Cato Paper - Fannie, Freddie, and the Subprime Mortgage Market
the Author has some opinions, but does offer good information about some of the events that lead to my current research topic —Dodd-Frank.
Painting Wall Street and the GSEs as competitors fails to account for the fact that Wall Street firms and their affiliates were among the largest mortgage sellers to Fannie and Freddie.Companies such as Citibank, Chase, Lehman,Morgan Stanley, and Goldman Sachs all did significant business selling mortgages to the GSEs.
In part because of the Basel capital standards, which required banks to hold far less capital for a given volume of whole mortgages than for an equal volume of mortgage-backed securities, Wall Street banks were far more inclined to hold mortgage-backed securities rather than whole loans.
And in many cases, their preference was those loans issued by Fannie and Freddie. For instance,over 50 percent of Maiden Lane I assets, those Bear Stearns assets guaranteed by the Federal Reserve, consist of GSE securities.
One culprit often discussed is the GSEs’mandated housing goals. In 1992, Congress established a set of housing goals for Fannie and Freddie. The statute established an interim goal with direction for the HUD Secretary to increase such goals on a periodic basis.
Although both statute and regulation set out several numeric goals, the primary goal focused on low- and moderate-income borrowers, which will also be the focus here.The first adjustment to the goals took effect in 1996, when HUD required 40 percent
HUD estimated that such borrowers were between 48 and 52 percent of the overall market. As initially set, Fannie and Freddie could go about business as usual and with a very high probability hit their goals. For the remainder of the 1990s, the goal was set at 42percent, also not much of a stretch to meet(Figure 4). Beginning in 2001, HUD increased the low- to moderate-income goals significantly,raising them from 42 to 50 percent of purchases. HUD’s intention in this case was for the GSEs to at least match the market.The GSEs responded accordingly. Fannie Mae, for instance, increased its purchases of low- to moderate-income loans from 45 per-cent in 1996 to 57 percent in 2006. Freddie’s increase was only slightly less dramatic.