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ElwoodBlues · M
@HoraceGreenley [quote] No one would underwrite the subprime mortgages without the loan guarantees.[/quote] FALSE.
Banks competed to make loans and afterwards hoped to sell them on the secondary market, in which the biggest players were Fannie & Freddie. There was no prior check with Fannie or Freddie. There was no guarantee they could sell a subprime loan on to Fannie or Freddie. Fanny & Freddie bought very few subprime loans.
Athough they did buy Alt-A loans, there was again no guarantee that a primary lender could sell any particular loan to Fanny or Freddy. The problems came, not from subprime loans but from loans in overheated markets - see the table below.
Some more facts:
[quote]Fannie and Freddie never purchased subprime loans in any significant quantities. They did build large portfolios of AAA-rated, privately-issued subprime mortgage-backed securities, but these securities differed from whole loans because they generally enjoyed a very substantial credit enhancement — meaning they were structured in a way that made them significantly safer investments. But although they generally stayed away from buying subprime loans directly, the two GSEs did begin acquiring Alt-A and interest-only loans on a large scale at the end of 2005 in an effort to win back market share. While both types of loans had features that made them riskier than traditional, prime mortgages, they were not subprime. Moreover, both types of loans tended to be made to borrowers with relatively high credit scores, and they tended not to involve very low down payments.
About 80% of Fannie and Freddie's combined $213 billion in credit losses between 2008 and 2011 involved mortgages that were either Alt-A, interest-only, or both. As a result, it is common for GSE losses to be attributed to "subprime or other 'high risk' mortgages." Given this performance record, it may seem reasonable to lump these loans with subprime mortgages. Grouping all these non-traditional mortgages into a "high risk" bucket because of high realized-default rates, however, introduces an element of hindsight that thoroughly confuses the issue. It ascribes huge significance to factors like mortgage structure that in reality had very little effect on the volume of mortgage defaults. The simple fact is that any mortgage on a house that declines in price by 70% is likely to appear "high risk" in hindsight.
Alt-A and interest-only loans were called "affordability products" because they were originated in areas — Miami, Tampa, Arizona, Las Vegas, and parts of California — where house prices had grown faster than borrowers' incomes. As a result, these mortgages were concentrated in the precise locations where house prices fell most dramatically when the bubble burst.[/quote]
[b] https://www.nationalaffairs.com/publications/detail/fannie-freddie-and-the-crisis [/b]
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Banks in overheated housing markets suddenly had lots of underwater mortgages. So why not just let them fail and let their stockholders take a bath? Why the bailout? It's because falsely rated securitized mortgages were all over the place, owned by big institutions with credit default swaps waiting in the wings.
[quote] The value of credit default swaps stood at $45 trillion compared to $22 trillion invested in the stock market, $7.1 trillion in mortgages and $4.4 trillion in U.S. Treasuries. [/quote] There was no clearinghouse for CDSs. Companies didn't have to declare them as risks on their books. $45 trillion in unregulated unsecured CDSs dwarfed everything else in the market. 45 trillion in unregulated unsecured CDSs made the whole system brittle, as was discovered when Lehman was allowed to fail and brought due $400 billion in CDSs.
[quote] I mean why hadn't this happened before? Something had to change. [/quote]
This DID happen before. It happened in 1929. And to prevent it from happening again, the government imposed strict regulations on banks. But by the early 2000s there were non-bank entities offering mortgages and there was the secondary mortgage market taking loans off the banks' books thus allowing banks to lend again.
My wife and I knew General Motors was in big trouble when GM credit & finance re-sold our mortgage. The institution to which we wrote our mortgage check kept changing. And it was never Freddie or Fannie; the secondary mortgage market was and is huge. And that's OK as long as the risks aren't falsified. But the rating agencies took "tranches" of crappy mortgages and rated them AAA, thus falsifying the risks.
Banks competed to make loans and afterwards hoped to sell them on the secondary market, in which the biggest players were Fannie & Freddie. There was no prior check with Fannie or Freddie. There was no guarantee they could sell a subprime loan on to Fannie or Freddie. Fanny & Freddie bought very few subprime loans.
Athough they did buy Alt-A loans, there was again no guarantee that a primary lender could sell any particular loan to Fanny or Freddy. The problems came, not from subprime loans but from loans in overheated markets - see the table below.
Some more facts:
[quote]Fannie and Freddie never purchased subprime loans in any significant quantities. They did build large portfolios of AAA-rated, privately-issued subprime mortgage-backed securities, but these securities differed from whole loans because they generally enjoyed a very substantial credit enhancement — meaning they were structured in a way that made them significantly safer investments. But although they generally stayed away from buying subprime loans directly, the two GSEs did begin acquiring Alt-A and interest-only loans on a large scale at the end of 2005 in an effort to win back market share. While both types of loans had features that made them riskier than traditional, prime mortgages, they were not subprime. Moreover, both types of loans tended to be made to borrowers with relatively high credit scores, and they tended not to involve very low down payments.
About 80% of Fannie and Freddie's combined $213 billion in credit losses between 2008 and 2011 involved mortgages that were either Alt-A, interest-only, or both. As a result, it is common for GSE losses to be attributed to "subprime or other 'high risk' mortgages." Given this performance record, it may seem reasonable to lump these loans with subprime mortgages. Grouping all these non-traditional mortgages into a "high risk" bucket because of high realized-default rates, however, introduces an element of hindsight that thoroughly confuses the issue. It ascribes huge significance to factors like mortgage structure that in reality had very little effect on the volume of mortgage defaults. The simple fact is that any mortgage on a house that declines in price by 70% is likely to appear "high risk" in hindsight.
Alt-A and interest-only loans were called "affordability products" because they were originated in areas — Miami, Tampa, Arizona, Las Vegas, and parts of California — where house prices had grown faster than borrowers' incomes. As a result, these mortgages were concentrated in the precise locations where house prices fell most dramatically when the bubble burst.[/quote]
[b] https://www.nationalaffairs.com/publications/detail/fannie-freddie-and-the-crisis [/b]
Banks in overheated housing markets suddenly had lots of underwater mortgages. So why not just let them fail and let their stockholders take a bath? Why the bailout? It's because falsely rated securitized mortgages were all over the place, owned by big institutions with credit default swaps waiting in the wings.
[quote] The value of credit default swaps stood at $45 trillion compared to $22 trillion invested in the stock market, $7.1 trillion in mortgages and $4.4 trillion in U.S. Treasuries. [/quote] There was no clearinghouse for CDSs. Companies didn't have to declare them as risks on their books. $45 trillion in unregulated unsecured CDSs dwarfed everything else in the market. 45 trillion in unregulated unsecured CDSs made the whole system brittle, as was discovered when Lehman was allowed to fail and brought due $400 billion in CDSs.
[quote] I mean why hadn't this happened before? Something had to change. [/quote]
This DID happen before. It happened in 1929. And to prevent it from happening again, the government imposed strict regulations on banks. But by the early 2000s there were non-bank entities offering mortgages and there was the secondary mortgage market taking loans off the banks' books thus allowing banks to lend again.
My wife and I knew General Motors was in big trouble when GM credit & finance re-sold our mortgage. The institution to which we wrote our mortgage check kept changing. And it was never Freddie or Fannie; the secondary mortgage market was and is huge. And that's OK as long as the risks aren't falsified. But the rating agencies took "tranches" of crappy mortgages and rated them AAA, thus falsifying the risks.