Subprime Mortgage Crisis Flashcards
Features of FM and FM?
Fannie Mae:
Federal National Mortgage Association: founded in 1938
Freddie Mac: Federal Home Loan Mortgage Corp.
Founded in 1970.
Both private corps with shareholders
Both have unique federal charters from congress (so GSE)
FNMA exempt from local, state taxes
Each has 2.25 billion line of credit with treasury.
Both exempt from SEC oversight, instead regulated by the Federal Housing Enterprise Oversight (OFHEO), replaced by Fed Housing Finance Agency (FHFA)
Regulatory capture issue: the tendency for regulators that only look after 1-2 firms to advance their own interests instead by joining up with the lone firms.
OFHEO particularly lax, allowed for the late publication of financial statements.
How did these features contribute to the undercap of F and F?
Both can sell bonds, buy mortgages
Debt NOT BACKED by US treasury, although an implicit guarantee seems to exist.
Private profit delivered to shareholders, risk placed on public.
Debt yielded about 15bps above treasuries, attractive given almost risk free nature of debt.
Role of F & F in the aftermath of the 1980s thrift crisis?
Undertook the new role of mortgage intermediation.
Held some mortgages in portfolio, repackaged them into MBS.
Payments guaranteed by Fannie or Freddie.
Are restricted to conforming mortgages (not over 417,000)
Therefore cannot securitize larger mortgages.
Current status of F and F and Ginne Mae? (government national mortgage association)
Fannie Mae: 1 trillion in assets, 2 trillion in MBS
Freddie Mac: 0.8 trillion in assets, 1.8 trillion in MBS
Ginnie: 0.014 trillion in assets, 0.5 trillion in MBS.
AS OF 2008!!!!!
Describe the onset of the housing crisis
In early 2000, Congress pressured F and F to relax underwriting standards to promote home ownership.
Feature: Lower down payments Higher payment/income ratios Lower credit scores Weaker documentation: lax appraisals, no pay stubs
Led to the rise of NINJA mortgages.
Who pressured them?
Barney Frank, Christopher Dodd
How did underwriting standards change?
Median down payment fell from 20% to 10 then to less than 5 in 2007.
Bernanke: irresponsible lending and lax ecuritization practices provoked the crisis.
How did home prices react?
Doubled from 2000 - 2006
How did IBs finance MBSs?
Through commercial paper sold to MMMFs (deemed as “safe”)
What happened in 2007 as a result of this buildup of issues?
Borrowers realized they were indebt. Cut back spending, borrowing.
Housing bubble stalled, then exploded.
Foreclosures spread
Countrywide financial failed in 01/08, had financed 20% of US mortgages, purchased by BoA.
Bear Stearns failed in 03/08, taken over by JP Morgan.
Rise of the first Maiden Lane LLC, used to absorb toxic assets.
09/08 WaMU failed, allowed to.
What was the most substantial measure introduced to combat failures?
Troubled Asset Relief Program in 10/08.
Administered by Hank Paulson.
TARP advanced 250 b to BHCs as preferred stock.
5% coupon for 5 years, then 9% if not repaid.
Better deal than Buffet’s previous advance of 10% coupon + stock options.
Strong BHCs forced to go along to cover up weakness of other BHCs.
Who benefited the most from TARP?
BHCs such as Citigroup, BoA, AIG etc.
Cost of TARP?
Nothing. Profit for tax payers. Made 24.9 billion on BHCs as a whole, lost 9.5 on GM. Not bad, but small in comparison to Buffet’s return.
Underpriced option.
By how much did US deposit share of top 5 BHCs increase?
From 29.5% to 38.1% (2006-2011)
Describe the case of the AIG bailout
AIG lost 100 billion on CDSs.
Rescued by Fed in September through Maiden Lane II, III.
+40 b from TARP.
Bailout amounted to 182.3 b.
AIG used bailout funds to pay GS, SG, Barclays etc.
Bernanke’s comments on AIG?
AIG unconscionable bets, cognizant of its important role, and yet still made structurally risky bets.
