paper about MBS

Private corporate world and at the same time cling

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Unformatted text preview: private corporate world and at the same time cling tightly to one of the federal government’s deepest and most lucrative welfare troughs…The combination has produced two GSEs that are not only too big to be allowed to fail but perhaps too influential and too politically connected to be regulated or shaped effectively in the public interest. Any suggestion that their power be limited or that subsidies be reduced triggers an immediate no-holds-barred counterattack from Fannie and Freddie. As John 20 Buckley, Fannie Mae’s vice president for communications, bluntly told the Wall Street Journal, ‘We’re not casual about managing our political risk’.” 5 This does not mean that some members of Congress and the leadership at the GSEs’ regulator didn’t try to rein in the GSEs; but the inadequate numbers of the former and the inadequate regulatory powers of the latter hindered these efforts – a condition that the GSEs lobbied strenuously to perpetuate. As just one illustration: In response to a 2004 Congressional bill that was aimed at enhanced regulation of Fannie and Freddie, with remarkable bravado, Fannie ran a television advertisement the day before the Senate Banking Committee was to work on the bill. 6 Fannie Mae -- created and supported by the government -- was now going after the government head-on. The monster was destroying its Frankenstein creator. Needless to say, the bill died. The advertisement shows a concerned Hispanic man. He says “Uh-oh,” and the wife responds, “What?” “It looks like Congress is talking about new regulations for Fannie Mae,” the man states. “Will that keep us from getting that lower mortgage rate?” the women replies. “Some economists say rates may go up” he says. “But that could mean we won’t be able to afford the new house,” says the woman. “I know,” the husband concludes. While Nader’s article makes clear how difficult it was for Washington DC to put constraints on Fannie Mae and Freddie Mac, the question remains: How did they grow so big? 1.4 Drowning in Debt With the deregulation of the mortgage finance market, the decade of the 1980s was a period of substantial growth for Fannie and Freddie. At the end of the decade, Fannie and Freddie were fundamentally entrenched as parallel GSEs, with similar structures, privileges, responsibilities, and limitations. The last major legislation to impact the GSEs until the financial crisis of 2007-2009 was the Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA) of 1992. It produced a number of important rules, one in particular related to capital requirements. In particular, a risk-based capital regulatory regime was specified for Fannie and Freddie and their two main functions: (i) securitizing and guaranteeing the credit risk of MBS, and (ii) investing in MBS or other similar portfolios of mortgages. With respect to (i), the capital buffer that the GSEs were required to hold against these guarantees was 0.45% (i.e., 45 cents per $100 21 of guaranteed mortgages), which implied that the Congress believed that residential mortgages...
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private corporate world and at the same time cling tightly...

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