in his October 2008 testimony before Congress, it was private securitizers selling bundled "Mortgage Backed Securities" who drove sub-prime lending standards through the floor -- Fannie/Freddie simply were not allowed to buy enough sub-prime to matter.

In their fictional universe, Fannie/Freddie bought oodles, oodles I say, of "liar loans". They have no government documents to that effect, no evidence of any sort, but over eight months they created an entire right-wing alternative reality where ACORN pressured Fannie/Freddie to issue all sorts of bogus liar loans to people who could not repay them. In the real universe, of course, that simply was not true.

In this reality, the Community Reinvestment Act (CRA) was passed in 1977 and applied only to banks, which were minor players in the sub-prime market (most sub-prime lending was done by unregulated finance companies such as Countrywide Mortgage and GMAC). In the right-wing alternative reality, it was passed in 1999 and applied to all financial companies and forced Countrywide and GMAC, forced them I say, to make these risky "liar loans".

So: Anyhow, that's this reality vs. the right-wing alternative reality that they furiously concocted within the past eight months (you will not find a single web page in their echo chamber that's more than eight months old about this issue). So what *really* caused the sub-prime crisis? And why did Fannie/Freddie collapse?

Well: to answer the first question: Countrywide Mortgage, and a private mortgage-backed-securities market which was deregulated by both Democrats *and* Republicans (no clean hands here) and eventually engaged in a race to the bottom in terms of loan quality, every time Countrywide reduced its lending standards, everybody else reduced their own lending standards for fear Countrywide would steal market share from them. To answer the second one: It was a failure of the fundamental business model that Fannie/Freddie operated under, which assumed that housing prices would never decline more than 10% nationwide, an assumption that was torpedoed when Countrywide collapsed and took housing prices with them into a steep decline (over 50% in some markets). I.e., in this reality as vs. fictional Republican reality, Fannie/Freddie were victims rather than perpetrators of the housing market collapse. More details on that, and why this torpedoed the economy, in another post...

-- Badtux the Economics Penguin