Some Information on Mortgage Backed Securities
Alex’s post has prompted me to write this one.
First things first, how long have Mortgage Backed Securities (MBSs) been around? If we believe Wikipedia About 70 years or so.
In 1938, a governmental agency named the National Mortgage Association of Washington was formed and soon was renamed Federal National Mortgage Association (FNMA or Fannie Mae). It was chartered by the US government as a corporation which buys Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages on the secondary market, pools them, and sells them as “mortgage-backed securities” to investors on the open market. FNMA was later privatized.
Lawrence White of the Stern School of Business at NYU says 1970 is when the first MSB was sold.
From its beginning, the issuance of MBS in the U.S. has been dominated by governmental and quasi-governmental entities, although “private label” MBS have been growing in relative importance after a late and slow start. The experience of MBS in the U.S. began in 1970, with MBS issued by Ginnie Mae.37 Freddie Mac, newly created in 1970, issued its first MBS in 1971. Fannie Mae, though in existence since 1938, issued its first MBS in 1981. Finally, the first “private label” MBS was issued in 1977, by Bank of America.
Lets go with the 1970 number, that means that MSBs have been around for 38 years
Did the government create MBSs?
MBSs are a result of government monkeying around in the home loan market. Ginnie Mae stands for the Government National Mortgage and is a government Agency. Fannie Mae was a government agency that was created in 1938 and was later turned into a government sponsored entity and Freddie Mac was a later comer to the game but is similar in nature to Fannie Mae. As we can see from Prof. White’s paper the first one was sold by a government agency, Ginnie Mae.
Second the government, through Ginnie Mae, and and also implicitly through Fannie Mae and Freddie Mac gauarntee home loan payments. Professor White also has a nice table showing the percentage of mortgages that MBSs comprised that are government and non-government.
In 2003 government MBSs were almost 5 times that of non-government MBSs.
The bottom line is that the government has its dirty paw prints all over this. Why this is so hard to understand I just don’t get it. Was government the sole/root cause? I wouldn’t go that far, but it was definitely an important factor.