Laurie Goodman is a well regarded expert on securitization and MBS. She is the former UBS mortgage analyst — Institutional Investor #1 ranked — and is now at Amherst Securities (Bloomberg video here). In a 17 page report released Tuesday, Goodman tried to estimate the total losses that the now-government-owned GSEs will accrue.

This is not an abstract question: Since the Christmas Eve massacre when the Treasury department removed all government caps on aid to Fannie/Freddie, Uncle Sam aka the taxpayers are on the hook for unknown amounts. Given the GSE’s hold $5.5 trillion dollars in mortgages, the potential losses are $100s of billions, if not trillions of dollars.

Not to get too wonky, but Goodman’s methodology was to cross-reference loan performance from the First American CoreLogic’s LoanPerformance Prime Servicing Database (LPSS) against other known mortgage databases. The goal was to develop parallel models that looked for similarities between conventional loans the GSEs held, comparing them with similar non GSE mortgages. Doing so would create a basis for estimating future delinquencies and foreclosures. The LPPS database contains information on 29 million active loans and 92 million closed loans, considered to be “prime” by the servicers. From this source, Goodman looked at variables such as payment history and re-default trends. The GSE and bank portfolio loans turned out to be strongly correlated, suggesting the GSE book would see defaults similar to defaults in prime, private label securitizations. Based upon the above data, a likely loss number was calculated.

And what are those estimated losses Goodman projects for the GSEs ?

Freddie will likely lose around $178 billion of its $1.86 trillion credit guarantee book, and Fannie will likely lose $270 billion of its $2.81 trillion book. Combine the credit guarantee books of the two firms, and you reach a $4.67 trillion book, with estimated losses at just under ~10%, or $448 billion.

Goodman notes that “overall losses on loans in the Fannie and Freddie credit guarantee books will be ~9.6%, very close to that for the 1983-84 origination in the 4 most severely hit states during the oil bust in the 1980s.

Ever since the US government took over the GSEs in September 2008 under Bush/Paulson, and the expansion of that policy under Obama/Geithner, the Government has injected ~$112 billion into these two entities. If Goodman is correct — and her guess is about as good as anyone’s — the budget deficit is about to get $336 billion larger.

To put that into context, from September 5, 2008 forward (the day the the GSEs were put into conservatorship) the U.S. Government is likely to spend more money bailing out Fannie/Freddie than they have on the Iraq and Afghanistan Wars — combined.

Over the next few days, we will consider what this means for the Credit and Housing markets, as well as for policy makers. Meanwhile, today’s TBTF tax is gonna need to be a whole lot bigger as the whole in the deficit expands.

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Charts and tables after the jump.


click for larger graphics

Loan Characteristics


Source: Loan Performance, Amherst Securities

>

Exhibit 3 (above) the characteristics of the loans. We have shown average loan size, average original LTV, distribution of LTVs, average original FICO, FICO distribution, average current LTV, and the distribution of current LTVs. We also included data on the % IO and the % of loans from the sand states (i.e., CA, AZ, NV, FL—the 4 states that experienced the greatest home price depreciation). We excluded CLTV data, which was very spotty. We excluded documentation type (full/other), as we believe the definition of “full doc” is ambiguous for Agencymortgages in which some of the documentation is waived.

Annualized Default Rates – 2005-2007


Source:  Loan Performance, Amherst Securities

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Estimating Losses on GSE Credit Guarantee Books


Source:  Fannie Mae, Freddie Mac, LoanPerformance , Amherst Securities

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Sources:
In-Depth Look – Crash In US Home Prices May Resume (Video)

Conventional GSE and Portfolio Loans Behave Like Prime PLS
MBS Strategy Group: Laurie Goodman, Roger Ashworth, Brian Landy, Ke Yin
Amherst Securities Group, January 12, 2010

GSEs Could Lose $448bn of MBS Guarantee Business, Says Amherst
DIANA GOLOBAY
Housing Wire, January 13th, 2010, 3:21 pm

http://www.housingwire.com/2010/01/13/gses-could-lose-448bn-of-mbs-guarantee-business-says-amherst/

Category: Bailouts, Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “Estimated GSE Losses = $448 Billion”

  1. One other tidbit:

    In March 2002 Joe Stiglitz, Jon and Peter Orszag wrote a paper titled “Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard”.

    They concluded with “on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero”

    Peter Orszag is the current White House Budget director.

