All the Devils Are Here [223]
What was the point of it all? In spring of 2007, even before the crisis hit, the Center for Responsible Lending published numbers showing that between 1998 and 2006 only about 1.4 million first-time home buyers purchased their homes using subprime loans. That represented about 9 percent of all subprime lending. The rest were refinancings or second home purchases. The Center also estimated that more than 2.4 million borrowers who’d gotten subprime loans would lose or already had lost their homes to foreclosure. By the second quarter of 2010, the homeownership rate had fallen to 66.9 percent, right where it had been before the housing bubble. Ever so swiftly, the wave of foreclosures in the aftermath of the crisis wiped out the increase in homeownership that had occurred over the past decade. In other words, subprime lending was a net drain on homeownership. A lot of needless pain was created in the process.
Financial innovation? Collateralized debt obligations? Synthetic securities? What had been the point of that? “The financial industry is central to our nation’s ability to grow, to prosper, to compete, and to innovate,” President Obama said when he signed the new legislation. During the bubble it had been nothing of the sort. As Paul Volcker said at a Wall Street Journal conference in late 2009, “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy.”
The new law can’t and won’t fix the unfairness. Nor will it bestow on Wall Street a sense of moral purpose. It can’t. The best it can do is protect against the worst of the abuses that took place during the bubble. It is difficult to know whether it will do even that. It is all well and good to have a systemic risk regulator, to cite one important example, but will that agency or person actually know how to look for systemic risk? It was often said in the aftermath of the crisis that agencies like the Fed and the SEC and the OCC had plenty of tools to curb the abuses that were taking place in the banking system. They just lacked the will. And that was true. These new regulations will also only be as good as the regulators themselves.
Perhaps the most glaring omission in the new law was any mention of Fannie Mae and Freddie Mac. With everything that happened in the two years since the crisis, neither the administration nor Congress has done anything to change the status of Fannie Mae and Freddie Mac. Right now, at least, they don’t dare: by 2010, Fannie and Freddie (along with the Federal Housing Administration) were backing more than 95 percent of mortgages. Right now, you simply cannot buy a house in America without a government stamp of approval. Once upon a time, the private market wanted nothing so much as to marginalize the GSEs. Today, it’s the private market that has been marginalized, afraid to make a loan that the government doesn’t guarantee.
Fannie and Freddie have continued to lose money—the government has put $150 billion into them to keep them solvent on an accounting basis. (It is worth noting, though, that most of this doesn’t yet represent actual cash losses on mortgages. The real number could be much bigger or smaller depending on where home prices go.) They have continued to be controversial. The same people who were GSE haters back when they were at the peak of their power now claim that Fannie and Freddie caused the crisis—by leading the charge into subprime mortgages to meet their housing goals. This is completely upside down; Fannie and Freddie raced to get into subprime mortgages because they feared being left behind by their nongovernment competitors. But never mind. They remain in a kind of limbo state, wards of the government, while underpinning a housing market that still can’t function without them.
The reason that the legislation makes no mention of the GSEs is that nobody can figure out what to do. Can we ever have a truly private sector market for mortgage