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1 Center or American Progress | Why Wallison Is Wrong About the Genesis o the U.S. Housing Crisis

Why Wallison Is Wrong About the

Genesis of the U.S. Housing CrisisResponding to Wallison’s Latest Defense of His FlawedFinancial Crisis Inquiry Commission Dissent

David Min July 2011

Introduction

I you’ve been closely ollowing he housing nance re orm deba e, you may havecome across a pair o shrill blog pos s penned by Pe er Wallison, a senior ellow ahe American En erprise Ins i u e and a epublican appoin ee o heFinancial CrisisInquiry Commission. He responded omy February 2011 ar icle, “Faul y ConclusionsBased on Shoddy Founda ions,”which cri icized he research underlying Wallison’s dis-sen rom he majori y o he members o ha commission, and his con en ion ha U.S.a ordable housing policies caused he global nancial crisis.

In hese blog pos s onTe American Spec a or ’s blog on May 24 and on AEI’s blogon May 26 , Wallison cri icizes ”Faul y Conclusions” as “ allacious,” “ raudulen ,”and “decep ive”; claims ha i con ains a “ ake” char ; and describes he ar icle as a“poli ical screed.”

As I describe below, hese accusa ions are baseless and dis rac rom he ac ha Wallison does no ac ually address he main argumen s o “Faul y Conclusions.” Wallison does no con radic he claim ha his FCIC dissen depends cri ically on heca egoriza ion o millions o home mor gage loans as “high risk” ha are no ac ually high risk. Wallison also ails o answer o her serious issues wi h his argumen s ha werepoin ed ou in “Faul y Conclusions.”

Tis issue brie will reexamine my core cri icisms o Wallison’s dissen rom heFinancial Crisis Inquiry Commission and respond o his cri icisms o my column“Faul y Conclusions.”

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2 Center or American Progress | Why Wallison Is Wrong About the Genesis o the U.S. Housing Crisis

Background

Wallison, o course, wro e a lonely dissenrom bo h he Financial Crisis Inquiry Commission majori y repor and rom his ellow epublican commissioners, in whichhe alone blamed he global nancial crisis on U.S. a ordable housing policies.Tis argu-men is clearly con radic ed by he ac s , including he ollowing:

• Parallel bubble-bus cycles occurred ou side o he residen ial housing marke s ( orexample, in commercial real es a e and consumer credi ).

• Parallel nancial crises s ruck o her coun ries, which did no have analogous a ord-able housing policies.

• Te U.S. governmen ’s marke share o home mor gages was ac ually declining pre-cipi ously during he housing bubble o he 2000s.

Tese ac s are irre u able.

Wallison’s argumen , which places mos o he blame on he a ordable housing goals o he ormer governmen -sponsored en erprises Fannie Mae and Freddie Mac be ore hey ell in o governmen conserva orship in 2008, also ignores he ac ual delinquency ra es.

As David Abromowi z and I no ed in December 2010:

“Mor gages origina ed or priva e securi iza ion de aul ed a much higher ra es hanhose origina ed or Fannie and Freddie securi iza ion,even when con rolling or allo her ac ors (such as he ac ha Fannie and Freddie securi ized vir ually nosubprime loans). Overall, priva e securi iza ion mor gages de aul ed a more han siximes he ra e o hose origina ed or Fannie and Freddie securi iza ion.”

So how did Wallison ge o he conclusion ha i was ederal a ordable housing policiesha caused he crisis, despi e he coun ervailing evidence? As Phil Angelides, chairmano he FCIC, has s a ed , “Te source or his new ound wisdom [is] shopworn da a,produced by a consul an o he corpora e- unded American En erprise Ins i u e, which was analyzed and debunked by he FCIC epor .”

Angelides is o course re erring o Wallison’s AEI colleague Edward Pin o. Wallison’sconclusion ha ederal a ordable housing policies are primarily responsible or henancial crisis is based en irely on he research conclusions o Pin o, who nds hahere are 27 million “subprime” or “high-risk” loans ou s anding, wi h approxima ely 19.25 million o hese atribu able o he ederal governmen ’s a ordable housing poli-cies. As I poin ou in “Faul y Conclusions,”Pin o only ge s o hese numbers (which areradically divergen rom all o her es ima es— or example,he nonpar isan Governmen Accoun abili y O ce es ima esha here are only 4.59 million high-risk loans ou -s anding) by making a series o very problema ic and unjus i ed assump ions.

