How Many Bad Loans Did Fannie and Freddie Originate?
Trick question: None, zero, zilch. By law, Fannie and Freddie can’t originate loans–they can only buy or guarantee loans that have already been made by actors in the private sector. This is no small point, but it’s a point that Zandi leaves blurry at best in his book Paying the Price which I reviewed for Barron’s here ($ probably). Here’s a key graph from the first few pages of the book:
f mortgages aren’t originated “by nongovernment lenders” aren’t the rest originated “by government lenders?”
I’d probably expect to see Fannie and Freddie’s total book growing, with the private sector growing even faster. Fannie and Freddie light the fire, then the bubble-prone private sector takes it from there. The result? Fannie and Freddie’s holdings of new mortgage backed securities (MBS) would grow in dollars, shrink in percentages. Just like in real life: