[HN Gopher] The Fannie and Freddie trade is back
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The Fannie and Freddie trade is back
Author : ioblomov
Score : 52 points
Date : 2025-01-08 19:14 UTC (3 days ago)
(HTM) web link (www.bloomberg.com)
(TXT) w3m dump (www.bloomberg.com)
| ioblomov wrote:
| https://archive.ph/AyyVE
| nayuki wrote:
| Relevant quotes from the article:
|
| > 2. Banks lend people the money to buy houses, but the
| government encourages them to do so by guaranteeing the loans.
|
| > 3. Banks lend people the money to buy houses, but someone else
| guarantees the loans. There's a big Mortgage Guarantee Company
| ... Mortgage Guarantee Company is a regular public company, owned
| by shareholders, but it is a large good safe company with
| sterling credit. And the Mortgage Guarantee Company is carefully
| regulated by the US government to make sure that it is well
| capitalized and safe, so banks will happily rely on its
| guarantees. They're not government guarantees, but they're AAA-
| rated, government-regulated guarantees, almost as good as the
| government. The government, in this approach, is not providing a
| financial guarantee, but it is putting its seal of approval on
| the Mortgage Guarantee Company's guarantee, saying "you should
| trust this guarantee almost as much as you would trust our
| guarantee, because we endorse this company and regulate it
| carefully.
|
| > The approach that the government settled on for many decades
| was "mostly 2, but kind of really 3."
|
| I like Matt Levine explicitly spelling out these details. Why?
| Because many people in the general public, especially leftists
| and socialists, believe that the 2008 Great Financial Crisis was
| caused by greedy US banks lending out money to unworthy people
| who had no ability to pay back loans, and take a profit from each
| transaction, and sell the toxic debt to other parties. It's a
| story directly attacking the greed and corruption in capitalism.
|
| While those 3 points in the story are true, what this ever-
| popular narrative misses out is that the banks were motivated to
| make these loans because someone else - FMAC and FMAE -
| guaranteed them. And FMAC and FMAE basically have the full
| backing of the US government. The banks weren't risking their own
| money if loans fail; they were risking someone else's money. If
| the banks were the ultimate underwriter of these mortgages and
| thus defaulters would impact the banks, then the banks would've
| been way more diligent and restrictive about loaning out the
| money. So in the end, this is more a story about socialism and
| government interference that underlies the capitalistic greed.
| The bad loans were subsidized by the public at large, and that is
| a good example of socialism in practice.
| alangibson wrote:
| > what this ever-popular narrative misses out
|
| Straw man. Left commenters know perfectly well about the roles
| of Fannie and Freddy. The left critique is not just greedy
| banks. It's also government collision in pumping property
| values, as well as interest and fees banks make, via Fanny and
| Freddy.
|
| If your opinion is that using government policy to enrich
| property owners and banks is socialist, then you have a very
| unorthodox view of socialism.
| jfengel wrote:
| I got a mortgage. I had to sign a vast pile of paperwork.
| There was one person in the room who had done it before, and
| it wasn't me.
|
| The idea that this was all about devious consumers taking
| advantage of poor innocent banks is laughable.
| NickC25 wrote:
| Seriously.
|
| The narrative that the banks had no incentive to be
| intelligent about who they lent money to is absolutely true
| because good credit bad credit no credit, the banks didn't
| care - the bank's money was backed by the Feds, and that
| was it. The banks got their cut, and made off like bandits.
| They knew what was going on.
| NomDePlum wrote:
| A good example of socialism in practice would have been to give
| the defaulted housing stock to people to stay-in surely? As
| opposed to underwriting the debt loaned by purely capitalist
| companies?
|
| I'm not an expert in socialism but governments underwriting a
| capitalist housing market does not appear close or aligned with
| socialism at all.
|
| I will say I've never associated the US government with
| socialism, at any level, so perhaps this bias is part of why I
| find a difficult argument to envisage.
| pessimizer wrote:
| It's the old classic Eustace Mullins theory that the Fed are
| secret judeo-bolsheviks working to bring about world
| communism, using the blacks as their pawns. They just
| disguise themselves as rich guys and focus all of their
| policies on making the rich richer as an extremely deep
| cover.
