Transcripts For CSPAN2 Discussion Focuses On The 2008 Financ

Live coverage underway now here on cspan2. [inaudible conversations] [inaudible conversations] [inaudible conversations] good afternoon. I am the executive director of the center for law economic the finest here at gw. The senate as a think tank is on to be a focal point in d. C. For the study integrated major issues, this is a law, entrepreneurship. We are excited about todays program. We have the best, so the best experts coming with different perspectives to discuss the use housing cost the 2000 financial crisis, what is the right policy for the future course for all audience members we are live right now on cspan2. So just so you know so they can ask questions, you will be broadcast to the world. Before we continue i would like to introduce you to the dean who is elderly Family Public service at gw law school. Thank you to ill be brief. I just want to express my thanks to all the different Peter Wallison with whom i agree on many things but disagree on many others. I bought this book. I read it. It very interesting and very challenging, and under will have a wonderful day today. Peter, thank you again for coming. Thank you. And now the moderated a real modern by colleague, professor art wilmarth. Thank you and welcome everybody. We are delighted to have you. I think we are very stimulated an interesting discussion of two issues, i guess like the god we are looking backwards and looking forward so were looking first backwards at the financial crisis and asking the question of whether u. S. Housing policy before the crisis played an Important Role in essentially sowing the seeds of the crisis. And then secondly we are going to be asking the question of what should be the u. S. Housing policy Going Forward. Im not going to anticipate the commentators remarks but obviously all of you are aware that fannie mae and freddie mac are in a quasilimbo state at the moment. There are essentially controlled by the federal government through conservatorships and there is periodic continuing debate about what the future of those organizations should be, or what any alternative organization might be in terms of federal participation in the Mortgage Market. I do like to introduce our three speakers as dean morrison mentioned we we are indeed greatly privileged to have all three of these speakers here today. They are nationally recognized experts on the Mortgage Market and on Financial Regulation more generally im also delighted to welcome all three of them back to gw law school. All of them have been here for some of our power programs and we are very grateful that they have come back once again. To our first speaker will be Peter Wallison. Peter is a codirector of the American Enterprise Institutes Program on financial policy studies and he is a longtime expert, analyst and commentator on financial regulatory matters generally. The current book arises it in part out of what that he did on the Inquiry Commission established by congress to analyze and comment on the causes of the financial crisis. Our second speaker is damon silvers. He is the director of policy and special counsel at the aflcio. He joined as general counsel in 1997. The treasury departments Financial Research Advisory Committee and the Oversight Board Standing Advisory Group and he served as the Oversight Group for the troubled asset relief program. Everybody knows it as part. Important different. He was involved with that from 2008 until 2011. He also had an Important Role in analyzing and looking at the causes of the financial crisis. He worked for two different unions. Our third speaker is kenneth noted. He is a professor of economics at the University North carolina greensboro. Its published extensively on the Mortgage Market. I would say he is the preeminent [inaudible] of the Mortgage Market from original in the. [inaudible] his co editor and contributor to housing and Mortgage Market in Historical Perspective. Both published by the university of chicago. He received his phd in economic history from the university of wisconsin at madison. Again, the order of our speakers will be peter, damon and ken. Then we will have a brief period for colloquy and we will open it up for q a from the audience. When we come to q a, because the program is being broadcast, please allow our assistant with the microphone to reach you before you ask your question. Okay. Without further ado, peter, please kick us off. Thank you very much. I also want to thank alan larson for working to set this up. Ive been talking to him for quite a while to see if i could get an opportunity to speak with him and this was it. In any event, im going to talk mostly about my book and if we talk about some other things afterward, i would be happy to participate in that conversation too. Hidden in plain sight is the name of the book. It grew out of my dissent from the National Crisis Inquiry Commission, it may surprise many of you to know that much of the material that the commission had assembled was not actually made available to the commissioners and so i wrote my dissent without that. When i finally did see much of the materials that the commission had assembled, i was able to write a book which fully supported but i put in my dissent but with a lot more. I thought i had more useful material. Lets start with the whole point of this. Why did we have a financial crisis . Everybody can agree that the financial crisis was caused by the fact that we had, in our video toll system, too many lowquality, subprime or otherwise week loans, mortgage