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.

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.

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]. . . .”

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

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?

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.

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