| jfengel wrote:
| Actual socialism requires collective ownership of the means
| of production, especially factories and farms. It's believed
| that private ownership of those things will inevitably result
| in abuses so ugly that the entire capitalist system will
| collapse.
|
| "Socialism" in common parlance means "the government does
| stuff. Any stuff. With the possible exception of things that
| benefit them, which are of course right and necessary.
|
| What a lot of people want is "democratic socialism", which is
| actually capitalism with strong government regulation and
| safety nets. It often includes strong mandates about the
| necessities of life: food, housing, health care.
|
| There are few genuine socialists any more, though many
| democratic "socialists" take note of the failures of
| capitalism and try to mitigate them.
| NomDePlum wrote:
| This lines up with my understanding, which is why
| underwriting monetary loss of banks does not appear
| anywhere close to being socialist.
|
| The worlds governments intervention in 2008 and since seem
| closer aligned to propping up capitalism, whilst ironically
| also invalidating a lot of the basis that capitalism
| actually is a coherent system.
| jfengel wrote:
| There's a bitter joke about privatizing profits and
| socializing losses. It's not exactly true, but it's
| depressingly close.
|
| It's not entirely incoherent to be prepared to backstop
| losses when they would become systemic. But that mandates
| limits on risk, or it just tells people that the joke is
| actually reality. Balancing that requires constant
| vigilance... which corporations deter by calling it
| "socialism".
| bloomingkales wrote:
| Let me add my own analogy:
|
| Imagine a fund with a 100 people in it that need a 100k each to
| goto medical school. What are the chances all 100 people become
| doctors? Who cares.
|
| Tell people you have a fund with DOCTORS in it. Woah, a whole
| fund of doctors. Bundle all the loans given to the med students
| into a financial instrument that you price at it 5% more. Sell
| off the financial vehicle, remove the liability of human
| failure (yall ain't all gonna become doctors).
|
| Collect my 5% profit, do that shit again, at scale.
|
| Hope all those doctors become doctors, I personally don't care.
| Ya feel me?
| nayuki wrote:
| > Sell off the financial vehicle, remove the liability of
| human failure
|
| Why would a buyer want to take that fund off your hands? Why
| do they think the fund will generate good returns and you
| sold it to them at a good price? What is guaranteeing/backing
| the fund?
|
| Just because you declare an asset for sale, it doesn't mean
| buyers magically appear to take it from you - especially not
| at the price you're hoping for. The buyer must personally
| expect a higher value from the asset than the price you set.
| steveBK123 wrote:
| Typically loan packagers use some law of large numbers type
| math to at least make the marketing attractive enough.
| Obviously this can blow up (see: 2008 GFC: MBS, CDOs,
| CDO^2, etc).
|
| The attraction to investors is something like - doctors are
| paying 7% interest on their loans, government 10~30yr
| treasuries are yielding 4.5-5%. Individual doctors have a
| much higher risk of defaulting than the US government. If
| you pull 1000s of them together, some will still default
| but you need like 30%+ of them to default for the increased
| yield to not reward you for the risk. For certain types of
| investors (pensions, insurance companies, etc) having
| something that pays a little more than "risk free rate"
| without taking on too much risk is a big benefit.
|
| Someone who knows fixed income more than me may chime in
| with lots of other nuances like early repayment risk,
| forbearance, re-financing, loan modifications, etc but this
| is the general framework.
|
| And the guys structuring these things make money off
| commissions on sale, making a market between buyers&sellers
| of these products (the spread) and probably some some sort
| of management fees.
| pessimizer wrote:
| > Why would a buyer want to take that fund off your hands?
| Why do they think the fund will generate good returns and
| you sold it to them at a good price? What is
| guaranteeing/backing the fund?
|
| With the hopes of selling it off to the next guy for more.
| There's nothing backing crypto either.
|
| These are _rational_ hopes, because a lot of people played
| that game of hot potato and got rich. And in the end, the
| government bought all of that trash at par and nobody went
| to jail.
|
| I worked in auction-rate municipal bonds when the (first
| and last) auction failed. People _thought_ they were going
| to jail. They knew they had been selling garbage. And to
| little towns for their teacher 's retirement funds at that.
| bormaj wrote:
| The buyer of that pool of loans will be an institutional
| investor with an allocation for that kind of risk.
