What Really Happened to Housing - Howard Voyles | HousingMatrix.com

The Setup
By the mid-2008 Fannie and Freddie (the "GSEs") owned over $5.4 trillion in outstanding mortgage securities and all of them were backed by the full faith and credit of the GSEs, and by proxy the US Government. This totaled 45% of all the residential mortgage debt was aggressively marketed worldwide with the implicit guaranty of the US government.

The Patsies
Next investors in GSE securities were led to believe that the vast majority of the loans backing these securities were low risk.

The Truth Reveled
Following the SEC's investigation, the GSEs have, for the first time, acknowledged the magnitude of their efforts to mislead investors with regard the true nature of their exposure to subprime and Alt-A loans.  It was revealed that the credit guaranty portfolios contained over $1.6 trillion in subprime and Alt-A loans, not the $600 billion previously reported. This meant that 80% of each mortgage was backed by the GSE’s high leveraged game, a true setup for disaster.

Now, it was impossible to fully ascertain the true value of the entire $5.4 trillion in outstanding GSE securities. A panic could have created a estimated market loss nearing 20% or $1 trillion.

Washington had encouraged low capital requirements for the GSEs and mandated marginal credit and equity underwriting through programs including “affordable housing” and the Community Reinvestment Act.

Facing Insolvency
The impact on the FDIC alone would have been catastrophic since depository institutions held about $1 trillion in GSE securities.

So the federal government was forced to acknowledge full responsibility for the GSEs' liabilities. Furthermore, Washington kept the GSEs off the books, believing that taxpayer s were ultimately responsible. Thus the $11 trillion residential debt market was seriously infected by Fannie, Freddie, Countrywide, and many of the nation's largest banks.

And that’s what led us to today’s bailout fiasco.