Proponents of The Big Lie claim that Federal regulators defined as "subprime," any loan with a FICO score of 660 and below. This, of course, is a lie.
In two must-read columns for The New York Times, "An Inconvenient Truth," and "The Big Lie," Joe Nocera goes after the chief proponent of the Big Lie, Peter Wallison of The American Enterprise Institute. For years now, Wallison and "his partner in crime," Edward Pinto of the AEI, have been spreading The Big Lie, which was encapsulated by Jonathan Alter as:
The financial crisis was caused not by Wall Street but by the federal government, namely Fannie Mae and Freddie Mac.
The Big Lie designation, now used by Nocera, Alter, Barry Ritholtz of The Washington Post, and Paul Krugman, has finally gone mainstream.
In his first column, Nocera writes about the lawsuits brought by the SEC against former executives of Fannie and Freddie. He writes:
The complaint is extraordinarily weak. Taking its cues from the Wallison/Pinto school of inflated data, it claims that Fannie and Freddie failed to reveal to investors the true extent of their subprime portfolios.
Bound by the limitations of an 800-word column, Mr. Nocera may not have had the chance to explain in detail what he was referring to. So, with apologies to him, I'll take a stab at fleshing out that particular point:
First, for an explanation of how the SEC fabricated a bogus definition of "subprime mortgages," see, Fatal Flaws In The Case Against Fannie Mae Execs, Part 1. In a nutshell, the GSEs, and just about everyone else, differentiate between: (a) a subprime borrower, and (b) a subprime loan product. The SEC ignored the fine print in the GSEs' financial filings, and defined a "subprime" mortgage as any loan to a credit-impaired borrower. Period.
Wallison and Pinto do something very similar. To inflate the numbers of subprime loans, they simply ignore the distinction between a subprime borrower and a subprime loan product. They also cherrypick words from the regulators' guidance on subprime lending, in order to include as "subprime" loans that were specifically excluded by the Office of the Comptroller of the Currency, the Federal Reserve, the FDIC and the Office of Thrift Supervision. Pinto writes:
In 2001 federal regulators issued “Expanded Guidance for Subprime Lending Programs” which set forth a number of credit characteristics for subprime borrowers including:
“Relatively high default probability as evidenced by, for example, a credit bureau risk score (FICO) of 660 or below (depending on the product/collateral)."
Like the SEC, Wallison and Pinto simply ignore the words they don't like, beginning with: "depending on the product/collateral." Pinto and Wallison also falsely assert that any loan to a borrower with a FICO score of 660 or below must be a "subprime loan." To arrive at that conclusion, they simply ignore clearly stated intent of the OCC, the Fed, the FDIC and the OTS. The Agencies specifically excluded from the subprime category, any loans that were not targeted at subprime borrowers, and any loans for which the borrower risk was offset by other credit enhancements. Again, from the inter-Agency guidance:
This guidance is meant to intensify examination scrutiny of institutions that systematically target the subprime market through programs that employ tailored marketing, underwriting standards, and risk selection...
Exclusions - For purposes of this guidance, subprime lending does not refer to individual subprime loans originated and managed, in the ordinary course of business, as exceptions to prime risk selection standards. The Agencies recognize that many prime loan portfolios will contain such accounts. Additionally, this guidance will generally not apply to…[loans with] private credit enhancements, or other appropriate risk mitigation techniques.
For example, under Fannie Mae’s Expanded Origination Program, Loans to credit impaired borrowers were first processed through Fannie’s standard Desktop Underwriter program, which was used for prime borrowers. Only then, on an exceptional basis, loans that didn’t make the first cut might be evaluated under the Expanded Authorization Program. The numbers reflect how the EA loans were booked as exceptions to the firm’s core business. By year-end 2007, Fannie’s loans extended under the Expanded Authorization and My Community Mortgage Programs totaled 3.7% of the mortgage book.
The Agencies also note that:
The average credit risk profile of such programs or portfolios will likely display significantly higher delinquency and/or loss rates than prime portfolios.
Pinto also claimed that any mortgage with a loan-to-value of 90% of more was, by definition, non-prime, or Alt-A. And on that basis, he declared that 27 million million mortgages, almost half of those outstanding were "subprime or otherwise risky." But the one thing Pinto and Wallison and all of their acolytes absolutely refuse to do is to test the validity of Pinto's categorizations by looking at delinquency or loss rates.
That's what the FCIC did, and that's what David Min of the Center for American Progress did. They both exposed Pinto's categories for what they were, a sham.
For another phony factoid from Pinto, see here.