Review of the Book:

More Money Than God
by Sebastian Mallaby

Edward J. Dodson

[An exchange of email correspondence with the author; 31 August 2011]

Mr. Mallaby,

As something of an industry insider, I found your history and analysis of the hedge fund industry and its relationship to the broader financial picture a work of immense importance. Until retiring in 2005 I worked as a market analyst and business manager at Fannie Mae, and it has been my conclusion that the demise of Fannie Mae was far less the result of the company’s own business activity than investor panic. Fannie Mae’s and Freddie Mac’s executives failed to present to the investor world a strong statement of just how much the character of the mortgage loans within conventional MBS differed from the loans packaged by Wall Street and rated by the bond rating agencies. Even our Alt-A business met stringent creditworthiness requirements. My reading of your research and the detail you provide makes a very strong case that my position is well-supported.

Another observation you might agree with is that economic theory and the economic policies derived therefrom have little to say about the function of property markets. There are important exceptions within the economics community, but their voices are seldom listened to.

Beginning in the late 1990s the market research work I performed within Fannie Mae’s Housing and Community Development group made clear to me that a residential property market cycle was accelerating. Land prices were increasing almost everywhere across the United States, an indication that the next crash would be national rather than regional. Rising land prices were driving up the price of “housing” much faster than median household incomes. Household savings were also in a steep decline. Fannie and Freddie unfortunately accommodated this crisis each year by increasing our maximum loan limits, then consistently reducing minimum cash contributions and down payments. Whereas reasonably stable property markets historically occurred when land-to-total value ratios were in the 20-25% range (while household incomes were increasing), by around 2000 appraisal data I reviewed reported ratios in many regional markets above 50%. Thus, we were financing more and more land value and less and less housing value.

To no avail, I have been trying to generate support from my former colleagues in community development banking to lobby for new regulation that would prohibit any financial institution that accepts government-insured deposits from making a loan for the purchase of land, or accepting land value as collateral. Doing so at this stage of the property market cycle (when land prices are well down from previous highs) would, I conclude, remove much of the credit-fueled speculation from reigniting.

Any comments you might care to make will be of great interest to me.


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Response from Sebastian Mallaby (1 September 2011)

Dear Mr. Dodson,

Thanks for your interesting note. Your distinction between land values and housing values is important. And of course I am pleased that you enjoyed my book. As any author will tell you, books live or die according to word of mouth recommendations, so please do pass the word along.

Your thoughts prompt me to ask a long-shot question: When you were working for Fannie Mae in the 1990s, were you aware of the views of the Fed? I mean, did the Fed chairman or his staff influence what you were doing one way or the other? I ask because my next book project is a biography of Greenspan.


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Ed Dodson (1 September 2011):

One aspect of the work I performed was to determine the affordable housing needs of geographies where we had or were looking to establish a local presence (what were at the time called "Partnership Offices.") One important source of demographic and other data was the Fed. On a number of occasions I had discussions with research staff members at the Philadelphia Fed regarding how they were tracking property markets. I expressed a desire to acquire data on land market trends, and the response I got was that the Fed researchers would love to see this data if I could find a reliable source.

Interestingly, the Fed regional banks published some good research on property markets and the effects of tax policy on land prices. Belatedly (as in this paper -- http://www.federalreserve.gov/pubs/feds/2010/201016/201016pap.pdf -- the Fed has paid some attention to the dynamics of land markets.

To what extent our chief economist at the time, David Berson (now with The PMI group, I believe) met and consulted with his counterparts at the Fed I do not know. He and I had a number of discussions regarding what was occurring in the property markets, and we were in the early stages of planning a conference for bank economists on the role of land markets in the housing sector. Those plans never came to fruition because of the pressures on Fannie Mae to amend its financial reports after the hearings before the Congress during the last years Frank Raines served as CEO.

One note of some historical significance is that prior to the Reagan presidency, the Federal government did collect data and report on land markets. Reagan cut the funding for this program. You might want to interview Mason Gaffney, now in his mid-80s but still very active, who teaches economics at the University of California (Riverside) and is well-versed on land economics and land politics.