Make My GSE a McGE

Campus Report ^ | October 22,2009 | Sarah Carlsruh

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Make My GSE a McGE

Sarah Carlsruh, October 22, 2009

The burden of bailing out mortgage giants Freddie Mac and Fannie Mae will fall to taxpayers, predicted Brooklyn Law School Professor David Reiss, at a cost which the Cato Institute suggested could top $200 billion.

The Cato Institute hosted a lecture on October 19th called, “Which Way Forward for Fannie Mae and Freddie Mac?,” where economics and real estate savvy speakers discussed secondary mortgage markets and the government sponsored enterprises (GSE’s) Fannie Mae and Freddie Mac.

Subprime loans were, until recently, considered by the Mortgage Bankers Association (MBA) to be the main reason behind loan defaults and home foreclosures (The Los Angeles Times reported on October 14th that MBA says job losses are now the number one reason for foreclosures).

In a 2007 speech at the Federal Reserve Bank of Chicago’s Conference on Bank Structure and Competition, Federal Reserve Chairman Ben Bernanke addressed the role of secondary mortgage markets and GSE’s in sub-prime lending, a contributing factor to the “increases in subprime mortgage loan delinquencies and [the] number of homes entering foreclosure.” Subprime mortgages—loans made to high credit risk borrowers—really took off in the 1990’s, claimed Bernanke, saying that the growth of the secondary mortgage market has “permitted lenders to more easily sell mortgages to financial intermediaries, who in turn pool mortgages and sell the cash flows as structured securities.”...