GSE Reform And A Conspiracy of Silence

Tue, 27 Dec 2016 02:33:00 +0000

"GSE Reform And A Conspiracy of Silence," is still a work in progress. It intends to highlight all the salient issues that GSE critics must ignore in order to make a credible case for replacing the GSEs.

Indeed, it will show how almost none of the criticisms against the GSE business model can withstand scrutiny.

See links below.

PART I

PART II

From page 5 of PART I

The Big Lie Emerges Out Of A Conspiracy Of Silence

The Brookings event, and many others like it, was remarkable because the experts made their case against the GSEs using little more than doublespeak and insinuations. The intellectual void becomes obvious when you focus what GSE critics refuse to talk about. You can read their papers and presentations, plus other books, academic articles and op-eds, which all insist the GSEs operated a failed business model. These authors simply ignore, or lie about, the critical issues of mortgage lending: market liquidity, comparative loan performance, and risk diversification.

Many of these experts insinuate falsehoods rather than stating them explicitly. Others are more blunt. Invariably, their case against the GSE business model is predicated on three big lies, which are easily disproved by fact checking. They are:

The GSEs faced collapse because of their liquidity problems, caused by the ambiguity of the government’s implicit guarantee;
The GSEs’ underwriting standards, under affordable housing goals, were unsustainable; and
The inherently flawed GSE business model of private gains and public losses forced to taxpayers to bail out the companies, which, rather than benefiting the public, distorted the mortgage markets.

The falsity of these claims should be obvious. It may not be obvious to the man on the street. But it should be obvious to a junior analyst whose job it was to review the GSEs’ financial disclosures and other government filings. It was always obvious that the GSEs never faced any liquidity problems. It was always obvious that the GSEs’ loan performance was vastly superior to anyone else’s, and that this superior loan performance benefited the pubic by stabilizing the mortgage markets.

It was always obvious that the GSEs liquefied, and thereby saved, the mortgage markets and the housing markets, which is a public benefit with a value that far exceeds the dollar amount of any individual bailout. By way of contrast, the public bailed out Wall Street banks, which did almost nothing the liquefy the mortgage markets from 2007 onward.

Moreover, it was always obvious that the financial crisis was caused by the collapsing values of private label residential mortgage backed securitizations (PLS), and not by the GSEs. It was always obvious that the GSEs attained a level of risk diversification that could not be matched by anyone else. And it was always obvious that PLS cannot diversify the most important risk in real estate, market timing.

It was always obvious that the GSE bailout never funded cash shortfalls or operating costs. It was always obvious that the GSEs, because they do not originate loans, would not abet mortgage fraud. GSE critics almost never examine the impact of fraud. Whereas it was always obvious Wall Street’s originate-to-distribute model for PLS led to industrial scale mortgage fraud, which triggered the crisis.

Do you think it was a coincidence that all these experts continued to ignore these salient issues, even after the flaws in their analyses were identified by others? If you read enough of this anti-GSE literature you eventually recognize that it’s all about dog wagging, reassigning blame for the failures caused by PLS on to the GSEs. Ergo:

The moral hazard of the PLS originate-to-distribute model (which sells credit risk to the greater fool) morphs into the moral hazard of the GSEs' implicit government guarantee[1].
Wall Street's recklessness and incompetence morphs into the GSEs' "lack of free market discipline."
The sudden collapse of the PLS market, which triggered instability throughout Wall Street, morphs into the "systemic risk" of the GSEs and the phony pretext for a government takeover.

Most importantly, the case against the GSEs is rooted in class bigotry. Which is how the epidemic of predatory lending and fraud in the PLS market morphs into the GSEs' affordable housing goals. The unspoken and unchallenged premise is that loans to middle and lower-income borrowers must, by definition, be recklessly imprudent. Sometimes the bias is quite explicit. But more often it's expressed in code, which says the GSEs are fatally flawed by their, "inherent conflict between private ownership and a public mission," or their, "structural problems." It's all nonsense, because the GSE business model, which buys and holds all credit risk, aligns the interests of shareholders with its public mission, which is to finance loans that pay back principal, interest and fees. Which explains why, for several decades now, GSE loan performance has always been vastly superior to that of anyone else.

These GSE critics are like the sportswriter who ignores the league tables, or the lawyer who never reads the fine print.

Over the past six years, additional information has come to light, which enables us to reconsider earlier views of Fannie and Freddie. The GSEs’ initial losses proved to be a chimera. They were caused by over-inflated non-cash accounting provisions that were subsequently reversed, beginning in 2012. By the end of 2013 the GSEs had paid back every dollar extended by taxpayers.

Moreover, lawsuits brought on behalf of Fannie and Freddie against 18 different banks offer definitive evidence that fraud in the PLS market had become institutionalized, and thereby devastated housing finance.

And yet, these same housing experts show they have learned nothing. Then and now, these same mortgage experts, the ones who seem impervious to empirical data, insist that the GSEs must be abolished in favor of a new, untested system, which appears to double down of the failures of the old PLS market. Senate bills like Corker-Warner or Johnson-Crapo and their progeny proposals—including ”A More Promising Road Toward GSE Reform,” and “Toward a New Secondary Mortgage Market ”— are predicated on a willful blindness to both the benefits of the GSEs and the failures of PLS.

[1] You can also substitute the, phrase perverse incentives for moral hazard.

Fiderer on GSEs, etc. - GSE Reform Paper

GSE Reform And A Conspiracy of Silence

The Big Lie Emerges Out Of A Conspiracy Of Silence