Fannie Mae asserts that intense competition forces the housing GSEs to pass through all subsidies. As evidence, it cites its estimate that, as of December 31, 2000, Fannie Mae and Freddie Mac together held only 22.7 percent of the fixed-rate single-family mortgages outstanding in the United States. However, adjusting for other government mortgage guarantees, GSE-guaranteed mortgage-backed securities, and jumbo mortgages, CBO estimates that Fannie Mae and Freddie Mac have at least a 71 percent share of the market. That share is growing, which suggests that they have significant market power.[/quote]
What does that have to do with the housing bubble that began and burst years later?
Subsequent to 2002, the bubble began to grow in ernest, the absolute size of the GSE portfolios were basically stagnant, and their share of the entire mortgage market shrank, until after the bubble burst, prices began to fall, and the GSE’s entered the sub-prime market. The mortgage market changed so drastically between the time of that statement and 2004 that it renders it’s usefulness in identifying the cause of the bubble/bust nil. It was not the same market in 2001 as 2004, different again by 2007, and yet different again today.
The clearest evidence is seen in the first chart at this link:
The Fannie/Freddie share of the market spiked downward at the exact same time the private lender share spiked upwards, and then after the bubble began to burst, the trends reversed. Nothing that happened between 2000 and the end of 2003 is really relevant.[/quote]
Sk,
Wow you just proved Ron Paul’s whole point. The government forced the banks into the position of taking risk to compete with the government.
The article from the CBO which I posted clearly states that the GSE as early as 2001 had up to 71% of the mortgage market in conforming and jumbo fixed products.
Your article states (from WSJ Marketebeat) states that the GSEs, “began losing market share in the profitable business of buying up loans, packaging them up into securities and selling them off to investors.” to the private banks.
It your own article which shows the competition between the two. The only way left for the banks to compete was quality. THAT IS THE WHOLE POINT”.
First the FNMA and Freddie take over the mortgage market….while Barney Frank and crew put through the Coomunity Reinvestment Act and the banks, if they want to stay in business have to lower their own lending standards. We should never have to compete against the immensely deep pockets of the government. Because those deep pockets are created by the threat of violence.
If you want to figure out what I mean, tell the IRS you will not not pay your taxes. You will end up in jail.
Just to underscore, I will point out that a bank has (had) to compete for capital.
Thank you for proving Ron Paul’s point.[/quote]
No, based on SK’s chart, it’s pretty obvious that the market share ratio between GSE and private market mortgages held pretty steady since at least 1990. What happened in the late 90s and early 2000s that changed everything?
This:
“Capital gains home-sale tax break a boon for owners
By Kay Bell • Bankrate.com
What’s the best tax break available to Jane and John Q. Public? If they’re homeowners, it’s selling their house.
When you sell your primary residence, you can make up to $250,000 in profit if you’re a single owner, twice that if you’re married, and not owe any capital gains taxes.”
“This brochure highlights the major provisions of the Gramm-Leach-Bliley Act (the “Act”), which was signed into law in November 1999. As I am sure you are aware, the law updated U.S. financial services laws and removed the remaining walls that fragmented the financial marketplace. This legislation, which represents the most significant change in the U.S. financial services industry in 66 years, repealed the core provisions of the Glass-Steagall Act and the Bank Holding Company Act that restricted bank holding companies from affiliating with securities firms and insurance companies.”
The CDS market is an important market that has grown dramatically over a short period of time. The market originally started as an inter-bank market to exchange credit risk without selling the underlying loans but now involves financial institutions from insurance companies to hedge funds. The British Bankers Association (BBA) and the International Swaps and Derivatives Association (ISDA) estimate that the market has grown from $180 billion in notional amount in 1997 to $5 trillion by 2004 and the Economist estimates that the market is currently $17 trillion in notional amount.2
Credit Default Swaps (CDS) were originally created in the mid-1990s as a means to transfer credit exposure for commercial loans and to free up regulatory capital in commercial banks. By entering into CDS, a commercial bank shifted the risk of default to a third-party and this shifted risk did not count against their regulatory capital requirements.
