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[Edvaard]

Quote:

Real quick, Fannie and Freddie are not technically guaranteed against failure, but as a government chartered entity, there is an implied guarantee that they would not be allowed to fail, so they can mop up all kinds of less-than-nifty loans and act as a backstop for private sector actors. They also enjoy favorable interest rates because of that implied guarantee.

Just to deal with this nonsense by itself ...

Implied by whom? Is there anything you've read by the people who actually buy the residential mortgage-backed securities that says they think that? Define "less-than-nifty" loans, and explain how you know that Fr. and Fa. mop them up? FLHMC and FNMA offer insurance on their own securities for payment of the principal and interest, which the vast majority of the investors purchase. If the investors thought there was an 'implied' no-default guaranty from the government, why would they pay for this insurance?

They are able to offer lower interest rates because there are no state taxes on them.

[Paul Cavins]

Edvaard wrote on Thu, 20 May 2010 22:56

Quote: Real quick, Fannie and Freddie are not technically guaranteed against failure, but as a government chartered entity, there is an implied guarantee that they would not be allowed to fail, so they can mop up all kinds of less-than-nifty loans and act as a backstop for private sector actors. They also enjoy favorable interest rates because of that implied guarantee. Just to deal with this nonsense by itself ... Implied by whom? Is there anything you've read by the people who actually buy the residential mortgage-backed securities that says they think that? Define "less-than-nifty" loans, and explain how you know that Fr. and Fa. mop them up? FLHMC and FNMA offer insurance on their own securities for payment of the principal and interest, which the vast majority of the investors purchase. If the investors thought there was an 'implied' no-default guaranty from the government, why would they pay for this insurance? They are able to offer lower interest rates because there are no state taxes on them.

Edvaard, I'm giving up on this shit.

The market knows that Fannie and Freddie will not be allowed to go under. This is expressed in the lower interest rates they can offer. The interest rate, or cost of money, is a function of risk. There is less risk with GSE's because the market knows that they are ultimately backed up by the government.

You are latching on to the fact that the GSE's are technically private and not officially  guaranteed. The market knows for a fact that this isn't a reality. If everyone in the lending market knows that Fannie and Freddie will be backed by the government, then that is what is true, economically. If by some technicality that isn't true on paper, it makes no difference.

Whatever source you are getting your info from is focusing on these technicalities and not the real world.


PC

[Edvaard]

Again, if this "implied guaranty" is so apparent as you imagine, why do the investors waste their money on paying insurance for the securities? Sorry to be so technical. The association with the government comes into play not because of an implied bail out back up, but because of the higher than average loan standards and, even more important, standards that are more consistent and unlikely to change at a whim, as compared to most investment banks doing anything similar.


In any case, regardless of the veracity or lack of concerning some 'implied guaranty,' the contention is that GSE's are at least partly responsible for the meltdown. The invitation is again extended to point out when in the 75 years of these programs prior to 2008 this has occurred before, and if so, if it was determined that GSE's were in any part the cause. Surely in all that time, with numerous housing market downturns, the GSE's should have done their damage at least a couple of times before now.


No one in any of the financial publications I have read mentions GSE's in the way of culpability at all, nor in any official or semi-official investigations into the financial disruption are they mentioned as even a partial cause. If it suits your world to have it otherwise, fine; if it is your opinion that GSE's should be done away with, fine; but trying to foist off  ideologically motivated conjecture as fact to people who know better is just plain silly.

[DarinK]

This is from a super-quick google search, and is an article from 2008.  I've read much more recent data along the same lines.
http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1644  

Key quote: "As of April, Sanders said, the rate of serious delinquencies on loans held by Freddie Mac was 0.81 percent. Fannie Mae's rate of serious delinquencies was 1.15 percent. Those rates compare to market-wide rates of serious delinquency of 1.47 percent for prime mortgages, 8.35 percent for Alt-A mortgages, and 20.74 percent for subprime mortgages.

Fannie Mae and the smaller Freddie Mac either own or guarantee nearly half the entire market of U.S. home loans. The companies purchase mortgages from lenders, keep some for their own investment portfolio, and resell some to Wall Street investors as collateralized debt obligations or asset-/mortgage-backed securities.

"It is clear that Fannie and Freddie are the remaining source of stability and prudent underwriting practices among financial intermediaries," Sanders said. "It is their willingness to continue to purchase conforming loans that is keeping the U.S. housing market afloat."

Finance Professor Herbert Kaufman holds the same view. "Fannie and Freddie haven't been involved in subprime mortgages -- those with all the defaults, the real source of the market crisis. Fannie and Freddie, instead, have mainly bought prime mortgages, with strong credit standards and fairly strict lending requirements. Even in this bad mortgage market, the default rate on those prime mortgages is reasonable based on historical precedent."