Supply of Mortgage Credit

If someone was asked how much securitized home mortgage debt was backed by government sponsored enterprises (GSEs) in 2007, one would probably say, “What’s a GSE?” instead of the correct answer — $4 trillion — an amount nearly doubling the sum of all outstanding consumer debt in the U.S. While this is an impressive figure, it might still be difficult to fully understand its meaning without first understanding what a GSE is. A GSE is a government sponsored enterprise, first created in 1970 by the U.S. Department of Housing and Urban Development to help reduce local bank’s exposure to local market risks through securitization. Securitization was a way for banks to pool mortgages together to create a safer bundle of mortgages to then, in turn, sell those mortgage bundles to the secondary mortgage market. This is where GSEs come into play. The GSEs bought the mortgage bundles from banks. However, the GSE would not just purchase any mortgage bundle, they insured themselves from purchasing poor-quality bundles by requiring limits on loan sizes and loan-to-value (LTV) ratios. At the beginning of the subprime mortgage crisis, the two most popular GSEs — Fannie Mae and Freddie Mac — were heavily involved in the secondary mortgage market, purchasing mortgages from banks that dealt primarily with lower income families in urban residential areas. As the financial crisis peaked, more and more Americans were unable to meet their required mortgage payments. Fannie Mae and Freddie Mac, left without their primary source of income, turned to the U.S. government for assistance…