FNMA may have always had only a market to market issue and not a long term cash flow issue.

And its always been a public/private partnership with govt’s role that of the funding model, so I never saw govt funding as a ‘bailout’

The public purpose of FNMA is to get lower income earners in their own homes, which it has successfully done for maybe 50 years for millions of American owners and their families.

The ‘real’ cost of the program is the alternative use of the actual goods and services devoted to this mission.

(Just me, but seems like it’s been a net gain.)

Note that banking is a public private partnership as well, with govt providing the funding, directly or indirectly, and private capital pricing the risk. So for me, govt provided liquidity for banking isn’t a ‘bailout’ but a necessary and continuous condition, all presumably serving public purpose.

Fannie Mae Won’t Seek Aid After Reporting $2.7 Billion Profit

By Clea Benson

May 9 (Bloomberg) — Fannie Mae, the biggest backer of U.S. home loans, said it won’t seek Treasury Department aid after reporting net income of $2.7 billion for the first quarter.

The Washington-based company, which has operated under U.S. conservatorship since it was seized in September 2008, cited lower credit-related expenses, a decline in serious delinquency rates and a drop in its inventory of owned properties as contributors to the improvement, according to a statement released today. The company has drawn a total of $117.1 billion in aid while under government control.

The first-quarter profit reflected a “less significant decline in home prices,” the company said in a Securities and Exchange Commission filing.

66 Responses

  1. “The ‘real’ cost of the program is the alternative use of the actual goods and services devoted to this mission.”

    I wonder how much that cost is, considering that if people don’t buy, they have to rent. Certainly, it puts an upward pressure on home prices, but one has to consider owner-occupied/vs investor-owned scenarios there too. The former would enjoy better financing terms and more likely to “fall in love with the dirt”, the latter more likely to have more skin in the deal, be more pragmatic about the purchase (although that went to hell with ninja mortgages).

  2. I’m not 100% sure that encouraging owner occupation is a “net gain” (to use Warren’s phrase). Renting is popular in Germany: in fact the rate of owner occupation in Germany is the lowest in Europe. I don’t know of any horrendous social consequences of that for Germany.

    As to the “real cost”, encouraging owner occupation presumably results in more being invested in housing, and less being spent on other forms of investment and less on other consumer goods.

    1. @Ralph Musgrave,

      It’s an interesting question; many factors involved. I suppose the hang time of the currency (before it gets sequestered in savings)is one of them. Another is pressure on wages. Homeowners build equity (if they don’t take it back out to pay off other loans), but what would be the net savings vs. what a renter would save?

      1. in the first instance the deficit spending adds net financial assets as dollar deposits, which is ‘savings’
        that ‘savings’/dollar deposit is then either spent or not spent.

      1. @MamMoTh,

        Seems like there would be a difference in how the money is spent and saved. My guess is that Home Depot (along with mom & pop hardware stores) would have fared rather differently if most folks were renters.

        Now, if you back off to the macro level, I guess it just becomes a difference in distribution of savings.

      2. @MamMoTh,

        “why would investment in housing depend on who owns the house?”

        When a subsidised buyer (or any new buyer) enters a market, total sales normally rise. Sales won’t normally rise by the full amount that the new buyer purchases, because the new buyer will displace some existing buyers. But absent some very strange elasticities, sales will definitely rise somewhat.

      3. @MamMoTh,

        “why would investment in housing depend on who owns the house?”

        Maintaining a home is not only a lot of work, but it is actually a specialized skill. Arbitrary subsidization of homeownership entices or entraps people into doing a job that they otherwise might not be qualified for (in terms of skill, temperament, desire, etc). The implicit tax benefits which accrue to do-it-yourself-ers only exacerbates these inefficiencies. It is better that a skilled computer programmer not be “tricked” into spending his time renovating his bathroom. If he really wants to do it (all things considered), fine, but he shouldn’t be incentivized to do it, by either the tax code or Fannie Mae.

