Mortgage Finance: From the GSEs to Wall St. and Back Again

This chart from a paper titled Recent Developments in Mortgage Finance from the San Francisco Federal Reserve has been popping up in a number of places over the last day or two and it's interesting to see how people are reacting to it.

Naturally, those on the left think it's vindication for the GSEs who were almost bit players during the worst of the housing market excess in the middle of the decade.
It's not clear what it might mean to those on the right, but I'll tell you what it means to me, as noted in these pages over the years, for example in this item from last year.

In a follow-up to Jeremy Grantham's comments about the former Fed Chairman whose name graces my blog, the offloading of mortgage securitization from the GSEs to Wall Street was Alan Greenspan's sole accomplishment in minimizing systemic risk during his entire 18 year term. He was instrumental in limiting the size of the GSEs' portfolios and, naturally, all that mortgage securitization had to go somewhere, so it went to Wall Street.

The rest, as they say, is history.

Comments

[Bruce Krasting:]

Not sure I agree with you on this. In the middle of the decade the GSE were 50% of the market. That does not make them bit players. Today they are 95%, certainly not bit players.

As to the Alan Greenspan comment, How is systemic risk reduced when all of the securities issued were functionally gteed by the tax payer? All of the risk was retained by the Agencies. That is why we are in the mess we are in. No?

Oct 29 08:11 AM

[Tim Iacono:]

The phrase "almost bit players" refers to the quantity and type of loans they were making - by comparison to Wall St., they were choir boys in 2005-2006 when the housing bubble peaked.

The systemic risk that Greenie saw in 2002-2003 was that the mortgage market was too heavily concentrated in the GSEs which had an implied guarantee. So, he was instrumental in cutting back their mortgage holdings and Wall St. took up the slack.

Oct 29 12:39 PM