Fannie Mae and Our Social Psychology

-- By CarolineElkin - 19 Apr 2009

I. Introduction

“No end yet for [the] housing downturn,” declared the New York Times this week. While there are significant financial and political implications of the ongoing housing crisis, there are also significant social implications worth exploring. Examining Fannie Mae, one factor (however great or limited) of the downturn, through a Leffian lens of a con may illuminate ways in which we can understand the social psychological effects of the housing crisis.

II. Leff and Fannie Mae

Understanding the relationship between con and sale may help us to appreciate the psychological impact on the mark/buyer of the resulting sale or swindle. At the time of the sale, both parties stand to gain some amount of both objective and subjective value from the transaction, otherwise it would not occur. But once it’s understood that a sale is really the same thing as a con, the subjective value of the transaction becomes central to understanding the relationship. In analyzing the legal, thriving, and publicly beneficial business of Fannie Mae through the Leffian lens of the con, the duality of its altruistic and financially risky activities is exposed.

• You use this phrase twice, here and in the preceding graf. It's awkward and it doesn't tell us anything.

A. Fannie Mae’s Business

Fannie Mae’s part in contributing to the housing downturn seems paradoxical. After all, Fannie Mae was created in the wake of the Great Depression in order to help solve the housing crisis at that time. Operating as a government sponsored enterprise in the secondary mortgage market, Fannie works by increasing liquidity in the mortgage market, thereby enabling low income families to purchase homes. In its own words, Fannie Mae’s “job is to help those who house America.”

• What's the paradox?

B. The Sale/Con

Leff says that the homo economicus requires that a con appear rational and indeed, the lending model that Fannie Mae operates is a rational one. Mortgage lenders grant more or less risky loans to families to buy houses. Not wanting the risk of loan defaults on their balance sheets, they turn and sell the loan to Fannie Mae, who buys it at a discount for assuming the risk. Liquidity is secured: lenders now have more money to lend and more families can obtain loans. This script is similar to the one in which Leff describes negotiable promissory notes. Nadir Notions buys its widgets from Acme Widgets and promises to pay later. Acme, wanting its money now, then sells Nadir’s promissory note to the bank. According to Leff, “[t]he bank takes over only one risk – insolvency of the borrower” (Leff, Swindling & Selling, pp. 93). Fannie Mae maps to Leff’s model.

• Sure. That's how negotiable instruments work. And so?

As a government sponsored enterprise, it is articulated in Fannie Mae’s charter that it must provide a certain number of loans to lower income (and higher risk) families as a service to the public. Abiding by its charter, Fannie Mae’s con included the securitization of loans for low income families who would almost certainly default, unable to meet the conditions of their mortgages . As we’ve seen, too much risk was taken, too many families had their homes foreclosed upon, and the housing market has been in crisis ever since. So where Fannie Mae stood to make or lose a large profit like any conman, it also ran the risks it did in order to serve a higher purpose of public good. Thus Fannie Mae’s business served both financial and social ends.

• No. FNMA was just doing what it was supposed to do, buying the loans made by lenders who were supposed to be finding people to lend to who would not default. Banks and FNMA had been cooperating for two generations, as you point out. Banks made loans that they regarded as good, reliable loans, and FNMA assumed the risks based on their business judgments. FNMA wasn't running a con. FNMA was gorged with risks by bankers who had stopped writing loans responsibly, because an immense private securitization industry had grown up which was willing to assume insane risks because it had found a way to sell those insane risks to fools. FNMA should have refused to play in the new world, but it couldn't do so without abandoning its charter, which you are right politics didn't want, so it gave up on caution, paid itself handsomely, and assumed they would have full faith and credit backing if the house of cards collapsed. On this last point, FNMA was right. But its sister agency's CFO committed suicide, not because he had been stealing, but because he couldn't deal with the pressure and the constant unrelentingly aggressive and morally condescending criticism.

III. Social Implications

In the times of economic boom, Fannie’s operational structure was socially profitable. In the recent decline, however, it has caused widespread social implication on the housing market – a market which I argue has a very important place in our social psychology.

• What changed in FNMA's structure? Nothing. What changed was the capitalist securities market, not the socialist housing finance insurance market.