      4. @ESM, Jimmy Carter came to my city and built some free houses, I personally went up to him and asked president carter how could I get a free house too, that those new free houses were much nicer and more advanced than the older place I was living in at the time. He said it was based on need, I said I don’t understand, the USA has the most powerful technologically advanced and most productive economic engine the world has ever seen, would it not be possible for “the people” to give a house to “the people?” Why aren’t we rebuilding all the cities with all our latest stargate atlantis technology?

        I see these old people, war veterans, disabled, less greedy blue collars – living in rundown shacks, some not much more than oversized garbage cans reaking with sewage, our country should be able to do better. The USA has the resources to give everyone a nice place to live, it is shameful so many live so poor in the most advanced nation ever to exist. The Amish make us look like cavemen socially.

        A lot of New Orleans was rebuilt in a relative short period of time, why not implement this all over the country, why does it take a natural disaster to rebuild a city to the newest and latest that our society can deliver? Why is detroit not importing third worlders from all over and saying here take this part of the city and make it new instead of bulldozing and breaking perfectly good windows? Failure from the top…. All it would take is a little planning and leadership and all our cities could be new and modern instead of wore out rust belts…

      5. @MamMoTh,

        It seems this discussion misses the fact that every house has an owner.

        So why would total investment in new housing depend on who is the owner?

      6. @MamMoTh,

        Investors would go for a more manageable portfolio, so higher density? Investors wouldn’t get the same financing as a first time buyer, needs to have more skin in the game. Investors try not to fall in love with the dirt, so less willing to pay a higher price if it doesn’t pencil out.

        Once again, if you bring in ninja loans, the squirrel hits the fan wrt the above points.

      7. @Warren Mosler,

        No income, No job, No assets. Neutron loans. Stated income loans and the the like. “Investors” stating that the property would be owner-occupied, when it wouldn’t. Loans based on poor lending practices in general.

      8. ok, understand your definition. most of that was fraud perpetrated by loan officers on commission based on volume.

        and, of course, bank regulators and supervisors usually too feeble minded to know a good loan from a bad loan in the first place.
        i happen to have met several of them with each audit of my bank.

    2. @Ralph Musgrave,

      “I’m not 100% sure that encouraging owner occupation is a “net gain” (to use Warren’s phrase).”

      I would say it this way: it was probably a “net gain” until it wasn’t. And then it became a monstrous net loss.

      That’s one of the problems with government programs (or government partnerships). They’re hammers looking for nails, and they have the capacity to make everything look like a nail, so they never stop hammering. This doesn’t happen in the private sector. When there are no more nails to hammer, the hammer gets retooled (usually by force).

      1. @ESM,

        Why do you think owning a home is a goal to be promoted. Seems to me, the home too often becomes an excessive burden–most people I know feel like slaves to their homes, in consideration of the cost of real estate taxes, and maintenance. Hell, if a silly tree dies on your property, you’re suddenly out 2K to have it cut down. And, look at all of the farmland and open space permanently consumed.

      2. It has it’s pluses and minuses for sure.
        The idea was to promote responsibility and good citizenry, whatever that is.
        And probably to buy a few votes as well, of course.

        Mtgs were made mostly by savings banks back then, with a cost of funds fixed by govt policy at maybe 5% for savings accounts, translating to 8% mtgs via competitive forces.

        If govt. wanted a lower cost of funds model they had several options to lower the cost of funds for banks making ‘qualifying’ mtgs.
        And they could also have put them in segregated accounts with different capital requirements, etc.
        They didn’t need to create new housing agencies.

      3. @ESM,

        “This doesn’t happen in the private sector.”

        You might want to get out more.

        Large companies make the public sector look like a hive on efficiency and well managed direction.

        It’s not a private/public divide. It’s down to the level of institutional entropy in the organisation – wherever it sits.

      4. @Neil Wilson,

        “Large companies make the public sector look like a hive on efficiency and well managed direction.”

        It’s not efficiency that matters. It’s profitability. From the perspective of geniuses like yourself, I’m sure all large companies look horribly mismanaged. But if they’re managed well enough, then they’ll be profitable and survive. If they cannot do the fundamental job of creating more in value than the value of the resources consumed, then they go out of business.

