“The truth is that they [Fannie and Freddie] never really wanted to dig too deep into the true nature of the loans they were buying.” Via Yahoo Finance.
I believe it. And that tells me that recklessness, or at least a horrendous lack of due diligence, was a huge reason Fannie and Freddie failed, costing U.S. taxpayers bazillions.
Anyway, when you have an implied government guarantee, why waste time checking the quality of the mortgages?
That idea also fits my open secret hypothesis, that everybody in the know knew those loans stank but because everybody was making a ton of money they didn’t want to rock the boat by shining a light on the quality of the loans.
That’s why the guys who discovered the house of cards (and made billions shorting the stuff) were all outsiders. The insiders didn’t want the music to stop. None of those brilliant, multimillion dollar a year banking guys figured it out until after the train wreck, if they ever figured out at all.
Anybody from Fannie or Freddie gone to jail yet?
{ 5 comments… read them below or add one }
JGBHimself 07.13.10 at 5:32 pm
John, while we do not disagree with you about some of FMae&FMac’s stupid mistakes in getting into the subprime mess, you must know that they did it almost too late to run up too big of a bill on U.S.
Let me share some other numbers with you: Prior to 2002 there were almost NO non-agency [not FMae&FMac] securitized RE loans made: from 02 to 04 almost all of the non-agency, investment bank securitized RE loan packages were to prime loan property.
However, from 04 to 07, those same non-agency, investment banks increased their percentage of RE loans to over 50% of the total RE mortgage market, AND they shifted into making 75% subprime & ARM loans to U.S. Between 04 & 07 they made over US$ 2.5 Trillion subprime & Alt-A/ARM loans, and less than US$ 1 Trillion in prime loans. Of those 04-7 subprime & ARM loans over 80% are now “bad” - behind in their payments, underwater and in foreclosure.
Those “Bad” RE loans were made in the “dead zone” = 03-06; in the Sand States = Cal, Nev, Fla & AZ; they were made by Countrywide/BoA, WAMU/Chase, Wichovia/WellsF and by New Century/BK. Very few were sold to FMae&FMac; most were sold in NY to “investors” by Goldman, BearSterns, et al.
At the beginning of 08 with the RE collapse, the non-agency securitized RE loan packages dropped off to nothing, and by July 08 FMae&FMac were the ONLY entities making RE loans to U.S. [FHA less than 3%] In July WBush, a Republican(?), “nationalized” both FMae&FMac and guaranteed China that their US$ 750 Billion “investment” in FMae&FMac securities would be “covered” by US. [China has another US$ 750 Billion invested in US TBills - which were & are guaranteed by U.S.]
What we have asked, and cannot find out, is what has happened to those US$ 2.5 Trillion in investment bank created securitized RE subprime & ARM loan packages.
John, we absolutely DO agree with you, the situation with FMae&FMac was disgusting, and tis not over yet. But, we must remind you and ourselves that that mess was only the tip of the iceberg. And, in spite of the 100+ temps, we still cannot see the size and depth of the non-FMae&FMac mortgage mess.
What you and we DO know is that more than 50% of ALL foreclosures since 07 to date, have been in the Sand States = Cal, Nev, Fla…, AND here in Arizona !!
John Wake 07.13.10 at 10:34 pm
What a great comment! Thank you so much. I love numbers.
I wasn’t aware how short the non-agency bubble was.
So what was the downfall of Fannie and Freddie? I had them lumped together in my mind as being in a similar category as the non-agency lenders. I’m guessing they increased their sub-prime and Alt-A significantly during the 2000s. That would be an interesting chart!
One more question. Price increases in California really started to take off in 2002 and 2003. Was there a financing change at that time that triggered it? Interest rates had become super low (and prices had been increasing rapidly for years anyway as they bounced back from the 1990s price bust). Was that it? Or was there also new money coming into California real estate with new sub-prime, interest-only or some other new financial product?
http://www.arizonarealestatenotebook.com/2010/06/30/case-shiller-home-price-index-phoenix-homes-appreciate-in-april-for-first-time-since-december/
Peter Fork 07.14.10 at 9:56 am
Here are some charts that show private players were a lot more active in the subprime bubble than Fannie or Freddie:
http://krugman.blogs.nytimes.com/2010/06/03/things-everyone-in-chicago-knows/
Here’s a FDIC report from 2006 saying among other things that “MBS Growth Has Shifted from Agency to Nonagency Issuers”:
http://www.fdic.gov/bank/analytical/regional/ro20063q/na/2006_fall01.html
I agree the agencies were well not run, but it would be a mistake to blame them for the whole subprime mess. These agencies actually reduced the amount of mortgages they were issuing after 2003.
RE Investor 07.16.10 at 10:46 am
“That’s why the guys who discovered the house of cards (and made billions shorting the stuff) were all outsiders. The insiders didn’t want the music to stop. None of those brilliant, multimillion dollar a year banking guys figured it out until after the train wreck, if they ever figured out at all.”
I want to change this a bit. I believe that those brilliant, multimillion dollar a year banking guys knew EXACTLY what was going on, they just know in our bought-and-paid-for congress, SEC and other regulatory agencies there would be NO CONSEQUENCES and they would still walk away with millions in severance EVEN if the whole house of cards failed completely. That is the way (big) business and (big) Government works today. Heads I win, tails you lose. Yesterdays Goldman Sachs settlement shows that nothing has changed. GS admits no wrongdoing, and the SEC can say “this is the largest settlement in history” as a soundbite for the masses. It sounds good, but considering that GS makes a PROFIT of over 7 BILLION dollars a year, a $550 million dollar settlement is like me reaching in to my pocket and paying $150 dollars for a traffic fine, irritating but certainly won’t make me stop speeding on the highway. A more appropriate settlement would have been at least a billion dollars AND a sanction on their proprietary CDS and MBS trading desk for at least 6 months. This would amount to getting your first DUI, paying a $1000.00 fine and not being able to drive for 30 days. That has some teeth, but also sends a message to Citi, JPMorgan, Morgan Stanley et al that the SEC and regulators are not just looking at porn sites anymore. Now, what are the chances of that happening in our corrupt Federal government? About 1 in 1000……
John Wake 07.25.10 at 4:35 pm
Peter, Very nice.
Notice that the graphic that Krugman uses only shows the non-agency MBS, it doesn’t show the agency MBS.
Others have reported that government-mandated loans accounted for two-thirds of “junk mortgages.”
And anyway, the argument is more that the Community Reinvestment Act and Fannie and Freddie created the subprime boom even if the non-agency MBS later took a significant portion of the subprime market.
I’d need to see more data.