As detailed on this blog, last week the Federal Housing Finance Agency (“FHFA”) released the first of what will be quarterly status reports of the financial health and condition of the mortgage giants Fannie Mae and Freddie Mac. The report provides a revealing snapshot of the companies, and its conclusions challenge many commonly-held assumptions about the reasons the quasi-governmental agencies nearly failed.A handful of economists, hundreds of politicians, and thousands of citizens place entire blame for the financial crisis on the two mortgage giants, in particular for creating and later bursting the housing bubble that nearly collapsed the global economy. Wrong. The Report shows that Fannie and Freddie’s market share plunged in 2003 and at the peak of the dangerous subprime mortgage and mortgage backed securities markets, Fannie and Freddie’s combined total share was only 1/3 of the mortgage market. Fannie and Freddie are not blameless, in that they clearly dipped their toes in the subprime market mania most notably in 2005 and 2006. Still, the report makes clear that private investment banks drove the appetite for subprime mortgages, the mortgage backed securities market and the collapse.
Are you overstating Fannie and Freddie's involvement? The Conservator's report indicates that the GSE's reduced market share massively in 2003 - 2004. Was it not the private banks that stepped in to fill this capital flow?
ReplyDeleteAlthough Fannie and Freddie definitely have to accept some ownership for the housing crisis and near collapse of the U.S. economy, the private banks definitely made the situation worse. It is unfortunate to watch friends or even family members who were approved for loans by their local bank, only to purchase a home which would lead them to a horrendous credit score and likely bankruptcy. In the event that such applicants were not so fortunate to have practices of fraud found within the private bank, the mortgage holder is now out of luck. By crunching numbers and allowing applicants to be approved based on a very different standard for approval than prior practices, the banks encouraged risky lending and have aided in ruining the lives of many hopeful first time buyers.
ReplyDeleteThe Report shows that Fannie and Freddie’s market share plunged in 2003 and at the peak of the dangerous subprime mortgage and mortgage backed securities markets.
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Mortgage Broker
I think that these reports are very biased. The mortgage markets are not as straight forward as one might think and the idea of banks buying notes from one another is a major factor in the market crisis.
ReplyDeleteYes, as loan originators, freddie and Fannie saw a lull in market share, yet when push came to shove, even those originators that overtook them for market share during those times were turning around and selling them right back.
Fannie and Freddie were by far the largest risk takers in the sub prime markets and even though they should not shoulder the entire blame for the market collapse, one cannot help but feel that their encouragment by mere participation was enough to spur some of the smaller organizations into the practice.