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Are the GSEs (Fannie Mae, Freddie Mac & Ginnie Mae) “too big to fail”?

From the lender's perspective, in the 35+ years of their collective histories, the GSEs (Government-Sponsored Enterprises) have successfully eliminated pretty much all of the risk in the mortgage lending market. Or, more accurately, what they've done is to SHIFT the risk. They've done this by progressively buying up more and more of the nation's home mortgages and reselling them to investors around the world as MBSs (Mortgage-Backed Securities). They now collectively hold/guarantee almost half of the outstanding mortgage debt in the U.S. In 1992, they held less than $200 billion, but today they hold over $3 Trillion in mortgage debt. Most of the rest are bundled up as private MBS/CMOs and sold to hedge funds, asian CBs, and pension funds. (Source: NLIHC)

As a direct result, banks, credit unions, S&Ls and other mortgage lenders today are little more than mortgage ORIGINATORS, not mortgage holders. This might help explain the explosive proliferation of speculative mortgages and loose lending standards a-la "NAAVLPs (Negative-Amortization Anal Voodoo Loan Products --hat tip to Surfer-X)."

How/why did this happen? Who/what drove this massive "paradigm shift" in mortgage risk over the last decade or so? If marginal/speculative homebuyers default on their mortgages en masse, who will ultimately pay the price? Will it be Fannie, Freddie & Ginnie? Will it be the large domestic and international MBS investors (U.S. mutual/pension/hedge funds, Bank of China, Japan)? Or, will it be up to the American taxpayer to bail out the GSEs and their investors if (when) they default? SHOULD the taxpayer bail out the GSEs? (Google "LTCM" and "PBGC" and "moral hazard" to learn more about previous large-scale federal bailouts.)

HARM

#housing