Welcome Matthew Richardson, (website), and Host William Black, (website)

Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance

Host, Bill Black:

The Authors’ Revolutionary Indictment of Systemically Dangerous Institutions (SDIs)

Fannie and Freddie, like all U.S. systemically dangerous institutions (SDIs) were privately-owned and their liabilities were not guaranteed by the Treasury. Nevertheless, all SDIs have an implicit Treasury guarantee of their debts because any SDI failure could cause a global systemic crisis. The SDIs obtain the implicit guarantee by implicitly hold our economy hostage. The perverse incentives arising from this guarantee are the authors’ core concept.

The authors are finance professors at NYU’s Stern School. Their logic makes this a revolutionary book. The book is a case study of the perverse behavior of the managers controlling two SDIs, but the authors generalize the perverse incentives as controlling all SDIs.

The authors’ findings support James Galbraith’s thesis in The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. Our financial leaders are the SDIs’ CEOs who make “free” markets impossible. The authors found that SDIs cause “a highly distorted market with two types of institutions – LCFI King Kongs and GSE Godzillas – both implicitly backed by the government….” (p. 55). (LCFI: “large complex financial institutions” – the authors’ polite euphemism for SDIs.) Their conclusion that “there was nothing free about these [housing finance] markets” applies to all the SDIs (p. 21).

“[T]he failure of the LCFIs and the GSEs is quite similar – a highly leveraged bet on the mortgage markets by firms that were implicitly backed by the government with artificially low funding rates only to differing degrees” (p. 49).

They adopt the CBO’s simile: living with Fannie and Freddie is like sharing a canoe with a bear.

“Because the GSEs are currently under the conservatorship of the government, it would be crazy not to kill off the “bear” and move forward with a model that did not again create a too-big-to-fail – and, more likely, a too-big-to-reform – monster” (p. 74).

The authors’ revolutionary logic is that it would “be crazy not to kill off the bear[s]” – the SDIs are inherently “monster[s]” that hold our economy hostage and block real markets and real democracy.

The authors argue that it is impossible even for massive SDIs to compete with the largest SDIs. Their simile is that the largest SDIs’ advantages are so great that it is “like bringing a gun to a knife fight” (p. 22).

In 1993, George Akerlof and Paul Romer authored Looting: the Economic Underworld of Bankruptcy for Profit. Akerlof & Romer explained how financial CEOs used accounting fraud to make record reported profits a “sure thing” (p. 5). The record, albeit fictional, reported profits were certain to make the CEO wealthy, while the bank was guaranteed to fail.

The authors confirmed Akerlof & Romer’s thesis. The CEOs’ perverse incentive creates three concurrent guarantees: the bank will report high (albeit fictional) short-term profits, the controlling officers will extract large increases in wealth, and the bank will suffer large losses. The bank fails, but the controlling officers walks away rich. “Control frauds” represent the ultimate form of “rent-seeking.” The SEC charged Fannie’s controlling officers with accounting and securities fraud to inflate its reported income so that they could extract greater bonuses.

The authors do not explain their concept of an extreme tail gamble, but they say that Fannie and Freddie’s tail gamble was purchasing nonprime loans. Those purchases were not honest “bets” and they were not subject to loss only in “rare” circumstances. Pervasively fraudulent “liar’s” loans sank the SDIs, hyper-inflated the bubble, and caused the great recession. Liar’s loans were certain to default catastrophically as soon as the housing bubble stalled. The housing bubble was certain to stall.

I believe that the authors’ logic chain is as follows:

1. SDI executives caused “their” banks to make investments that had a negative expected value, but a high nominal yield
2. In violation of generally accepted accounting principles (GAAP), the SDIs did not provide remotely adequate allowances for those future losses (ALLL)
3. This created a “sure thing” – SDIs were guaranteed to report high (fictional) short-term
4. This guaranteed fictional income led to the guaranteed massive executive bonuses
5. The officers controlling the SDIs used professional compensation (e.g., of auditors, appraisers, and rating agencies) to create a “race to the bottom” that led to widespread “echo” fraud epidemics among appraisers and credit rating agencies
6. The SDIs did the same thing to produce echo epidemics by loan officers and brokers
7. The accounting control frauds created a “race to the bottom” that drove the officers controlling other SDIs to mimic their frauds
8. This hyper-inflated the housing bubble
9. The hyper-inflation of the bubble allowed the SDIs to hide losses The SDIs’ creditors did not provide (expensive) market discipline because of the implicit government guarantee protected them from loss
10. The SDIs’ regulators did not act as the regulatory “cops on the beat” to break this private sector “race to the bottom” because the SDIs’ used their political power and ideological “capture” to create a regulatory “race to the bottom” (p. 191, n. 3)
11. SDIs following this fraud strategy were guaranteed to suffer massive loan losses and fail
12. These fraud epidemics and SDI failures triggered the Great Recession

Any analysis that ignores control fraud is certain to distract us from the reforms essential to prevent our recurrent, intensifying financial crises. Ignoring fraud led the authors to propose reforms that are criminogenic.

The authors’ suggestion that the Treasury charge the SDIs a fee equivalent to the value of their implicit Treasury subsidy would encourage accounting control fraud. Frauds use deceit to hide the risks the lender or purchaser is taking. The result would be an intensified Gresham’s dynamic because the accounting frauds would have an even greater advantage (due to the grossly inadequate charge for their implicit Treasury subsidy) over their honest competitors. Under the authors’ own logic and simile we must kill all of the bears.

[NOTE: Bill Black has a full review of this book up at MyFDL now.]

[As a courtesy to our guests, please keep comments to the book.  Please take other conversations to a previous thread. - bev]

105 Responses to “FDL Book Salon Welcomes Matthew Richardson, Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance”

BevW August 14th, 2011 at 1:56 pm

Matthew, Welcome to the Lake.

Bill, Thank you for Hosting today’s Book Salon.

William Black August 14th, 2011 at 2:02 pm
In response to BevW @ 1

Thank you!

Matt, welcome to the Lake.

What are the two or three most important things you and your co-authors learned in researching and writing this book (Guaranteed to Fail) that you would like your readers to come away understanding.

Matthew Richardson August 14th, 2011 at 2:04 pm

Bill, Thanks for inviting me.

Two points:

First, there should be outrage at the way our mortgage finance system was structured, and, at the center of this system, were Fannie Mae and Freddie Mac. These private firms with implicit government backing went from small players in the 80’s to controlling almost 50% of the mortgage market. They took on $5 trillion of mortgage risk with very little capital. And as a result, we’re all paying for it now.

