So why are we dismantling Freddie and Fannie?

now if only we could get that enacted for the private players.

There's a whole bunch of beating up on Freddie and Fannie, which if you actually look at the risk analysis they were doing in the lead-up to 2008 vs what Wall Street did, makes no sense.

Fannie and Freddie analysts did some good work on highlighting the diluted quality of credit, too bad they were swept away in a tide of competition around loosening standards.

 

I agree. Isn't that basically what I wrote?

 

I just meant the part about getting a loan that isn't "backed by the government". My point was, that the vast majority of mortgages originated are backed by the government vis-a-vis FNMA/FHLMC. You and the people you know probably just can't get a loan because your credit sucks.

 

From what I understood, the way they were structured in the later years as a publicly traded company that's also a GSE caused a loophole where their debt was implicitly guaranteed by the government despite the hazards and consequences of risktaking and profit making of a private company.

That status caused massive investment inflows by other countries which used it as a safe investment entry in the booming housing markets. It also meant the government couldn't let FnF fail.

Also a huge factor was its AAA credit status, which government backing heavily contributed to and emboldened its boardmembers. As we saw in AIG, the few companies with a AAA credit rating were being used as a tool to print and guarantee CDS and was a major cog in ramping up the shadow banking system.

GSE or not, we would've had to take over FnF if it went into AIG-status, but FnF also had other roles to play in the collapse which weren't the main factor but in a vacuum could prove unsustainable (such as subsidizing housing owners as another housing bubble is rearing its ugly head...much to the glee of rich speculators who have saving up money that poorer people could use)

 

That being the case, you should be all for dismantling Fannie/Freddie. As I'd said, the vast majority of mortgage loans, whether they're conventional or government, must conform to Fannie/Freddie guidelines in order to be purchased. Hence, all of the documentation you had to provide in order to be a non-occupant co-borrower were guidelines setup by Freddie Mac. There is a market for loans that don't conform to their guidelines, but its a small market because those lenders are at a competative disadvantage in the current system, as they must assume all of the risk for the loans they originate. If you dismantle Fannie/Freddie, it frees up lenders to originate and purchase the loans they want to invest in, rather than trying to push guidelines that make it difficult to get a loan that doesn't conform exactly to the guidelines they implement for the entire industry.

On a separate note, sorry for the jab. I wasn't aware that you weren't an internet troll. The company I work for probably could've helped you out with this. When it comes to mortgages its always better to go with a bank that specializes in mortgage lending. The turn-times are quick, they know what documentation is needed, and their systems are built to be quick. Wells Fargo, on the other hand, is a megalyth. They are built for consumer banking, and servicing loans. Any small task must circulate from department to department before anything gets done.

 

this will end well.

 

China and Russia were huge investors in Freddie and Fannie (the oft-reported story of Russia threatening to sell their shares en masse is true, according to Paulson).

The problem is that investors (especially institutional ones) will always look for the safest harbor that still makes the most profit---and all of those situations are problematic, or generated through some slight of hand that cannot be maintained. GSEs are the tip of the iceberg (and really, should be the last priority with this regards) especially with how FDIC-insured corporations like JP Morgan Chase act. And yes, I'd put JP Morgan Chase in the same category as GSEs with regards to implicit government backing. who wouldn't at this point.

 

Historically, it actually does when you can't just securitize the loan away. Dodd-Frank contributes some to forcing this, and getting rid of Freddie/Fannie would help a bit more, I would think.

 

Dodd-Frank proposes several measures with securitization, most saliently,a risk retention rule with regards to origination and sponsorship of asset-backed loans---it's a complex system where 5% of credit risk still has to remain with sponsors or originators (god help the people who have to decide how to evaluate whether that rule is being fulfilled), and a clause that will prevent "material conflict of interest" (basically trying to avoid a John Paulson situation). The rest has to do with making asset-backed securities more transparent---which will work well, because a host of REALLY smart people have admitted they don't f**king understand things like ABACUS (which is why we're in the crapper in the first place) so assumably, lobbying more complex data at them will make this better.