loans. Residential mortgage loans. That is what we all agree on. The question is why did we have so many loans in our Financial System like that. Im going to now, i hope this thing actually works, im going to try to explain why this happens. What you see on your screen now, on the screens is where things stood on june 30, 2008 just before the financial crisis if we assume the crisis began with the default, with bankruptcy of lehman brothers. On june 30, 2008, this is what the situation looked like for subprime and other high risk loans. On the left is the federal government that had 76 of all of those loans. The blue is fannie mae and freddie. Above that the red is fha and above that a number of other Government Agencies like the department of agriculture and veteran affairs, all of what participated to some degree in the Mortgage Market. On the right is the private sector. What you see immediately when you look at this is that the government had a major role in buying be lowquality in risky mortgages. In fact, you might say that the government created the market for those mortgages. After all, they were the principal buyer and the holder of it. Now how serious were these mortgages . In terms of their effect on the holders . This is an excerpt from a Credit Profile published by fannie mae in june 2009. I was just about a year later. They have had a chance at this point to take a look at what the losses came from. This will show you that they had about 800 30,000, almost 838 billion subprime dollars in subprime or otherwise week or highrisk mortgages. If you look at the line below, it shows in 2008, 81. 3 of their losses came from these mortgages that shows two things, first the government was a major buyer who created the market for these mortgages and when these mortgages were held by the government, they they were the principal source of the lawsuit that occurred in our Financial System. Why is all of this important . Its important because the response to the way the financial crisis has been perceived produced some very significant legislation, the dodd frank act. The way the Financial Crisis Commission described the financial crisis was that it was the fault of the private sector. Banks and other Financial Institutions, according to them were insufficiently regulated and had insufficient Risk Management and as a result, for reasons that we are not actually in my mind fully explained but for whatever reason, they were the ones that caused the financial crisis. The government was really not involved at all and if you look at the report of the Inquiry Commission, you will see that they say fannie mae and freddie. Were really not important. Real substance of the crisis came from the fact that these banks and other Financial Institutions essentially went crazy. They began to make mortgages they had never made before and as a result, they failed and that was the substance of the financial crisis. The Government Agencies that help these did not cause the financial crisis. Pat is a misunderstanding of how the mortgage system works because to the extent that a mortgage fails, in any community, and drive down the price throughout the community. As a result, even if the result is suffered by the taxpayers because of frannie mae and freddie. Or some other Government Agency that bought this was holding it, the failure of fannie and the failure of the mortgage causes failures throughout the time. As you have these failures we are going to have many more lawsuits as a result of these weak and highrisk mortgages. When you blame the financial crisis on the private sector because they have not been adequately regulated, what you get is some significant regulations of the Financial System. The socalled dodd frank act. What we are looking at now is a comparison of recovery from a recession. Can see that the red line, eight years old now which is below the average recovery which is the average of all recession. An incorrect diagnosis rather than on what the government did produced legislation that has punished all of us in the economy because of a very strict regulations that have been put in place. As a result, how does this happen. Fannie mae and freddie. Were two very large government backed mortgage companies. They were, by the year 2000 even before that, the dominant players in the u. S. Mortgage market. They were buying about 50 of all mortgages in the United States. In 1992, congress adopted something called the Affordable Housing goals. The black line and what youre looking at here are the goals as they increase over time. Initially they required that one fannie and freddie bought mortgages, 30 of all the mortgages they bought had to be made to people who are at or below income where they live. However, housing and urban development was given authority to increase those requirements, and what you see here in the black line are the increases over time. It went from 30 , 40 and by 2000 it was 50 . By 2008 it was 58 . That meant anytime fannie and freddie bought mortgages, 56 of all the mortgages they thought had to be made to people who were at or below the Median Income. Fannie and freddie were known for one thing before 1992, and that is that they would only accept prime mortgages. What the prime mortgage . Thats a mortgage with a down payment of 10 20 made to a person who has a credit or which is not a great credit score but its a solid credit score. That is if that person has been paying his or her obligations over time for the third element was whats called the debt income ratio. That is after the mortgage closed, your debt or