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3 Center or American Progress | Why Wallison Is Wrong About the Genesis o the U.S. Housing Crisis

Case in poin : o suppor his claim ha he Communi y einves men Ac , whichrequires regula ed banks and hri s o provide credi nondiscrimina orily o low- andmodera e-income borrowers, caused he origina ion o 2.24 million ou s anding “high-risk” mor gages, Pin o includes many loans origina ed by lenders who were no evensubjec o CR. In ac , mos o he “high-risk” loans Pin o atribu es o CR were noeligible or CR credi .

Similarly, in arguing ha Fannie and Freddie’s a ordable housing goals caused heorigina ion o 12 million “subprime” and equivalen ly “high-risk” loans, Pin o includesmillions o loans ha would no ypically quali y or hose goals. In ac , he vas major-i y (65 percen ) o he “high-risk” loans Pin o atribu es o he a ordable housing goalso Fannie and Freddie all in o his ca egory.

Wallison does no address hese and o her problems wi h Pin o’s research iden i ed in“Faul y Conclusions.” Ins ead, he ocuses all o his energies on de ending agains one o my main cri iques o Pin o’s work— ha Pin o’s unila eral expansion o he de ni ions

o “subprime,” “Al -A,” and “high-risk” mor gages is bo h misleading and unjus i ed. Sole ’s decons ruc his atack on my research o demons ra e once again why he is simply wrong abou he genesis o he U.S. housing crisis.

Wallison’s response

So how does Wallison go abou de ending Pin o’s work? He o ers a series o dispara echarges agains he argumen ha Pin o’s expansion o he “high-risk” loan ca egory isinappropria e. No ably, he does no ac ually address he cen ral issue— ha Pin o ca -

egorizes as “high risk” many millions o mor gages ha are demons rably no high risk.Le ’s go over his main cri icisms in urn.

Claim: It’s simply a disagreement over the correct meaning of “high-risk” lending

In his rs blog pos , published on May 24 onTe American Spec a or ’s blog, Wallisonsummarizes “Faul y Conclusions” as merely a minor cri icism abou Pin o’s usages o heerms “subprime” and “Al -A,” one ha misunders ands he rue in en o wha Pin o isdoing. Here is wha Wallison says:

[Min is] arguing ha Pin o’sde ni ions o subprime and Al -A loans are no con-sis en wi h he de ni ions o hers have used or da a collec ion and analysis. In o her words, Pin o has used his own de ni ions o analyze he da a in a new way.1

As he Financial Crisis Inquiry Commissionand Pin o, among o hers, have all no ed, heconven ional de ni ions or “subprime” and “Al -A” are imprecise, bu generally re er oindus ry ca egoriza ions o loans wi h high-risk charac eris ics, loans made o high-risk

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4 Center or American Progress | Why Wallison Is Wrong About the Genesis o the U.S. Housing Crisis

borrowers, or loans wi h incomple e documen a ion o income orasse s. Wallison is con ending here ha he cen ral argumen o “Faul y Conclusions” is simply a complain ha Pin o expanded he de ni ionso hese erms, wi hou considering he ques ion o whe her Pin o’srevised de ni ions ac ually make sense. Tis is, as anyone who’s ac ually read “Faul y Conclusions” would know, no accura e.

Pin o’s research does deserve cri icism or i s unila eral expansion o he erms “subprime,” “Al -A,” and “high risk,” because i is con us-ing. For example, when Wallison, as he has done, ci es a 25 percenserious delinquency ra e or subprime mor gages (re erring o hedelinquency ra e or ac ual subprime mor gages) and hen s a es hahere are 27 million ou s anding subprime mor gages (re erring oPin o’s expanded de ni ion o “subprime”), he is comparing applesand oranges in a very misleading way.

