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February 18, 2005

Alan Greenspan Is Worried About the Mortgage Lending Agencies

The Economist reports:

Economist.com | Greenspan’s worries over America’s mortgage giants: FANNIE MAE and Freddie Mac, the twin titans of America’s mortgage markets, think of themselves as big, friendly giants. They stand behind the mortgages of around three-quarters of America’s households—they ‘make home possible,’ as Freddie Mac likes to put it. Their circle of friends does not, however, extend to the Federal Reserve and its chairman, Alan Greenspan. On Thursday February 17th, he told Congress that by letting these two agencies grow unchecked, ‘We are placing the total financial system of the future at a substantial risk.’ Very big but not so friendly, these giants could soon loom over America’s financial skyline like Godzilla and King Kong.

Fannie Mae—originally the Federal National Mortgage Association, it now calls itself by its chummy Wall Street nickname—traces its origins to the credit crunch of the Great Depression, and government efforts to help families borrow to buy a home. Fannie Mae, and its smaller cousin, Freddie Mac (the Federal Home Loan Mortgage Corporation), do not lend to budding homebuyers directly. Instead, they buy up the mortgages that other lenders offer, helping local banks and thrifts to distance themselves from the risks involved. Some of these mortgages are then bundled up and sold on: the agencies serve simply as middlemen. But a growing proportion are kept on the agencies’ balance sheets. Between 1997 and 2003, their combined holdings more than trebled, to over $1.5 trillion (see chart). The middlemen have got fatter and fatter.

Posted by DeLong at February 18, 2005 07:30 PM

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» Fannie Mae and Freddie Mac from ProfessorBainbridge.com
Brad DeLong posted an excerpt of an article by the Economist on Freddie Mac and Fannie Mae, the quasi-governmental corporations that buy up mortgages from banks and bundle them together into asset-backed securities. DeLong didn't comment, but the excer... [Read More]

Tracked on February 19, 2005 04:41 PM


Another example of our Chairman's "unbiased, professional" opinion about a federal institution designed to help the middle class.

I have been hearing Republicans talk about how they are the "risk" that is going to bring down our system for years but still do not understand it.

Posted by: spencer at February 19, 2005 07:26 AM

Again, I have been wondering why there should be systemic risk in Fannie Mae and Freddie Mac. The near government agency status of the corporations has allowed for lower middle class mortgage for decades, and Fannie Mae has been moving to mortgage for lower income households that will shield the households from excessively priced debt. The hedging techniques used by Fannie and Freddie are fairly transparent and conservative. What then is the problem? The problem seems to be persistent lobbying by other finance corporations for more of the mortgage market. So, there is another conservative target.

Posted by: anne at February 19, 2005 08:16 AM

Who cares what Alan Greenspan thinks? He's a partisan hack like any other, according to Krugman.

From the remarks of Greenspan, is he worried about the U.S. housing market? He expressed puzzlement over the low long term interest rates even though short term are rising. Is he signalling he thinks there's a housing bubble?

Posted by: Unstable Isotope at February 19, 2005 09:55 AM

I have seen other articles which express concern about the hedging concerns, which were an important element in Greenspan's comments. Wasn't there an issue about the accounting for the hedging that entered into the recent restatements of earnings for both agencies? I do not know enough about the matter to say anything about transparency, and whether that is enough. But the derivative market is totally unregulated, and so I doubt that we actually know what we need to know about hedging.

Maybe Greenspan's comment was meant exactly as he said, as a thought that the agencies should market more of their mortgages and reduce the reliance on hedging. Or is that the bitter memory of the S&L crisis talking?

Posted by: masaccio at February 19, 2005 10:07 AM

Alan Greenspan is against a program that provides services to the lower-middle class? How can this be?

Posted by: Kimmitt at February 19, 2005 11:55 AM

But don't the operations of the GSE increase the supply of mortgage finance, by defusing (and exporting) risk, which, in turn, stabilizies, if not increases, the asset value of housing, (though increased demand), or, at any rate, increases the overall asset value of the housing stock, which, in turn, increases the credit-worthiness of home owners and thus their consumption expectation/capacity? So then, they would create additional asset-backing for the value of the U.S.$ independent of the control of the Fed, but which the Fed must take into account. Is that the rub?

Posted by: john c. halasz at February 19, 2005 12:19 PM

When Greenspan was worried about were the federal government was going to invest the SS surplus after the national debt was paid off,
he somehow didn't have enough imagination to
consider these agencies. (yes it could be a wonderful life) Will someone remind me
why we ever thought this guy was so indespenseable particulary given his advise during the current administration. the accurate assessment of his behaviour over the last four years would be hacktaculous. As to his economic philosophic matrix considering what has become apparent through the process of globalization and the fact that this guy's job is to keep a constant eye on these things from a front row seat with the prerequsites of someone in his position one would also question why we ever thought this guy was so smart. As of late it's becomes clear to me that his real talent is being a superb courtier.

Posted by: joe at February 20, 2005 11:27 PM

Why is it a good thing to concentrate the interest rate risk of 20+% of the mortgage market into one place? For those of you who don't remember how mortgages work, they have optionality that benefits the borrower and hurts the lender. In the event of a sharp rise in rates, mortgage convexity is difficult to model. It stresses all the players, including the hedging counterparties. FNM's "hedged" portfolio can get hurt due to counterparty risk, as well as by FNM simply doing their hedging incorrectly. Unlike any other player, FNM is big enough to really hurt the country in the event of default, and the bagholder will be you, the taxpayer. If things go OK, the shareholders will do well, and mortgage rates will be a little cheaper because of the presence of an outsized buyer with market immunity, again courtesy of the taxpayers.

Greenspan would have to be a fool to want this arrangement to be as large a part of the market as it presently is.

Posted by: RichL at February 21, 2005 01:31 PM

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Posted by: at February 21, 2005 06:32 PM

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