paper about MBS

Of the $481 billion portfolio less than $10 billion

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Unformatted text preview: Of the $481 billion portfolio, less than $10 billion was in private-label securities backed by the riskier non-prime mortgages. While data are sparser from this period, the analysis in Chapter 2 showed that, in terms of guaranteeing riskier MBS in 1997, the GSEs had started to support risky loans with high loan-to-value ratios and low credit scores. But not only was this a small percentage of the risky issuance in 1997, it was only just a few years earlier that the two GSEs had even ventured into this arena. Move forward ten years to year-end 2007: Fannie and Freddie had essentially tripled in size – with $70.7 billion of shareholder equity, $1.43 trillion mortgage portfolio, $3.50 trillion in MBS guarantees, and a much larger derivatives book of $2.26 trillion. The growth in the GSEs illustrated here, and described in detail in Chapter 1, is astonishing in its own right. But the hidden fact underlying this growth, discussed in Chapters 2 and 3, was the nature of this growth: Fannie and Freddie’s foray into riskier mortgage portfolios was now $313.7 billion, or 22%, compared to just 2% ten years earlier. Their mortgage book as a percentage of MBS guarantees now included mortgages with (i) FICO scores less than 660 (14%, or $498 billion), (ii) LTVs greater than 80% (17%, or $589 billion), and (iii) interest-only or negatively-amortizing mortgages (6%, or $210 billion). This was not your mother’s GSE. It has become a convenient excuse for Fannie and Freddie executives to blame their failure on the collapse in housing prices and the financial crisis in general. For example, Robert 62 Levin, Fannie Mae’s Chief Business Officer and Executive Vice President during the period up to the crisis, wrote in testimony in April 2010 to the Financial Crisis Inquiry Commission: “This extraordinary upheaval in the mortgage market and the economy placed stresses on Fannie Mae that would have been difficult for the company to withstand regardless of any business decisions that preceded the crisis.” While there is no doubt that the massive drop in housing prices sealed Fannie and Freddie’s fates, their financial failures would have happened anyway even with a mild housing correction or economic downturn. And given their systemic risk as detailed in Chapter 4, the financial system would have been put at risk even in milder times. And, in the financial crisis of 2007-2009, Fannie and Freddie’s effective bankruptcy was not a borderline failure in any way. For example, the Congressional Budget Office (CBO) estimates that total losses for the two GSEs could be on the order of $400 billion. It was not even close. The problem with Fannie and Freddie was their business model, and their incentives to ramp up risk on the taxpayer’s dime, not the catastrophic drop in housing....
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Of the $481 billion portfolio less than $10 billion was in...

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