Will someone explain to me what Fannie and Freddie have to do with the credit crisis?
 

I really want to know. I keep reading and hearing all of these conservative pundits and mouthpieces saying the crisis was caused by Fannie and Freddie and because the liberals wanted poor people to own homes.
I can't, however, find any facts to back that up.

Fannie and Freddie were taken over by the government before the current credit crisis emerged. Any subprime mortgages that were backed by Fannie and Freddie are already guaranteed by the government, by virtue of them taking over Fannie and Freddie....so the paper/bonds/securities/mortgages from Fannie and Freddie have nothing to do with the current crisis.

The current "toxic securities" are a creation of the investment banking and insurance industries. "If" they had anything to do with Fannie and Freddie, they would be backed by the government and worth 100 cents on the dollar.

These mortgage backed securities were an instrument created by the banking industry, after they were deregulated, and these "non Fannie and Freddie" securities are what are choking off the credit market.

They are a direct result of deregulation and have nothing to do with the Community Reinvestment Act or the increased home ownership goals that both parties pushed for in congress. As a matter of fact, very few of the loans that are causing problems now were given by institutions that were subject to the provisions of the Community Reinvestment Act.

So will someone please explain to me how a bunch of bad mortgages given out between 2003-2007 are the fault of a law passed in 1977 or the push for home ownership by the Clinton administration from 1992-2000?

More info
http://www.businessweek.com/investin...ity_reinv.html

google: Community Reinvestment Act

check out the wiki site for it, good read

as i understand it, and i'm just sayin, those corps hold ~50% of all u.s. mortgages, when the foreclosure rate drastically went up last year, fannie and freddie's portfolio values plummeted, since these corps are publically traded, their stock values plummeted as well.

simplistic explanation but i figured i'd get the discussion going, this is not my opinion, just how understand the situation.

Plain and simple, they were responsible for giving high risk home loans out. The people who got the loans were risky and it was highly unlikely that they could make the balloon payments or the loan rates after they were raised.

Also the banks did not care if they defaulted cause they would end up with property way more valuable then the loan, well after the fall out the homes ended up being worth less then what was owed and that just fucked every thing up.

No, you don't.

If you did, you'd have read the comments right below the article you linked. Or you'd have performed a quick Google search. Or you would have taken a look at Wikipedia.

Fannie Mae and Freddie Mac certainly did not cause the crisis, but they did contribute to it. If you want to know why, don't waste our time by asking us to explain it to you. Read the readily available sources I just mentioned instead.

Ummm, go fuck yourself.

I know what Fannie and Freddie did, and NONE of their assets/mortgages/paper are what the Treasury will be buying with the new $700 billion credit card it just got.

Fannie and Freddie's paper is already guaranteed by the government, therefore it's value is intact and doesn't affect any banking institution's balance sheet in an adverse fashion.

So again, please explain to me (if you are able) how it's Fannie and Freddie that are somehow responsible for the current credit crisis when their loans aren't the ones that the banks can't unload.

You can google all you want, but unless you're willing to accept right wing blogs and such as legitimate sources, you can't find the connection.

The point of this thread was to point out that blaming Fannie and Freddie, and by extension the democrats, and by extension trying to exonerate McCain because he jumped onto a bill to impose stricter regulations on Fannie (a year after the bill was written) is nothing but right wing rhetoric and is not based in fact.

If you can point me to FACTS that support the assertion that Fannie and Freddie and government policies toward mortgages are what led to this crisis, rather than deregulation of the banking sector which led to creations such as collateralized debt obligations and credit default swaps, then I would be more than happy to read them.

Well there are a lot of things that actually contributed to the meltdown. I was on the inside and saw first hand how it got out of control. My "side job"....

Everyone is to blame, from Greenspan down to Joe Blow and his wife for signing the loan docs... and everyone in between too...

Ever notice how everyone looks away when everyone is making money... homeowners, realtors, mortgage brokers, banks, investment houses..... but when the shit hits the fan everyone wants ONE entity to take it up the ass, well sorry but in this case its is eveeryones fault.

FYI- it started when Greenspan back in 2000 wanted to "cure" the tech bubble by making money easier for banks to borrow from the FED... I don't think he had a clue as to what was going to happen.. :2 cents:

Here are just a few points...

Fannie Mae and Freddie Mac contributed to the housing bubble. By using loose standards for buying loans at the bottom of the market, credit supply in that part of the market increase, and thus housing demand in that part of the market increased, which increased prices in that part of the housing market. That, in turn, drove up prices in the middle and upper parts of the housing market as well.

Shareholders of Fannie and Freddie, two of the biggest companies in the world, lost shitloads of money.

By buying loans, Fannie and Freddie increased the value of loans and reduced availability for other buyers. This encouraged other buyers to find profitable assets elsewhere in the market. In many cases, that meant going for the ones that didn't conform to Fannie's and Freddie's standards.

The impending failure and subsequent federal rescue of Fannie and Freddie convinced many investors to pull their money out of related markets.

Etc.

Of course, the wondrous new financial products of the past ten years, made possible only by a lack of regulation, have also played a huge role. And the ratings agencies' failure to correctly assess the risk on such products played a significant role, too. As did interest rates, which were kept too low for too long.

As I said before, many factors played a role. But Fannie and Freddie most certainly did contribute to the mess we're in right now.

Banks make loans and then sell them so they can get the cash back and make new loans. If Fannie and Freddie weren't willing to buy up risky loans the banks wouldn't have made them.

Thank you, that was a good answer, you made a good point, and kind of made my point for me.

Fannie and Freddie definitely helped to cause the housing bubble and by extension the subsequent pop...but the main problem with our financial system now, the problem that the Treasury wanted $700 billion to fix, is with loans that didn't conform to Freddie and Fannie standards.

