May 4, 2010

Franklin Raines on risk management at Fannie Mae

When I was at Fannie Mae, we had a very tough risk management structure. That was 5, almost 6 years ago [2003, when housing bubble first took off]. Instead of staying the course as later management said, they changed that structure in order to become a bigger player in the market. They were losing market share by maintaining their tough standards, they wanted to be players, they jumped in and they bought a lot of things they shouldn't have bought. They've testified to this themselves so I'm not really speaking out of turn here, and that really led to the company's failing financially because they took on more risk than they should have.

~Franklin Raines, former chairman and CEO, Fannie Mae, CNBC, May 4th, 2010

(Of course, this directly contradicts the point he made moments earlier in the interview, in which he argued that Fannie Mae, Freddie Mac and the FHA need to be available to support the mortgage market when traditional lenders become risk-averse and flee from these very types of mortgages he now says shouldn't have been made.)


fdr said...

No contradiction at all. Fannie and Freddie are necessary to insure that mortgage credit is available at all times, not just when banks are interested, but they are not obligated to buy bad mortgages at anytime.

Taylor Conant said...


You don't seem to understand what Raines said, and thus why he contradicted himself.

In the interview he claimed that Fannie and Freddie play an important role because they buy mortgages when the other banks don't want to. The banks don't want to create/buy mortgages when they deem the mortgages to represent too high a risk of loss-- because the economy is in the tank, because the loans themselves are of marginal quality, etc.

Then, he said that Fannie and Freddie have high quality standards and that they gave those up to get more market share, ie, to extend more loans than banks themselves would have liked to make at particular market rates of interest.

This is the contradiction. He is claiming BOTH that Fannie and Freddie must stand ready to make all loans, even the ones banks don't want and that Fannie and Freddie have/had good credit standards and did not make risky loans.

Those are mutually exclusive ideas. Thus, to hold them simultaneously as complementary is a contradiction.

I hope that helps.