Bu con rary o Wallison’s asser ion, his was no he en ire y o “Faul y Conclusions’” cri icism o Pin o’s newly inven ed de ni ionso “subprime” and “Al -A.” Pin o’s expanded de ni ions are no only con using bualso unjus i ed. Pin o’s expansion o “high-risk” loans occurs primarily by includingall loans made o borrowers wi h a FICO credi score o be ween 620 and 659 and allloans wi h a loan- o-value ra io o more han 90. No only are hese loans no gener-ally unders ood o be “high risk,” bu as demons ra ed in he accompanying char rom“Faul y Conclusions,” calling hem “high risk” is inconsis en wi h heir delinquency ra es. Tese newly dubbed “high-risk” loans look much more like prime con ormingloans han ac ual high-risk loans.

Claim: “Faulty Conclusions” includes a “fake” chart

Wallison also cri icizes “Faul y Conclusions,”his ime in a May 26 pos on AEI’s blog ,or relying on a “ ake” char , namely he one above. Speci cally, Wallison s a es hahis char is “mislabeled as coming rom he Mor gage Bankers Associa ion’s (MBA)Na ional Delinquency Survey or he second quar er o 2010,” and implies ha his wasan atemp o mislead readers in o hinking ha his char was crea ed by he MBA.

I is rue ha he char is missing a line o atribu ion. Somewhere in he process o crea -ing, edi ing, and pos ing ha char , a re erence o Freddie Mac’s Second Quar er 2010Financial esul s Supplemen go dropped rom he char i sel . Bu he missing re erenceis ac ually con ained in he accompanying ex o “Faul y Conclusions,” immedia ely pre-ceding he char in ques ion on pages 7–8, which bo h in roduces he delinquency guresused in his char and clearly sources hem o he MBA’s Na ional Delinquency Survey and Freddie Mac’s Second Quar er 2010 Financial esul s Supplemen .

The real data on delinquent mortgages

Delinquency rates on Pinto high-risk loans vs.conforming and actual subprime loans, Q2 2010

10%

5%

0%

20%

15%

30%

25%

Pinto highrisk: Freddie

620-659 FICO

Pinto highrisk: Freddie

> 90 LTV

8.45%10.04%

Actuasubprim

28.3

S e r i o u s

d e

l i n q u e n c y

r a t e

Type of mortgage

Conforming

6.8%

Source: Mortgage Bankers Association, “National Delinquency Survey Q2 2010” (2010

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5 Center or American Progress | Why Wallison Is Wrong About the Genesis o the U.S. Housing Crisis

In o her words, Wallison’s accusa ion ha his char was “ ake” and mean o “deceive”readers is baseless and con radic ed by he ac ual ex o “Faul y Conclusions.”

Claim: “Faulty Conclusions” overlooks Fannie and Freddie’s purchases of actualhigh-risk loans

Wallison also con ends ha he analysis in “Faul y Conclusions” overlooked Fannieand Freddie’s exposure o ac ual high-risk loans, hrough heir purchases o AAA-ra edsubprime priva e-label mor gage-backed securi ies— hose securi ies issued by inves -men banks and o her priva e nancial ins i u ions, which are no ied o he ederalgovernmen or i s a ordable housing policies. Te implica ion is ha Fannie andFreddie were crea ing mos o he demand or hese priva ely issued securi ies, whichmos analys s blame or he housing crisis. Tis claim ac ually ge s o he core o heproblem wi h Wallison’s argumen .

I is o course well known, including by heir regula or,he Federal Housing Finance Agency , ha Fannie and Freddie were responsible or some ac ual high-risk loans,primarily hrough heir purchases o high-risk priva e-label securi ies or heir inves -men por olio as well as hrough purchases o ac ual high-risk loans or heir coresecuri iza ion business. Ye as Wallison knows, his ac ual high-risk ac ivi y by Fannieand Freddie was nei her su cien in volume nor did i come a he righ ime o per-suasively argue ha he wo mor gage nance gian s drove he surge in ac ual high-risk lending we saw in he 2000s.