| Depending on the state of the market, the pool might be
| sold at a discount or a premium which may attract/deter
| certain investors.
|
| Separately, pooling loans generally makes the aggregate
| product less sensitive to default risk because you're
| talking about many loans instead of just one.
| dehrmann wrote:
| > Because many people in the general public, especially
| leftists and socialists, believe that the 2008 Great Financial
| Crisis was caused by...
|
| This is a lot like the cost of college and student debt load. A
| large cause was unlimited, government-backed loans. With buyers
| who weren't price-sensitive, colleges started competing with
| each other on things like amenities, and there wasn't a
| mechanism to say "maybe a $200k loan for an art degree isn't
| worth it."
| nayuki wrote:
| Correct. A lot of free market distortions can be explained by
| bad government policy. In your example, when the government
| funds and backs student loans, colleges can treat that as a
| free cash machine to extract as much money from students as
| possible. Also, note that student loans cannot be discharged
| in bankruptcy, so the lender can't lose! Whereas if student
| loans were made by for-profit banks without government
| backing, and with the possibility of discharging in personal
| bankruptcy, we would see way more prudence in how money is
| lent out. After all, you (the bank) are way more careful with
| your own money than with someone else's money (government
| insurance/guarantees).
|
| And speaking of free market distortions, one of my favorite
| example is externalities, e.g. pollution. If the government
| doesn't charge a price on pollution (e.g. carbon dioxide),
| then obviously every business would pollute as much as they
| want because it's free. The polluters impose a cost onto
| other people - e.g. health, loss of human productivity,
| cleanup costs, loss of land value.
| viraptor wrote:
| > student loans cannot be discharged in bankruptcy, so the
| lender can't lose!
|
| They can still lose - the borrowing party may never earn
| enough to repay fully. Or may just stop paying for many
| reasons.
| tzs wrote:
| I'm not convinced on government backed student loans. I
| haven't been able to find much data on college costs going
| back well before government backed loans started, but for
| the couple of schools I found data for (Stanford and some
| midwest public university whose name I don't remember) that
| data showed tuition has been going up at a fairly steady
| rate for the last 100+ years. There was no significant
| change at those schools pre and post government backed
| student loans.
| santoshalper wrote:
| 1. It's Fannie and Freddie, nobody uses the acronyms, but if
| you must it's FNMA and FHLMC.
|
| 2. The mortgage meltdown started with subprime loans, which
| were not guaranteed by Fannie and Freddie. It was private
| lenders selling loans to clients and then selling the mortgage-
| backed securities on the private investor market.
|
| 3. Fannie and Freddie were not under federal conservatorship at
| the time. They were regulated by the government as government
| sponsored entities (GSE) but were corporations with
| shareholders and profit motive. The regulation under the Bush
| administration was extremely lax. There was no FHFA or CFPB.
|
| 4. The real damage happened between 2001-2006. That's when
| option ARMs, pick-a-pay loans, and NINA/SISA (no documentation)
| loans were being made. The fact that these loans would age
| poorly was well understood in the industry. It was just assumed
| that continually rising property values would offset how
| genuinely terrible these loans were.
|
| 5. After the clusterfuck, Fannie and Freddie were brought into
| conservatorship by the federal government to prevent a repeat,
| and it has largely worked. The quality of mortgage paper is
| much, much higher than it was 20 years ago.
|
| Yes, it was 100% stupid greed. And to be clear, nobody learned
| the lesson. The Trump administration is going to defang CFPB
| and probably bring Fannie and Freddie out of conservatorship.
| Another mortgage meltdown is a predictable outcome of this and
| I would expect it around 2032.
| nayuki wrote:
| Thank you, that was really helpful in correcting my
| understanding.
| steveBK123 wrote:
| Real estate pumper president pumping real estate seems like a
| very likely outcome yes.
| bormaj wrote:
| > And to be clear, nobody learned the lesson.
|
| This is not true. The mortgage lending pipeline is quite
| different today compared to pre-GFC. There is considerably
| more due diligence required by lenders and banks in order to
| back loans. Conventional loans backed by the GSEs these days
| have a much higher quality control. If the originating lender
| lied to push the loan through or didn't due diligence, they'd
| be on the hook for paying the defaulted principal.
