A Commenter Comments and I Answer

Bill, a pyramid scheme always results in rising asset prices (for a while). As long as a new sucker joins the game the prices rise. Add falling interest rates so troubled borrowers can refinance and defaults stay low. This was the reason JJ was able to walk away. By the way... they didn't have SEC filings while JJ was there... he made sure they were exempt from filings. Keep talking your book though.


The above is a “comment” sent to my blog this week, signed “Anonymous,” which most have been since that option is available. I started to answer, but my response quickly became blog-length, so I thought I just would put it out as a separate blog. My answer to the commenter follows.



So, let me see. Using your paradigm, Jim Johnson was responsible for what you call a housing “pyramid scheme,” which single handedly increased America’s homeownership rate to the 65% range, supporting the economic activity and all of its related facets, which generated 25% of America’s gross national product during Johnson’s years.

Ergo Johnson was responsible for a strong economy which kept people working and juiced their desire to own homes. Then he—not Fed Chairman Alan Greenspan (no friend of Fannie Mae)—managed to keep interest rates low so millions of middle income families, not to mention low income families, could afford those houses. (Could have fooled me and most history writers about who controlled rates.)
Apparently, federal financial regulators say Johnson did do such a superb job of those two things—quantity and quality of home mortgage financing-- that most of those families stayed in their home, never defaulted, and Fannie Mae (and Freddie Mac), created by the Congress to foster affordable homeownership, succeeded fabulously.

The Johnson era loans originated in the 1990’s—according to those same federal regulators--not only performed well while he was Fannie’s Chairman but also logn after he left (again, as reported by federal regulators).
That’s what you have??

Oh please, don’t throw me into the briar patch.

Regardless of when Fannie began filing with the SEC (prior to that time, its corporate disclosure were the near equivalent of what companies gave the SEC), the current SEC filings show that most of Fannie’s truly bad loans were worthless private label subprime securities, originated and sold by Wall Street—which Johnson’s successor, once removed, bought by the buckets full.
None of that computes with Gretchen’s book or the similar AEI attacks.
As I’ve written, I think much of this animus comes from business and political enemies, who failed where Johnson and Fannie succeeded.

The same fellows were jealous of the attention he generated personally and which he brought to Fannie Mae, a company that for years earned awards and achievements for the “Best Place to Work” for any number of groups, including women, African Americans, Hispanics, couples who wanted to adopt, adult children with the responsibility for elderly parents, etc. etc.

Recognizing where many moderate income families came from, literally, Johnson directed that all Fannie Foundation homeownership information needed to be printed in about a dozen foreign languages, including two dialects of Chinese. He then charged Fannie’s outreach efforts to conduct homeownership fairs all over the nation to spread that word.

Johnson reached out to everyone in the industry who could help, including lenders of all stripes (large banks, small banks, mortgage companies, thrifts, credit unions, and state finance agencies), Realtors, builders, community groups, Governors, Mayors, and state and local officials.

Fannie’s Foundation supported dozens of national and local efforts to help the homeless and a variety of other homeownership initiatives, including an immensely successful national advertising campaign which began on National Basketball Association games, because the league’s “fan demographic” matched the would be homeowners Fannie was trying to reach.

Johnson brought an energy and verve to Fannie’s effort, which sometimes embarrassed other providers and turned them negative.

If the American people could grasp that concept—called “jealousy”--they would better understand a lot of the political grief Fannie encountered during the Johnson years and later.

Frank Raines left Fannie Mae in 1998 to serve President Bill Clinton as head of OMB and in 1999 and 2000 produced the last two balanced budgets (consecutive years) in America’s history. After that government service, he rejoined Fannie.

Johnson was gone in 1998, succeeded by Raines, who was gone in 2004.

The financial meltdown hit in 2008.

In my humble opinion looking at the pre-2005 years, the worst that critics can claim is that the Fannie’s work to stimulate interest and the means to homeownership in the 1990’s--which later was copied, distorted, and suborned by voraciously piggish Wall Street forces, who bypassed the Fannie and Freddie standards and underwriting systems--gulled borrowers and mortgage securities investors by creating and heaping onto world market billions in poorly documented and soon to be worthless mortgage backed securities.

Depending on your values (and politics), there are plenty of Johnson and later Raines initiatives which their detractors could attack, but geometrically those were dwarfed by more accomplishments, realized best by those who understand mortgage finance and the obstacles to make it broadly available. Both of which Johnson and Raines, as former Fannie chairmen, overcame to achieve their national successes.

However, as I’ve noted, all of the effort, goodwill, and most of the positive personal and institutional opinions were wiped out by the foolish post-2005 Fannie subprime purchase adventures which occurred after Johnson and Frank Raines were gone from Fannie Mae. Both men, being Democrats with political profile, along with the company paid a steep price with the GOP and the Right.

When that story is finally written and not just hinted at, as some magazine articles and books have done, then that author will have a block buster best seller.

Maloni, 6-3, 2011