  2. Andy T says:

    So, does this mean you might be changing your mind on the impact the GSEs had on the housing market?

    Ah, forget it. I already know the answer: “Read my book…it’s all explained in many pages…It was all Greenspan’s fault…cheap money…lack of regulation…oversight…”

    Why did we create behemoth “government sponsored” entities that pushed massive amounts of credit to the American public in order for us to invest in an “asset” that depreciates over time and creates no real economic yield?

    ~~~

    BR: You seem to have a temporal comprehension issue.

    There is a difference between what occurred pre-crisis — call it 1938 (Fannie created) to 1968 (Freddie created) to 2001 (rates start sliding towards 1%).

    What occurred AFTER the crisis, post-September 2008 — the conservatorship, bailouts, and tax monies wasted — was not a cause of what occurred before.

    Why is this so hard to grasp?

  3. rob says:

    Makes the Fed’s $45B record earnings kind of mute doesn’t it?

  4. Greg0658 says:

    AndyT – “massive amounts of credit to the American public in order for us to invest in an “asset” that depreciates over time and creates no real economic yield?”
    keywords – massive – invest – no real yield
    what is the goldielocks just right $s amount to allow the pyramid scheme to work so Americans can MEW?

  5. call me ahab says:

    wow- from CNBC

    Jobless Claims Unexpectedly Rise by 11,000 to 444,000

    Retail Sales Disappoint, Fall 0.3% in Dec.

    doesn’t sound like much of a recovery- lol

  6. rktbrkr says:

    This is a snapshot of current projected losses
    1)with banks holding back from foreclosure sales
    2)before the next wave of Option ARMs
    3)before widespread jingle mail

    how many zeros in trillion?

  7. rktbrkr says:

    Jobless Claims Unexpectedly Rise by 11,000 to 444,000

    Retail Sales Disappoint, Fall 0.3% in Dec.

    Gentle Ben will just have to print more money for his bankster friends to invest in stocks & commodities to keep this recovery going!

  8. tagyoureit says:

    We created GSEs to fulfill a vision of America build upon a foundation of maximum consumption (maximal demand)?

  9. gbgasser says:

    Andy @ 7:10

    You also need to ask “Why was there a push to privatize Fannie/Freddie when they were functioning quite well in their public mode ?”

    These behomths were created decades ago and it wasnt until the neo-liberal ideology of privatization and deregulation took hold in the last couple decades that we have seen the risk profile change dramatically.

    And Barry, why even mention the “deficit”? The deficit is a meaningless number. There is no particular negative number that is bad. There can be very bad economy even with a surplus. It was bad to bail the banks out but not because it adds to the deficit.

  10. call me ahab says:

    gbgasser-

    Freddie was always a GSE- created that way- Fannie was a government Agency spun off by Johnson to make it easier to finance the Vietnam War-

    Freddie was created in 1970 so Fannie would not be a monopoly in the secondary mortgage market

  11. dead hobo says:

    call me ahab Says:
    January 14th, 2010 at 8:43 am

    Jobless Claims Unexpectedly Rise by 11,000 to 444,000 … Retail Sales Disappoint, Fall 0.3% in Dec. …

    doesn’t sound like much of a recovery- lol

    reply:
    ——-
    It doesn’t matter. Stock market bulls (aka account managers) still want that 1.5% – 2% account management fee and will say anything to get your account or talk you out of new cash. CNBC infomercials want to make their advertisers happy and will happily prostitute themselves largely.

    Some of the lies to part you from your money:

    The fundamentals are getting better and a recovery is beginning

    ZIRP financing will make the market rise. It’s only a trade. The economy isn’t good, but the market is on fire. Get in fast! The easy money is gone, but I’m a bull here! Ignore the economy; look at the market. ZIRP to continue and so will the stock market increase. We make good calls here.

    This is like 19XX, just look at the chart. All other recoveries have bounced back famously and so will this one because all other ones have.

    Housing is last year’s story. Spending is this year’s and the inventory cycle is ready to fly! People are ready to spend. Can you say ‘pent up demand?’.

    Bonds are a great alternative. (Ignore that with ZIRP, interest rates can’t fall any further unless Uncle Stupid decides to go negative. This means bond rates have nowhere to go but up, which means nothing but capital losses to look forward to for those who trust their advisers. Expect to hear from them, “Who could have seen that coming???)

    High oil prices mean an expanding economy. This is a leading indicator. Give me your money (or, don’t take your money out). The market is ready to take off.

