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Op-Ed: Our Assets Are Your Debts

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How Fannie, Freddie went rogue.

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Editor's note: Jim Boswell, a former Director at PriceWaterhouse Coopers, supervised the team of analysts managing Ginnie Mae's MBS portfolio risk for more than 15 years - including the period of the S&L crisis. An authority on mortgage-backed security programs, he has been published extensively, received the Vice-Presidential Hammer Award and is now a leading risk management consultant.


Mortgage-backed securities (MBSs) increase a country's housing capital by bringing global financing into an otherwise more restrictive localized and regional investment environment. As a result, homeownership becomes more available and affordable to the citizens.

Unfortunately, the current MBS crisis in the United States isn't due to some inherent flaw in the theory or concept behind MBS; instead, it's caused by poor implementation, execution and oversight of the US's implicitly guaranteed MBS program.

Although blame for the oversight failure can be shared by many players, including the Congress, the Office of Federal Housing Enterprise Oversight (OFHEO), the Federal Reserve and the Department of Treasury, just to name a few, the program implementation and execution problem should be placed entirely at the feet of the 2 government-sponsored enterprises (GSEs) we call Fannie Mae (FNM) and Freddie Mac (FRE).

Though Fannie and Freddie are indeed sponsored by the government, they don't act or operate like government-affiliated entities. Instead, they act like what they really are: 2 independent, publicly-traded, Fortune 500 companies - profit-driven, rather than policy-driven.

Because it's impossible to serve 2 masters at the same time -- and because Fannie and Freddie's primary allegiance is to their stockholders -- they have repeatedly operated counter to the best interest of the financial goals and policies of a complacent and somewhat bewildered U.S. Government.

Figure 1
Source: Annual Financial Statements

Click to enlarge


Figure 1 shows the amount of accumulated MBS debt obligations from 1992 to 2007 for Fannie Mae, Freddie Mac and Ginnie Mae (the 3 entities responsible for issuing government-guaranteed or implicitly guaranteed MBSs).

Note the constant, almost exponential, growth in Fannie Mae and Freddie Mac's MBS obligations during the 15-year period displayed on the graph. What's driving this extraordinary growth?
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