paper about MBS

While chapter 1 laid out the growth of fannie and

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Unformatted text preview: While Chapter 1 laid out the growth of Fannie and Freddie during the last 30 years, this chapter provides evidence of their increasing use of riskier mortgages from the mid 1990s until 2003, as a result of (or at least justified by) the 1992 Act. For good reason, many analysts point to the behavior of Fannie and Freddie in 2004- 2007 when it comes to ramping up the risk of their portfolio. But, as a matter of fact, the seeds for this behavior and the GSEs’ eventual collapse started a decade earlier. Analysts, regulators, and politicians, however, did not realize that the GSEs were a ticking time bomb because aggregate U.S. housing prices increased every month from July 1995 to May 2006, thus obscuring the ever-increasing credit risk that Fannie and Freddie were taking on. 2.1 The “Mission” to Support Affordable Housing The new mission laid out in FHEFSSA was quite specific and encompassed three related goals for the GSEs. The overarching theme was for the GSEs to reach a target percentage of their mortgage purchases in terms of homeownership for lower and middle income households. The first goal was directed towards low-income housing, defined as household incomes that were below the area median. The second goal chose underserved areas as defined by census tracts with median household incomes that were less than 90 percent of the area median, or else in census tracts with a minority population of at least 30 percent and with a tract median income of less than 120 percent of the area median income. The final goal named “special affordable housing” targeted census tracts with family incomes less than 60 percent of the area median (or else in tracts with incomes less than 80 percent of the area median and also located in specified low-income areas). 10 Until the late 1990s, Fannie and Freddie were mostly part of the general process of encouraging people who would buy anyway to buy more house on a larger lot. And they were doing most of their business in upper income communities. However, as Jonathan Brown explains in Peter Wallison’s book – Serving Two Masters, Yet Out of Control , Fannie and Freddie were doing little business in the “inner city” where poor households tended to live, and more business in the suburbs. These patterns led HUD in 2004 to step up the targets, which in Table 2-1 below provides the detailed goals for 1993 and after. 28 turn, led Fannie and Freddie to undertake a greater proportion of high-risk mortgages. This increase followed on the heels of a large increase in targets in 2001. Table 2-1: GSE Affordable Housing Goals Since 1993 (Share of mortgage purchases) 1993- 1995 1996 1997- 2000 2001- 2004 2005 2006 2007 2008 Low- and Moderate-Income Goal 30% 40% 42% 50% 52% 53% 55% 56% Underserved Areas Goal 30% 21% 24% 31% 37% 38% 38% 39% Special Affordable Goal NA* 12% 14% 20% 22% 23% 25% 27% Source: FHFA; *NA – Not Applicable: goals set in dollar amounts for each GSE rather than percentages....
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While Chapter 1 laid out the growth of Fannie and Freddie...

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