Fannie Mae and Freddie Mac do not issue mortgages and never have. They are not a bank. They act as a secondary market by buying up mortgages and packaging them up in marketable mortgage-backed securities. As I said before, they are responsible for buying 40-50% of all subprime mortgages along with roughly 80% of all mortgages, so they make up the biggest chunk of the market. What happens to them affects everyone by their sheer size. That is why so many people say that without them, the whole mortgage mess would never have happened. Of course not everything is because of subprime loans. There are ARMs that are above prime that have caused people to default. Subprimes are a market all in themselves that caused most of the problems, but not all the problems.
But when organizations hold up to 80% of all mortgages, that's significant. It's a very good reason for government to never get involved in the markets directly. I have no problems with safe regulation, but for the government to be such a large participant in the markets is a different matter.
It was also the failure of Fannie Mae and Freddie Mac that triggered the collapse of Lehman Brothers, Bear Stearns, AIG, Washington Mutual, etc. as the mark-to-market rules kicked in. With the market for mortgage-backed securities gone due to the bankruptcies of FHMA/FHMC, mark-to-market rules suddenly made many of the securities held by these organizations suddenly worthless, triggering downgrades in their credit ratings, and in turn creating a credit crisis as these companies could not come up with the reserve requirements needed for their lower credit ratings. Companies did not have to hold securities directly issued by Fannie Mae to be caught in the avalanche. In those cases the failure of FHMA/FHMC was the catalyst for their collapse since FHMA/FHMC was the biggest market for these securities, acting like the first domino that falls, taking out many of the dominoes behind them.
To explain further, companies with high credit ratings are only required to hold 4-7% of their debt in assets. AIG, for instance, was downgraded by Moodys and Standard and Poors after mark-to-market forced them to write off a large number of their mortgage-backed securities. That upped their reserve requirements to 85% of assets to debt. Going from 7% to 85% required the bank to come up with a tremendous amount of immediate cash, which they couldn't get. That caused those companies that could not obtain sufficient cash to immediately go bankrupt. AIG, for instance, only got bailed out because the federal government gave them an emergency loan of $85 billion in cash to cover their reserve requirements.
So now, you should be able to understand just what the impact of FHMA/FHMC had on the investment banks.
I've seen no other sources that say the Administration had the authority to restrict the portfolio of the two mortgage giants. Every article and commentary piece I've seen indicates that was what the Administration was asking for, such as in this article reprinted from the Washington Post:
White House Sets Forth Plan To Limit Size of Fannie, Freddie It makes no sense that the Administration would be asking for power it already had, so I seriously doubt that was the case. The regulator is the entity that actually performs the enforcement of these rules as they are the representative of the executive branch, and the regulator was saying they needed the power, so I have no idea what it was Oxley was actually referring to.
By the way, banks like Bear Stearns and Lehman Brothers are not banks that originate mortgages. They had large amounts of mortgage-backed securities that caused their investment arms to collapse. Investment banking is their primary function, which is assisting companies in making their securities public, e.g. IPO's.
American Home Mortgage and brokers like LendingTree.com are primarily conduits. Having used these sites myself, what happens is that you fill out an online application, tell them the type of loan you want, and wait. After a day or two, you'll get dozens of emails and phone calls from numerous banks who want to loan you money. Those banks are the loan originators.
Mortgages are a fairly complex topic, but underneath all of the layers of middlemen, brokers, and such are the commercial banks, who are the originators of these loans. Those loans are subject to the rules of the CRA and the Federal Reserve.
The bank originators do not hold onto the mortgages, typically, which I've mentioned in the past with regards to swaps. Swaps, remember, are financial transactions designed to equalize the risk time frames between the loans and deposits in a bank. Once those banks sell their loans to entities like Fannie Mae, those organizations package them up into marketable mortgage-backed securities that are then sold to other organizations like investments banks such as Lehman Brothers and AIG and Bear Stearns. Most of the banks that have failed, with notable exceptions like Washington Mutual, are not the originators of the loans but rather bought what they thought were government-backed AAA securities. Those AAA's didn't turn out to be as safe as they thought.
