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Thread: Fannie and Freddie tab is $146B and rising

  1. #31
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    Re: Fannie and Freddie tab is $146B and rising

    Quote Originally Posted by NolaMan View Post
    Fannie didn't actually make the loan, but they bought the loans and essentially insured them, and they got tax incentives to do so. According to the WSJ, in 1996, HUD set a goal for Fannie Mae and Freddie Mac that at least 42% of the mortgages they purchase be issued to borrowers whose household income was below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.

    Before this, beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers.

    I think it is dodging the issue to argue that Fannie did not give any of these loans, and ignore that they were were basically required by the government to purchase billions of dollars worth of these loans, thus driving up demand.
    Fannie and Freddie dealt with conforming loans, so of course they lended primarly to low and middle income borrowers.

    Of course they drove up demand. Why else would we securitize loans made by banks? Banking without securitization became unprofitable in the mid 1980's.

  2. #32
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    Re: Fannie and Freddie tab is $146B and rising

    Quote Originally Posted by drz-400 View Post
    Fannie and Freddie dealt with conforming loans, so of course they lended primarly to low and middle income borrowers.
    And ultimately those who really should never have gotten a loan to begin with.

    Of course they drove up demand. Why else would we securitize loans made by banks? Banking without securitization became unprofitable in the mid 1980's.
    So, driving up demand for loans that should never have been made is not a good thing, especially when it all hits the fan so to speak.

  3. #33
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    Re: Fannie and Freddie tab is $146B and rising

    Quote Originally Posted by NolaMan View Post
    And ultimately those who really should never have gotten a loan to begin with.



    So, driving up demand for loans that should never have been made is not a good thing, especially when it all hits the fan so to speak.
    I regret using the word demand. If demand for home loans was what was driving the increase in quantity of loans we would have seen interest rates increase, and judging by the size of the bubble, they would have done so considerably. I think a larger component of the financial crisis did not come from demand for loanable funds.

    Lets look at the CPI (base year 1983/84). I think in most places the peak house prices were in mid 06. Lets start at year 2002 since this is when the trend for home prices really began steepening and the bubble first started to take shape.
    CPI Jan. 2002:177.1
    CPI jun. 2006::202.9

    ((202.9 -177.1)/177.1)x100 = 14.568/4 = 3.642

    So inflation average inflation was 3.62% per year.

    The nominal interest rate for a 30 year home in 2002 was around 7%. In jun 2006 it was around 6.5%.

    So the real interest rate in 2002 was 3.38% and in mid 2006 it was 2.88%. Real interest rates declined. This suggests that an the supply of loanable funds was increasing. This seems strange considering the US national and personal savings rates were not really at very high levels. So I would suggest that large capital inflows (as a result of our large current account defecit) resulted in this increase of loanable funds. The interest rate dropped because of a shift in the supply curve, more loans were made at lower interest rates. This caused a shift in the demand for houses to right and an increase in house prices. Thats my theory for the housing bubble. Subprime of course played a role, fannie and freddie were involved, but they were all part of a much bigger picture. This in my opinion is why we saw housing bubbles arise in a large part of the rest of the developed world as well.

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