Monday, June 20, 2005

Fannie Mae Counter Punches Greenspan

Says Lax Lending Standards Cause of Housing Bubble
Cites Subprime Market–Area Fed Ignores

The Wall Street reported today ("Fannie Sees Higher Odds of Regional Busts’, Ruth Simon & John R. Hagerty, June 20, 2005) that Fannie Mae in report yet to be published "says the probability of housing busts has "risen sharply in certain parts of the country," partly because of looser lending standards."

Fannie Mae is implying that the Fed has been asleep at the switch because under its watch banks have lowered their borrowing requirements. While a variety of government and state agencies most notably the OCC (Office of Comptroller of the Currency ) monitor the banking industry it is ultimately the Fed that is the Head. Martin Mayer in The Fed (The Free Press 2001)notes such and states that the Fed is the "umbrella Supervisor" of the financial services industry that is the "first among equals regulator."

For over two years Greenspan has been on the attack sounding the warning alarm about the risk Fannie Mae and Freddie Mac’s loan portfolio’s present. Greenspan was even able to pursuade Congress to begin the process of passing legislation to curb Fannie and Freddie.

While many financial publications, several referenced on this blog, have noted that it has been the Fed’s easy money policy that contributed to the housing bubble this is the first, I know of, that says lax lending standards are also a contributing factor. Some would say that this is a moot point because it has been the Fed’s easy money policy that has led to the deterioration in credit standards. What is noteworthy is that this is arguably a counter punch from an organization under siege from Greenspan.

The Journal article notes that Fannie Mae sees several problem areas–the rise of subprime (lesser quality and less affluent borrowers) interest only loans, a rise in the loan to house value ratio to 91%, reduced documentation of the income and asset holdings of borrowers, etc..

It should be pointed out that the Fed has consistently turned a blind eye to the abuses in the subprime market as we and others have written about on numerous occassions. For example, the Fed does not monitor the market for fringe banking–a market into the hundreds of billions of dollars.

As Journal notes "The report (Fannie Mae) adds, however, that it is impossible to know whether there is a housing "bubble" until after the fact".

With all this jockeying about whether there is a bubble, or regional froth in the housing market and who is too blame will prove interesting when and if the bubble bursts. My bet is Greenspan won’t get the short end of the stick!

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