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History Repeats Itself: Wall St Wants a Part of Fannie and Freddie's Gov't-Guaranteed Deal

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Because Wall St has proved itself a self pair of hands in the past, right?

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This article by Marian Wang originally appeared on ProPublica.org

As the White House considers how to reform troubled mortgage giants Fannie and Freddie, some of the nation's largest banks have piped up with their own suggestion. The New York Times reports that banks are suggesting that they be allowed to take over some of Fannie and Freddie's work of issuing securities backed by a government guarantee. That guarantee can be quite convenient for businesses, which get to keep the profits in good times and -- as we saw during the housing market collapse -- get to socialize the losses by passing them onto the government. From the Times:

The banks have presented their ideas publicly through trade groups. Housing industry consultants and people familiar with recent meetings at the Treasury Department say these banks view the government's overhaul of the mortgage market as a potential profit opportunity.

This is something that nearly dates back to the beginning of mortgage securitization. Even in the '80s, Wall Street was looking for a way to cash in on the secondary mortgage market -- in other words, looking for a way to get in on Fannie and Freddie's business. Bethany McLean and Joe Nocera give a quick refresher of this history in the first part of their new book, All the Devils are Here:

Wall Street realized it was never going to dislodge Fannie and Freddie from their dominant position as the securitizers of traditional mortgages. If it hoped to circumvent the GSEs and keep all the profits to itself, Wall Street would have to find some other mortgage product to securitize, products that Fannie and Freddie couldn't -- or wouldn't -- touch.

What they found was riskier mortgages and subprime loans. As the Center for Public Integrity reminded us this week, it was Wall Street, after all, that led the way into the mortgage mess.

Fannie and Freddie were followers, lowering their underwriting standards when they realized they were losing market share. CPI reports:

Government data shows Fannie and Freddie didn't take the same risks that Wall Street's mortgage-backed securities machine did. Mortgages financed by Wall Street from 2001 to 2008 were 4½ times more likely to be seriously delinquent than mortgages backed by Fannie and Freddie.

... Fannie and Freddie, Cecala says, didn't start making a big move into riskier mortgages until the mortgage boom was already under way, and they were fighting to reclaim market share they'd lost to more aggressive Wall Street players. Even then, they were more cautious than Lehman Brothers and other investment banks. For example, just over 15% of Fannie- and Freddie-backed loans made in 2007 have been seriously delinquent, compared to nearly 42% of mortgages bankrolled by Wall Street, according to the FHFA.

Nonetheless, Republicans have consistently blamed the mortgage giants for the financial crisis. GOP.gov calls Fannie Mae and Freddie Mac "the main cause of the nation's current financial turmoil."

While there's no doubt that Fannie and Freddie's billion-dollar housing losses -- which necessitated their government takeover in 2008 -- have cost taxpayers billions, at least one former Treasury official told the Times that having Wall Street take over Fannie and Freddie's work is not a good idea.

Michael Barr, who worked on housing issues at the Treasury Department until last month, told the Times that although reforming the mortgage giants is necessary, allowing banks to issue government guarantees sets up the banks as a second-generation of Fannie and Freddie, creating "the same conflict we had in the past."


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