        That doesn’t happen with government. Why? Because government has the police power. Government doesn’t have to satisfy and balance the competing needs of customers/investors/employees to stay in business.

        Ironically, when a government program fails (which it never does via bankruptcy – it only fails according to some subjective metric, which may or may not be applied honestly), it is often taken as evidence that funding was insufficient.

        And, for the record, one can be extremely efficient in destroying value. I could give you one great example, but then I would have to apply Godwin’s Law to myself and concede the point.

      5. it’s about being able to sell your product, which, with and without govt. standards, too often involves forms of fraud, often never being discovered, or discovered but not subject to restitution. Not to mention the likes of the Ford memo stating that it would be cheaper (more profitable) to pay the lawsuits from people killed by exploding gas tanks than to change the design.

        and profits are accounting residuals based on the rules of accounting, which are often divorced by what you would call ‘value’ and this can be perpetuated for extended periods of time as well.

        And don’t take this as a defense of the public sector, thanks.

      6. @Neil Wilson,


        “Not to mention the likes of the Ford memo stating that it would be cheaper (more profitable) to pay the lawsuits from people killed by exploding gas tanks than to change the design.”

        I always love a little paralipsis, which I suppose in this case means you disagree with the premise of the so-called Pinto memo. I confess I don’t know the details of Ford’s cost-benefit analysis, but I think these kinds of analyses make sense in general and are not per se harmful or unethical.

        Interestingly, this kind of cost-benefit analysis would show that CAFE standards do not make sense if a human life is assigned a reasonable economic value, but you have indicated that you support such standards, and even advocate tightening them.

      7. @Neil Wilson,

        Warren, regarding the ford memo (and similarly larry summers pollution emission world bank memo) – it makes me wonder if Japan is ahead of the game of the rest of us by shutting down all thier reactors ( I am reminded of that movie Brazil, where all the infrastructure was decaying all around them):

        Dmitry Orlov addressed the issue of fuel rods recently, and the fact that no-one will “do the right thing” because there’s no money in it.


        There are some important projects that need to be up and running starting like yesterday, because they are key to human survival. Unfortunately, they cannot be funded in the usual ways because of the warped nature of market economics and global finance, which dictates that the only goal of investing money is to make more money. The project of averting disastrous outcomes is not a money-maker, per se, and does not get funded. But shipping in millions of plastic orange Halloween pumpkins from China every year is a sure bet, and so the free market prioritizes orange plastic pumpkins above doing what is essential to keep us all alive. The invisible hand of the free market, it turns out, is attached to an invisible idiot.

        A good example of this sort of project is shutting down nuclear power stations before the electric grid goes down and they all melt down à la Fukushima Daiichi, poisoning land and sea around them for thousands of years. The electric grid is indeed going down: the rate of power supply disruptions has been increasing exponentially in the US. Just recently a large and important piece of central Boston went dark because of a transformer explosion. The response was to roll in diesel generators to provide emergency power.

        The transformers within the grid tend to be old, sometimes decades old, are at this point only built overseas, and, since they are expensive, there aren’t too many spares sitting around. As this infrastructure ages (as it does, and will continue to do, since there is no money to update it) such incidents increase in frequency, putting greater and greater pressure on already scarce and expensive diesel supplies. Already in many places emergency diesel generators are run not just in emergencies, but to fill in gaps in the power supplied through the grid during peak load hours. Diesel is already used for sea and land freight, as well as for most other heavy machinery, and there is not much of it to spare anywhere in the world, so the idea of replacing the electric grid with local diesel generators runs into a very serious problem almost immediately. In fact, looking at the many reports of diesel shortages around the world, it already has.

        An extended blackout is fatal to a nuclear power plant. Without a grid to power, the reactors have to be shut down, but they still need to be cooled in order to avoid a meltdown. The power to run the cooling pumps comes from the power plant itself, or the electric grid, or, if both are down, from, you guessed it, diesel generators. There is usually only a few days’ worth of diesel on hand; beyond that, cooling water boils out, the zirconium cladding of the nuclear fuel assemblies catches on fire, and the whole thing melts down and becomes too radioactive to even go near, never mind clean up.