    ******

    Getting my elderly relative out of the funds and into cash last year was a proud moment for me. When the market stops being a fraud vehicles, I might suggest my relative return, assuming old age hasn’t won out by then. When the markets were safe, the adviser did a good job. At this time, it’s just a commission scam for Wall Street.

    I made 22% in 2007 and lost about 3/4 of that 22% in 2008. So, my position is about the same as having made about 5% in 2007, no 2008 loss, and cash from then on. That’s better than most at this time, even taking into consideration “the greatest stock buying opportunity in our generation”. I may have missed the big run up (because the fundamentals didn’t support it and still don’t), but I’m still better off than most reading this.

    Let me be blunt … this market is overvalued by a large amount, it will only go up if the Fed pumps it up some more, and it has nowhere to go but down because the economy sucks and will probably suck worse before it starts to not suck.

  12. DeDude says:

    The total losses of $448 billion on those loans that default has to be compared to the profit on all the loans that do not default. What has been the profit on performing loans in the past year and how many years would it take to cover that $448 billion loss? That is the information needed for those of us who want to be informed, not just outraged. Since F&F pretty much have a monopoly for the next decade they actually can increase the price for their products to make sure that their need for public assistance is temporary and not that large. The politicians would have to balance the effects of such a price increase on the economy vs. the effects of giving them bigger and longer credit lines.

  13. cognos says:

    @DeDude — Thanks.

    Credit losses only matter vs LT interest spreads. So given that FNM/FRE should easily clear a 1% interest spread… and even 2-3% if fully govt guaranteed. It looks like “crisis losses” are equal to about 10 years of “credit loss accurals” if properly accounted for. That sounds managable.

    Now I read somewhere, that previously FNM/FRE had only accrued 18 bps/yr for actual credit losses (the rest was call “earnings” to the private side, or “bonuses” to the execs). Turns out this is the problem.

    But its an easy fix. As public institutions FNM/FRE could spin off similar aggregate cash to the Treasury that the Fed does. This is currently $40B/yr… and in ten year could prob be $75B/yr each. This can more than make up for this “mistake” and “learning process”.

    Its funny when I think longer-term in my hedge fund work… that politicians and pundits do about government policy. Shouldn’t all govt policy be made with 25-50 yrs in mind?

  14. arogersb says:

    I thought the cost of the wars was around 900 billion. Why do you say the bailout of F&F would be bigger than that?

  15. Rikky says:

    dead hobo thanks for sharing. in 2007 i made 12%, 2008 lost 30% and last year made 15% so near break even. i’m ready to move most of my remaining money out of the market. its strikes me as long in the tooth.

  16. finBig says:

    This may be a dumb question. The mortgages are paid via monthly payments. Why doesn’t the government create a simliar payment plan rather than paying the mortgages in full? Another way of saying it….why not $448 Billion over 30 years? Wouldn’t this money come in this way anyway if there wasn’t the defaults?

  17. DeDude says:

    cognos; I agree that policy should be made with the 25-50 year in mind. Problem is that it is always made with the 2, 4, or 6 year election cycle in mind. A couple of decades ago a liberal senator from NY raged about the plundering of the social security trust fund, he was not taken serious by the other senators (because fixing that problem would hurt in the next election, not fixing it would just hurt the next generation). That is the last time I have seen any politician take the long-term future more serious than the next election.

  18. DeDude says:

    “Now I read somewhere, that previously FNM/FRE had only accrued 18 bps/yr for actual credit losses (the rest was call “earnings” to the private side, or “bonuses” to the execs). Turns out this is the problem”

    Yes a big part of the problem was that F&F became private for profit entities. They started getting all the associated problems of shareholders and leadership wanting to scim huge sums of money out of the enterprise. That is also why they got themselves into so much of that risky (high profit) sh!t at the end of the housing boubble (bonus envy and shareholder gread provided strong incentives to take the risk). If they had simply been a government agency they would not have worried about private competitors taking away their business share (that would just be less work). But as you say, it is an easy fix.

  19. DeDude says:

    Sort of interesting that the half trillion estimate is pretty close to the first estimates of what the S&L crisis would cost (another disaster build on lack of proper regulation and precipitated by falling house prices).