Second, the problem can be fixed. In our book, we outline the three stages required to get from where we are today to where we need to be. First, we need to wind down Fannie and Freddie. Second, we need to wean mortgage finance off the government. We cannot do this cold turkey; it has to be gradual. We call for a partnership between the private sector and government with the government winding down it support. We estimate it will take 10 years. Finally, at the end, we will have a private mortgage finance system, which should be well functioning and well regulated. The taxpayer won’t be on the hook, and, 10 years from now, we will have a dramatically different looking economy.

William Black August 14th, 2011 at 2:06 pm

Why did Fannie and Freddie’s CEOs adopt a business strategy of purchasing vast numbers of “liar’s” loans knowing that it would cause the firms to fail as soon as the bubble stalled?

Matthew Richardson August 14th, 2011 at 2:09 pm

I would not quite portray it that way. Fannie and Freddie are simple institutions that perform two functions: they buy mortgages/mortgage-backed securities (MBS) and they guarantee the default on mortgages. While they are somewhat restricted in the types of loans they could guarantee, they could pretty much buy any type of MBS as long as they were rated AAA. Since they had a low cost of borrowing due to the government’s backing and they did not have to hold much capital, the higher yielding MBS from Alt-A pool (“liar” loans) were seen as too good to pass up. It is not clear ex ante that all of these purchases were bad bets for Fannie and Freddie because, of course, the risk was being borne by tax payers.

Teddy Partridge August 14th, 2011 at 2:10 pm

Why hasn’t anyone gone to jail yet?

William Black August 14th, 2011 at 2:13 pm

You call for the U.S. to “kill the bears” (Fannie and Freddie), but your logic applies to all the “too big to fail” banks that you call “King Kongs.” Should we kill all the bears, or only Fannie and Freddie? The “risk [is] being borne by tax payers” for all the systemically dangerous institutions (SDIs). If Fannie and Freddie’s managers had an overwhelming incentive to purchase endemically fraudulent liar’s loans, so did the other SDIs. Indeed, your book emphasizes that many SDIs held onto the toxic CDOs because of the yield — just as you say Fannie and Freddie did.

Mauimom August 14th, 2011 at 2:14 pm

Thank you, Matthew [and your co-authors] for your book.

What do you think the odds are that the steps you’ve recommended will be taken? It seems to me that both parties are in the pockets of Fannie & Freddie and thus wouldn’t recommend reform or winding down.

Should we be rooting for Ron Paul?

Matthew Richardson August 14th, 2011 at 2:16 pm

for the most part, the firms worked within the system.
If the system:
(i) says buy these type of mortgage backed securities, you will have to hold little capital, that’s what they did
(ii) encourages the firms to invest in these risky mortages, so that’s what they did
(iii) and if you transact with Fannie and Freddie, the system as a whole allows for double the leverage, that’s what happened

we have to fix the system

Mauimom August 14th, 2011 at 2:16 pm

I thought the explanation in the first portion of your book re “how we got here” was particularly useful.

Are you all teaching any classes @ Stern which cover these issues? Are there other venues to acquaint people to the history and the problem?

BTW, Matthew, if you want to reply to a specific comment, you can hit the little “reply” button beneath the comment, and that reference will appear in your response.

Matthew Richardson August 14th, 2011 at 2:16 pm
In response to William Black @ 7

In theory, the financial regulation last year – the Dodd-Frank Act – was supposed to end too-big-to-fail (TBTF). While the Dodd-Frank Act has some positives, for the most part, the legislation ignores implicit government guarantees and does not adequately price systemic risk which would have caused these TBTF firms to organically become less systemically risky. When mortgage finance reform is put in place, it is important that the reform encourages the mortgage risk to be held outside the systemically risky banking sector into other parts of capital markets such as pension funds, mutual funds, hedge funds, and the like. In other words, we should not replace Fannie and Freddie with private versions of these institutions.

BevW August 14th, 2011 at 2:17 pm

As a technical note, there is a “Reply” button in the lower right hand of each comment. Pressing the “Reply” will pre-fill the commenter name and number you are replying to and helps for everyone in following the conversation.

(Note: If you’ve had to refresh your browser, Reply may not work correctly unless you wait for the page to complete loading)

Knut August 14th, 2011 at 2:18 pm

I remember back in the late 90s and the early 2000′s when the budget surplus had people thinking that the US treasuries would no longer be around for portfolio balancing. The substitute US securities were supposed to be Fannie and Freddie backed mortgages, on the grounds that they were ‘as good as government.’ Does this ring a bell, or am I just making it up? I was told by my financial advisor that they were as good as government, because everyone expected the government to back their debt.

Matthew Richardson August 14th, 2011 at 2:21 pm
In response to Mauimom @ 8

the good news is that mortgage fiannce reform is not ideological – it is not healthcare, not a fight to the death. Both the administration and the leadership in congress basically agree that the system should be private. the bad news is that there has been decades of subsidies thrown at the housing industry, not just Fannie and Freddie, but also mortgage interest deductibility, special treatment for capital gains, etc… There is massive pushback from the industry – they want the gravy train to continue – and they have pull with the rank and file.

Matthew Richardson August 14th, 2011 at 2:22 pm
In response to Mauimom @ 10

yes. in january of this year, i will be teaching two courses on the financial crisis, based not only on this book, but also on our two other ones as well.

William Black August 14th, 2011 at 2:22 pm
In response to Teddy Partridge @ 6

Prosecutions of accounting control fraud by financial institutions have to be prompted and guided by the financial regulators, who (should) have the expertise to identify fraud schemes and the resources to investigate it. In the S&L debacle, our agency made well over 10,000 criminal referrals, trained the FBI and AUSAs on fraud schemes, detailed examiners to work for the FBI to serve as in house experts, and provided (free) expert witnesses for the prosecution. In the current crisis, my former agency made ZERO criminal referrals. The OCC, depending on which source you believe, made zero or three criminal referrals. As late as FY 2007 we have roughly 1/7 the number of FBI agents assigned to investigating mortgage fraud as we had assigned to investigate the S&L frauds — even though this crisis is massively greater. Worse, absent any criminal referrals, the FBI agents were assigned to minor cases and divided up into “penny packets” that were incapable of investigating any large entity. If you don’t look; you don’t find.