Did Fannie and Freddie buy high-risk mor gage-backed securi ies? Yes. Bu hey did no

buy enough o hem o be blamed or he mor gage crisis.2

Highly respec ed analys s who have looked a hese da a in much grea er de ail han Wallison, Pin o, or mysel ,including henonpar isan Governmen Accoun abili y O ce , heHarvard Join Cen eror Housing S udies , heFinancial Crisis Inquiry Commission majori y , he FederalHousing Finance Agency , and vir ually all academics , have all rejec ed he Wallison/Pin o argumen ha ederal a ordable housing policies were responsible or he proli -era ion o ac ual high-risk mor gages over he pas decade.3

Indeed, i is no ewor hy ha Wallison’s ellow epublicans on he Financial CrisisInquiry Commission—Bill Tomas, Kei h Hennessey, and Douglas Hol z-Eakin, all o whom are s aunch conserva ives—rejec ed Wallison’s argumen as well.

Tis is why nei her Wallison nor Pin o ry o make he argumen ha he ederal govern-men was responsible or he proli era ion o ac ualhigh-risk lending ha occurred inhe pas decade, as such a claim would be quickly rejec ed as ridiculous. Ins ead, wha

Wallison and Pin o do— he key o heir argumen —is o expand he de ni ion o “highrisk” and “subprime” o include new ca egories o loans no ordinarily unders ood o be

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high risk. Tis expansion o “high-risk” lending is essen ial o he Wallison/Pin o argu-men ha he mor gage crisis was caused by ederal a ordable housing policies.

Poin ing o he ac ha Fannie and Freddie bough some ac ual high-risk priva e-labelsecuri ies is hus irrelevan and does no address he claim ha Pin o’s research reliescri ically on an improper and unjus i ed expansion o “high-risk” lending.

Claim: “Faulty Conclusions” fails to criticize all of Pinto’s “high-risk” categories of loans

Ano her Wallison cri icism o “Faul y Conclusions” is ha i mainly cri icizes only wo ca egories o Pin o’s “high-risk” loans. Te rs ca egory is hose wi h a FICOscore be ween 620 and 659, or FICO 620-659 loans in mor gage indus ry parlance.Te second ca egory is high-risk loans wi h a loan- o-value ra io o more han 90percen , or L V>90 loans. In par icular, Wallison akes excep ion o he ac ha hiscri icism does no “men ion he mor gagesbelow620 FICO … [o which] 14.4 per-

cen were also seriously delinquen .”4

Tere are wo reasons I did no address hese par icular loans o borrowers wi h FICOscores under 620 in “Faul y Conclusions.” Firs , his is ac ually a rela ively insigni canca egory o loans or Fannie and Freddie due o he heigh ened regula ion or risk hey enjoyed as specially char ered en i ies, which barred hem rom aking on excessiveamoun s o risk (al hough his regula ion was clearly insu cien ).

Loans made o borrowers wi h FICO scores under 620 accoun or only $60.8 billiono he $1.077 rillion in “high-risk” loans Pin o claims are held by Freddie Mac,5 and a

similarly small percen age o he “high-risk” loans Pin o claims are held by Fannie Mae.6

As a resul , whe her or no one cri icizes Pin o’s descrip ion o hese loans as “high risk”is imma erial. Adding hem o FICO 620-659 loans held by Freddie Mac yields us aserious delinquency ra e o 11.4 percen , compared o he 10.04 percen serious delin-quency ra e I lis ed or FICO 620-659 loans.7

In o her words, whe her one cri icizes or does no cri icize Pin o’s charac eriza ion o loans made o borrowers wi h FICO scores under 620 as “high risk” is irrelevan . I doesno change he basic poin ha hese loans look ca egorically di eren rom ruly high-risk loans, which were origina ed almos en irely or priva e-label securi iza ion andsu er a serious delinquency ra e o more han 28 percen .

Te second reason I did no cri icize Pin o’s ca egoriza ion o home mor gages wi hFICO scores below 620 as “high risk” is because, unlike wi h L V>90 and FICO 620-659 loans, here is ac ually some legi ima e deba e over whe her his par icular charac-eris ic should be considered high risk.8

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Con rary o Wallison’s asser ion, Pin o’s unique con ribu ion o he deba e over hecauses o he nancial crisis was no he discovery ha Fannie and Freddie had aken onsome legi ima ely high-risk loans. As I no e above, his ac is well known,including by Fannie and Freddie’s regula or. a her, Pin o’s unique con ribu ion o he deba e washe crea ion o a new “high risk” ca egory o loans, one which combines ac ual high-risk loans, which mos everyone agrees are high risk, wi h new ca egories o loans ha very

ew people hink o as high risk.

