Good point but the GSE contributed maybe 3% to the crash.
Actually the contributed a lot more.. Just look at how much TARP money they have taken (almost 100Bil with a cap of 400Bil-fed expecting more?) compared to;
Goldman Sachs – 10Bil – paid back
JPMorgan – 25Bil – paid back
Morgan Stanley – 10Bil – paid back
Wells Fargo – 25Bil
BofA – 45Bil (15Bil initially, 10B inherited from Merrill, 20Bil additional- probably to grease Merrill shotgun wedding).
Fannie = 45Bil
Freddie = 50Bil
The crash first occurred with non-GSE backed subprime loans, and they infected the GSE loans.
GSE’s also had subprime.. and the crash did not start with the loans.. it started with the Credit Default Swaps that occurred as loans went bad. The Credit Default Swaps were not being properly priced to risk of default. Take a look at how much AIG took in on TARP (69Bil in warrants, 37.8Bil in more loans just approved with an 85Bil Credit line).. AIG is an insurance company, not a bank. There was a mindset that RE always goes up, so a loan at 100%LTV was good because you could always resell the property to cover the loan irregardless of FICO or ability to pay.
Freddie had over 25Bil sub-prime loans. I can’t find the amount that Fannie had because they often bought securitized loans.. not actual loans. One thing to note is that Fannie’s default rate is almost 2x Freddies.
You stated ‘infected the GSE loans’.. so just how do you ‘infect’ a loan? It doesn’t work that way. Loans don’t have viruses. Either the loan is written well or written poorly. It is money, value of the property and the ability to repay, period(to copy a word you used – loans are fairly black and white). This is why banks like New York Mellon repaid TARP quickly and others are taking longer or went under. Freddie and Fannie were doing 100%+ LTVs during the ‘craze’ and many of these fit under the community reinvestment act. The increased interest rate on loans offsets the risk of default. CRA tried to violate that tenant. It also pushed Fannie and Freddie outside of their traditional 80% max LTV, high FICO score area.
Community reinvestment loans were never the problem as Rush likes to claim.
Rush is actually partially right.. the problem with Rush is that the truth gets trampled in his rush to the ‘goal post’, so I completely ignore him. He takes a small grain of truth and then blows it up all out of proportion.. ignoring everything else to the contrary.
Speculation on flip properties, whether the flippers were residents or not, was the problem.
Flippers were actually a very small part of the problem. Who buys the property from the flipper after the inflated price? If no-one does, flippers don’t survive. Another part of the problem was the RE brokers pumping that ‘you have to buy now or forever be priced out!’. This caused people to get caught up in the moment and taking un-necessary risk, combined with really funky loans to try to keep it all going. Add in mortgage brokers steering people into improper loans with high kickbacks to the mortgage broker, mortgage brokers mis-stating income on the loans so that people could qualify… and you have a disaster.