Mauimom August 14th, 2011 at 2:24 pm

special treatment for capital gains, etc

What I want to know is when they’re going to give capital LOSS status as a result of selling one’s house [to complement the capital gain one has to recognize on a similar sale in an "up" market.]

Matthew Richardson August 14th, 2011 at 2:25 pm
In response to Knut @ 13

that’s correct. Fannie and Freddie debt (and mortgage-backed seeurities with their guarantee) have had the implicit (now explicit) backing of the government. of course, that’s the problem because, if they don’t hold enough capital or take on too much risk, the government is on the hook.

Knut August 14th, 2011 at 2:25 pm

Thanks for pointing this out. People forget that the driving force behind these gimmicks has been the construction lobby. Do you think it has weakened to the point that some reforms might make it through Congress?

Mauimom August 14th, 2011 at 2:26 pm

What’s the response of students to any courses like this that you’ve taught?

Are you able to use other means to disseminate your teaching, such as classes via The Teaching Company or other outlets?

William Black August 14th, 2011 at 2:27 pm

The fight has an enormous ideological component, as the web videos by Republican stalwarts will show. One of the most important memes is the claim that Fannie and Freddie were unique causes of the crisis because (1) the government made them make bad loans to minorities and (2) the Bush administration tried to bring Fannie and Freddie to heel but were blocked by Democrats. If you are interested in more detail, see Mr. Wallison’s FCIC dissent and my (several) published replies as well as the FCIC majority report.

Matthew Richardson August 14th, 2011 at 2:28 pm
In response to Mauimom @ 20

much of our material is available on the web. we have run numerous conferences on the crisis and most of that is available through streaming video on the http://www.stern.nyu.edu website. i run the salomon center there which has hosted most of these conferences.

Matthew Richardson August 14th, 2011 at 2:31 pm
In response to William Black @ 21

i have to disagree a bit here. there is clearly a debate on what caused the financial crisis, but i was referring to fixing Fannie and Freddie.

with respect to the fix, the administration and congressional leadership are for the most part on the same page. it’s the industry and rank and file in congress which are against a large change.

Matthew Richardson August 14th, 2011 at 2:33 pm
In response to Knut @ 19

the answer is yes but how successful these reforms will be is an open question. that said, five years ago, it was unthinkable that mortgage interest deductibility could get hit. now, it is at least on the table.

Mauimom August 14th, 2011 at 2:36 pm

As I was reading your book, thinking about all the devastation that’s resulted, and contemplating the past rationale & cheer-leading for “home ownership,” I could help but imagine a “re-wind:”

** Family A buys a house in 1995 or 2000. They buy beyond their means, perhaps refinance a few times. Dad A loses his job in 2009 or 2010. However, Family A can’t sell the house & move to find work, and end up foreclosed upon in 2010, perhaps in bankruptcy. Their lives & credit are ruined.

** Family B, instead of buying, rents for this entire time. When Dad B loses his job in 2010, the family can move. They haven’t poured thousands into the bank’s coffers to attempt to save their house. They can find a cheaper rental, either locally or somewhere new.

So how has “home ownership,” based on the past 15 years of experience, turned out to be such a great deal for anyone but the banks, Fannie & Freddie, and Goldman Sachs?

I’d think such a narrative could help in shaping public opinion re why this whole fantasy should be ended.

Mauimom August 14th, 2011 at 2:37 pm

Terrific. I’m not worried about my own ability to find this, just trying make others aware of your excellent work.

Thanks. [Daughter went to NYU.]

William Black August 14th, 2011 at 2:39 pm

I don’t think we disagree. Causality is a huge political football. Fixing it will have major political divisions as well as soon as one gets to specifics. At the level of generality, I agree that there is support in Congress for reform. The devil will, as always, be in the details.

FYI: I’m a long-time (and I mean decades) critic of Fannie and Freddie.

I met for over an hour with OFHEO’s two top leaders, for two hours with all of their units heads, and for over two hours in an all staff meeting to report on what we have found in the course of preparing our expert testimony. The truly extraordinary thing about OFHEO (then run by a prep school friend of President Bush), was that it had no one powerful that believed it was legitimate to regulate prior to disaster. They had drunk deeply of the theoclassical economic hatred of regulation.

Matthew Richardson August 14th, 2011 at 2:40 pm
In response to Mauimom @ 25

there is no doubt that housing subsidies – again, not just Fannie and Freddie but other ones lie mortgage interest deductibility – encouraged people to borrow more than they could afford to buy houses bigger than they needed. like any pyramid, it’s all fine on the way up, i.e., when house prices are rising, but the collapse always causes greater devastation.

if we reduced subsidies to homeownership, we would get less overconsumption in housing, and investment in more productive parts of the economy, such as human capital, infrastructure, other forms of business capital.

June Carbone August 14th, 2011 at 2:43 pm

Do you address the resolution of the housing problem? That is, what I see is that, unlike the Savings and Loan crisis, we still haven’t dealt with the full scale of the loses. My cousin tried to buy a house recently in Riverside, CA, the heart of subprime land. There wasn’t much on the market; yet, there were vacant home and underwater homes, whose owners had stopped paying their mortgages. And we know that Fannie and Freddie hold large amounts of practically worthless mortgages or the securities based on them. Doesn’t this prevent the housing market from recovering? During the last crisis, there were complaints that government action would depress commercial real estate markets, but in fact the markets seemed to recover fairly quickly.

Mauimom August 14th, 2011 at 2:46 pm

I was struck by two items in the Epilogue of your book:

** Bill Gross’ comment that without a government guarantee, he’s want borrowers to put down 30% on a house; and

** your remark

if mortgage lenders and securitizers cannot issue and securitize mortgages without full government backing, then this says more about the current business model of mortgage securitization than anything else.”

Do you think there’s any possibility of “reformers” recognizing these truths, getting over the idea that one should be able to buy a house with 10% down, and recognizing that “the current business model” of mortgage securitization IS a failure?

Matthew Richardson August 14th, 2011 at 2:46 pm
In response to William Black @ 27

a major problem was the 1992 housing act that created the OFHEO as Fannie and Freddie’s regulator. OFHEO were part of HUD, but Fannie and Freddie are really financial institutions that should have been regulated by the Fed or a more appropriate regulator.

a great passage from the book on the financial crisis by previous Treasury secretary Paulson describes how just a few weeks before they were forced into conservatorship, the OFHEO had given Fannie and Freddie a clean bill of health from a regulatory capital point of view even though it was apparent to the market and many others that they were insolvent.

