Fed's seek further control...

[mookiemookie]

Originally Posted by UnderseaLcpl

Negative. The term "subprime" may not have existed until then ( I wouldn't know) but Fannie Mae was created with the intent of providing a secondary mortgage market through purchasing risky loans, thus setting the groundwork. A rose by any other name still has thorns.

You misunderstand what FNMA/FHLMC actually did. They were bound by charter to only buy conforming (i.e. not subprime) mortgages. This only changed in the mid-2000s when they began losing market share of the mortgage market to private securitizers.

Yeah, because Wall Street thought it had a backup plan in the security promised to GSEs by the Fed. You're missing a key point here, and that is that this whole industry is a reflection of what it is built on. Like dollars themselves, it was only worth anything because people thought other people thought it was. A whole industry was built, and then expanded upon the premise that the state would buy debt, and there was a killing to be made while high- interest payments came in. It didn't take long for a whole trading system to grow up around that system, but the system itself was bound to collapse. If there had been no Federal housing initiatives of this type banks wouldn't usually lend to high-risk customers and there would be no crisis.

No. The ace in the hole "backup plan" was the fact that the originating lender did not need to keep the loan on their books. they could make any loan at all, as they knew that there would be someone on Wall Street would would buy it and securitize it. The voracious demand for securitized debt can be traced back to the decisions of the Fed - with rates as low as they were, the reach for yield led asset managers to take on other assets than traditional bonds and Treasuries. Mortgage backed securities were yielding much higher rates than any other security out there - coupled with the fact that defaults were low due to housing boom, and credit rating agencies putting their stamps of approval on all of it. It was a great deal.

It was a system of passing the buck and shortsightedness. Loan originators didn't care about the quality of the loans they made, as they could sell it to a Wall Street securitizer. Wall Street securitizers didn't care about the quality of the loans they bought, as the risk of any individual loan would be mitigated (or so they thought) by pooling it with other loans and selling it to investors. The investors didn't care, as they were earning great yields and the credit rating agencies had rated this stuff AAA. Everyone wins.

And why didn't they care? Why was there a way to trade bad loans in the first place? Government made it happen. It's just another unintended side-effect of screwing around with the market.

Ah, ah - be careful there. Did government MAKE it happen? Or did government LET it happen? It's the latter - the Federal Reserve completely failed to reign in banks making liar loans (loans with no income verification) or NINJA (No Income, No Job or Assets) loans. And why was there a market for these kind of loans? FNMA/FHLMC were forbidden by charter to purchase these in the early years of the credit bubble? Where were they going? To the private label securitizers!

Like I said, they laid the groundwork. They created a market where none existed before, and where one should not yet have existed.

Are you blaming securitization? The process of pooling mortgages into a security? If you are, then you should realize that the first mortgage backed security was issued in 1981. That's way before the crisis, and thus cannot be a cause of it.

FNMA and FHLMC were rife with fraud and poor risk management practices. but they did not create the market for mortgage backed securities. The private label securitization market had developed on its own by the 1990s. Wall Street was securitizing all sorts of debt - as I said before, auto loans, credit card debt, student loans, etc.

Let's do a little experiment. Imagine that the GSEs had been taken out of the picture during the mid to late 1990s (imagine they went bankrupt, or swallowed up by a black hole, or whatever). What happens? It changes nothing! The Fed still lowers rates to historic lows, asset managers still search for yield, loan originators still make crappy loans to satisfy that yield and earn a hefty profit, the credit rating agencies still stamp it all AAA, the Wall Street firms still get heavily into derivatives and still overleverage themselves. None of that relies on the GSE's existence or non-existence to happen.