[fanboy123]

Misleading intro to article. The expansion of credit was not due to over ambitious politicans who wanted homeownership for the poor. It was fueled by lax accounting and regulatory standards which expanded private securitizations of mortgages (did not involve freddie and fannie). This generated money which went into legislator pockets though.

It is true that subprime products gave politicians something good to speak to poor constituants about but credit standards were never allowed to drop very far for the federal agencies (other than FHA/VA etc) and their marketshare of mortgage bond issuance dropped as a result.

Despite being a highly regulated industry too little govt involvement in key spots was a primary cause of the bubble not too much.

I also am not entirely sure how swapping beer for mortgages makes the situation easier to digest.

[aaronklein]

That's just not accurate.

Go look at government-backed Fannie and Freddie and what they did in partnership with their cronies like Angelo Mozilo at Countrywide Home Loans.

Big Business and Big Government have formed a cartel to make money off each other. And that is exactly what led to the Great Recession.

[mdda]

Your article had a lot more credibility before you came up with this comment : The vast majority of RMBS and CDO-of-RMBS losses have nothing to do with the government.

Your story would have been even better if you included the necessary element of how the repayment characteristics of selling beer to unemployed people on credit were better than the interest rate they would pay. Because, as a foundation to these securities, the banks (based on flawed rating agency analysis) believed that the subprime mortgages would pay back.

If the banks had had a better understanding of how past performance (subprime mortgage payers in the 1990s) was no indicator of the future (people in 2005 buying investment properties to flip, based on the theory that property prices would increase at 4% p.a. forever), then they would have lost so much money that they required bailing out.

The major post-crash failure of government (IMHO) is that they didn't take large equity stakes in the banks, and prevent them from making obnoxious bonus announcements.

[fanboy123]

freddie and fannie started issuing "subprime" loans in the 90s, to lower income and minority borrowers with reasonable default rates. by the time the boom came around their marketshare in this market plummeted because everybody else dropped their standards (the garbage was to be somebody elses problem anyways) and their marketshare dropped. the growth in subprime during the bubble period had little to do with them.

they are currently the garbage bilge where junk loans are deposited, but that is by design to protect housing prices.

they were not a huge area of growth when housing overheated, subprime or otherwise.

[yummyfajitas]

the garbage was to be somebody elses problem

Simply false. The garbage was usually your own problem, the AAA tranch was sold to someone else. This is what took down Lehman, for example. BNC Mortgage (owned by Lehman) made bad loans, Lehman sold off the AAA tranches while holding the riskier tranches for themselves.

[fanboy123]

Originators underwrote the mortgages who usually sold them to banks who packaged them into bonds. Later on to streamline this process the banks bought mortgage originators (lehman bought bnc) because their appetite for product was huge.

But originally the loans were passed onto somebody else (and most private label issuance by notional balance was in fact not held by either originator nor the underwriter/ibank). It was a method of breaking out credit risk (the borrower risk was separated from originator risk) and seen as a feature. Really it was the whole point of securitization -- to get bankruptcy remoteness for credit products.

Originate to securatize is now seen as a problem because it does not give the originator an incentive to make good, proper loans (which is already tough to do). We dont know if credit standards and checking would have become so lax without the securtization machine during 1998-2007 but it seems unlikely.

[enjo]

Just to be clear. I think you're arguing that it was failures in both policies (government backed loan programs that made money cheap) and oversight (no one was properly overseeing the whole mess).

If that's what your saying.. I would completely agree. There were so many moving parts in this and we needed ALL of them to fail for catastrophe.

All of them did.

[yummyfajitas]

If Fannie/Freddie were not involved, why do they require the largest bailouts?

[fanboy123]

because private label mortgage issuance shut down. over 90 pct of mortgage origination are now agency. this includes all refis which rolls crap out of private label onto the govt sheets. we went from investors loaning money to the taxpayer and this is a subtle method of bailing out the fin industry. no way fin instutions would have paid back any govt loans without this help and its a convenient place to sweep away the losses.

also prime mortgages from the bubble years got hammered and of course that hurt them.

[yummyfajitas]

because private label mortgage issuance shut down. over 90 pct of mortgage origination are now agency.

Interesting - it's as if the private sector has figured out that maybe fewer mortgages should be issued until we come up with better underwriting standards.

Fannie/Freddie are now taking taxpayer dollars to continue issuing mortgages that the private sector considers too risky.

Clearly, Fannie/Freddie are paragons of underwriting and would never issue bad loans.

also prime mortgages from the bubble years got hammered and of course that hurt them.

Wait, Fannie/Freddie made bad loans and assigned them the label "prime"? They clearly had nothing to do with the mortgage mess whatsoever.

[fanboy123]

Well, without them to pick up the slack we would have almost NO mortgages issued in this country, which some of us might think is bad. The alternative would be for rates to rise (some of us might think this is a good thing, which it might be) and to allow housing prices to fall. This has many knock on effects like crippling pension funds and banks and insurance companies etc etc.

I find it horrible that guilty parties profited/are profiting from their mistakes. But its a complicated problem which is why we are going to go through hell to fix it.

FWIW I this does not excuse govt behavior, which leans far far too much in the way of banker cronyism, which might have been the original point of the article. I am just pointing out that its a complicated situation that is a mess to sort out.

Also I never stated that fre/frn never made bad loans and were not players in this whole debacle. I just stated that they were not the main engine of horrific growth and the "cause" of all of these problems.

[Codayus]

This is completely wrong. Credit standards not only dropped dramatically at Freddie/Fannie, but they drove the decline elsewhere. Causality is clear: Private banks issued loans that they knew that Freddie/Fannie would securitized; as the government agencies decided they'd buy crap, the private banks provided it. (For crying out loud, the government agencies CREATED the subprime market.)

In actuality, about half the bubble has been directly traced to the lowering of underwriting standards by Fannie/Freddie, which in turn was directly caused by....a desire to provide home ownership for the poor.