Last week, the Huffington Post published an article by David Fiderer, who describes himself as a financial professional, that did somewhat more than question the data in a 2008 article by AEI scholars Peter Wallison and Charles Calomiris. Put baldly, Fiderer called Wallison and Calomiris liars. The article was published by HPost without giving Wallison or Calomiris an opportunity to defend themselves. The following day, Wallison and Calomiris sent the reply—copied below—to Marcus Baram, a senior editor at the HPost. When they had received no response in two days, they sent another copy to [email protected]. To date, the HPost has not replied to either communication, and has not published their response. We invite you to read Fiderer’s attack and the response below by Wallison and Calomiris. Decide for yourself why the HPost has been mum about this breach of any standard of fairness.
What kind of organization is the Huffington Post? We’re not regular readers, but it’s astonishing that the Huffington Post would publish a libelous attack such as David Fiderer’s December 29 article without at least checking to determine whether there is any truth in his statement that we “lied” in our September 2008 Financial Services Outlook entitled “The Last Trillion Dollar Commitment: The Destruction of Fannie Mae and Freddie Mac.” As participants in academic and scholarly work, we are used to challenges to data—that’s how the academic world operates—but to be called liars, which implies bad motives rather than simple error, is a disgraceful breach of all acceptable standards. It is a bad mark on the Huffington Post as well as the author of the article.
In any event, Fiderer describes himself as a “Financial Professional” but he completely misinterpreted the statements and the data in our article. We stand by our statements and our numbers, which have turned out to be conservatively low in their estimates of Fannie and Freddie’s exposures to subprime and other high risk mortgage losses.
The point of our article was that Fannie and Freddie had acquired large numbers of high risk loans between 2005 and 2007, and that these were responsible for the losses that caused their insolvency. Fannie’s data was more complete than Freddie’s, so we’ll use that to repeat the points we made.
The table below, reproduced from our article in Fiderer’s attack piece, shows that 62.2 percent of the negative amortization loans in Fannie’s total book of business were acquired between 2005 and 2007. Different percentages are presented for other types of high risk loans. Fiderer misinterpreted the meaning of these numbers. He apparently believed that we were presenting the percentages in Table 1 as the percentages of loans in Fannie’s entire book of business. Thus, he seems to have thought we were drawing the absurd conclusion that negative amortization loans were 62.2 percent of all of Fannie’s book. We didn’t draw any such conclusion. In fact, the table he reports in his article fully supports our point that Fannie acquired large percentages of high risk loans between 2005 and 2007; it shows, for example, that of all of Fannie negative amortization loans, 62.2 percent were acquired between 2005 and 2007.
Indeed, our estimates of the total amount of Fannie and Freddie exposure to risky mortgages turned out to be too low, as indicated by subsequent analysis that Edward Pinto performed using additional data. It turns out that Fannie mischaracterized as prime loans that should have been reported as subprime. In addition, the losses that Fannie and Freddie have suffered—requiring the Treasury to send them over $150 billion to cover their losses thus far (with much higher losses expected in the future)—are ample evidence of the quality of the loans they acquired.
Having begun with a misunderstanding of what he was reading, Fiderer then launches an absurd and baseless attack. He notes that the actual percentages of Fannie’s book represented by these high risk loans were those in the table below, and then asks: “how could those percentages be so low if… they represented the majority of originations during the three-year period 2005-2007?” The answer, of course, as your more astute readers have probably already figured out, is that Table 1 did not represent and was not intended to represent the percentages that these loans formed of the entire Fannie book, but only the percentage of the total number of loans of this type—in Fannie’s book on June 30, 2008—that were acquired between 2005 and 2007.
Fiderer’s next error is to confuse stock with flow. We said in our article that during the 2005-2007 period more than 49.8 percent of the mortgages Fannie acquired were high risk or junk mortgages. Fiderer accused us of lying because he couldn’t imagine how the small percentages in the table just above could have amounted to 49.8 percent. The explanation, again, is fairly simple. What Fannie acquired between 2005 and 2007 is a flow number—that is, a statement of what came in as a percentage of all mortgages acquired. But Fannie already had a huge outstanding stock of mortgages it was either holding or had guaranteed. The flow of 49.8 percent was added to the stock, but of course was a small percentage of the existing stock. Also, we noted in our article that many of the junk mortgages that Fannie acquired had more than one deficiency and that we had carefully summed the various numbers to eliminate duplications. This risk of double counting is apparent in Fiderer’s table. If he had added the dollar amounts, they come to $947.1 billion, over 50 percent more than we had said Fannie had acquired between 2005 and 2007.
Finally, what is most puzzling about the Fiderer article is that he seems to be challenging the idea that Fannie and Freddie actually acquired a large number of high risk mortgages. If our claim about that fact were inaccurate, would it have gone unchallenged for this long? No one—academic or otherwise—has challenged this fact before for the obvious reason that it is apparent to everyone. For one thing, it would be difficult to account for Fannie and Freddie’s insolvencies unless they had acquired very large numbers of high risk or junk mortgages. Most of the dispute about what happened to Fannie and Freddie revolves around their motives for buying so many low quality mortgages between 2005 and 2007. The members of the Left—“progressives,” if you will—have been arguing that Fannie and Freddie were following Wall Street, acquiring these high risk loans to earn profits. Conservatives, on the other hand, have been arguing that Fannie and Freddie were compelled to acquire these mortgages by the government. In our article, we argued that, in addition to government mandates, Fannie and Freddie bought these mortgages in order to curry favor with Congress, which wanted the two firms to allocate more of their funds to low-income borrowers.
When we wrote our article we had not yet collected detailed data on the importance of the various affordable housing requirements that had been imposed on Fannie and Freddie by Congress beginning in 1992. These requirements, administered by HUD over the following 15 years, required Fannie and Freddie to make increasing percentages of loans to borrowers at or below the median income in the area in which they lived. The percentages began at 30 percent, but were escalated over time to 42 percent and 50 percent during the Clinton administration, and then to 56 percent in the George W. Bush administration. It was primarily these requirements that caused Fannie and Freddie to buy the mortgages that ultimately caused their insolvency as well as the financial crisis itself. As a result of these requirements, as Fannie reported in August 2009 it held $878.2 billion in subprime and Alt-A loans with the characteristics we discussed in our 2008 article. Since its entire book at that time was $2.74 trillion, this means that 32 percent of its entire book of business consisted of the subprime and Alt-A loans from which the vast majority of its losses were derived. In our original article, we had estimated that these loans constituted only 23 percent of Fannie’s book.
We are not surprised that some people cannot accept facts that contradict their strongly held views. What we are surprised about is that the Huffington Post is willing to publish plainly libelous material (calling someone a liar is libel per se—which means it is not necessary to prove damages in order to recover for defamation—when the charge is leveled at someone whose integrity is essential to his livelihood, as it is with scholars and academics), without giving the target of such attacks an opportunity to review and respond before the article is published. No, we are not going to sue the Huffington Post, but we wonder why anyone reads it if it regularly publishes such unreliable material.
– Peter Wallison and Charles Calomiris