Mauimom August 14th, 2011 at 2:48 pm

if we reduced subsidies to homeownership, we would get less overconsumption in housing, and investment in more productive parts of the economy, such as human capital, infrastructure, other forms of business capital.

I would certainly welcome that. I just wonder how we get it to happen. Many myths and fantasies to be busted.

Mauimom August 14th, 2011 at 2:49 pm

Was it at this point that Congress gave Fannie & Freddie UNLIMITED financial support?

Sorry, my memory’s foggy on that, but I sure remember the UNLIMITED part.

Peterr August 14th, 2011 at 2:50 pm

Welcome, Matthew and Bill!

Parallel to the mess outlined so nicely in the post is the mess made of the mortgage documentation process. I was stunned recently to discover that in Missouri — my state — recording the assignment of a mortgage from one bank to another is no longer required. That is, once the initial lending bank assigns the loan to MERS, that’s all you’ll see in the County Recorder’s office, though it may have been passed from the first bank to several others in series.

Michael, does your book get into the whole issue of sloppy/missing/fraudulent mortgage documentation by the banks?

Scarecrow August 14th, 2011 at 2:53 pm

Matthew — after your research, how do you think the teaching of financial regulation and oversight should change at Stern and other business schools?

eCAHNomics August 14th, 2011 at 2:55 pm

Abstracting from the specific points made here & trying to go toward the larger picture.

Reading chapter on Andrew Jackson in Zinn’s Peep’s History.

One of the tactics Jackson used to steal land from the Indians was to grant it to individual Indians instead of to the Indian nations that had previously held it in common. That made the “soil” for white man speculation much richer bc individual Indians were much easier prey for speculators, lenders, and all the other parasites of that kind of “economic” activity.

I wonder if Freddie & Fannie weren’t conceived with the same end in mind. Get poor & middlings to borrow, then it’s much easier to steal what they have when they default, or to change the terms on them, or whatever else is required to loot them.

And the reasons why the poor & middlings are prey, regardless that each has so little, are twofold: (1) bc they can; (2) bc there are so many of them that it is worth figuring out a looting scheme that will work on the majority.

Critique of that idea?

Matthew Richardson August 14th, 2011 at 2:55 pm
In response to June Carbone @ 29


two points here:

(1) in terms of a housing recovery, i hate to be the bearer of bad news but there is no short-term recovery on the horizon. house prices went through a bubble, the bubble burst, and prices came back to earth. they are pretty much at the right level. we need to shift our focus away from trying to prop up prices and instead change the system that propped them up in the first place.

(2) that said, we still have two more years of mortgage loan resets on the horizon. there are deadweight losses associated with foreclosures – both borrowers and lenders lose – and when the foreclosures are en masse, the economy loses. So many financial institutions, and Fannie and Freddie are part of this sector, are holding back on putting them on the market in fear of the housing market falling further. we’ve begun to see more and more private loan modifications.

in hindisght, it is shame that the government (either this one, or the previous one) couldn’t create the right loan modifictaion program. it could have really helped. in their defense, they are notoriously difficult to structure.

Robert Alexander Dumas August 14th, 2011 at 2:56 pm


My understanding of what Galbraith has been saying is that it is not possible “save” the system, primarily because of the computerization that is its heart and soul, and that reform looks nearly impossible because of corruption, and thus it is going to burn to the damn ground, just a matter of when. Sounds like you’re quite a bit more optomistic, sorry, haven’t read your book, why do you think beginning on a path of restructuring or reform is even possible when little or nothing has been done yet years later now?

Kelly Canfield August 14th, 2011 at 2:58 pm

I agree with every inch of Fannie/Freddie criticism in post Glass-Steagall world; but the prescription of winding them down in the same post-Glass-Steagall world doesn’t make a whole lot of sense to me.

Isn’t it just shifting completely over to TBTF banks? At that point the systemic problems still remain as far as I can tell.

What am I missing?

Matthew Richardson August 14th, 2011 at 2:58 pm
In response to Peterr @ 34

we don’t too much because the book is focused on fannie and freddie, and their “battle” with other large financial firms. but you make a good point – the loan documentation process is awful and way behind other countries. there is recent work on this in academia, including some careful work by nancy wallace (of uc berkeley). you can go to her website to read about it.

Matthew Richardson August 14th, 2011 at 3:02 pm
In response to Scarecrow @ 35

academia is obviously more focused on financial crises and regulation than previously.

i think the one mea culpa from academia should be that we taught about the importance of deregulation in financial markets without considering the fact that many institutions – Fannie and Freddie being prime examples – had considerable government support. Mixing private with public is a dangerous mix. Financial markets weren’t quite as free as we taught.

Scarecrow August 14th, 2011 at 3:02 pm

Much of Bill Black’s review is centered on control fraud and how it permeated the entire system. And it goes to both F&F and to other still nominally “private” institutions. How do you respond to that framework for analyzing what happened? Do your proposed solutions take that framing into account and root it out?

William Black August 14th, 2011 at 3:03 pm

There I have to disagree. OFHEO had ample regulatory authority to order Fannie and Freddie to stop purchasing liar’s loans. It lacked the will because of the ideology of its leaders.

Paulson is disingenuous in that statement. What happened is that OFHEO administered the congressionally-mandated “stress tests” (hyped by Fannie and Freddie as “nuclear winter” scenarios) — and Fannie and Freddie passed with flying colors because all bank stress tests are designed to be passed with flying colors. OFHEO’s leadership knew full well by that time that Fannie and Freddie were deeply insolvent. OFHEO’s director made the absurd statement about them being healthy because they met all of their capital requirements to please the Bush administration. Paulson led the anti-regulatory effort in the Bush administration and was trying to roll back Sarbanes-Oxley as his top priority right up to the point that the three “de’s” (deregulation, desupervision, and de facto decriminalization) produced the latest financial crisis.

June Carbone August 14th, 2011 at 3:05 pm

Thanks. I don’t assume that there is a correct “price level,” but I am interested in the other parts of your response, especially whether the failure to either modify mortgages or recognize the losses and get on with it isn’t contributing to the failure of the economy to recover. I also wonder it will take decades to resolve the paperwork problems. If it’s not clear whether a bank in fact can foreclose because of problems with MERS, for example, isn’t that likely to scare off potential buyers?