        Worse yet, most of the 100 or so nuclear power plants in the US are full of spent fuel rods. The spent fuel is no longer potent enough to generate power, but a lot of it is still quite hot, and so the rods are kept in pools of water, which has to be circulated and cooled to keep it from boiling away. The spent fuel contains decay products that span the entire periodic table of elements, many of which are both radioactive and toxic. If the water boils away, the fuel rods spontaneously combust, blanketing the surrounding countryside with a plume of radioactive and toxic products of nuclear decay. The solution is to fish the rods out of the pools, put them into dry casks, and place the casks deep underground in geologically stable formations away from seismic zones. This is a slow and expensive process, for which there is currently no money.

      8. @Neil Wilson, I can’t seem to nest my comments any deeper, but “wind and solar backed by diesel to ‘fill in’ to provide ‘steady power’ to the grid is becoming more common as well”

        I went to a power grid utility conference they are having in Orlando this week for 2 days: http://www.ieeet-d.org/

        And I asked some of these people I keep hearing nasa reports that heightened sun EM activity can seriously start to short out some of our grid, if enough of the grid is taken out at the same time, what about all the nuclear power plants, and they said, well now you know why Japan has shut down ALL thier plants. Hope a worst case scenario can be avoided if the sun sends a huge CME our way one day

      9. whether said housing options are ‘good’ or ‘bad’ is a political discussion.

        and it went bad only after unemployment skyrocketed due to a failure to make any fiscal adjustment in August 08.

      10. @WARREN MOSLER,

        Yeah, but objectively speaking, people were paying ridiculous amounts for crap, and it was fueled by incredibly loose financing (all made possible by the government of course). So even if the government did the right thing and made the appropriate fiscal adjustment, you still had an inefficient allocation of resources to building houses in the middle of nowhere that nobody really wanted to live in at the true cost.

    3. yes, those are the political concerns that presumably go into making those kinds of decisions.
      and since we’ve never actually been at full employment for any length of time we’ve always had the capacity to do other things as well, but point taken

  3. The “public” should stay out of the mortgage industry. The “public” (ie govt) decided everyone should own a home, look how well that worked..

    Centralism and Maoist central planning DO NOT WORK in the long term.

    1. @JBH,

      you know – there are actually countries where people were given their homes by the central government. It worked quite well. They got homes.

      the problem in the US was that people were loaned money and then required to pay back more than they could, while some “entrepreneurs” created schemes to profit from that.

    2. @JBH,

      the problem with US housing is stupid central planning, and not the over-planning.
      Suburbia is a stupid plan, and not the idea that people should live in homes (not necessarily houses).

    3. actually, they decided more people should have access to housing, and seems to me it worked out very well for maybe 50 years and multiple generations before the
      govt. let the floor fall out of aggregate demand causing 8 million people to lose their jobs all at once, and then leave aggregate demand at the ‘too low’ levels that continues to this day.

      I doubt fnma would have had 1/10th the problem it did if employment had held up.

      1. @MamMoTh, I was at KSC over the weekend and they had a latin american astronaut from costa rica say he could get us to mars in under 40 days with plasma rockets, I saw john carter of mars and thought those boys really need to upgrade some housing, let the development of mars begin! 😉 We need a second home in the solar system, this house is getting too crowded!

      2. @Save America, No need to go that far. We’ve already created a plastic island the size of Argentina in the middle of the Pacific Ocean in a few decades.

    1. it was accomplished for 50 years with multiple generations and failed only recently when they let unemployment go up.
      and even them it’s not like no one is in a fnma financed home today.

  4. Warren,

    Seems like the basic gist is that regardless of what happened to FNMA at the micro level, our institutional structures helped foster an environment where we ended up with a misallocation of real resources at the macro level, i.e. we built too many stinking houses. It appeared to be a net gain during the up-phase, but in the aggregate it doesn’t seem to have been so. The result was in overinvestment in housing whereby profits from the activity were distributed narrowly to the finance sector, and losses distributed broadly across households.

