Don't agree. But we're talking past each other.
Fannie and Freddie were still constrained by regulations that the Wall Street banks, and CountryWide, and Joe the Mortgage Broker, weren't. You know this.
Also, CR (and the late Tanta) knows this topic backwards and forwards and has no ax to grind. I trust his take on it.
In closing, you might want to read this 2008 interview with the inventor of mortgage backed securities, Lew Ranieri, to see his take -
http://www.businessw...4091040380049.htm
Why did it go wrong?
When interest rates go up and refinancings end, the industry has to contract. It's never fun. But at the end of the last cycle in 2004-05, all of a suddenÂand some of us think not accidentallyÂinstead of normal contraction we had this amazing growth of the subprime industry. It distributed the benefit of homeownership to people who never would have qualified for mortgages otherwise.
Is that how the industry rationalized exotic loans?
That was one of the excuses. In the name of trying to enfranchise everybody, we started creating unstable loans that were designed to blow up in two years. Now the loans need the tooth fairy to keep up their values.
Why did that happen?
There's an old Wall Street adage that there's a nexus between fear and greed. If you diminish fear, you get more greed. People got braver issuing this stuff. All the participants felt they could act merely as agents and collect fees. Nobody was prepared to say "I have liability."
Emphasis added.
Fannie Mae's market share fell in 2004-2005 because of ARMs -
http://www.washingto...005051102030.html
To a point, housing finance experts agreed with Fannie that its drop in market share was attributable to the proliferation of adjustable-rate mortgages. They noted that Fannie typically does not buy adjustable-rate loans from retail mortgage lenders because the lenders generally do not want to sell them.
But the experts added that the regulatory pressure on Fannie Mae is also helping constrict its business as it cuts back some of its investing activities to preserve capital. OFHEO has ordered Fannie to raise the amount of capital it has in reserve as a percentage of its holdings, a goal the company is pursuing by conserving cash and reducing its portfolio.
"The banks are far more willing to hold adjustable-rate mortgages than 30-year fixed. With the consumer preference for adjustable rates, it's harder for [Fannie] to get the volumes. Couple that with the spreads and the political and regulatory problems surrounding portfolio growth, and it's hard for them to be growing market share," said Josh Rosner, an analyst with Medley Global Advisors LLC in New York.
Oh, but it's equally Fannie's fault because they caused some Solomon Brothers guy to invent MBS's in 1977. And it's equally Fannie's fault because Wall Street was cranking out ARMs like sausages, taking Fannie's market share, and Fannie couldn't compete due to the regulations they were under, and because shut up that's why.
Or something... :-/
Cheers,
Scott.