Matthew Richardson August 14th, 2011 at 3:06 pm
In response to eCAHNomics @ 36

I am not sure I buy your explanation.
Fannie and Freddie were the perfect entitlement program for the government. they got to subsidize housing through lower mortgage rates, the largest beneficiaries actually being the well to do (because they buy bigger and multiple homes). the government didn’t have to “pay” for it because it was not on their balance sheet. of course, this was true until they did have to pay for it when everything came crumbling down as it eventually had to.

Scarecrow August 14th, 2011 at 3:07 pm

Your response suggests that the systemically risky institutions would not have been so if they had lacked implicit government support that F&F had. But they all got bailed out. It’s still not clear why just fixing this F&F problem would solve the rest of it. So perhaps it’s better to ask, what major regulatory reform did you and co-authors recommend for these non-F&F entities, and how would that change prevent a recurrence?

eCAHNomics August 14th, 2011 at 3:09 pm

Thanks. Didn’t realize the well-to-do were the largest beneficiaries of F&F, but that would make sense.

Matthew Richardson August 14th, 2011 at 3:09 pm

it is frustrating that nothing has been done for three plus years. and it is woprrying that all these industry supported bi-partisan bills are being offered that essentially mainatin the status quo. but the leadership in the administration, in congress and in regulatory agencies understand how poorly constructed the mortgage finance system was. so i believe (hope!) it will be addressed.

Peterr August 14th, 2011 at 3:12 pm
In response to June Carbone @ 44

It’s worse than that, June.

In a recent housing sale in my area, the buyers, sellers, and the sellers’ bank had agreed to a short sale, but before the closing, the IRS slapped a lien on the home for unpaid taxes. Via an expedited process for short sales, the IRS cleared the sale, once they were assured that there were no proceeds going to the sellers.

But the deal almost didn’t go through. Said the IRS to all the parties, “According to the County Recorder, Bank A is the holder of the mortgage. Where is there any evidence that they sold the mortgage to Bank B?” It took Bank B five hours to dig up some kind of paperwork proving they owned the mortgage.

From what I’ve been told, this was a relatively simple deal. The house had one prior owner, and the loan had only been sold once. Still, the deal almost came unglued because of the MERS-related paperwork mess.

This whole episode made the various realtors involved in the deal look much more dubiously on MERS.

Matthew Richardson August 14th, 2011 at 3:12 pm
In response to Kelly Canfield @ 39

our proposal takes about a decade to complete, but, at the end, the mortgages that are securitized would be held within capital markets outside the banking system (as they were originally intended). the problem was that large firms exploited capital regulation rules to load up on this stuff.

Scarecrow August 14th, 2011 at 3:15 pm

For Bill and Matthew: Just out of curiousity, how does one shoot a bear while in the boat? Or . . . What are the steps for reducing the power and corruption of the entities that need to be taken down? And why would we expect the current political folks in D.C. to be interested in such an exercise? Is their dependence on contributions not also part of the problem? — preventing any solution?

William Black August 14th, 2011 at 3:17 pm

As to the adequacy of documentation, the most devastating change was under Clinton when the banking regulatory agencies abandoned the singe must useful rule — underwriting. The rule had three key provisions: 1) it mandated underwriting prior to making the loan, (2) it required that the lender document that the borrower had the capacity to repay the loan, and (3) it required that the lender maintain that documentation. Any prudent lender would do these three things, so the rule imposed no costs on the industry and helped block what the authors refer to as the “race to the bottom.” The rule was also critical in allowing us to take effective regulatory action to prevent frauds and to allow the prosecutors to make their cases. Indeed, it was this rule that allowed us to kill the liar’s loans that Orange County S&Ls began to make in 1990-91. We did so effectively, which is why the key lenders gave up their federal charters and became unregulated mortgage bankers so they could evade our jurisdiction. (This was the birth of the infamous Ameriquest.) The rules were changed (if memory serves, in 1983) to turn them into unenforceable “guidelines.” This was part of “reinventing government.” Liar’s loans, of course, are the ultimate vehicle for not underwriting and creating intense adverse selection. This is why there were no honest lenders making liar’s loans. The documentation at these frauds is shockingly bad for very good reasons — documenting is at best a cost and at worst it aids the prosecution.

MERS is a separate disaster that has aided widespread fraudulent foreclosures. Its purpose was to avoid paying recordation fees. Conservative economists such as Hernando de Soto have written about the enormous advantages the U.S. garnered through its title recordation process, but the industry decided to undercut that highly successful government program.

masaccio August 14th, 2011 at 3:17 pm

How do your views differ from the views of Peter Wallison of the American Enterprise Institute, expressed in his dissent to the Final Report of the Financial Crisis Inquiry Commission? He seems to say that the Great Crash was almost solely the fault of US government pressure to increase housing ownership by everyone, especially the poor.

Jane Hamsher August 14th, 2011 at 3:17 pm

Welcome Matthew and thanks to you for hosting Bill.

BTW, Bill, you may have seen Michael Moore’s comment here the other day on our webinasr about how Matt Damon should run for President. It’s been everywhere:


What you may not have heard was my response, which was that Bill Black should be his Vice President. For some reason that didn’t get as much play. Dunno why.

masaccio August 14th, 2011 at 3:18 pm
In response to Peterr @ 49

Somehow I bet you played a role in the attitude of the realtors towards MERS.

Matthew Richardson August 14th, 2011 at 3:18 pm
In response to William Black @ 43

as we document in our book, and from data taken from fannie and Freddie, and newly released deata by the FHFA, Fannie and Freddie started taking on risky mortgages in the mid 1990s onward. other than when the accounting scandals hit in 2003, the OFHEO (as part of HUD) was not a strong regulator in the 1990′s or 2000′s. Whether the Fed or some other agency would have done a better job of course is a counterfactual but they certainly would have better experience because of their knowledge about banking and other capital markets.

William Black August 14th, 2011 at 3:19 pm
In response to Scarecrow @ 51

I recommend getting out of the canoe before shooting.

hackworth1 August 14th, 2011 at 3:19 pm

Is it not true that housing prices are currently significantly artificially deflated because of the massive amounts of foreclosures and short sales? They dominate the market.

The Banks control the market. The banks control the pricing. The banks can sell cheap b/c they get an 80 percent “kickback” of the original loan value.

Therefore: If I want to sell my house in this economy, I must price it in line with the banks’ short sales and foreclosures.

Of course, there is no kickback for me. So I get an artificially depressed price for my house.

