The GSEs had very little to do with the credit/housing bubble, IMHO. Their losses resulted from them making loans (even conservative loans) during a time when sales and prices were driven by the completely irrational lending being done by the private mortgage lenders/originators. Even if you require 20% down, and allow a max DTI ratio of 28/32, if housing prices are 200%-400% higher than they should be (due to happenings in the private mortgage market), most of your borrowers will end up being under-water when prices eventually normalize. Couple that with the economy falling off a cliff, and the job losses that go with cutting off billions of dollars in “available credit” to idiots who use their house as collateral for consumer loans, and the GSEs were bound to take significant losses.
IMHO, the GSEs were forced to expand their portfolios late in the game (2005-2006) because the PTB were already trying to offload the toxic stuff onto the taxpayers. Prior to this time, they were actually shrinking their portfolios.
This is also a good read:
Conservator’s Report: A Different View of the GSE’s Demise
The first Conservator’s Report on the Enterprises’ Financial Performance issued by the Federal Housing Finance Agency on Thursday makes an argument that the Government Sponsored Enterprises’ role in the housing market was and still is vital. It also paints a picture of their fall prior to being placed in federal conservatorship in the fall of 2008. Some observers are already pointing to it as a map for the eventual reorganization of the two government sponsored enterprises. Another way of viewing the report is that is presents a strong argument for leaving the GSEs in charge.
According to the report, in 2003, 62 percent of all mortgages originated in the country were conventional/conforming loans. Another 20 percent or so were FHA or jumbo loans; only 8 percent were subprime and Alt-A loans were virtually non-existent. By 2006 the conventional loan share had dropped to 33 percent while subprime loans had ballooned to 20 percent and Alt-A represented 13 percent of the market and the Home Equity share of the pie had more than doubled to 14 percent. During this same period the Enterprise’s share of the MBA market literally fell off a cliff.
In 2003 the combined enterprises issued over two-thirds of the almost $300 billion MBS volume, in 2004, the volume dropped dramatically to under $200 billion and the Enterprises had ceded over half of that to private issuers. When the size of the market shot back up in 2005, it was the private market driving it; the Enterprises participation remained relatively flat. According to the report, the Enterprises were guaranteeing primarily traditional mortgages while the private market took the lead in securitizing higher-risk products. It is no coincidence that the trouble began when the Enterprises no longer dominated the market.
