Gretchen Morgenson’s new book about FNMA and the mortgage meltdown — Reckless Endangerment — is worth a careful read. There a few copies in the local library system and the Huffington Post ran a long excerpt.
The basic outlines of the story are familiar now — the mortgage industry broadly lost integrity, to the point where unscrupulous brokers were making loans that had no prospect of repayment and yet were able to sell the loans off into the secondary market with ease. Since the bubble finally burst, people have been losing their homes and the taxpayers have been picking up the pieces of the mortgage secondary market.
The book is worth reading because it documents how almost everyone in positions of economic leadership, whether from greed or ideological blindness, lost their way.
- The rating agencies failed to blow the whistle and kill a lucrative business rating collateralized mortgage obligations.
- Leading federal reserve bank economies endorsed the cause of broad housing ownership and failed to raise concerns about the housing bubble or the huge bloat of toxic sub-prime mortgages in the secondary markets.
- Wall Street was just making too much money on every stage of the secondary market process to put on the brakes — collecting fees from providing start-up (“warehouse”) credit lines to mortgage originators to packaging and trading the collateralized mortgage obligations.
- Politicians on both sides of the aisle were swept along by the a combination of (a) the appeal of broad home ownership; (b) an effective marketing campaign led by FNMA of aggressive lobbying, campaign contributions and community photo-ops with developers and lenders.
- The major federal mortgage entities — “Fannie and Freddie” — were run by political people who manipulated the accounting of the agencies to maximize their bonuses and were only about defending the profit opportunity that the special status of their agencies gave them in the market.
The most charitable way to look at the whole housing/home-equity bubble is that leadership went along with it because it allowed many of us to live more comfortably (although above our means) over a period of decades when the labor market has been moving in the wrong direction. A great many people have been unemployed, under-employed or under-paid as a result of international competition and automation. That’s the central problem we really need to face in the long term — how to put people back to work.