Fannie Mae-No Politics (FNMA)

[DJVan57]

The real flaw of the secondary market in my opinion is “no skin in the game” as originators dump the risk off to another party and then get paid. This was seen big time in the GFC with private label securities. Having a secondary market does provide for 30 yr fixed rate mortgage which we all hold dear and provides competition for banks from non- bank mortgage companies ( who have to sell everything they originate) don’t have deposits & therefore can’t make portfolio loans. The beauty of the GSE model is that as a near monopoly they can be the gatekeeper of high standards and impose their underwriting on the market keeping everybody honest. Traditionally, except right before the real estate meltdown Fannie and Freddie were conservative and defaults were at a minimum. This worked as long as Congress didn’t impose too much pressure to loosen underwriting standards

If you ask me a government guarantee and UMBS will lead to another disaster unless there is some recourse back to the original lender as you say a “ race to the bottom” but there will have to be standards to be met to get that guarantee and penalties for not adhering to them .