o adap he analogy Wallison uses in calling subprime mor gages bananas and Al -A mor gages peaches , wha Wallison is doing is o ering up a medley o vege ables andrui s, prepared by Che Pin o, and calling i a rui salad. And o ry o prove i is a ruisalad, Wallison will ypically poin ou ha i has charac eris ics o rui , such as delin-quency ra es, which are higher han o her ypes o loans.9

Wha “Faul y Conclusions” demons ra ed, which is represen ed in he char above, isha his rui salad includes lo s o vege ables, including corn (L V>90) and asparagus

(FICO 620-659), which do no have he charac eris ics o rui . Moreover, he inclu-sion o hese vege ables is in egral o Pin o’s conclusion ha a ordable housing policiescaused he crisis.

a her han de end Pin o’s inclusion o loans ha are no high risk in a “high-risk”ca egory, Wallison chooses o cri icize my omission o oma oes (FICO<620) rom my analysis. O course, here are some legi ima e reasonso claim ha a oma o is a rui , jus as here are legi ima e reasons o claim ha mor gages wi h FICO<620 loans arehigh risk. Bu his s ill begs he ques ion o whe her here is any legi ima e basis o labelcorn (L V>90) and asparagus (FICO 620-659) as rui s.

More questionable numbers from Pinto

While Wallison avoided responding o he signi can evidence o ered in “Faul y Conclusions” showing ha Pin o’s “high risk” loan ca egories o L V>90 and FICO620-659 loans are no ac ually high risk, Gene Eps ein, he economics edi or a Barron’s,does ry o ake on his claim wi h a litle bi o help rom Pin o. Speci cally, Eps eincri icizes “Faul y Conclusions’” comparison o he delinquency ra es or L V>90 andFICO 620-659 loans wi h he Mor gage Bankers Associa ion’s Na ional Delinquency Survey’s 6.8 percen delinquency ra e or prime con orming loans. elying on calcula-ions per ormed by Pin o, Eps ein argues ha he MBA’s ca egory o prime con ormingloans ac ually con ains many “high-risk” produc s:

Tose “con orming” mor gages wi h he 6.8 percen ra e include, or example, a lo o loans wi h below-660 FICO scores. When I asked Pin o o back all his high-risk ca -egories ou o he MBA da a on “prime” loans, he ound a 3.4 percen delinquency ra e,or hal as grea as 6.8 percen .

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Essen ially, Eps ein claims ha prime con orming loans are no ac ually he sa es possibleca egory o mor gages, and so using hem as a benchmark leads o misleading conclusions.

Tis sounds convincing bu i ’s wrong or wo reasons. Firs , i is impossible o “back ou ” Pin o’s high-risk ca egories rom he MBA’s delinquency numbers because heMBA doesn’ ac ually record i s delinquency da a based on he cri eria used by Pin o. As

MBA Vice Presiden o esearch and Economics Mike Fra an oni emailed o me:

“In our Na ional Delinquency Survey, we receive aggrega ed da a om servicers, no loan level da a. Servicers iden i y heir book or por ions o heir book as prime or sub- prime, we do no speci y a speci c FICO score cu of. For ha reason, here is no means or us o “back ou ” high-risk ca egories om prime loans.”

Moreover, as Fra an oni explained, under he MBA’s me hodology, prime adjus able-ra e mor gages, which were su ering a 13.75 percen delinquency ra e, included somehigh-risk produc s (mos no ably op ion A Ms), bu prime xed-ra e mor gages, which

were su ering a 5.98 percen delinquency ra e, did no include any o Pin o’s “high-risk”loans. Said Fra an oni:

“Te prime FRM ca egory does no include any [Pin o] high-risk produc s, bu i alsoexperienced a signi can increase in delinquency and oreclosure ra es due o he spikein unemploymen and he s eep drop in home prices.”

In shor , no only is Pin o claiming ha he can “back ou ” his numbers rom he MBA’sdelinquency survey—some hing he MBA says i canno do i sel —bu Pin o’s “backedou ” delinquency ra e o 3.4 percen or xed-ra e and adjus able-ra e prime mor gages

is ar lower han he MBA’s delinquency ra e o 5.98 percen or xed-ra e prime mor -gages, which con ain nei her Pin o’s “high-risk” mor gages nor adjus able-ra e mor -gages (which have de aul ed a much higher ra es han xed-ra e mor gages).

