Comments on: Final Thoughts on the Bailout (I Still Don’t Like It) http://www.coyoteblog.com/coyote_blog/2008/09/final-thoughts.html Dispatches from a Small Business Sun, 12 Feb 2012 02:42:00 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Mark http://www.coyoteblog.com/coyote_blog/2008/09/final-thoughts.html/comment-page-1#comment-13934 Mark Mon, 29 Sep 2008 16:35:32 +0000 http://coyote-blog.com/wordpress/2008/09/final-thoughts.html#comment-13934 <p>"But nothing forced private companies, particularly highly leveraged institutions like banks, to load up their balance sheets with these things"</p> <p>Nothing "forced" them, but what you are leaving out of your analysis is the fact that Fannie Mae and Freddie Mac GURANTEED the mortgages that backed these securities. The ratio of the mortgages guaranteed by Fannie Mae to that actually held by Fannie Mae is 3:1, almost $5.4 trillion in guaranteed mortgages.</p> <p>With the guarantee on the securities and absurd underwriting at Fannie Mae, it clearly was not economically irrational for the financial industry to act as it did. THat is, the people at the front end of the mortgage industry mass recruited applicants and slammed them through. The people at the back end of the market bought the doubly secured loans (secured both by real property and the guarantee of a Government Sponsored Enterprise) because it offered an very good return based upon the risk. </p> <p>I do not believe that the crisis ever develops without the role of the GSE middleman. Why? Because if you are the front end mortgage broker, the ones taking all of the heat from the Left, why bother to find these poor customers if they are not going to be qualified. And, if the mortgage backed securities do not receive essentially the full credit backing of the United States of America, your risk parameters will be very different. To fill that role in your portfolio you simply would shift back to direct Treasuries.</p> “But nothing forced private companies, particularly highly leveraged institutions like banks, to load up their balance sheets with these things”

Nothing “forced” them, but what you are leaving out of your analysis is the fact that Fannie Mae and Freddie Mac GURANTEED the mortgages that backed these securities. The ratio of the mortgages guaranteed by Fannie Mae to that actually held by Fannie Mae is 3:1, almost $5.4 trillion in guaranteed mortgages.

With the guarantee on the securities and absurd underwriting at Fannie Mae, it clearly was not economically irrational for the financial industry to act as it did. THat is, the people at the front end of the mortgage industry mass recruited applicants and slammed them through. The people at the back end of the market bought the doubly secured loans (secured both by real property and the guarantee of a Government Sponsored Enterprise) because it offered an very good return based upon the risk.

I do not believe that the crisis ever develops without the role of the GSE middleman. Why? Because if you are the front end mortgage broker, the ones taking all of the heat from the Left, why bother to find these poor customers if they are not going to be qualified. And, if the mortgage backed securities do not receive essentially the full credit backing of the United States of America, your risk parameters will be very different. To fill that role in your portfolio you simply would shift back to direct Treasuries.

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