How Compromised Data Led to the Housing Market Destabilization
If we've learned anything from the mortgage debacle, honesty really is the best policy and accurate appraisals are critical to success. A lack of data integrity--whether intentional or not-- can bring down the mightiest of Goliaths.
Fannie Mae and Freddie Mac, which were AAA-rated public corporations prior to 2008, played a role in the crash of the housing market. We won't comment on the integrity of the players, but we can fault the integrity of the mortgage data--and the inaccuracy, misrepresentation and misinterpretation of appraisal data, specifically--that caused the house of cards to fall. Let us hope this is not a cycle that will inevitably continue, like global warming and ice ages.
Although the housing crisis was triggered by Mortgage Backed Securities (MBS) issued by unregulated private-label securitization conduits, typically operated by investment banks, Fannie and Freddie followed the big money and sharply lowered their underwriting standards and, with that, the value of their data.
One would think that after the estimated $154 billion government bailout*, Fannie and Freddie would be finished. However, their central role in the secondary market creates liquidity for lenders that allows housing to be affordable and is crucial to propping up a still collapsing housing market.
Now that the government owns 80% of their shares and they are in conservatorship, the Federal Housing Finance Administration (FHFA) has directed Fannie and Freddie to conform to higher quality lending standards. The new leadership agreed that the best way to do this was to develop detailed uniform standards that are easy to monitor for buying or securitizing mortgages.
Want to know more about these standards? Stay tuned. And read Making sense of "Alphabet Soup." The UMDP, UAD and the UCDP.
*Source: Davidson, Paul (2010-10-22). "Fannie, Freddie bailout to cost taxpayers $154 billion". USA Today. http://www.usatoday.com/money/economy/housing/2010-10-21-fannie-mae-freddie-mac-bailout_N.htm. Accessed 1/5/12.