Greenspan agrees leftist housing laws caused crash
“A significant proportion of the increased demand for subprime-mortgage-backed securities during the years 2003 to 2004 was effectively politically mandated,” he said, adding that the full extent of the mortgage enterprises’ investments in risky loans was not known until September, when a large portion of what had been classified as “prime” mortgages in their portfolios was revealed to be subprime.
By Patrice Hill at Washington Times
Former Federal Reserve Chairman Alan Greenspan on Wednesday testified that mortgage giants Fannie Mae and Freddie Mac played a critical role in fostering an explosion of growth in the subprime-mortgage market that led to the global financial crisis.
In his first appearance officially defending his own role in the crisis before the Financial Crisis Inquiry Commission, Mr. Greenspan deflected the blame from himself and the central bank – which had broad but largely unused authority to regulate banks and the mortgage market – while giving voice to long-standing charges by Republicans that congressional meddling with Fannie Mae and Freddie Mac was a critical factor in the run-up to the crisis that brought down the global economy in the fall of 2008.
Fannie and Freddie, while under strict federal control since a government takeover in September 2008, have escaped efforts at reform in Congress, though they are fast becoming the biggest beneficiaries of taxpayer bailouts with $125 billion in cash infusions so far. Moreover, their growing and potentially unlimited liabilities are not likely to be recovered through repayments like those from big banks and Wall Street firms in the past year.
In detailing the role of the mortgage monoliths in the crisis, Mr. Greenspan pointed to the mandates Fannie and Freddie received in 2000 from Congress and the Clinton-era Housing and Urban Development Department to make housing more affordable to minorities and people with blemished credit by using their vast resources to purchase more subprime-mortgage securities.
As the mortgage giants started to scarf up the subprime securities, much of which had been engineered by Wall Street firms to earn AAA ratings, the subprime market grew rapidly. It burgeoned from less than 2.5 percent of the mortgage market in 2000 to encompass 40 percent of Fannie’s and Freddie’s more than $5 trillion mortgage portfolios by 2004, Mr. Greenspan said.
The enormous appetite for subprime mortgages that Fannie and Freddie brought to the market is the reason that interest rates on mortgages fell so dramatically in the mid-2000s and many exotic and risky loans were created to satisfy the heightened demand for mortgage investments, Mr. Greenspan said. That, in turn, gave birth to the most abusive loans with low initial “teaser” rates and no requirements for down payments or income documentation.
“A significant proportion of the increased demand for subprime-mortgage-backed securities during the years 2003 to 2004 was effectively politically mandated,” he said, adding that the full extent of the mortgage enterprises’ investments in risky loans was not known until September, when a large portion of what had been classified as “prime” mortgages in their portfolios was revealed to be subprime.
While much of the riskiest subprime securities were purchased directly from Wall Street by European investment funds drawn by high yields and low default rates during the housing boom, Fannie and Freddie proved to be the best conduit for rapidly growing demand from more conservative investors in Asia for U.S. mortgage investments.
Fannie and Freddie first issued their own debt, which had an implicit government guarantee that appealed to the Asian investors, and then used the cash to invest in subprime loans, in a process that Mr. Greenspan often criticized at the time as over-acquisitiveness aimed at dominating the mortgage market.
“The subprime market grew rapidly in response,” he said, and “subprime loan standards deteriorated rapidly,” worsening an investment bubble that was already developing in the housing market.
Mr. Greenspan, whose views are still closely followed in financial markets though he left the Fed more than four years ago, spurned repeated assertions by members of the commission that the Fed’s own low interest rate policies in 2003 were what nurtured the housing bubble.
“The house-price bubble, the most prominent global bubble in generations, was engendered by low interest rates,” he said, but “it was long-term rates that galvanized prices, not the overnight rates of central banks.” Long-term rates are largely set in global financial markets and reflect investors’ demand for Treasury bonds and competing instruments, such as Fannie and Freddie mortgage bonds.
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