    Over time we can easily absorb the excess supply with some cost, but the true damage was a distributional issue at the micro level. It exacerbated inequality through non-natural market forces of things like fraud.

    1. @Chad Starliper,

      “…whereby profits from the activity were distributed narrowly to the finance sector, and losses distributed broadly across households.”

      I think this is wrong. I think that there was a huge transfer of wealth from the financial sector to homeowners and the housing sector in general.

      “It exacerbated inequality through non-natural market forces of things like fraud.”

      I think you have it backwards. Wealth inequality has been reduced, not that I particularly care one way or the other. The housing bubble and subsequent collapse acted like a huge Robin Hood machine.

      I do agree that the whole thing resulted in a tremendous waste of resources, not least of which is that houses are being destroyed through either negligence or wilful vandalism.

      1. @ESM,
        “Wealth inequality has been reduced, not that I particularly care one way or the other. The housing bubble and subsequent collapse acted like a huge Robin Hood machine.”

        both statements are false. inequality has gone up in the last decade and certainly in the last 4 years. huge financial institutions received bailouts while the homeowners have been foreclosed upon. how exactly is this akin to robin hood?

        “people were paying ridiculous amounts for crap, and it was fueled by incredibly loose financing (all made possible by the government of course).”

        it was the banks that had the incredibly loose financing. fannie and freddie still had lending standards. the ninja loans were exclusively a private sector invention.

      2. @jah,

        “inequality has gone up … certainly in the last 4 years.”

        Provide a link. I think you’re wrong.

        “how exactly is this akin to robin hood?”

        Because the “bailouts” were not actually bailouts for bank shareholders or for mortgage investors. And the guys getting foreclosed upon were given huge amounts of money in 2005-2007 and then got to walk away from their crappy, underwater homes and keep the difference.

        When somebody buys a house for $200K in 2000, then borrows $400K against the house in 2006, defaults on his payments in 2008, continues to live in his house rent-free for 4 years, and then is finally kicked out in 2012, did he lose to that, or win to that? And did the ultimate investor in that mortgage in 2006 (whether it be an investor in a security backed by that mortgage or a shareholder of a bank which owned that mortgage) win or lose? And should we also count the value of the appliances and copper pipe that the homeowner stripped out of the house on his way out the door?

        “it was the banks that had the incredibly loose financing.”

        First, as Warren will tell you, banks are public-private partnerships. Second, the banks were forced to loosen lending standards because they were being eaten alive by an increasingly aggressive Fannie Mae and Freddie Mac who were taking a larger and larger share of the “good” business. Finally, the government is responsible for the fact that the credit rating agencies (NATIONALLY RECOGNIZED Statistically Ratings Organizations) had any influence at all, and they really screwed the pooch, which facilitated the whole debacle.

      3. @jah,

        Some comments on income/wealth inequality:


        Gini of income is up over the decade, but down from peak. Not that I think this is a useful measure of happiness, but those who favor envy find it interesting (I guess I’m more in the lust or gluttony, or maybe wrath camp).

        Then there’s a cute blog entry on wealth disparity:

        Who wants to make a wager on the results of the 2010 Survey of Consumer Finances results?

        The 2007 results are still what people quote to show growing wealth disparity. What odds are you offering that the disparity’s down from 2007 to 2010?


      4. @ESM,

        “I think this is wrong. I think that there was a huge transfer of wealth from the financial sector to homeowners and the housing sector in general.”

        According to the Flow of Funds data…

        Since 1987, financials NW +1,168%, households NW +252%.

        Since 2000, financials NW +215%, household NW +33%.

        Since 2008, financials NW +27%, household NW -7%.

      5. @Chad Starliper, Warren says the financial sector is too big, in the 80’s it was maybe 20% of GDP, now over 40%, too many smart human beings could be doing something more useful maybe?