|
| > The Trump administration is going to defang CFPB and
| probably bring Fannie and Freddie out of conservatorship.
|
| I'm not aware of any chatter on the former and the latter is
| becoming discussed quite frequently. Though I'm not sure the
| GSEs are interested in a GFC 2.0
|
| > Another mortgage meltdown is a predictable outcome of this
| and I would expect it around 2032.
|
| These days I would be more concerned about private credit
| than the mortgage market...
| 1shooner wrote:
| > what this ever-popular narrative misses out is that the banks
| were motivated to make these loans because someone else - FMAC
| and FMAE - guaranteed them.
|
| I don't think the popular narrative misses this point at all.
| That's key to the lesson that socialists and leftists got from
| 2008 (and what probably created quite a few socialists as
| well): Capitalism is compelled to exploit social resources,
| irrespective of and ultimately to the determent of the public
| good.
| forinti wrote:
| In a socialist country, you would have a government entity
| (backed by a public bank) build houses and give them to workers
| or sell them at a loss or with subsidised interest rates.
|
| This is purely a misguided (maybe corrupt) government policy in
| a capitalist country.
| pjlegato wrote:
| In a socialist country, you would have a government entity
| building various qualities of housing.
|
| The best houses in the best locations go to the nomenklatura,
| to the governor's cousin, to the nephew of the town party
| boss, and to black market operators who are capable of
| providing large bribes to those who decide housing
| allocations.
|
| Normal people live three hours outside the city center in a
| low quality concrete highrise.
| forinti wrote:
| All human enterprises are prone to our simian failings.
| wrfrmers wrote:
| In a word, "gentrification."
|
| (Yes, I know, I'm making a point, ye who lives in the
| United States of "It's not what you know, it's who knows
| you.")
| Workaccount2 wrote:
| In socialist countries housing is a cost that provides almost
| no benefit to the productivity of the state. Because of that
| there is strong incentive to build the absolute minimum to
| house the working class.
|
| See Soviet and Mao apartments. Shoeboxes with shared
| bathrooms and kitchens.
| forinti wrote:
| I think you might be mixing up different things.
|
| Some housing in the USSR had communal kitchens and
| bathrooms because they were actually older buildings
| adapted to house more families (hence the "you'll have to
| share your house" horror stories told in the West). Other
| buildings were actually meant to be temporary but lasted
| more than planned. Most of the housing of the Soviet Union
| was just plain apartment buildings; the flats might be
| small by some people's standards, but that was dictated by
| economic constraints.
|
| I don't know much about China, but I know some regions had
| multi-family buildings with shared facilities before the
| revolution. These too were dictated mostly by economic
| constraints.
| wrfrmers wrote:
| Modern China is an even more interesting story. Their
| largest state-backed real estate firm collapsed years
| ago. The reason why China is in a mild recessions instead
| of a full-blown depression is because the state took
| control, triaged what they could, and chose losers in
| such a way as to prevent the worst-case scenario. A
| solution similar to what the US eventually dragged itself
| to after the 29 Crash. In a crisis, socialism works,
| actually.
| Workaccount2 wrote:
| The economic constraints you are referring to is the
| terrible ROI on housing. Ask yourself what economic value
| a house produces compared to a farm, factory, or research
| lab. The answer is almost nothing.
|
| Socialist states don't like building anything more than
| the bare minimum to house workers. They get nothing for
| it (economically and ideologically) and the land saved
| can be used for actual productive things.
| scarface_74 wrote:
| Default of conforming loans was partially caused by people who
| could afford to keep paying their mortgage deciding it wasn't
| worth it because the value of their houses was so much less
| than their loan, they decided to do a strategic default.
|
| The prices of homes were inflated by investors overpaying for
| homes and non conforming loans that were not government backed.
|
| There were a lot of tricks that investors and home buyers could
| play. I was involved in investment real estate and had my first
| house built between 2001-2005.
|
| The first and easiest non conforming process that wasn't
| government backed was to take out two mortgages - 90/10. I had
| a my first house built a 2500 square foot home and only put
| $1000 down. The cost at the time was $175K mortgage and the
| value of the house went up to $205K before the crash. It was
| also an interest only first mortgage.
|
| I refinanced it before the crash to get fixed interest rate and
| had a HELOC for $30K
|
| While one investment property I bought was 10% down, it also
| wasn't government backed.