Clearly, Pin o is relying on some very large and uns a ed assump ions here o “back ou ”he MBA’s numbers.

Te second reason Eps ein is wrong abou Pin o’s numbers is ha he’s missing he key poin being made in his comparison, which was ha he unique ca egories o “high-risk” loans used by Wallison and Pin o con ain large numbers o mor gages ha are noac ually high risk (and which could no be legi ima ely unders ood o have caused hemor gage crisis), as refec ed by heir rela ive delinquency ra es.

Te poin o his comparison was no , as Eps ein seems o assume, o imply ha L V>90and FICO 620-659 mor gages are he sa es loans possible, bu simply o poin ou ha ide es all logic o call hese loan ca egories “high risk.” As such, i does no mater whe herPin o can or canno back ou a sa er version o “prime con orming” han he MBA.

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a her, he impor an ques ion is whe her and o wha ex en heseloan ca egories can jus i ably be called “high risk.” Looking a his roma di eren perspec ive, Pin o’s newly inven ed “high-risk” loans haveserious delinquency ra es ha are essen ially iden ical o he na ionalaverage o 9.11 percen (again rom he MBA’s Na ional Delinquency Survey or Q2 2010). (see char )

I is di cul o unders and how hese loans are “high risk” unless oneclaims ha all U.S. mor gages are “high risk,” in which case one wouldexpec o see a much higher na ional delinquency ra e, par icularly given he his orically high housing marke price declines and unem-ploymen levels we have experienced.10

Chefs Wallison and Pinto overlooked a couple of ripe fruits

Clearly, he Wallison/Pin o argumen depends cri ically on an enor-

mous expansion o he de ni ion o “high-risk” lending. As such, i is very curious ha hey do no include wo ypes o loans ha are signi can ly riskier hanL V>90 and FICO 620-659 mor gages, based on he delinquency da a, speci cally:

• Loans ha were origina ed or priva e-label securi iza ion• Loans wi h adjus able ra es11

Loans origina ed or hese wo ca egories have higher delinquency ra es han L V>90and FICO 620-659 loans, and ye Wallison and Pin o ignore hem.

Why? One answer may be ha hese loans were overwhelmingly origina ed or priva e-label securi iza ion,12 a ac which direc ly con radic s Wallison’s pre erred argumen hahe governmen was o blame or high-risk mor gages.

Whe her or no he omission o hese ypes o loans rom heir expanded de ni ion o “high-risk” mor gages was ideological or no , i seems airly inexcusable. Coun less ana-lys s,including he s a o he Federal Crisis Inquiry Commission where Wallison was acommissioner, have no ed ha mor gages origina ed or priva e-label securi iza ion andmor gages wi h adjus able ra es per ormed very poorly.

Conclusion

I is un or una e ha Wallison, who is a prominen conserva ive voice on nancial mar-ke s issues, consis en ly ails o apprecia e he deep problems wi h he Pin o researchhe has adop ed as his own. As I poin ed ou in “Faul y Conclusions,” Pin o’s research iscri ically dependen on he broad and unjus i ed expansion o he de ni ions o “sub-prime,” “Al -A,” and “high-risk” loans.

The real data on delinquent mortgages(updated)

Serious delinquency rates on Pinto high-risk loans vs. national average, conforming, andactual subprime loans, Q2 2010

10%

5%

0%

20%

15%

30%

25%

Pinto highrisk: Freddie620-659 FICO

Pinto highrisk: Freddie

> 90 LTV

8.45%10.04% 9.11%

Actsubpr

28.

S e r i o u s

d e

l i n q u e n c y r a

t e

Type of mortgage

ConformingNationalaverage

6.8%

Source: Mortgage Bankers Association, “National Delinquency Survey Q2 2010” (2010Freddie Mac, “Second Quarter 2010 Financial Results Supplement” (2010).