      6. @Chad Starliper,

        Despite the fact that you have used data which defines “financial sector” more narrowly than I would (I would include wealthy people and institutions which invest in financial products) and “housing sector” more broadly than I would (I only meant to include homeowners and those who make their money from housing directly), the data you give arguable supports my point. Relative to the past, financials have underperformed versus households since the housing collapse.

      1. @MamMoTh,

        OK – well, the artificial demand created by our flawed institutional structures created a Ponzi condition in housing. So yes, at bubble prices what once appeared to be market clearing demand disappeared, and thus too many houses built at that price.

    2. we didn’t build too many houses if we had kept ourselves anywhere near full employment.
      houses are vacant because busted people moved in with others as household formation dried up with the recession.

  5. ESM,

    You wrote: “…the data you give arguable supports my point. Relative to the past, financials have underperformed versus households since the housing collapse.”

    No — that is not what the data says at all. Unless you believe that the financial sector should always be growing much faster than the household sector.

    1. @Chad Starliper,

      Whether or not the financial sector should always be growing much faster than the household sector, it has been for at least 25 years. No doubt this has to do with what Warren likes to call institutional structure, although I think a lot of it has to do with the advance of technology and globalization (which I like to think of as separate from institutional structure).

      Your data show that since the collapse of the bubble, the rate of relative growth of the financial sector decelerated (a lot). Is there an alternative interpretation?

      1. @ESM,

        The proper interpretation is not about second derivative growth rates (deceleration measures the change in the rate of change). The straight forward point is that since 2008 the financial sector has grown by a lot — much much faster than the economy — while the household sector has shrunk. Therefore, it would seem inconceivable to state there has been a wealth transfer from the household sector to financial sector.

      2. @Chad Starliper,

        I don’t see how you can just blithely ignore the background trend. My claim was that the housing bubble itself transferred a greal deal of wealth from the financial sector to homeowners. There are obviously other flows between the financial sector and the rest of the world that have little to do with housing.

        The housing crisis boils down to this: homeowners borrowed trillions of dollars, collateralized by their homes, and then defaulted on those loans when they realized the collateral was worth less than the loan balance, in the vast majority of cases within 2-3 years of borrowing the money. That is a large transfer of wealth.

        Sure, there are those poor suckers that bought at the top in 2006-2007 and lost their down payments (if they even made any). But the money they lost didn’t go to the banks. It went to the homeowners that sold at the top.

  6. Warren/ ESM:

    If we want to narrowly define the topic as: “Who is the recipient of the transfer of wealth in a US home foreclosure?” Within that narrow frame, yes — the forgiveness of mortgage debt has been a transfer to the (former) homeowner.

    Now, that is different than saying the entire process of the housing bubble-to-bust resulted to date in a ‘net’ transfer of wealth from the FIRE sector to the household sector. If that were the case, we would be seeing a shrinking FIRE sector and an increase in household NW.

    The Occupy Main Street movement hasn’t gotten much traction.

    1. in most cases the homeowner didn’t actually get anything as even after the debt reduction he didn’t have any equity in his home.
      and under the you can’t get blood from a stone theory in general you can’t get negative equity out of homeowners
      so it was just a recognition of actual values.

      1. @WARREN MOSLER,

        In most cases, the homeowner had refinanced and already taken equity out of his home before he defaulted. He also, in most cases, got to live in his home rent-free, tax-free, maintenance-free, insurance-free for a year or more (in NY, the average time is 3 years!).

        But I agree perhaps that the transfer of wealth was temporary. Many of these homeowners spent the money on fancy cars and vacations, which stimulated the economy in 2005 and 2006, with much of that money ending back in the hands of wealthy people. So all homeowners really got out of it was extra consumption for a few years.

    2. @Chad Starliper,

      “The Occupy Main Street movement hasn’t gotten much traction.”

      Actually, the Tea Party got its start as a revolt against the government’s plan to bailout underwater homeowners (cf Santelli’s rant on CNBC), so in a sense it is an Occupy Main Street movement. And I think even the most delusional Occupy Wall Street “leader” must envy the Tea Party’s (at)traction.

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