paper about MBS

“we didn’t really know what we were buying,”

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Unformatted text preview: “We didn’t really know what we were buying,” said Marc Gott, a former director in Fannie’s loan servicing department. “This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.” - Charles Duhigg, New York Times , October 5, 2008 On October 28, 1992, President George H.W. Bush signed into law H.R. 5334, “The Housing and Community Development Act of 1992”. As described in Chapter 1 above, Title XIII of the law, Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA), created rules for the two largest government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. In his remarks, President Bush said: “This legislation addresses the problems created by the rapid expansion of certain GSEs in the last decade. It establishes a means to protect taxpayers from the possible risks posed by GSEs in housing finance. The bill creates a regulator within the Department of Housing and Urban Development (HUD) to ensure that the housing GSEs are adequately capitalized and operated safely… I regret, however, that the Congress chose to attach these important reforms to a housing bill that contains numerous provisions that raise serious concerns. My Administration worked diligently to craft a compromise housing bill that would target assistance where it is needed most, expand homeownership opportunities, ensure fiscal integrity, and empower recipients of Federal housing assistance.” Title XIII was a compromise between those politicians who wished to restrain the GSEs and those who wanted to unleash them. It turned out not to be a very fair fight. On the one hand, FHEFSSA created a separate prudential (safety and soundness) regulator for Fannie Mae and Freddie Mac: the Office of Federal Housing Enterprise Oversight (OFHEO), which was lodged in HUD. It was clear to many observers at the time, however, that a policy-oriented department such as HUD was not the appropriate agency for lodging a prudential regulator. While there may have been a policy angle in this being allowed, it should also be noted that Fannie and Freddie spent over $200 million lobbying the Congress to avoid tighter oversight. The GSEs were essentially a government-supported banking system and should have been regulated as such. On the other hand, FHEFSSA specified a set of “mission goals”: essentially, efforts to help support housing for low- and moderate-income households, as well as a special “affordable 27 goal” and serving “underserved areas” (formerly inner-city areas). It established HUD (but not OFHEO) as the mission regulator. The mission goals essentially gave the GSEs a mandate to purchase lower-quality mortgages. These riskier mortgages received the same implicit government guarantee nevertheless....
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“We didn’t really know what we were buying,” said...

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