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Friday, September 19, 2008

Fun With Numbers: The Fannie/Freddie Debacle

In another installment of my fun with numbers series, it's time to examine the most important numbers related to the Fannie Mae/Freddie Mac debacle.


Yeah, that number is quite a mouthful when written out, isn't it? 4 trillion is roughly what the two giants currently back in terms of the number of home loan mortgages. All sorts of questions come to mind. Why are two companies allowed to own so much? How did two companies grow so large centered specifically in one specific industry, mortgage securitization? I'll have more on that later.


This is the number that should get everyone mad. That's how much Politico reported that the two giants spent lobbying Congress over the previous ten years. Now, take a look at the second number and compare it to the first and you should realize there is plenty in between. If you're wondering why there was a lack of oversight, well the obscene amount of lobbying dollars ought to give you a clue.


This is the percentage of all mortgages that so called experts estimate the two giants are backing. This is also a very misleading number. Keep in mind that while subprime and Alt A are no longer in existence, there are still plenty of those types of loans out there that were closed while they were. I would estimate that these two will fund about 90% of all loans going forward unless our system is not dramatically restructured. Do you want to know why they needed to be bailed out, the first number and this number should give you a clue.


That's the size of the credit line that Fannie/Freddie get straight from the Treasury. They get special rates no other companies would get. They get all of this because they are Government Sponsored Entities.


That's how many companies are currently in the business of conventional loan securitization., Fannie Mae and Freddie Mac. That's it. That's called a duopoloy which is a monopoly only with a different word. We thought that AT&T had a monopoly long distance phone service and broke them up. Standard Oil had a monopoly on gasoline and we broke them up. Why does the federal government continue to allow a monopoly in mortgage securitization? Worse than that, it is a government sponsored monopoly. Since these two are Government Sponsored Entity, this monopoly isn't merely being perpetrated in front of the government, but it was created by the government. So what you say, mortgage securitization is one step in the mortgage process, and lot's of companies contribute to mortgages in lot's of ways. Not exactly, before Fannie/Freddie securitize and mortgage, it must meet their specifications. Why would they securitize a mortgage they didn't like? In other words, by securitizing, they control everything, pricing, underwriting, and securitization. The government created a government run monopoly on mortgages.

Put all the numbers together and you have a very bad idea that the government created, perpetrated, and now only the government can solve it. I am not altogether hopeful.


Chris said...

Good post, Mike. It looks as if Fannie and Fred have finally been put out of our misery. They outgrew their purpose long ago but the gravy train was too much to resist, so they were expanded rather than done away with. Shocking, I know.

If they only cost us 200-300 billion to get rid of, then it's a price worth paying. Not pleasant but the political will (mostly on the left, but plenty on the right) didn't exist to control the excesses.

mike volpe said...

The thing is that they haven't. They can be as a result of this and I for one hope they will. Hopefully, there will now be political will to totally restructure them.

Anonymous said...

Should have said, "they'll slowly be put out of our misery." Pretty sure the legislation calls for them to shrink the portfolios by 10% annually.