  20. anjan says:

    Things might get even worse. Mish has an article on the severe downward pressure on wages in the small business sector detailed by NFIB. With states going bust, outsourcing running rampant and the supply of applicants for jobs (ie unemployed) all in play, I could easily see wages deflate significantly forcing more losses from the GSEs. I wonder if her methodology accounts for this

  21. [...] – Fannie Mae (FNM) and Freddie Mac (FRE) bailout costs are pretty astounding. [...]

  22. Mythiot says:

    The GSE losses are less of a problem than they appear. To cover the losses, the Treasury will issue bonds and give the proceeds to Fannie and Freddie. The Fed now owns 73% of the debt issued by the GSEs, so 73% of the funds that Treasury gives to Fannie and Freddie will be paid to the Fed. The Fed will then give that 73% back to the Treasury. The Fed has basically “sterilised” GSE debt since now it doesn’t matter whether the loans are paid back or not. Which is probably a good thing because if the economy get worse, then the President can call for a “mortgage holiday”, wherein homeowners will be allowed to suspend payments while staying in their homes, without a negative impact on the GSE debtholders (except for the 27% not held by the Fed). The GSE debt will probably stay on the Fed’s balance sheet for the next thirty years, decreasing incrementally as the loans expire, until it’s all gone.

  23. Andy T says:

    “BR: You seem to have a temporal comprehension issue.

    There is a difference between what occurred pre-crisis — call it 1938 (Fannie created) to 1968 (Freddie created) to 2001 (rates start sliding towards 1%).

    What occurred AFTER the crisis, post-September 2008 — the conservatorship, bailouts, and tax monies wasted — was not a cause of what occurred before.

    Why is this so hard to grasp?”
    ~~~~~~~~~~~~~~~~~~~~~~~~~
    For such a seemingly smart guy, it’s amazing to me that you cannot grasp that the general trend in US Housing price the last few decades was:

    a) Affected/Created by the TRILLION DOLLAR BID from Governments Sponsored Entities for mortgage securities over the same period; and,

    b) Artificially boosted by clear “pro-housing” tax policies.

    I acknowledge and accept all of of your arguments in regard to the housing bubble. The were all contributing factors. Lax lending standards and reckless greed on the part of the borrowers and lenders were contributing factors. However, one should wonder ‘why’ these borrowers and lenders ever wanted to “really own a house.” The GSEs/Gov’t helped to create the never ending trend. Home prices would never go down….So why not get a little crazy? Why can’t you acknowledge that the GSEs/Gov’t Policy were a part of the problem?

    Your focus/conceptual view is limited to a small period of time. If you pull back a few decades and try to grasp the larger trends and impacts, you would understand the big role that GSEs and government policy played in fostering the trend, and thus, the overall background to the story.

    On top of this, there is obviously a ‘bigger story.’ The Federal Reserve lost control of the money/credit supply a long time ago to the “cavaliers of credit.” (GSE’s were one of them) We went on a debt binge unlike we’ve ever seen….thus, the housing bubbles (and bubbles of every kind) everywhere in the world.

    This will be the last pixels I spill on this subject and the last time I’ll comment on this site. Your ad hominem attack told we what I needed to know.

    Good Luck and Best Wishes.

  24. ArmadaRisk says:

    “[BR: I have researched this extensively, and I found no evidence that FNM/FRE purchased many non-confirming loans pre-2006 -- certainly not in significant quantity or dollar volume, in 1993 or later. Do you have some data/evidence of this? Or is it just "I know a guy who knows a guy. . . ?" ]”

    Barry, I would like to apologize for my tone in the prior Fannie/Freddie discussions and for any insulting statements that I made.

    However, I don’t believe that you have fully researched Fannie/Freddie’s role in subprime.

    In 2002, Fannie/Freddie purchased $38 billion of the total $213 billion subprime originated that year.

    In 2003, Fannie/Freddie purchased $81 billion of the total $332 billion subprime originated that year, and 49% of the subprime volume from the top 20 subprime issuers.

    In 2004, Fannie/Freddie purchased $175 billion of the total $530 billion subprime originated that year, and accounted for 44% of the subprime securities issued.

    In 2004, Fannie/Freddie purchased $169 billion of the total $625 billion subprime originated that year, and accounted for 33% of the subprime securities issued.

    Even as their share of the subprime market slipped in 2004, they still bought 27% of the subprime loans originated and issued 33% of the subprime securities issued that year. Does this sound like “no evidence that FNM/FRE purchased many non-confirming loans pre-2006″?

    Over the 4 year period, they bought $463 billion or 27% of the subprime loans originated.

