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Why Fannie Mae and Freddie Mac Pose 'Manageable Risk' to Financial System and 'Minimal Cost' to Taxpay... Oops!

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I was taking a look at Bloomberg's morning notes this morning and ran across this nugget on Fannie Mae and Freddie Mac from a 2006 report that is, incredibly, still posted on the Freddie Mac Website:

"Substantial research on the effects of the GSEs has been conducted since our first evaluation in 2001. Much of this work supports our conclusions in that earlier piece: the GSEs bestow substantial benefits on homeowners while posing manageable risks to the financial system and minimal cost to taxpayers."

Hahaha! Wel, so much for that, right?

The report, authored by James C. Miller III, a former Budget Director in the Reagan White House, and James E. Pearce, a VP for Welch Consulting, is actually a fascinating artifact of boom-time thinking..

Of course, while those two are the primary authors of the report, the glass-totally-full optimism on the stability and benefits of the GSE's is based on a host of reports from others.

The "Macroeconomic Stability" section alone cites works such as, "Housing Markets and Economic Growth: Lessons from the U.S. Refinancing Boom”, wherein the authors Akash Deep and Dietrich Domanski describe the 2001 refinancing boom in the U.S. and discuss how it helped stabilize the economy, and Calvin Schnure, “Boom-Bust Cycles in Housing: The Changing Role of Financial Structure,” in which Schnure, an IMF economist, observes that "home prices under the current structure of securitized mortgage finance are more stable now than in the past," and Joe Peek and James A. Wilcox, “Housing, Credit Constraints, and Macro Stability: The Secondary Mortgage Market and Reduced Cyclicality of Residential Investment,” which concludes that "by tempering the volatility of residential investment, growth in the secondary market for residential mortgages has contributed importantly to the stability in the U.S. economy."

Yeah, except all that stuff turned out to be totally wrong.

Consider this report, cited as part of the "Social Benefits" section: "The Impacts of Affordable Lending Efforts on Home ownership Rates,” which purportedly shows how "financially innovative products from the GSEs" -- uh oh, you can see where this is headed -- "—have been responsible for increasing the homeownership rate for minorities by as much as five percent." great, except "financial innovation" works both ways. According to a 2009 Pew Research report, since the housing bust began, home ownership rates for both blacks and Hispanics have fallen more steeply than for the rest of the population.

Change in Home Ownership Rates from 2008 to 2009
, via Danter

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