Fannie and Freddie

October 1, 2008

A followup email regarding a conversation about Freddie and Fannie:

I’m not so convinced that Fannie and Freddie didn’t play a large role in the subprime mess, beyond just being thinly capitalized, as we discussed/concluded on Monday. I don’t think we either knew or acknowledged that these two institutions were the largest purchasers of packaged subprime mortgages between 2004 and 2007, as the article below states.

http://www.realclearmarkets.com/articles/2008/10/the_long_road_to_slack_lending.html

So, it seems to me that if an agent of the Federal Government is buying this stuff up in great quantities, it bears a great deal of the responsibility for the demand it created. This doesn’t absolve the bankers on Wall Street, but without a rabid buyer, their incentive to move these mortgages through the system would have been greatly reduced.

This article also goes on to talk about the press and the Boston Federal Reserve’s (Seriously, other than Babe Ruth, has anything good come out of Boston in the last 100 years?) contribution to putting pressure on banks to create such loans.

This article from 2002 by Allen Fishbein (who appears sympathetic to the general idea of greater access to capital) discusses the potential negative consequences of Fannie and Freddie’s move into subprime mortgages. The concluding paragraph:

http://www.nhi.org/online/issues/125/goingsubprime.html

“It is ironic that, with all of the talk in Washington about investor need for greater transparency about the capital market activities of the GSEs, the discussion does not extend to finding ways to improve the monitoring of their loan purchase activity. Yet this is precisely what is needed to judge the impact of automated underwriting, risk-based pricing, and increased GSE subprime activity on affordable housing and credit access by underserved groups.”

Anyway, I’m left with the impression that Fannie and Freddie played a bigger role in the subprime mess than we concluded on Monday, even if they didn’t provide guarantees for the loans themselves.

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