Anyone who points their finger at one thing, GSE’s, congress, private lenders, greedy borrowers, Global pool of money sloshing…If you put your finger on one and say, that’s who did it. You are incredibly wrong. The GSE’s clearly played a big role. To insinuate otherwise is shockingly blind. Imagine for a second, that they did not exist, there was no fha, Fannie and Freddie, HUD, etc. would we have had the bubble? Hard to know, but they were clearly a key contributor.
Lets talk about a similar arena in which GSE’s are also prevalent.
Student loans…Arguably a bigger bubble in terms of YOY growth than the housing bubble…only it has yet to pop.
Do you think the infusion of easy debt and loan shark like collections rules has made a college education cheaper/more affordable? Has the infusion of easy debt made the quality of our education better?
Now is Sallie Mae solely responsible for the raping of “students?” Of course not. But are they a key contributor and are they “evil?” Probably!
I would contend that the same market dislocations and distortions done by the GSE’s of the education bubble are the same with the housing bubble.
It all comes back to the law of untended consequences. My first link.
Don’t forget, the GSEs, FHA and CRA have been around for decades. It was private securitzation (and the explosion of derivatives!) and low interest rates (pushing investors into higher-risk instruments) that fed the bubble.
Fannie and Freddie were being scaled back in 2003 and 2004 because of their accounting “irregularities,” but were forced to expand their portfolios again when the PTB saw the writing on the wall. They lowered GSE standards/increased loan limits, and lowered reserve requirements in order to move the “toxic” assets from the private market to the GSEs.
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“The GSEs had already suffered interest-rate hedging difficulties in the 1990s and accounting scandals in the early 2000s. A number of commentators, including the IMF, called for them either to be wound up or more tightly regulated, or for a fundamental change in their business objectives.
Increased capital requirements
The GSEs were able to avoid such outcomes by claiming their activities promoted homeownership and by intensive political lobbying. However, following their accounting problems, the former regulator increased the GSEs’ capital requirements somewhat and froze the growth of their portfolio holdings.
The GSEs’ immediate problems arose from the weakness of the U.S. housing market that resulted in growing losses on their own holdings of risky MBS (including subprime and Alt-A mortgage exposures), and increasing provisions on their mortgage portfolios and guarantees as delinquency and foreclosure rates on prime conforming mortgages (the bulk of their business) began to rise.
Simultaneously, Congress charged the GSEs with providing greater support to the falling housing market by increasing the maximum loan size they were permitted to guarantee, while their regulator relaxed constraints on their MBS portfolios. These losses and additional business lines forced the GSEs to increase fees to lenders, tighten standards, and seek more capital from the market.
Some, like myself, would argue that even lenders who tried to remain conservative throughout the bubble years were negatively affected by the behavior of the private-label lenders.
IMHO, the prices were driven up because of the non-conforming loans, including the notorious zero-down, stated-income, neg-am loans. It was the introduction of these more “innovative” loans that caused the speculative mania in housing. Even if the GSEs tried to maintain traditional standards (which they did until forced to get into subprime in order to save the private market), the abnormally high prices were enough to weaken their position since ALL buyers were overpaying during the boom, even if they were qualified under traditional lending standards (20% down, 28-33% DTI ratio on proven income, 620+ FICO scores, etc.). ALL buyers during the bubble years were subject to being underwater on their loans, even if they put 20% down. This is what caused problems with the GSEs more conservative (prime, conforming) loans.
This is why it’s important for the Fed/govt to monitor price action in various asset classes, and try to get ahead of bubbles. Even those who try to do “the right thing” end up being injured by all the speculation.
