So here’s the dilemma. On the blogosphere I get push back from people who do not want to hear my assertion that Fannie and Freddie were deeply involved in screwing the pooch when it comes to the current financial and housing crisis. They resist knowing the facts of MBS (Mortgage Backed Securities) in which the two FMs sucked up trillions in mortgages and sold off notes with implicit government guarantees that interest and principal would be repaid. And that is just the facts of those two agencies. They were established to do these things and supply a constant stream of liquidity into the mortgage markets so that banks could make endless new loans.
Since they don’t accept that simple fact that the ability of banks to sell off risk through FM^2 encouraged them to take ever more risk (since they, in effect, bore little of it) they don’t accept that this situation encouraged ever poorer lending standards.
And they certainly won’t accept that from at least the mid-aughts on Fannie and Freddie were encouraged to dip their toes into the sub-prime market (where they were not really supposed to tread) encouraging the growth of that segment.
Here’s where it all gets interesting. When I say sub-prime, I mean more than the market segment as described by regulation. I am also including liar loans, investment property loans, adjustable rate loans that are not technically sub-prime at the low teaser rates but will be later. You see, the roots of the current problem include:
· No one knows how many of the mortgages are “upside down” in which the value of the home is now worth less than the face value of the loan.
· No one knows how many will go into either foreclosure or at least delay of payment now that billions of dollars worth have seen their interest rates rise.
· No one knows how many are liar loans in which the property “owner” was never going to be able to make the payments.
· No one knows how many are for investment properties. Investors are much more likely to walk away without trying than are residents.
And as all these problems mounted FM*2 performed little to no oversight. Liar loans, should be sub-prime loans, some sub-prime loans and other detritus are all bundled up in the MBS market. And that is why banks cannot trust each others’ valuations nor collateral.
So yes, the bankers bear much responsibility here. But then again, so do people who borrowed more than they could pay, believed that house values always rise at double digit rates, took out second and third loans to tap the “capital” they had earned through appreciation, and anyone who speculated on the belief that it would go on forever.
But the regulatory environment, coupled with a tax code that unjustly rewards housing debt, created the perfect petri-dish environment for all this to happen.