It's not exactly forcing people not to securitize away (in fact the central risk retention rule, which I think is the most forceful, doesn't even apply to certain classes of commercial loans, automobile loans and etc., and goes nowhere near saying you shouldn't securitize), it just limits the playground a bit.

anyways, a summary---
http://www.sec.gov/spotlight/dodd-frank/assetbackedsecurities.shtml

A deeper look at the risk retention rules if interested---
http://www.stblaw.com/google_file.c...er=585C1D235281AED9B6A07D5F9F9478AB5A90188899

Freddie and Fannie are exempt from the rules (yes, this is probably not a good idea).

Under the circumstances, a loose approach to origination isn't to be trifled with. Hell, the rules I've just described are first of all 1) incomplete as far as I can tell, 2) being lobbied the hell on by Wall Street, 3) need tons of work in terms of definition.

(I'm not very much against unwinding Freddie and Fannie's implicit government backing, I just cannot understand why it is of paramount importance, especially when issues like this are languishing/unresolved).

 

<iframe width="560" height="315" src="//www.youtube.com/embed/1fD8L-4JUUY?rel=0" frameborder="0" allowfullscreen></iframe>

 

Yes, with the lenders that originate bad loans going bankrupt and not getting bailed out.

 

...not exactly sure how getting rid of Fannie and Freddie contributes to that "not getting bailed out part" (in fact, this would dilute standards further, and probably lead to more risk and more bailout potential), and short of a revolutionary new set of laws post-Dodd-Frank, you're going to have about the same sort of downstream problems as you did in 2008.

Remember, nobody really cared to bail out the lenders, but it was the big banks that exposed themselves to the crap that originated with shoddy lenders---well that's a whole different set of problems (and again, one that is not addressed at all by attacking Freddie or Fannie.)

 

A lot of banks didnt get bailed out but they did get bought. washington mutual and wachovia two of the larger. remember some banks didnt need bailout funds but took some due to govt requirements

 

your original question in this thread was why dismantle Freddie and Fannie?

The answer is that they, in their current form, are constructed for moral hazard.

My point, in hastening to point out why this should be the last point of order for the American government, is that the entire system is crawling with moral hazard, and getting rid of Fannie and Freddie standards might make that even worse.

it's just disappointing to me that this is the thrust of bipartisan reforms and presidential announcements, while crucial parts of Dodd-Frank suffer quiet, slow deaths.

 

Why don't you go ahead and read the first paragraph of the post you're quoting. I essentially agreed what you're saying. In my opinion, dismantling them is a good idea, but is essentially useless without serious changes to the overall banking system.

 

Freddie and Fannie standards were higher than the crap subprime originators pushed, but they had to step down to compete. you'll hear differing notions of this (whether or not Freddie and Fannie first triggered the original sin of looser standards), but at the end, nobody can dispute that Freddie and Fannie were late to the table on subprime.

http://www.nytimes.com/2010/12/18/business/18nocera.html?ref=business&pagewanted=all

subsequently, there's nothing for me in that paragraph that explicitly suggests you want tighter origination regulation, or subsequent tighter securitization regulation (or anything else at all with regards to the banking system), in fact you seem to be suggesting otherwise quite pointedly. however, if you want more regulation and better standards for the banking industry as a whole, good on you, we agree. Maybe you meant a different post.

As it is, this chase after Freddie and Fannie is at best a set of misguided priorities---and at worst, a red herring meant to distract the American people and policy-makers from a central task they must set themselves on: the implementation of proper standards and rules to avoid financial meltdowns, most notably on private markets.

 

Breaking up 'too big to fail' or 'systemic' financial institutions would help this wouldn't it? Of course, the actions post-bust have been to shore up (zombie?) champions that are colossal in size.

The FDIC worked in reducing panics for the American people. Problem is that financial institutions such as the repo market deal in momentary transactions worth in the hundreds of billions in a normal slow day. If that were to seize up, all that credit lube being used to grease the sodomite financial engine would seize up from institutional panics.

So the implicit government guarantee is almost an assured thing moving forward given that the Fed is the only institution capable of backstopping a blitz of disastrous exchanges or psychological frenzy.

That doesn't bode too well for us, and I'm not sure to what extent a Volker Rule-like regime would do to fix a deeply flawed system at this scale. But what's frustrating to me is that "too big to fail" is catchy and simplistic enough while it encapsulated what the larger and deeper problem was but couldn't be explained well to the public. "Shadow banking system" and "repo markets" sound too gangstery, conspiracy-like, or over-technical.

Yet we still have what we have right now...