|
| The second investment property not only was done 100% financed
| because I knew people by then, it was also valued by a bank
| appointed appraiser at an unreasonable high price, I overpaid
| for it and the seller gave me cash back for the difference. I
| knew this was shady. But I later found out that this was
| illegal.
|
| They also took my word for it that I had enough income from my
| other investment property to cover the mortgage.
|
| By 2008, I was making $70K from work and had five mortgages
| totaling around half million.
|
| By late 2012, I walked away from all of them. The value of all
| three houses put together were worth $250K.
|
| Exactly three years after the last foreclosure to the day, I
| got approved for a mortgage of $335K FHA and had my house built
| - 3200 square foot 5 bedroom 3.5 bath in 2016 with 3.5% down
| and 3.5% interest rate. I just sold it last year for $670K
|
| The house I had built in 2003 and walked away from in 2012 just
| got back up in value to the price I paid for it in late 2018
| and the price I refinanced it for in mid 2020. It sold for
| $270K last year.
|
| The bank bailouts were because banks were making a lot of risky
| non conforming non government back loans and as investors like
| me started walking away from houses, the economy crashed and
| people saw it made no sense to try to keep their homes, they
| walked away.
|
| > The banks were the ultimate underwriter of these mortgages
| and thus defaulters would impact the banks, then the banks
| would've been way more diligent and restrictive about loaning
| out the money Banks also lied about the credit worthiness of
| loans in their portfolio when they sold them off
|
| That's just the thing, as soon as the banks made even non
| conforming non government back loans, they bundled them, lied
| about the credit worthiness of the loans and sold them off -
| mortgage backed securities. They weren't ever at risk.
|
| The banks servicing the loans were not the original
| underwriters
| abduhl wrote:
| I assume you were in a non recourse state? Your strategy as I
| understand it would only work in a non recourse state.
| scarface_74 wrote:
| Two of the mortgages for one investment property were sold
| so many times, we were able to negotiate a short sale. The
| first mortgage short sold for $27K when I owed $120K and
| the second mortgage negotiated a pay off for $1000 on I
| believe around $25k.
|
| For my home back then, the second mortgage didn't ask for
| anything and I believe I was able to negotiate around $10K
| and the short from what it was sold was around $50k.
|
| The fifth mortgage I never heard anything back. I think it
| sold for around $50K less than owed in foreclosure.
|
| My backup plan was bankruptcy. I had a place to stay and
| all of my assets were in my protected retirement accounts.
| datavirtue wrote:
| Good job, dude. Awesome.
| fredgrott wrote:
| that is not how those securities work....if you buy such a
| security you are betting on your own disaster...
|
| How?
|
| When you buy what is called A tranches it always has a layer of
| toxic non A tranches....
|
| Once housing repossessions rose above 8% all housing mort
| securities were under water....
| wrfrmers wrote:
| >Because many people in the general public, especially leftists
| and socialists, believe that the 2008 Great Financial Crisis
| was caused by greedy US banks lending out money to unworthy
| people who had no ability to pay back loans, and take a profit
| from each transaction, and sell the toxic debt to other
| parties.
|
| Most of the people that I've seen taking this position were
| conservative, free-market capitalists, giving themselves a
| little "Bad, me!" slap on the wrist. The leftists and
| socialists are well-read enough to know that the reason loans
| were backed the way they were is because the regulatory
| apparatus has been wholly captured by financial players, from
| regressive legislator campaign funding to the revolving door at
| regulators, and everything in between. Further, the _fallout_
| from 2008 hit most Americans so hard because insitutions
| leveraged this "in" to warp the shape of the federal and
| monetary response to the crisis in order to make them whole at
| everyone else's expense - a course that was not explicitly
| called for in law (and that some would say, in many cases,
| violated the duty of responsible parties to uphold the law).
| The problem remains the banks.
| datavirtue wrote:
| It only works because the interest is amortized out to term and
| front loaded so that investors can distribute almost the entire
| mortgage payment to shareholders immediately. If the home owner
| pays for five or ten years you are golden. If they default you
| get the principle back from the loan guarantee/foreclosure and
| you move on and do it again. This is why MBS REITs can pay such
| amazing dividends.