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10 Center or American Progress | Why Wallison Is Wrong About the Genesis o the U.S. Housing Crisis

Moreover, and perhaps refec ing his ideological bias, Pin o ails o include wo loancharac eris ics ha are ac ually more indica ive o risk han his newly added “high-risk”loans—whe her a loan has an adjus able ra e and whe her a loan is origina ed or priva e-label securi iza ion. Tese loans are, o course, overwhelmingly atribu able o he priva esec or. And wi hou ques ion hey are he genesis o he U.S. housing and nancial crises.

David Minis he Associa e Direc or or Financial Marke s Policy a he Cen er or American Progress. He leads he ac ivi ies o he Mor gage Finance Working Group, a group o leading exper s, academics, and progressive s akeholders in housing nance rs assembled by heCen er or American Progress in 2008 o beter unders and he causes o he mor gage crisisand crea e a amework or he u ure o he U.S. mor gage sys em.

Endnotes

1 Peter Wallison, “The True Story o the Financial Crisis—Responding to Criticism,” The American Spectator Blog, May 24, 2011,

available at http://spectator.org/blog/2011/05/24/the-true-story-o -the- nancia .

2 Jason Thomas and Robert Van Order o George Washington University explicitly reject the claim that the afordable housing goalswere a major driver o demand or subprime MBSs, or at least three reasons. First, Fannie and Freddie were only buying AAA-rated securities, which means that others were buying the riskier, lower-rated subprime securities. Second, unlike the lower-ratedtranches, AAA-rated tranches had very short durations, which means that to a l arge degree, the two mortgage nance giants’purchases o subprime securities were simply replacing their own expiring holdings. Third, Fannie and Freddie only purchasedmortgage-backed securities, not derivatives such as collateralized debt obligations or credit de ault swaps. Thus, looking at theirpurchases o subprime mortgage-backed securities actually signi cantly overstates their share o the total ofering o subprimesecurities (since synthetic collateralized debt obligations and credit de ault swaps could mimic the risk/reward oferings o mortgage-backed securities). Moreover, as Thomas and Van Order point out, the act that synthetic CDOs and CDSs could be cre-ated without originating new loans essentially meant that the supply o subprime securities was in nite.

3 This blame primarily goes to p rivate-label securitization, which, as I noted in “Faulty Conclusions,” is responsible or only 13 per-cent o all outstanding loans but 42 percent o all seriously delinquent loans. Conversely, Fannie and Freddie are responsible or57 percent o all outstanding loans but only 22 percent o all seriously del inquent loans. I , as Wallison and Pinto claim, Fannieand Freddie were responsible or 12 million high-risk loans (o 27 million total high-risk loans), then one wou ld expect to see anexponentially higher delinquency rate or Fannie and Freddie, and a much larger share o delinquent loans.

4 One other undamental problem with the Wallison/Pinto argument that I did not raise in “Faulty Conclusions” is tied to this point.

In general, the riskiness o a particular loan is not integrally tied to a single characteristic but rather to multip le characteristics, or“risk layering.” Loans with low down payments may or may not be high risk, depending on their other attributes. Loans with lowdown payments, made to borrowers with bad credit histories and who have adjustable teaser rates, are truly high risk, which iswhy they are categorized as high risk by lenders. The underlying assumption o Pinto’s work is that judging the riskiness o loansbased solely on single loan characteristics is more accurate than lender determinations o risk. This assumption not only ignoresone o the key principles o loan underwriting; it is, as I point out in “Faulty Conclusions,” contradicted by the delinquency data.

5 Edward J. Pinto, “Sizing Total Federal Government and Federal Agency Contributions to Subprime and Alt-A Loans in U.S. FirstMortgage Market as o 6.30.08,” Exhibit 2, p. 8–10, available at http://www.aei.org/docLib/Pinto-Sizing-Total-Federal-Contribu-tions.pd ; “Freddie Mac’s Second Quarter 2008 Financial Results,” p. 26, available at http://www. reddiemac.com/investors/er/pd /slides_080608.pd . Using Freddie Mac’s Q2 2008 nancial results, Pinto combines Freddie’s Alt-A loans with all o the diferentcategories that comprise his newly invented “Alt-A by characteristic” and “subprime by characteristic,” and then multiplies theseby 80 percent to account or overlaps between the diferent categories. Freddie Mac lists $76 billion in loans made to borrowerswith FICO scores under 620. Applying the same 80 percent discount actor to this $76 billion leaves us with $60.8 billion, which is5.6 percent o the $1.077 trilli on in total “high-risk” loans Pinto calculates are held by Freddie Mac.