In the late 1990s, CDS were starting to be sold for corporate bonds and municipal bonds. By 2000, the CDS market was approximately $900 billion and was viewed as, and working in, a reliable manner, including, for example, CDS payments related to some of the Enron and Worldcom bonds. There were a limited number of parties to the early CDS transactions, so the parties were well-acquainted with each other and understood the terms of the CDS product. In most cases, the buyer of the protection also held the underlying credit asset (loan or bond).
However, in the early 2000s, the CDS market changed in three substantive manners:
Numerous new parties became involved in the CDS market through the development of a secondary market for both the sellers of protection and the buyers of protection. Therefore, it became difficult to determine the financial strength of the sellers of protection
CDS were starting to be issued for Structured Investment Vehicles, for example, ABS, MBS, CDO and SIVs. These investments no longer had a known entity to follow to determine the strength of a particular loan or bond (as in the case of commercial loans, corporate bonds or municipal bonds.); and
Speculation became rampant in the market such that sellers and buyer of CDS were no longer owners of the underlying asset (bond or loan), but were just “betting” on the possibility of a credit event of a specific asset.”
IMHO, the **private market** “guarantees,” based on these CDSs, had FAR, FAR more to do with the credit/housing bubble than the GSEs ever did. The repeal of Glass Steagall made this market much more dangerous, IMHO.
SK’s chart/article clearly show that the GSEs and the CRA had nothing to do with the credit/housing bubble.
I would also opine that the Federal Reserve forced many investors into these riskier speculations because they held rates too low for too long. We are seeing the same thing all over again. Will we ever learn?
………….
Oct. 31 (Bloomberg) — The European sovereign debt crisis stands as the latest in a long line of similar crises. Argentina in 2001. Russia in 1998. Mexico in 1994. The list goes back into history. Debt crises are about as natural as earthquakes, but this time there is something different — and possibly more dangerous.
The image is like a complex wiring diagram for a ticking debt bomb. Yet what it shows may be less important than what it leaves out: a largely invisible network of ties among institutions around the world, which could ultimately cause global financial chaos.
This hidden network has been created by institutions that buy and sell unregulated credit-default swaps. These are essentially insurance contracts on bonds; in the event of a default on the bond, the seller of the swap promises to pay the buyer the bond’s value.
I know I keep harping on these derivatives, but they are absolutely deadly, IMHO. They mask risk and cause the gross mispricing of debt. In their fairly short history, they have been responsible for some of our worst financial disasters.
“Business risks that were once seen as a lumpy fact of life are now routinely sliced up and packaged into combinations that generally suit issuers and investors alike. At the heart of the change has been the development of huge markets in swaps, derivatives and other complex and often opaque instruments that allow the transfer of risk from one party to another. From small beginnings in 1987, the face value of contracts in interest-rate and currency derivatives is now more than $200 trillion—16 times America’s GDP. A further $17 trillion is outstanding in (even newer) credit-default swaps, which allow bond investors to lay off the risk of issuers defaulting.
“These kerfuffles show that conflicts of interest can probably be solved by market pressure rather than intervention by regulators. A bigger problem for both investors and regulators has to do with risk itself. Outsiders—and perhaps even insiders—find it hard to judge whether Goldman’s business is sustainably good or has thrived thanks to a dose of unsustainable good luck and skill. In addition, the very improvements in risk management that have spread risk far and wide make it harder to know where risk is concentrated or how risks might combine to threaten the system’s overall health.
So far central banks have concluded that the system is more robust than it was. But the trading models that have propelled Goldman will be tested one day. At worst, the bank itself—or, more likely, a second-tier rival or a hedge fund—might fall into the kind of dramatic spiral that killed off Long-Term Capital Management (LTCM), a hedge fund, in the late 1990s. Financial markets have always been subject to crises.
Any crisis would affect Goldman, because it is so intertwined with the system. The bank says it keeps plenty of liquid reserves against the dread day. It might well profit from any crisis (it did from LTCM). But the chances are that some banks, somewhere, will get into serious trouble.
If that happens, the losses of any bank will be for its shareholders; they should not expect any bail-out. The wider question has to do with systemic risk. If the much vaunted systems do not work, then the central banks will have to step in (as the Federal Reserve did with LTCM).”