A. Home Ownership

We are a nation of settlers: we began as Pilgrims coming to build homes in order to pursue our own beliefs free from oppression. We even killed the indigenous people we found in order to do so. We created a government protecting against the quartering of soldiers in our homes – literally preserving private ownership of our houses. We moved west in the quest of manifest destiny and set up homes along the new frontier. Waves of immigrants have come in search of a better life and took such pride in the opportunity to create a home here. Historically speaking, owning a home has developed into a deeply-ingrained value American society.

• More relevantly, we are a nation of real estate speculators, which has been going through boom and bust, sell and swindle cycles, converting the continent from wilderness to crabgrass, making a fortune out of buying cheap and selling to the newcomers dear, for half a millennium.

The fallout from the downturn hits home then, literally, as people are forced into foreclosure, downsizing form a larger home to a smaller one, from a house to a trailer, or from there to a homeless shelter. However much contributed to by Fannie Mae’s swindle, this fallout resulted in a growing social psychological and intra-psychological depression, in addition to financial depression.

B. What Would Veblen Say?

Veblen’s view of this downturn might emphasize that those who are merely downsizing from a very large house to a less large house were only consuming conspicuous waste. He’d say that there are probably those among society who are better suited to own smaller homes or rent, who are instead trying to own (larger) houses as a means of pecuniary emulation. His view would focus on the “emulation -- the stimulus of an invidious comparison which prompts us to outdo those with whom we are in the habit of classing ourselves. Substantially the same proposition is expressed in the commonplace remark that each class envies and emulates the class next above it in the social scale.” (Thorstein Veblen, Theory of the Leisure Class) This is not to minimize the psychological implication: while Veblen was not in favor of the conspicuous waste he observed, he would likely agree that the emulation was deeply connected to a person’s intra-psychological self-worth. He would refer us to the personal honor that goes along with owning one’s home, conferring upon that person the air of success, worthy of esteem.

• Why are we talking about what Veblen would say? At this stage in the draft, we need to be hearing about the implications of your idea. Instead we are hearing about the theories of somebody else.

IV. Conclusion

In our society, we want to help people buy homes, hence Fannie’s mission. But there is an inherent paradox in Fannie’s model in that the more people it helped, the greater the risk for everyone else. Thus we see that the competing desire for a social good can lead to a social bad. While Fannie’s swindle/sale was most obviously economically-centered, it is also deeply related to our social psychology. The subjective value involved then makes it better understood as a potential con: risking the social implication of psychological depression, beyond the depression felt in the purse.

• This conclusion depends on a proposition not proven, and which is wrong. There's no "inherent paradox" in the mutualization of risk. Life, disability and casualty insurance aren't cons: we can spread all the losses in the community so that reasonable contributions by everyone reduce the shock of catastrophe to the portion of the community that is fated to suffer one. Socialism is particularly effective at mutualization, but so is anarchism. Capitalism is partially hospitable to mutualization, as long as enough inefficiency exists to create a profit, and enough inequality exists for wealth to exercise political power. What went wrong just now was that capitalism also creates certain forms of criminal behavior (though in capitalist societies, of course, the behavior isn't criminal). Irresponsible parties knowingly create large societal risks in order to achieve large personal rewards. This is like knowingly operating an unsafe nuclear reactor near a city in order to make personal profit as the CEO of the company by selling cheap electricity, cornering the market, and then jacking up prices, operating unsafely all the while. But in general it's okay to do this in capitalism, unless you work alone. Madoff goes to jail, Angelo Mozillo may or may not do so, but Sandy Weill, Jimmy Cayne, Dick Fuld and--of course--Robert Rubin and Henry Paulson will be in no worse trouble than the harsh judgments of history may constitute. Madoff committed crimes; Mozillo was a manipulator; the others were captains of industry and wise public servants.

• So why all the concern for the federal mortgage guarantors? They were weak, they were unprepared, they were comfortable and a little corruptible, and they accumulated more risk than the society intended for them to run. Those are serious problems, but they aren't "inherent paradoxes." They're a minor scandal at the corner of yet another major proof that capitalism isn't healthy for people, and this is what we should be concerned about?