no more than 38 of your income. If you had no more than 30 of that including your mortgage, that that was part of a prime mortgage. Up until 1992, thats how frannie and freddie conducted their business. By 1992, they persuaded that this was keeping many people in the United States from buying homes. Especially lowincome people. For that reason, the affordable Affordable Housing goals were adopted requiring fannie and freddie to buy mortgages made to people who are at or below Median Income. As they rose over time, fannie and freddie found the red in the green lines are fannie and freddie, they found it was very difficult to continue to buy prime mortgages when they were required to by increasing numbers of mortgages made to people who were below Median Income. It is very hard to find mortgages when more than 50 of all all of the loans you are buying are below Median Income. The obvious result is that fannie and freddie started to reduce their underwriting standards. In the mid 19 90s they started to reduce their down payment requirement and as they proceeded through the years, they reduce their credit scores, they increased debt to income ratios because otherwise they couldnt meet these government requirements. As we see, by 2008, 56 of all mortgages in the top line here had to be made to people who were at or below the Median Income and fannie and freddie had reduced their standards substantially. The two other categories below that had to do with a very low income people and underserved areas which were largely minority areas. We will just focus on the top level, and that shows a very substantial increase over time in the mortgages that had to be purchased by originators and others that were made to people that were at or below Median Income, where they lived. How will a reduction in underwriting standards have an effect on the economy . If you think about it in terms of down payment, if the requirement to buy a home is a 10 down payment and a person has 10000, he or she can buy 100,000 home. If the under writing requirement is reduced to 5 , then the same 10,000 can buy a 200,000 a 200,000 home. What does that mean . It puts great upward pressure on home prices and thats what happened over time. In addition, a person who is going to buy it 100,000 home with a 10000 down payment is now a much weaker credit because he or she has now bought a 200,000 home with the same 10,000 down payment which means instead of borrowing 90000, he or she has borrowed 190,000 has much we weaker credit for all of his or her other obligations including the mortgage. The most important thing is to look at this chart and see what the effect of this upward pressure on Housing Prices was because this is prepared by Professor Robert schiller at yale and it shows that about 1997 and 2007 we had the biggest Housing Price bubble we have ever had in our history. When, in 2007, that bubble began to deflate, we had the financial crisis. There comes a point in any housing bubble where no matter how recessionary the loans get, people cant afford to buy a new house. So, people stopped buying houses and the bubble reached the top and you have a serious downturn and losses throughout the economy. This particular chart shows the extent to which those losses occurred and how quickly they occurred. This happens to be only a chart that shows what was happening in the mortgaged backed security market. This is a pretty good representation of what was happening to mortgage crisis throughout the country. What we see happening here is that the government had policies which require wired fannie and freddie to reduce their underwriting standards over time. As they reduce their standards, that created pressures, upward pressures on home prices creating a bubble and eventually the bubble came to an end and we had a financial crisis. It is on the strength of that that i believe the financial crisis that we suffered in 2008 was the result of Government Housing policy, not the result of the private sector going crazy. If you think about it, fannie and freddie were the key buyers in this market. They were buying at least 50 of all the mortgages that were made in the United States. When a principal buyer in any market reduces the quality of the product that it was looking for, the market will supply that. Now, now, you can say ethically, the banks and others should not have responded to the request of fannie and freddie for these lowquality mortgages. They shouldve said no i will not make these mortgages. Thats a little but too much to expect. In any market, when a major major buyer is looking for a lowquality asset, that asset will be supplied by the people who create that asset and that is the mortgage originators. In 1992, there were very few highrisk quality mortgages being made. It was about a 10 market at the time simply because there were no buyers. Fannie and freddie would not buy those mortgages so people didnt make them. As their underwriting standards get further, more and more of them were made over time. It drove up Housing Prices and resulted in the crash of 2008. Thank you very much. [applause] good afternoon. As you were told, im damon silvers. Im the policy director. That is not really why im here. I was involved in the oversight of the asset relief program. We have to say things about the bailout but we didnt really do anything. Peter and i have been engaged and peter has the edge on me. He has written the book on it. The key thing, i disagree with the framing of the question. There is a different way to look at it rather than the private sector at fault.