    This data can be found on the website of the current conservator of Fannie and Freddie[1], under OFHEO research papers, various years. Additional information on the extent of the GSE’s purchase of Private-Label Securities, which was sizeable, can be found at the same source, along with information on their entry into the Interest Only and Option Arm markets.

    Additionally, there is some evidence that Fannie’s subprime loans had lower interest rates that standard subprime loans[2], further increasing the incentive for subprime borrowers to enter the market. The purchase of subprime loans by such big quasi-government players as Fannie and Freddie no doubt added to their legitimacy and acceptance by the broader market.

    Further, simply pointing out that Fannie was created in 1938 and the housing crisis happened in mid-2000′s does not help your argument. This is a bit along the lines of saying that Hitler didn’t have anything to do with WWII because he was born in 1889 and WWII did not start until the late 1930′s. The size and nature of Fannie and Freddie were greatly changed by the events of the 1980′s and 1990′s.

    Finally, please do not think that I am blaming the credit crisis on Fannie and Freddie. This blame falls squarely on the Federal Reserve and on Congress’s inability to understand fractional-reserve banking and the impact of low reserve requirements on the supply of money and credit. But Fannie and Freddie played THE key role in transmitting the credit explosion to the housing sector, which is unfortunate because such a large percentage of the US non-business population thus became involved and assumed a debt burden they could not bear.

    [1] http://www.fhfa.gov/Default.aspx?Page=72
    [2] http://www.huduser.org/publications/pdf/subprime.pdf

  25. DeDude says:

    ArmadaRisk; so you are making Barry’s point. The GSE’s who had over 70% of the mortgage market, had only 27% of the subprime (18% in 2002, 24% in 2003), so they were late to enter and did not have nearly as much weight in subprime as the other private companies that securitised mortgages.

  26. DeDude says:

    “Affected/Created by the TRILLION DOLLAR BID from Governments Sponsored Entities for mortgage securities ”

    Do you really think that if there had been not privately owned GSE’s, there would not have been some other private companies that would have done the exact same thing? Mortgage securities were created because there was a huge demand for them (money looking for AAA rated paper to invest in). That is why eventually private companies were created whose business model was to get people into houses they could not afford. It didn’t matter because as long as it was AAA paper they had more people who wanted to buy it than they had borrowers that could carry the underlying debt. If companies were created to make non-conforming mortgages (because initially the GSE’s would not make those), why would companies not be created to make the conforming mortgages if no GSE’s existed to take care of that need.

  27. Andy T says:

    DeDude: Do you realize what you’re saying….”the GSE’s who had over 70% of the mortgage market…”

    Just stop right there and evaluate your statement. That, in itself, is nutso. Why should a “government sponsored anything” be 70% of a market….

    And to just flip the last component of your silly argument on it’s head….what if the government decided to buy up 27% of the U.S. oil market every year? Would that make a difference?

    As any commodity trader knows, 95% of the buyers and sellers have ZERO effect on a market…it’s the last 0-5% of buyers and sellers that sets the price for the ENTIRE market. Think about it…

    In other words….let’s say there’s 85million barrels of oil for sell everyday. And, there’s 85 million barrels of buyers everyday. What happens? The market is balanced, right? There is little price movement. Now, what happens when an additional 1 million barrels of buying hits the market and there are no more barrels for sell? What happens? The price of the commodity goes exponentially higher…

    Get it?

  28. Andy T says:

    DeDude. I comment so rarely here that I forgot you were a moron and one of the reasons that so few people comment here any more. I regret even addressing anything you wrote.

    Good Luck and I hope that you find that ignorance is bliss.

  29. ArmadaRisk says:

    DeDude,

    They don’t have to have an equal market share to their prime business to have a major impact on that sector, which, until Fannie and Freddie got involved, was a niche and highly specialized sector of the market. It was also one in which lenders had a keener interest in paying attention to the details of the deal than prime because of the less-liquid market, that is, less liquid until Fannie and Freddie added legitimacy to subprime securities.

    The fact that in 2004 they bought nearly half (49%) of the subprime loans originated by the top 20 subprime shops means that Fannie and Freddie had become a MAJOR source of funding for these types of loans. If you own a store and two customers represent nearly 50% of the sales you make, that would make them pretty important, don’t you think?

    Additionally, until 2005 (when Fannie got in trouble and had to scale back their purchases to re-capitalize), their market share in the subprime sector had been aggressively growing. That is, as they had established a dominant market share in the conforming sector, they were aggressively moving into the subprime sector.

