And THAT’S why these private entities were pressing Freddie and Fannie to start buying subprime loans. After all, no private company would do it, at least not in mass quantities!

So, when Fannie and Freddie agreed to lower their standards (primarily for political reasons and certainly not as a matter of sound business practice) and started purchasing subprime loans in large amounts in the late 1990′s, they almost single handedly created a secondary market for such loans. The existence of this secondary market allowed allowed private banks and brokers to begin originating such loans in much larger quantities. And, when certain private competitors like Lehman saw the enormous profits that Fannie and Freddie were realizing in the subprime market, they eventually stepped in and began to compete with Fannie and Freddie for this business, which expanded the secondary market even more, which in turn allowed even more such mortgages to be written.

So certainly the private sector bears some of the blame, but it all started with Fannie and Freddie’s ill-conceived decision to create a secondary market for these securities.

Hopefully institutions private and public will learn from this and be much more prudent with their- or taxpayers’- funds in the future.

“The 1999 NY Times story did not merely say that banks etc. were pressing the GSEs. It said:

Once again, for the UMPTEENTH TIME, those were NOT the vast overwhelming majority of the loans that went bad.
.

Now, if we’re going to talk about the “crisis” specifically rather than the “subprime” strawman, then Fannie Mae IS very relevant, and not just because the FNMA bailout in asset terms is multiples of the $700 bio bank deal. FNMA eased lending standards in the 2000s significantly, abetted by Congress. When you have a government subsidized-entity effectively cutting prices and easing terms (and using govt. subsidies to offering prices lower than private companies can) as well as using govt-subsidized credit to buy mortgage securities in the secondary market (pushing down yields), then it leaves private companies with three choices
1) exit the lending business (some banks did this- orginating/selling directly to FNMA or to securitizers rather than doing actual lending, but again it is hard for a regulated, high cost firm to outcompete unregulated mortgage brokers)
2) stay in the business but cut prices to match the govt-subsidized competitor
3) move to niches without a government-subsidized competitor (subprime, jumbo, home equity, option pay, etc).

Greenspan’s low interest rates and the “Greenspan put” made options 2 and 3 seem attractive for awhile.

There is no doubt that FNMA’s govt-subsidized activities in the core market drove private market activity to subprime and other niche products. The republicans weren’t anti-FNMA because of regulatory arguments, they were anti-FNMA because the banking sector was lobbying them to provide a broader playing field for them to compete in. FNMA had made core lending less profitable and pushed banks to more exotic and profitable (but much smaller and more dangerous) niches. The Democrats were of the view that the more govt credit at below market terms the better, and the more involvement by non-banks the better.

In hindsight the solutions were simple:

1) tightly regulate mortgage brokers. Prosecute fraud by mortgage brokers, real estate agents and homeowners.
2) prevent FNMA from writing mortgages without strict income/employment and primary residence tests and significant downpayments (10-20%). Limit FNMA’s activities to new mortgage origination rather than secondary market speculation/carry-trades
3) prevent banks from writing neg. AM mortgages and require special capital reserves against mortgages without significant downpayments and income tests.

The mortgage brokers have disappeared (sadly without prosecution of homeowners, real estate agents and most mortgage brokers) but I don’t hear many pols or regulators talking about 2) or 3). Instead, the pols are talking about looser FHA/FNMA terms and more government subsidy.

“Bush” is unfairly blamed for the current mortgage crisis and no doubt will be blamed when the next president and Congress make it even worse

Today I have visited your blog http://bigpicture.typepad.com and found some quality information. That’s why I will request you to exchange link with my blog.

Please send me your link info.

Waiting for your reply asap.

With Best Regards,
smithernesto

Disclaimer: This email is strictly confidential and is requested not to share with anyone.

“Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers.”

Why did you only quote the second paragraph? For the sake of your readership, if you can’t be honest, move on to another subject.

http://thinkprogress.org/2008/10/23/mica-waxman/

It’s what I’ve been saying all along. You have to look at the timeline, specifically *when* did FM&FM start buying up these AAA securities in huge numbers.