Is this not correct?

gigi3 August 14th, 2011 at 3:22 pm
In response to eCAHNomics @ 36

FWIW, I have theorized the same thing you lay out. It would not be anything devised by FNMA or FHLMC. One needs to look at this from a much larger, long-term perspective. There are many parallels throughout history.

William Black August 14th, 2011 at 3:22 pm
In response to Jane Hamsher @ 54

Jane, why would you want to doom the ticket by adding a serial whistle blower to it? Members of Congress still rush to break my pencil when I enter a room with them lest they find themselves in an ethics investigation on the basis of my notes of the meeting.

athena1 August 14th, 2011 at 3:24 pm
In response to William Black @ 60

The voters like you. Even the libertarians think you’re a hero, fwiw.

Matthew Richardson August 14th, 2011 at 3:25 pm
In response to masaccio @ 53

Fannie Mae and Freddie Mac were part of the problem, but they weren’t the only problem. One can see the emergence of large, complex financial institutions in 2003 onwards that also got favorable borrowing rates (some would argue from too-big-to-fail) and leverage up.

My view, and the one expressed in the NYU stern books, is that the major culprit was the poorly designed government regulation that allowed certain firms (like Fannie and Freddie) to exploit loopholes in regulatory capital requirements to take a one-way highly levered bet on credit, especially residential and commercial real estate.

here’s one example. if you owned AAA-rated securities and bought insurance on these securities from a AA- or AAA-rated insurance firm (AIG for example), you didn’t have to hold capital under international capital rules. not surprisingly, this is what happened.

June Carbone August 14th, 2011 at 3:26 pm
In response to hackworth1 @ 58

It’s “artificially” depressed in the sense that since there are powerful players deliberately keeping foreclosed homes off the markets (because the accounting rules provide that they do not have to recognize the losses until they sell) investors should accurately feel that prices may fall further and housing is not a good investment. If the banks put all of these properties on the market right away, prices would in fact fall much lower, but there would be an end in sight. If that occurred, more people would presumably buy houses at what appear to be bargain prices and invest in fixing them up. Right now, there is no incentive to buy a house with an eye toward making money on resale. Indeed, there is good reason to believe that prices may fall further.

Matthew Richardson August 14th, 2011 at 3:28 pm
In response to William Black @ 57

to Bill’s point, the “bear in the canoe” analogy came from the congressional budget office’s analysis in the 1990′s of Fannie and Freddie, and referred to the fact that you can’t get rid of the bear without its permission because, if you do, it can get very messy.

Jane Hamsher August 14th, 2011 at 3:29 pm
In response to William Black @ 60

You say that like it’s a bad thing.

Matthew Richardson August 14th, 2011 at 3:30 pm
In response to Scarecrow @ 46

that’s what our book “regulating wall street: the dodd-frank act and the new architecture of global finance” is all about. you’re right – you can’t fix one part of the system and not touch the rest of it. we have detailed discussion of this in both books.

athena1 August 14th, 2011 at 3:31 pm
In response to June Carbone @ 63

Michael Hudson argues that rock-bottom housing prices are (or would be) actually good for most working people, and that this whole idea of needing to go into a lifetime of debt to just have a place to live was sort of a scam all along. (he calls it “debt peonage”.)

Peterr August 14th, 2011 at 3:31 pm

the major culprit was the poorly designed government regulation that allowed certain firms (like Fannie and Freddie) to exploit loopholes in regulatory capital requirements

Poorly designed from a regulatory perspective, perhaps, but ideally designed for those looking to exploit the system.

Loopholes do not appear out of nowhere. Do you name names in your books, as to who pushed for these loopholes to be included?

Scarecrow August 14th, 2011 at 3:33 pm

Okay, here’s a hypothesis. The current system is so badly corrupt it is not possible to make whatever changes you’re advocating. Assume that’s true. In that scenario, would you expect another financial crisis, similar to the one we just had — or different — to occur in the forseeable future? And what would drive it? Or prevent it?

Matthew Richardson August 14th, 2011 at 3:34 pm
In response to Scarecrow @ 42

it is very true that our accounting system is flawed because it is not risk-based

but i believe the first order effect here is that regulation encouraged and gave special treatment to leverage with certain types of loans (e.g., mortgages). so at the end of the day financial firms acted on this.

it is not dissimilar to what is going on with european banks who have exposure to risky sovereign debt. under international capital rules, this debt got favorable capital treatment, hence, the problem over there.

PeasantParty August 14th, 2011 at 3:35 pm
In response to Jane Hamsher @ 54

Yes, Bill! Vice Prez would be an excellent thing you could do for America. You know how much this Peasant loves you and your work. Please keep the truth rolling out daily.

gigi3 August 14th, 2011 at 3:36 pm
In response to Peterr @ 68

“Poorly designed from a regulatory perspective, perhaps, but ideally designed for those looking to exploit the system.

Loopholes do not appear out of nowhere.”


athena1 August 14th, 2011 at 3:36 pm
In response to Scarecrow @ 69

I personally think we might have a huge health care bubble that probably won’t end well.

Matthew Richardson August 14th, 2011 at 3:37 pm
In response to Peterr @ 68

that’s a good point. our book is more about the underlying economics of it all. there is a co-authored book “reckless endangerment” by gretchen morgenstern (of ny times). the book names “names” and provides a narrative of how it happened. the conclusions from teh book are not that different from ours albeit reached through a different approach.

athena1 August 14th, 2011 at 3:38 pm
In response to PeasantParty @ 71

I totally agree. :)

greenwarrior August 14th, 2011 at 3:39 pm
In response to William Black @ 60

All right. If you don’t think VP is a good plan, how about president?

PeasantParty August 14th, 2011 at 3:40 pm

Having had some experience in the street level of real estate, I’d say that predatory lending started the problem. Then the appraisers were brought on board to jerk up the prices based on comparables that were more than 3 miles apart.

I’d also like to add to that the facts of what the robo-signing banks have been doing is criminal. Deeds and Deeds of Trust have to be recorded within minutes apart on the same date. If only the Deed of Trust/Mortgage instrument has been changed without proper attorney and recording it is contract fraud.

masaccio August 14th, 2011 at 3:41 pm

I certainly agree that government regulation was weak and the enforcement mechanisms failed.

That only raises the question: how did that happen? I attended a securities seminar in the mid 70s at which Stanley Sporkin spoke. The white shoe securities lawyers from the financial centers were obviously frightened of Sporkin. No one has feared the SEC since 1980,

So who is to blame for weak government regulation?

