Arnold Kling  

More on the Freddie Mac Risk Management Culture

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From the comments on my chapter.

Chet Foster writes,


One thing that irks me is the requirement that Fannie And Freddie are required to make specified proportions of their purchases in lower income and minority areas. This more than anything else has created this mortgage market disaster. The mortgage market is one of the most competitive markets in the country. We have National Banks, commercial banks, S&Ls, finance companies, Credit Unions, mortgage bankers, and mortgage brokers (I am sure I have left some out) all competing for the last nickel on the table. I live in a small town in Texas (pop. 8,911) and we have 6 Banks, a credit union and a mortgage broker. In such a market everyone should be able to get a loan as long as the property and borrower are reasonable risks.

Bob Van Order writes,

I think the [home] price decline is most of the story, but not all, re defaults. They [Freddie Mac] also did a lot of Alt-A in the last few years (currently about 10% of book). These have high downpayments and high credit scores, but are performing lousy. They are tough to evaluate because some are in securities with subordination ahead of them and insurance. As far I I know all of the subprime is in senior pieces of securities, but the senior pieces are at risk. The problem there is more a liquidity one--no one wants to buy even senior pieces. These will take losses, but not as much as the market discount suggests. Unfortunately neither accounting equity or mark to market equity are very accurate.

That's why I like the stress tests.

I cited Chet and Bob as the founding fathers of the risk management culture that was not appreciated by the new regime at Freddie Mac.


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COMMENTS (3 to date)
Jason writes:

How very convenient to blame everything on Syron and his rejection of the "old" risk management culture at Freddie Mac.

If the old model at Freddie was so great, then why is Fannie Mae in the same dire straits? After all, Mudd didn't change much vis-a-vis Raines's days.

Truth be told, whether under Brendsel or Syron (Freddie), Raines or Mudd (Fannie), both companies had a deeply flawed model -- and all that Messrs Kling, Van Order and Foster did was provide a patina of pseudo - academic respectability to these paragons of corporate welfare.

Methinks Kling needs to re-read his own post and the article thereof, before he starts spouting further defenses of Freddie -- http://econlog.econlib.org/archives/2008/07/i_wish_larry_su.html

Arnold Kling writes:

Fannie Mae always prided itself on going farther than Freddie Mac to serve low-income borrowers. I'm not surprised they got into trouble. The big shock is that Freddie Mac managed to get into more trouble.

Robert writes:

Can someone please tell me how much the Top was getting paid each year ? And to help me understand how this has JUST happened ? Didnt this take years to get in this shape ? And what were the Top Brass doing ? They still get there pay raises ? I didnt get mine this year. 0% thats what I got.Bouns non.....Wheres all the money at ? Bob doesnt have it!! Guys this is some scary stuff here !!!!

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