The GSEs are not competition to the banks.
The banks want the GSEs because they sell loans to the GSEs...the do this to because they can only loan so much money out at one time as part of their fiduciary requirements. The government created Fannie Mae to buy packaged loans from the banks to increase banks ability to lend and to ensure there would always be a stable place to sell their loans to.
The GSEs in turn bundle these loans and repackage and sell them as mortgage backed Securities(MBS)
quote from investopedia:
|In order to be sold on the markets today, an MBS must be issued by a government-sponsored enterprise (GSE) or a private financial company. The mortgages must have originated from a regulated and authorized financial institution. And the MBS must have received one of the top two ratings issued by an accredited credit rating agency."
The GSEs are not the only game in town though. There are private companies which do the same thing as the GSEs. However, these other financial institutions did not have the same standards as the GSEs prior to the financial collapse.
Before the financial collapse the GSEs were a significant but small fraction of the MBS market... Ive seen 20-30 percent...after the collapse they almost 75-90 percent depending on who you want to source.
As people have pointed out on this board, new articles, books, etc the GSEs did not need all those funds from the government. Mainly because their MBS's at the time of the collapse were good for the most part. However, the government took over the GSEs to bailout the rest of the secondary mortgage market...and bought all the loans from banks to allow the banks to keep lending...
What some people do not understand is the GSEs bought assets at fire sale prices. And it took years to sort through. Yes, the bought some crap but they also bought a huge chunk of good assets at discount prices.
I honestly have no issue with the government stepping in to help. But I have issue with it being a loaded gun to the head to sign over the two companies into conservatorship.
The Treasury could have done something as simple as giving the GSEs a revolving credit facility like banks do with companies all the time. Tell them you can borrow up to this much money. Basically borrow when they need it. In simplistic terms, its the equivalent of credit card. You only use it when you need it.
Instead the government gave the GSEs huge loans they did not ask or no where need for at extreme interest rates.
Life lesson: The first reaction is almost always an over reaction.