William Black August 14th, 2011 at 3:42 pm

I know, I read every word, including the footnotes. I think your “crossing the Rubicon” claim fails as a metaphor and as a fact. Yes, Fannie and Freddie started loosening the definition of “prime” years ago — a bit. Yes, they bought some nonprime. But as you concede, Fannie and Freddie lost enormous market share precisely because other GSEs rushed to purchase nonprime loans, e.g., from Ameriquest. It was after the SEC and OFHEO cracked down of Fannie and Freddie’s prior accounting fraud scheme and limited portfolio growth that they moved massively into nonprime.

The major move by Fannie and Freddie into fraudulent liar’s loans, the move that caused the catastrophic losses, occurred when OFHEO had plenty of financial expertise — and no regulatory will because its leadership did not believe it was legitimate to regulate until the investments had been proven to be disastrous. We don’t need counterfactuals. The Fed and the OCC were supposed to regulate the SDIs. Their supposedly superior expertise made them even worse anti-regulators. The OCC and the Fed spent all of their passion seeking to preempt state efforts to regulate fraudulent, predatory lenders making liar’s loans. The more a regulator had “expertise” in modern finance theory, the worse s(he) was likely to be in regulatory effectiveness. Modern finance theory taught a series of false propositions, each of which counseled anti-regulatory complacency. It was Greenspan who told Brooksley Born that preventing fraud was no basis for regulation.

The S&L regulators were successful in stopping the liar’s loans in 1990-91 because we understood adverse selection, negative expected value, Gresham’s dynamic, and fraud mechanisms. The OCC and Fed did not employ a single economist that I am aware of that cited these core economic concepts to urge an urgent crackdown on liar’s loans. The Fed had authority under HOEPA to stop liar’s loans — even by lenders not insured by the federal government. Remember, this is after the FBI’s September 2004 warning that the fraud “epidemic” would cause a financial “crisis” and the MBA’s 2006 warning that the incidence of fraud in liar’s loans was 90%.

As a group, economists are simply weird in their unwillingness to even use the “f” word (fraud) and ignoring Akerlof & Romer’s 1993 article (Looting: the Economic Underworld of Bankruptcy for Profit). I literally start meetings with economists by getting them to say “fraud” out loud so they can bring themselves to join in a discussion of the leading cause of catastrophic bank failures. Akerlof & Romer, Volcker, Jamie Galbraith, and my colleagues at UMKC being the great exceptions.

beowulf August 14th, 2011 at 3:44 pm
In response to masaccio @ 53

That’s not far from the truth. As Raghu Rajan put it, the policy was Let Them Eat Credit.

Since 1968, income inequality has been steadily increasing in the United States…. the government’s response to rising inequality—whether carefully planned or the path of least resistance—has been to encourage lending to households, especially but not exclusively low-income ones (the government push for housing credit was just the most egregious example).

PeasantParty August 14th, 2011 at 3:44 pm
In response to William Black @ 79

Absolutely! FRAUD!

Contract Fraud, Real Estate Fraud, Securites Fraud, and even Pudding Face Fraud!

Matthew Richardson August 14th, 2011 at 3:46 pm
In response to June Carbone @ 63


a good loan modification program would have written down the principal to its fair value, the losses going on the bank’s balance sheets, perhaps with some government support, but enough that some homeowners would continue to live and maintaing their property. perhaps, the upside would be shared between the bank and the homeowner.

unfortunately, as more and more houses go on the market, and more imminent foreclosures occur (so the properties are not maintained), it is a downwards spiral.

but june has a point. once the property is in default, then it does show up as losses on the bank’s balance sheet. if they do not hold adequate reserves – this is a regulatory issue -, then the losses aren’t transparent.

William Black August 14th, 2011 at 3:46 pm
In response to greenwarrior @ 76

OK, fun is fun, but let me play teacher now and say: “Please focus on the book.” We have one of the most productive authors on finance topics in the world here to take our questions. That’s a fabulous opportunity.

masaccio August 14th, 2011 at 3:47 pm
In response to William Black @ 79

I agree that there was massive fraud in these markets, and I see reasons to believe that all of the market participants knew it. It is astonishing that economists as a group ignore this obvious fact. It is equally astonishing that as a group, they continue to push the same discredited theories.

I corresponded with a Freshwater Economist about a paper, and asked if perhaps it needed to be rethought. I was told that the biggest problem in the wake of the Great Crash was that economists had been insufficiently insistent on the virtues of the market.

Perhaps they don’t want to eat their share of the blame for the Great Crash.

PeasantParty August 14th, 2011 at 3:49 pm


When Bernanke was down on his knees to Bush over TARP, I said then it would have been better to write off all mortgages prior to that date as paid in full. It certainly would have saved us tax payers a great deal of money and kept the economy from hurtling into the dirt.

Do you see a Part II to this Epic Story where the monster raises it’s head again?

athena1 August 14th, 2011 at 3:49 pm

Does anyone know:
There’s an argument out there that states that Bernanke’s QE1 and QE2 were mostly designed to “help the housing market”, which could be reinterpreted as “reinflate the housing bubble.”

Anyone have any thoughts on that?

Matthew Richardson August 14th, 2011 at 3:50 pm
In response to masaccio @ 78

As a previous responder asked “Loopholes do not appear out of nowhere”

It is a bit of a chicken and egg problem. Did firms act the way they did because regulators wrote rules a certain way, or because they influenced regulators to write rules a certain way? It is likely a bit of both. Again, with respect to Fannie and Freddie, the “Reckless Endangerment” book points somewhat to the latter.

athena1 August 14th, 2011 at 3:52 pm
In response to masaccio @ 84

I wouldn’t want to if I were them, either. It implies extreme and dangerous incompetence, and suggests that they should be looking for new lines of work.

BevW August 14th, 2011 at 3:52 pm

As we come to the end of this lively Book Salon,

Matthew, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book and Fannie Mae and Freddie Mac.

Bill, Thank you very much for Hosting today’s great Book Salon.

Everyone, if you would like more information:

Matthew’s website and book and blog.

Bill’s website and blog.

Gretchen Morgenson, Joshua Rosner / Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
Hosted by Yves Smith

Maria Armoudian / Kill the Messenger: The Media’s Role in the Fate of the World

Thanks all,
Have a great week!

Just quick reminder:
Membership drive! Are you an FDL member? If not, please join and help keep FDL delivering kick ass activism and independent journalism. You can join HERE.

