bostonbubble.com

[Guest]

This is a question I have been pondering for the last couple days and I'm hoping some smart people here will tell me whether I'm on to something or off base...

While the most important question seems to be "where will things go," the more important question may be "how did things get here."

My theory:

The scale of the housing bubble and the credit bubbles built thereupon was aided and abetted chiefing through the operation of Fannie Mae and Freddie Mac as a shadow US treasury pumping trillions of dollars into the housing market.

The basic story:

Fannie and Freddie borrowed capital near the treasury rate with the implicit understanding that they were backed by the Treasury, which they were.

They have very low capital requirements (3.5%) such that they could borrow enormous sums at very low rates from very little investment.

They used this power to flood the market with capital for mortgage financing.

Commercial banks and investments banks further the availability of Fannine and Freddie as a ready purchaser for all the mortgages they can pump out.

The profits deriving from Fannie and Freddies ability to borrow at the treasury rate filtered through the banking sector supporting furthering leveraging, eventually backed by the taxpayer.

The Treasury essentially assumes the obligations of Fannie and Freddie, doubling the national debt.

How were Fannie and Freddie not acting like our treasury pumping taxpayer money into a housing bubble?

Granted, the secondary effects of Wall Street were immense but for a period of years the presence of the US Treasury printing money to fund MBS issuance removed all market discipline making this problem much worse.

But, tell me how Fannie and Freddie did not function essentially as described?

[samz]

The consensus seems to be that Fannie and Freddie were part of the problem, but only one part.

They were private companies, though, and had no access to the treasury or to taxpayer money before the bailout. (Which was significantly smaller than the subsequent bailout of Wall St.)

I've read some articles saying that Fannie and Freddie had actually started to be marginalized in the last few years of the bubble. The big investment banks realized they could securitize mortgages themselves and bypass the middleman. This became a lot easier when the SEC waived their leverage rules in 2004, allowing them to go to as much at 30 or 40 to 1.

I posted this link before:

http://online.barrons.com/article/SB122246742997580395.html

-Sam

[admin]

[samz]

[admin]

[Guest]

I think the argument I'm trying to make is as follows:

There was an enormous flow of investment into the housing sector in the US over the past 10 years.

Most of this money came through Fannie and Freddie.

I've seen some analysis suggesting that Fannie and Freddie were actually much more invested in the subprime market than is commonly assumed through purchases for their own portfolio and also through securitization of mortgages. The companies had some quite opaque practices that hide their exposure and the generally only bought the AAA subprime securities.

Regardless, however, of how involved Fannie and Freddie were in the subprime sector and the fact that they weren't directly underwritting the most risky loans or more risky tranches of loans, they were the source of trillions of dollars of capital that flowed into the markets.

Why this matters is because Fannie and Freddie were able to raise money at very low rates. People buying their debt considered it to be just a hair riskier than treasury debt. In the end, our government has assumed all of these liabilities. Thus, from the perspective of hindsight, it looks like Fannie and Freddie were basically borrowing trillions of dollars, basically backed by the full faith and credit of the US taxpayer, and pumping that money into the mortgage industry.

I would guess that this infusion of taxpayer money into the markets had a huge impact on other market participants, like Countrywide, who took huge risks and relied heavily upon the stability of their business with Fannie and Freddie to underwrite those risks. I think if you imagine any market where the government suddenly starts pumping trillions of dollars into that particular sector, you would expect the same thing to happen. Alone these actions caused an inflation of price, but it also had the effect of drawing even more private capital into a market that was perceived to be safe because of the government involvement.

I guess my feeling is that if you took away the GSEs, it is very hard to imagine the scale of the housing bubble and collapse. Private market discipline would have intervened much earlier and there would have been no incentive or driving force for overinvestment in housing....

Anyways, I'm hoping someone will directly address the merits of this argument and let me know if I'm missing some crucial fact.

[admin]

[balor123]

It has already been demonstrated that housing prices rose very quickly with easy credit in Boston. Can someone explain why they aren't falling, ignoring inflation, with the lack of credit (at least in and around the 128 belt)?

[balor123]

I say to ignore inflation because income isn't keeping up with it either.

[john p]

If a tree falls in the woods and nobody is there to hear it; does it make a sound?

My mother says the difference between a recession and a depression is a recession happens to your neighbor and a depression happens to you.

People are living their lives as normal; maybe not spending as much, but for those that bought more than 4 or 5 years ago, they most likely bought before the bubble and have refinanced to a low rate and most likely have had 5 years of salary adjustments so that they are clearing their hurdles.

The question is, how many people have used their homes as ATM's and got HELOC's or ARMS? Those people will be a big portion of the first shoes to fall. Even though the math makes this correction have the potential to be much worse than the 90's, we haven't had the recession and job losses that caused the price drops.

[samz]

[samz]

[admin]

[balor123]

I know that's what the index says but I just don't see it in the areas that I follow: Waltham, Watertown, Wellesley, Weston, Needham, Lincoln, Needham, Lexington, Arlington, and Belmont.

[admin]