6 $101.92 billion.

7 “Freddie Mac’s Second Quarter 2008 Financial Results,” p. 26. Freddie Mac lists a 14.44 percent delinquency rate on $64.9 billion($9.37 billion) in mortgage with FICO scores below 620, and a 10.04 percent delinquency rate on $141.5 billion ($14.21 billion)in mortgage with FICO scores o between 620 and 659. Merged together, Freddie has a 11.44 percent delinquency rate on theseloans ($23.58 billion seriously delinquent out o $206.4 billion total).

8 For the same reasons, I did not criticize Pinto’s categorization o option ARMs, actual subprime (what Pinto calls “sel -denominated” subprime), or actual Al t-A (what Pinto calls “sel -denominated” Alt-A) loans as “high risk.”

9 This is done through a chart provided by Wallison, available at: Joseph Lawler, “The True Story o the Financial Crisis -- Respondingto Criticism,” The American Spectator Blog, May 24, 2011, available at http://spectator.org/blog/2011/05/24/the-true-story-o -the- nancia ; Peter J. Wallison, “Financial Crisis Inquiry Commission, Dissenting Statement” (Washington: American EnterpriseInstitute, 2011), p. 462, available at http:// cic-static.law.stan ord.edu/cdn_media/ cic-reports/ cic_ nal_report_wallison_dissent.pd . The chart describes a delinquency rate or Fannie and Freddie “high-risk” loans o 17.3 percent and 13.8 percent, respec-tively. There are serious problems with this chart as well. First, Wallison and Pinto use a 30-day delinquency rate rather than thenine-day serious delinquency rate typically used by serious most ob jective analysts. This, o course, has the efect o signi cantly

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11 Center or American Progress | Why Wallison Is Wrong About the Genesis o the U S Housing Crisis

increasing the stated delinquency rates. For example, Fannie Mae had a serious del inquency rate on these types o loans o only9.36 percent, as compared to the 17.3 percent listed. Moreover, the decision to use 30-day delinquency rates rather than seriousdelinquency rates is a very curious one, because all o Wallison and Pinto’s listed data sources (Lender Processing Services, FannieMae, Freddie Mac) provide serious delinquency rate data, but only LPS ofers 30-day delinquency rate data. As a result, Wallisonand Pinto had to “convert” Fannie and Freddie’s serious delinquency rate into “estimated” 30- day delinquency rates. Nor doWallison and Pinto provide a description o the methodology used or assumptions applied in making this conversion. No suchconversion would have been necessary i they had used the standard 90-day delinquency rates. Wallison and Pinto could simplyhave provided the serious delinquency rates, but this may not have provided the numbers they pre erred to see.

10 By way o comparison, the delinquency rate or urban home mortgages in 1934 was about 50 percent. See: David C. Wheelock,“The Federal Response to Home Mor tgage Distress: Lessons rom the Great Depression,” Federal Reserve Bank of St. Louis Review 90 (3) (2008): 138–139, available at http://research.stlouis ed.org/publications/review/08/05/Wheelock.pd . As Wheelock notes,“comprehensive data on mortgage delinquency rates do not exist or the 1930s.” The delinquency rate or urban homes was

compiled through a study o 22 cities by the Department o Commerce.

11 See, or example: Federal Housing Finance Agency, “Data on the Risk Characteristics and Per ormance o Single-Family MortgagesOriginated rom 2001 through 2008 and Financed in the Secondary Market” (2010), available at http://www. h a.gov/web-les/16711/RiskChars9132010.pd .

12 O course, all loans originated or private-label securitization were originated or private-label securitization. Adjustable-rateloans were disproportionately attributable to PLS as well. Ibid, p. 3. (“Enterprise-acquired mortgages were predominantly xed-rate loans. Such loans comprised 88 percent o all Enterprise-acquired mortgages originated between 2001 and 2008. … mort-gages nanced with private-label MBS were predominantly adjustable -rate loans. Such loans comprised 70 percent o mortgagesnanced with private-label MBS originated between 2001 and 2008.”)