BooRadley August 14th, 2011 at 3:54 pm

Terrific discussion, definitely on my “buy” list.

athena1 August 14th, 2011 at 3:54 pm

Thank you, everyone!

PeasantParty August 14th, 2011 at 3:54 pm
In response to athena1 @ 86

I do and plenty! If QE 1 and 2 were for that, what was TARP 1 and 2?
Also, why did Bernanke allow billions to be loaned out to foreign banks?

I could say lots on my feelings and back it up with a few facts, but I would get banned for sailorspeak. (grins)

Peterr August 14th, 2011 at 3:54 pm

Thanks, Matthew and Bill!

gigi3 August 14th, 2011 at 3:55 pm

The Essence of the Banking Industry (1:43 You Tube clip) sums it up very well. Just substitute mortgage securities for the “small arms” discussed in the clip.


It is what Michael Hudson describes as “debt peonage.”

Matthew Richardson August 14th, 2011 at 3:55 pm
In response to William Black @ 79

The mistake made on Fannie and Freddie by the regulators (OFHEO) and its ultimate regulator (Congress) from 1995-2005 was that they considered Fannie and Freddie as having good underwriting practices because loan defaults were low. (We have read the congressional testimony during this period when critics tried to raise questions.) Of course, they confused ex post with ex ante. the house price index went up every month for 132 straight months during this period. people (who can’t make payments) don’t default on the mortgage if the house price goes up; they simply sell the house or refinance. our title “guaranteed to fail” refers to the fact that if house prices had fallen in prior years, Fannie and Freddie would have been gone then. thats aid, I don’t disagree that things GOT much worse srating in 2006 onwards when Fannie and freddie went all-in.

masaccio August 14th, 2011 at 3:57 pm

The way you phrase it, it looks innocent, as if the government players and the Wall Street players and Fannie and Freddie were all acting in good faith. That points squarely at the theoreticians who explained why this would work perfectly well.

Are you blaming Greenspan and all of the academic and think tank economists who pushed free market theories of government?

Matthew Richardson August 14th, 2011 at 3:58 pm
In response to BevW @ 89

thanks. very lively and lots of fun.
looks like i gave some early press to the “reckless endangerment” book you are hosting next week!

Mike Konczal August 14th, 2011 at 4:00 pm

Thanks for hosting this. A few questions:

1. What countries have a fully private mortgage market? What lessons can we draw from them?

2. What were the benefits of the GSEs during their mid-century tenure, and has innovations in the private market replaced them?
2.a. Related I think the idea that the role of the GSEs were simply a (distorting) “subsidy” to the housing market misses that another analysis would say that they created a deeply-liquid, standardized secondary market for housing. Rather than an already existing market that the government adding or subtracted from at the margins, the government here is creating the actual market. Without this, the private market would replicate the PLS market we saw during the 2000s – a deeply dysfunctional market we are now seeing. What do you make of this argument?

3. If the 30-year fixed-rate mortgage disappears in a private market, and if the mortgage market looks more like the subprime mortgage market (or the pre-New Deal mortgage market) – bullet loans, volatility, risk-transfered to households, macro-instability, etc. – is that a problem?

William Black August 14th, 2011 at 4:00 pm
In response to masaccio @ 84

Larry White (one of my bosses as an S&L regulator) and one of Matt’s distinguished co-authors, famously wrote of the S&L debacle that there were “no Cassandras” among economists warning that deregulation would produce disaster. The National Commission on Financial Institution Reform, Recovery and Enforcement concluded that at the typical major S&L failure “fraud was invariably present.” Akerlof & Romer ended their article with a statement about the failure of policy makers to understand how perverse incentives (what we criminologists would refer to as a “criminogenic environment”) could create fraud epidemics led by the CEO. Here’s an easy test to use of any recent article/book on this financial crisis: look at the table of authorities and check whether they cite Akerlof & Romer and look at the index and see if there is an entry for “fraud.” The reason we suffer recurrent, intensifying financial crises is because we keeping ignoring control fraud and learning the wrong lessons from the crises. We keep embracing the three “de’s” and produce even more intensely criminogenic environments. Lake denizens may recall that Dr. Rajan responded that fraud could not be a serious problem, only poor incentives could be. Even after reading about criminogenic environments/perverse incentives it was a bridge too far for him to consider that perverse incentives are what cause fraud epidemics and drive financial crises such as the S&L debacle, the Enron-era frauds, and this crisis. The truly odd thing is that economists think they are virtuous because they refuse to consider fraud as a hypothesis.

Elliott August 14th, 2011 at 4:00 pm

Thanks everybody, great salon

nice work Bev

Matthew Richardson August 14th, 2011 at 4:01 pm
In response to masaccio @ 96

we start our book with a quote from a former speechwrite of president bush, david frum:
“the shapers of the american mortgage finance system hoped to achieve the security of government ownership, the integrity of local banking and the ingenuity of wall street. instead they got the ingenuity of government, the security of local banking and the integrity of wall street”

i think that sums it up.

William Black August 14th, 2011 at 4:02 pm

Bev, Matt,

Thank you both. Sell many books! Say “hey” to Larry for me.


athena1 August 14th, 2011 at 4:04 pm
In response to William Black @ 99

That’s the basic hypothesis/tale behind Taibbi’s “Griftopia” in a nutshell.

Matthew Richardson August 14th, 2011 at 4:07 pm
In response to Mike Konczal @ 98

1. chapter 7 of the book discusses mortgage finance systems in other countries, and the US is mostly unique in terms of its government involvement (except maybe canada and japan)
2. there is no doubt that standardization of mortgages and resulting securitization and MBS create liquidity. the question is whether you need a government guarantee for that, and why that guarantee has to be underpriced. our answer and analysis suggests that you don’t.
3. you don’t necessarily need the govenrment guarantee for the 30-year mortgage – consider Denmark’s mortgage finance system. but again the point is that if the 30-year mortgage cannot be sustained on its own in a fair and equitbale manner, then perhaps that says more about the viability of a system based on the 30-year mortgage. that said, we belive it is sustainable within a private mortgage finance system.

Matthew Richardson August 14th, 2011 at 4:12 pm
In response to William Black @ 102

Thanks for the debate and I will tell Larry you said hello.

Btw, with respect to Fannie and Freddie, Larry has screamed for years about these firms but, as we discussed, the crisis was broader than just these firms.

Sorry but the comments are closed on this post