| tzs wrote:
| It was definitely a crazy time for mortgages. I was buying my
| first house in 2007 and went to Countrywide for a mortgage. I
| had analyzed my finances and determined that I should be
| looking for a home in the up to $240k range and could push it
| up to $300k with some trepidation.
|
| Countrywide looked at my finances and pre-approved a loan of up
| to something like $700k.
|
| Since my analysis had told me that was way more than I could
| afford I only looked at houses under $300k. I wonder though how
| many people apply without having done their own analysis
| instead trusting that the mortgage company would not offer more
| than they can afford?
|
| Anyone else here who was buying around the time with stories of
| receiving insanely high pre-approvals?
| KaiserPro wrote:
| > then the banks would've been way more diligent and
| restrictive about loaning out the money
|
| No, because thats not how you make money.
|
| You make money by loaning out as much money as possible for the
| highest rate possible. When the economy is booming, this works,
| because you don't need to call in the loans, you can parcel
| them up and sell them to someone else. This gives you more
| capital to lend out and so on.
|
| This means that bank failed _alot_ Just go back and look at how
| many banking runs there were in the states before 1913.
|
| both those companies are secondary market makers, rather than
| guarantors. Once again high finance likes to make out that they
| have "fixed" the problem of loans by using a "patented" method
| for optimum yield. Its always been either a rising market, or
| fraud that has driven those fancy methods.
|
| Sub prime was just coin clipping but in the 21st century.
| great_psy wrote:
| I think a lot of conspiracies people have are out in the open,
| it's just that they are hidden behind articles that take 30
| minutes to read and understand.
| WorkerBee28474 wrote:
| As they say, the devil is in the details.
| AnotherGoodName wrote:
| Note that the majority of bad 2008 loans were from a spike in
| financial business lending not personal lending.
|
| https://en.m.wikipedia.org/wiki/Subprime_mortgage_crisis#/me...
|
| You've probably heard of private equity buying companies, loading
| them with debt, transferring money to the parent and bankrupting
| the company and wondering why banks give loans to private equity
| when we know this playbook. Well the bank loans are guaranteed
| ultimately by Freddie/Fannie. There's no risk here and everyone
| but productive members of society win here. It's still ongoing
| too.
| kasey_junk wrote:
| What are you talking about? Fannie and Freddie don't buy loans
| for businesses other than some commercial real estate. They
| certainly don't back most private equity plays.
| downrightmike wrote:
| I've heard about it because that's how we lost American
| Manufacturing like SunBeam, sold off for parts. But hey
| deregulation and greed was good in the 80's, and no one who
| should have stopped it, did.
| alecco wrote:
| Maybe it's a good trade. But if it's not, Ackman and all the
| other snakes will get out of the trade well before you. Stay in
| safe money markets with decent yields. Don't swim with sharks.
| Mistletoe wrote:
| Money markets don't remotely have enough gains to keep a
| retirement portfolio going.
|
| https://www.firecalc.com/
| alecco wrote:
| My point is that doing risky stuff as a small investor in an
| unfair market with high risks is even worse.
| everybodyknows wrote:
| Some history may be useful here. In the first weeks after the
| 2016 election, on similar speculation, FNMA doubled in price. A
| few months into 2017, it crashed back down.
|
| https://www.cnbc.com/quotes/FNMA?qsearchterm=fnma
| jarsin wrote:
| I encourage anyone thinking of following Ackman to look up all
| the shenanigans he played on investors with his Spac.
|
| He essentially leveraged the massive pile of money from Spac
| investors to buyout UMG for his own fund. Leaving the Spac
| investors high and dry with no ownership. He keeps making those
| investors empty promises about some future deal to this day years
| after the Spac folded.
|
| Ackman only puts out stuff like this public if he needs retail to
| give him leverage on some angle he has.
| dehrmann wrote:
| > Ackman only puts out stuff like this public if he needs
| retail to give him leverage on some angle he has.
|
| Replace "Ackman" with "Any major investor" except for maybe
| Warren Buffett.
| muglug wrote:
| I hope Matt Levine is well-capitalised because he's pretty-much
| the only reason I subscribe to Bloomberg
| otherjason wrote:
| If you or anyone else are interested, his newsletter is
| available by email for free!
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