Since leaving Freddie Mac, I have thought a lot about my experiences there, about the things Freddie Mac did right and wrong, and more broadly about the strengths and weaknesses of the GSE-model of housing finance. I’ve looked at respected analyses of mortgage defaults, considered the various “who-dunnit” arguments, and read the popular books. As a financial policy consultant and academic, I closely track the current state of new mortgage regulations being implemented and those still on the drawing board. I have watched countless congressional hearings on the subject.
My overall conclusion is that although the GSEs made serious mistakes, the financial crisis was not brought about by one single company (or two) operating in a single slice of the mortgage market. The causes are far broader and more complex than that. The relaxation of Glass-Steagall, which permitted investment banks to enter real estate years before, the failure to regulate derivatives, expansive Federal Reserve monetary policies, and bank regulatory lapses have all been nominated for best actor.
Nevertheless, the fact remains that the GSEs’ mismanagement of higher risk mortgages enflamed an already vulnerable mortgage landscape.
Within the mortgage market, the disaster resembled a high-stakes game of musical chairs, with multiple entities piling on business and warily competing with each other as the mortgage music played on and on, and then greedily grabbing chairs when it ended, attempting to stick each other with the losses.
This game did not occur in a vacuum; it was heartily cheered on by the homebuilders and real estate trade groups and well-intended non-profit organizations, such as consumer and housing groups. Unfortunately, as has been well documented, regulators were lounging on the sidelines and did little to set the rules of engagement or enforce them.
Like fault-lines under major cities, other unseen dimensions of the crisis make true recovery elusive and unsustainable.
Beneath the mortgage game is a maze of competing philosophies and ideologies that has yet to be untangled and addressed. These include outsized government investments in homeownership at the expense of rental housing and other more productive investments society could be making; the unresolved tension between free markets and government support for housing, and between safety and soundness of the system and broad access to homeownership.
These issues are hard and make for painful conversations, which is why there’s been little progress addressing them.
Excerpted from Chapter 1, Reckoning Day, p. 9, Days of Slaughter, Inside the Fall of Freddie Mac and Why It Could Happen Again (Johns Hopkins, 2017)
[i] Financial Crisis Inquiry Report, (New York: Public Affairs, 2011), xxii-xxiii.