It was investors chasing yield, and thinking they were safe because of the insurance products being marketed by Wall Street. These are the "toxic securities" that are clogging up the bank balance sheets and making it hard for people and businesses to get credit, and they happened independently of Fannie and Freddie.

Unless of course we go with your assumption that the reason people were buying bad loans is because Fannie and Freddie bought all the good ones....but still nobody made those other investors buy the bad loans, they could have invested in something else.

Here is an article from Sept 30, 1999 from the NYT.....I don't think this answers your question entirely but gives some insight into how Fannie Mae got into trouble as a result of the Clinton adminsitration putting pressure on them to increase home loans to minorities with sub-par credit and predicts the trouble in an econmoic downturn.

http://query.nytimes.com/gst/fullpag...pagewanted=all


Some informative quotes:

"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits. "


"In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans."


"In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's"

"Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings."

"In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups"

Good article, good find, and it explains why the government had to take over Fannie completely and it may cost the taxpayers some money in the long run.

Yet still, the loans that are fucking up the financial system now, that the government is going to spend $700 billion to buy, are not Fannie or Freddie loans. They are loans that were given by other institutions, that didn't conform to Fannie or Freddie rules.

My point is this, conservatives are trying to exonerate McCain from having anything to do with the current crisis because he "called for" stricter regulation of Fannie and Freddie a couple of years ago.
But Fannie and Freddie aren't the problem.

Conservatives are also trying to blame the problem on the Community Reinvestment Act, which was passed in 1977 and enforced by the Clinton administration....so that lower income people could buy houses.
The problem with that is the loans that are causing the problems now weren't Fannie and Freddie loans, and they weren't made by institutions that are subject to the rules of the Community Reinvestment Act.

They were made by mortgage brokers (a ridiculously unregulated industry) and then sold to Wall Street firms which packaged them into collateralized debt obligations (a creation of Wall Street which was made possible by banking deregulation) and insured by credit default swaps (another creation made possible by deregulation)

So my overall point is this....blaming the current credit crisis on Fannie Mae, or the CRA, or on poor people or the folks in Washington who wanted to help poor people buy homes, doesn't pass the smell test.

The current glut of toxic securities and their impact on our credit markets is a direct result of banking deregulation.

Actually, there isn't a single "main" problem. There are multiple problems affecting each other, which have spread like wildfire throughout the markets.

For example, the collapse in share value of Freddie and Fannie causes capitalization problems for many banks (e.g. Gateway, which is being taken over by a smaller rival to stay in business, directly because of losses on Fannie and Freddie shares). These capitalization problems further the scarcity of credit, which leads to trouble for more institutions, etc.

Also keep in mind that the federal Freddie and Fannie takeover is actually a $200 billion bailout by the government. (there was a good article in The Economist about this, if you're interested in why this is the case)


But, you see, the toxic securities aren't the only thing brining down bank balance sheets. Shares in Fannie and Freddie are also doing it, as well as investments in funds and companies that had invested in the failing securities, etc. It's all linked together.

One might go down because it had invested too much in another that went down, which went down because of it's investments in MBS and its Fannie shares, etc.

Fannie and Freddie caused billions of dollars of value loss in shares, which impacted either directly or indirectly the asset values of numerous companies.

The MBS and ABS you mentioned play a larger part in this, of course, but by no means the only one.

Well, they didn't buy all the good ones. They just increased value by adding demand. Because the demand they added was to a large extent concentrated in the bottom portion of the market, and the overall market already caused very strong competition in the upper portion of the market, others had to go below them in the market to achieve the volume necessary for significant profit.

Consumer cost, business risk and potential profit all rise the closer to the bottom of the market you get. Fannie and Freddie, however, artificially lowered these things at what otherwise would probably have been the bottom of the market, and thus lowered the de facto bottom.

While you're right about the fact that investors could have invested in other things, the reality of market forces virtually made sure that that wouldn't happen.

As an aside, this discussion unfortunately is somewhat pointless. It's impossible to write comprehensively about all the main factors in the current crisis without spending days or weeks doing so. So the scope of this discussion is by necessity extremely limited, which makes many of the points we make lack much-needed nuance.

Thats not all of it. you left out the part that had the rates been FIXED on the mortgages, then this would not have happened as well.

All I know is, it all reminds me of watching my neighbor get new cars, great clothes for her kids, and move into a new house she bought.. and she was on welfare the entire time.

I've never drawn a single welfare, unemployment, or other government check that YOU as another US citizen paid for. Here I am once again having NO bad loans, no fucking debt, no contribution to this issue whatsoever, bailing out the morons. One tends to get sick of watching the whole barrel spoil because of some bad apples.

It sure seems that it PAYS in the US to be a moron bottom feeder who is exactly as dumbed down as they speak to you. Congrats to the losers.

You really have no clue as to how bad it gets.

I once saw a family of 17 living in a three bedroom DUMP. Pimped out cadi's in the front yard, half a fridge of beer plenty of candy for the naked kids running around, and when asked what the old lady, ( 40's) did for a living, she stated. " I got da Check ".

the monthly income to the house from " Da Check " was 4k. Not to mention the money the " OLD MAN " brought in, and the 3 boys that were working.

Unfortunately, ignorant Americans are to blame, not just Fannie and Freddie. Take a moment to think of some idiots you've met or know: do they vote? do they call their Congressman or representative to let them know how they feel about important issues? do they do any research into anything? or do they sit on the couch and watch FOX news, let the mortgage broker decide what they can afford, and pay their VISA bill with the Discover card?
But hey, if the govt. will take care of everyone, why bother with all that extra EFFORT?

There were a lot of more well thought out answers explaining the multitude of causes leading up to the current financial crisis, but on some level, people must realize that this is what you get when the govt. goes unchecked by the people.