Do we want to take all the risk again?

Real Estate Agent with Keller Williams Realty Professionals OREA# 201211562

Keeping the home financing market liquid is vital to home-ownership but do we (the public) want to take all the risk again? The mortgage meltdown during the Great Recession made it clear that taxpayers were on the hook for the majority of the losses...and we were not happy about it.


Post-crash, the way forward was debated. Do we recapitalize the GSE's and move on with them as wards of the state? Keep FHA? Or, gradually wind them all down and allow the free market to fill the void? As the market slowly recovered, changes were made: stress tests, increased reserves, along with new rules, agencies, oversight, and lending standards.


So what happened to the debate on residential financing? Frankly, the topic had drifted off my screen until reading this article. It appears the GSE's have been selling Credit Risk-Transfer Securities (CRT's) for some time now. These bonds are backed by a mix of loans to spread the risk and here's the kicker: the buyers of the bonds agree (for a higher return) to assume responsibility for any losses!


As the article mentions, the words 'mortgage bonds' can be viewed with hostility because of our recent not-so-great experience. However, this fear is unwarranted.


First, the loans included in these new CRT's were underwritten with strengthened criteria. And the performance of these recent loans (including the low-down portion) has been better than those prior to the crash. Even in the depths of the crash, the below chart shows the GSE loans performed significantly better than average. Compared to the losses at commercial banks and private label securities, the GSE's did great.

Second, the mortgage bonds were not the major factor in the crash, it was the speculation. There were then ~5 trillion in bonds but ~60 trillion in unregulated Credit Default Swaps (CDS). Because the CDS market was unregulated and opaque, financial entities had no idea what the risks were, so trading with counter-parties stopped, freezing the global financial system. That's why AIG (an insurance company, heavy with swaps) received an $182 billion bailout. If it had been just the mortgage backed securities, the crisis would have been much more manageable, similar to the S&L crisis in the 80's.


This seems to me the best of both worlds. The GSE's provide the liquidity and market rules, then package the loans into bonds for sale to investors, who assume the risk. Private capital can still enter the market, which we're now seeing with Alt-A, subprime, jumbo subprime, and interest only products available. While the CDS's are still a concern, I like where the GSE's are headed.



Thanks for reading and tell me what you think.


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John Van Hogen - Principal Broker - Licensed in Oregon

Keller Williams Realty Profes.   9755 SW Barnes Rd #560   Portland OR 97225

Each Office Independently Owned & Operated - 503.546.9955




Comments (3)

William Feela
Realtor, Whispering Pines Realty 651-674-5999 No.

I feel we learned nothing.  The meltdown also was worsened by the encouragment of people to walk away from their homes if their equity was less than they owed.

Many of them lost a lot money when their credit tanked just because they walked away from a mortgage they could affoard

Oct 01, 2016 11:37 AM
MichelleCherie Carr Crowe Just Call...408-252-8900
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

I sure hope this time investors are willing to take responsibility for the risks.

Oct 01, 2016 04:04 PM
John Van Hogen
Keller Williams Realty Professionals - Hillsboro, OR
Serving Sellers / Buyers / Investors 503-680-9390

Yes William, let's pray we're not put in a similar situation again.


These new bonds appear to do just that Michelle and that's good.

Oct 02, 2016 04:10 AM