Killing Zombies: Freddie and Fannie didn’t cause the mortgage crisis….

A Zombie lie is one that keeps being told long after it has been debunked.
One of the hardest to kill Zombies is the “fact” that Freddie and Fannie caused the mortgage crisis; you see they forced those honest banks to lend to lowlifes who could not afford the houses.

How do they (the conservatives) get away with telling this over and over? They lie; they bundle all of the “poor peoples mortgages” together and say that AS A GROUP, they were responsible for the crisis. And since they count Freddie and Fannie in that group, well, there you go.

The problem is that this is nonsense:

Wallison and Pinto claim that the GSEs were responsible for half of all subprime and subprime-like mortgages. They do this by making up a confusing definition of “subprime-like,” what above is mentioned as their “and other high-risk” mortgages.

The fun part of making up your own definition is that it can be whatever you want it to be. If we define a conventional loan made to a borrower with a FICO credit score between 620 and 660 as a “leprechaun” and a loan with a cash down payment of less than 10 percent as a “unicorn,” we can say that Fannie and Freddie was responsible for half of all leprechauns and unicorns under oath and while serving on the FCIC.

Now instead of a leprechaun they’ve created the definition of “subprime by characteristic” and instead of a unicorn they say “Alt-A by characteristic,” for the numbers mentioned above. This is a definition nobody in the financial markets use.

The three-card monte trick is pretty straightforward once you know where to watch. There’s a lot of statements that go: “Fannie and Freddie made a lot of subprime loans and other high-risk mortgages. And subprime loans had a 25% default rate!” And you naturally assume that the other high-risk loans must also have a gigantic default rate compared to regular mortgages. Except they don’t. From Min’s paper (p. 8): […]

Surf to the blog post to read the rest.

Remember: the banks made these risky loans (the not-as-regulated ones) because of greed; they were going by the axiom “property values always go up”. Hence if the property defaults…well, “win-win”, right?

Remember: conservatives have their minds made up in advance; they then cherry pick and twist and…well…make stuff up to support their “common sense” positions. Ironically, when it comes to intellectual honesty and rigor, they are the analogues of some of the leftist activists that they despise (radical feminists, Afrocentrists, new age medicine types, etc.). 🙂


November 2, 2011 - Posted by | economy, political/social, politics, republicans, republicans politics


  1. Ollie

    I don’t pretend to understand what caused the mortgage crisis. My question for you is to explain why the taxpayer (i.e. the governement) has had to spend so many billions “bailing out” Freddie and Fannie if they were making prudent loans.

    I’m not trying to be argumentative, I just don’t understand how these things go together



    Comment by Dr. Andy | November 3, 2011 | Reply

    • I’ll have to bore into this in more detail, but my “off the cuff” answer: many more people than expected lost their jobs and therefore couldn’t pay a reasonable loan. Someone who had a formerly “safe” job making, say, 60K might be a prudent risk for a modest loan and may well default if he/she were suddenly laid off.

      Again, this is just a guess on my part; I haven’t “fact checked” myself.

      Comment by blueollie | November 3, 2011 | Reply

  2. In other words, the economy tanked and a lot of people couldn’t make their mortgage payments, even those who seemed like good risks. Nearly 7% seems like an incredibly high default rate for people with “conforming” loans, so this makes some sense to me



    Comment by Dr. Andy | November 4, 2011 | Reply

    • That is my understanding. Evidence for the claim: Fannie and Freddie started to have trouble AFTER the mortgage crisis first hit; the other subprime stuff had trouble first.

      Comment by blueollie | November 4, 2011 | Reply

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