Looking at the Residential Mortgage Crash

Matt Phillips at WSJ.com’s Market Beat put together some great charts showing the problems with the residential mortgage market: Fannie and Freddie: The Saga in Charts.

The first one that caught my eye shows how Wall-Street took such a quick, big chunk of the market share of residential mortgage-backed securities during the housing boom.

Fannie Mae and Freddie Mac’s share of mortgage-backed securities issuance plummeted from 70% to 40% during the housing boom. We have seen in many companies and markets that rapid growth comes without a similar growth in market controls and compliance. I think the lack of market systems and compliance contributed to the crash. It’s hard to understand the market when it barely existed a few years earlier.

Did Wall Street take business away from Fannie Mae and Freddie Mac? It looks like Freddie Mac and Fannie Mae’s origination activity was relatively stable. The private mortgage-backed securities were tapping into a new market.

As Joe Nocera and Bethany McClean noted in All the Devils are Here, the vast majority of that subprime activity was refinancings or second home purchases.

For those trying to pin the blame for the 2008 Crisis on Fannie Mae and Freddie Mac theses charts point in a different direction. Not that Fannie Mae and Freddie Mac are without blame, it’s clear that Wall Street excess carries a big chunk of the blame.

The last question, and the last chart, help answer the question of whether we need Wall Street in the mortgage business.

The answer seems to be yes. There are not enough deposits in the banks to cover all of the outstanding US home mortgage debt.

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