    GSE share of subprime originations by year:
    2002 – 18%
    2003 – 24%
    2004 – 33%
    2005 – 27%

    I believe the main point of Barry’s argument is that Fannie and Freddie were not very involved in subprime until after the crisis, that is, they stepped in to act as a market maker during the crisis. The data and the OFHEO reports clearly indicated that the GSEs played an ACTIVE and GROWING role in the subprime market leading up to the crisis.

    As a correction to my post above, I wrote 2004′s stats twice instead of 2004 and 2005. The 7th section of my previous post should have read:

    “In 2005 [not 2004], Fannie/Freddie purchased $169 billion of the total $625 billion subprime originated that year, and accounted for 33% of the subprime securities issued.

    Even as their share of the subprime market slipped in 2005 [not 2004]. . . .”

  30. DeDude says:

    “Why should a “government sponsored anything” be 70% of a market”

    Why should it not? Because some dumb little brainwashed clowns would start running around in circles and cry soci@lism, soci@lism? The criteria should not be whether it something gets idiots paranoid but whether it serves “we the people” better or worse. “We the peoples” government has pretty much 100% of the market for military forces, police forces, roads and a lot of other infrastructure, because it serves nobody but the financial sector vultures to hand those things over to the private enterprise cult and its ubberpriests. We now have a clear demonstration that private enterprise cannot handle the mortgage securitization market and not only will use it to milk hard working people but then completely disappear when it implodes. Without the GSE’s and governments rescue of them there would only be a cash market for housing today – and that kind of a chock would destroy our economy.

    You are rolling around in your own pathetic arguments trying to defend your “free market for the vultures” religion. At the same time as you argue that 95% of the byers have ZERO effect on the market, you want to tell me that if government took over 27% of the oil market then it would have some kind of huge effect. The traditional argument about GSE’s are that they kept rates lower, now you are saying that they added bying power (like government bying a million barrels of oil) and drove prices higher – tjek reality and think again. Furthermore, the market actually does not care who the “owners” are it only cares about supply and demand. It makes no difference for the market whether the big dominant companies are owned by “we the people” via a democratically elected government or via a less democratic set of pension funds and life insurance companies. Only difference is that “we the people” have ownership via an elected government the companies will be subjected to more preasure for acting in the interest of “we the people”. But I regress because the GSE’s were actually privately owned and that was the problem.

    I am sorry if it is to hard on you to have your “free market” religion and its ridiculous assumptions challenged with facts and arguments. I personally believe in the free market of ideas; if they can’t be defended by facts they should be abandoned. But you go ahead and stay in your little religious cocoon until some brain activity or reality breaks it.

  31. DeDude says:

    ArmadaRisk;

    Years ago the GSE’s had 90% of the mortgages and they were all safe conforming loans. The remaining part was private companies that made highly specialized niche products (subprime, etc.) and were very good at doing so in a safe manner, all was good and everybody did what they knew how to do. However, Wall Street found out that via the rating agency scams and playing on the incentive structure in the real estate financing chain, they could make a lot of money. All they had to do was push substandard (non-conforming) loans onto unsophisticated regular folks and then use the rating agency scams to bundle those into securities that could be presented as giving higher yields but being as safe as agency debt. As these money trains grew bigger (with everybody in the chain taking big juicy cuts for themselves) the GSE’s share of the mortgage market went down from 90% to 70%. Because the GSE’s were privately owned companies with shareholders and bonuses totheir leadership the loss of market share was actually a problem – much bigger than the problem of taking more risks by accepting more substandard loans. Had they actually been government owned the leadership and owners couldn’t have cared less about loss of market share (indeed Bush would have applauded that loss all the way down). The GSE’s did not drive subprime, they reacted to it the way any privately owned company would react to something that is competing for its business. But they chocked on subprime earlier than the private companies because they had to stand behind their own paper, in contrast to the rest of the private sector who sold their subprime paper without guarantees and then washed their hands and could let the owner of that paper carry all the losses.

  32. [...] Laurie Goodman at Amherst Securities via the Big Picture: Freddie will likely lose around $178 billion of its $1.86 trillion credit guarantee book, and [...]

  33. [...] Estimated GSE Losses = $448 Billion (The Big Picture) – In a 17 page report released Tuesday, Goodman tried to estimate the total losses that the now-government-owned GSEs will accrue. [...]