Basel Rules Linked to Extreme Leverage in Fannie Mae and Freddie Mac Housing Debt
What happened
An analysis contends that Basel rules enabled extreme leverage in housing debt for Fannie Mae and Freddie Mac. The report traces this architecture to policies from the 1970s and 1980s, noting that paper mortgage debt grew 110 percent while physical housing-stock only grew 10 percent.
From eurasiareview.com
Why it matters
The analysis suggests that public prudential regulation crowded out private market discipline, allowing for derivatives notional that reached 60–70 times the underlying housing stock. This contributed to a $7.6 trillion GDP loss, which is equivalent to 30 million missing homes.
From eurasiareview.com
Who's involved
- Fannie MaeGovernment-backed financial services company central to the housing debt issue
- Freddie MacAmerican government-sponsored enterprise involved in the housing debt issue
- Financial Stability BoardOrganization that might be affected by the systemic risk failure
- Bank for International SettlementsInternational financial institution whose standards are critiqued by the report
- Federal Housing Finance AgencyU.S. federal agency that maintains regulatory oversight of the housing finance market
- central bankPublic institution whose benchmarks are questioned by the event
Who could feel it
Possible knock-on effectsThese are possibilities Brind reasoned out, not predictions, and not advice. Most are not stated in any report.
- Fannie MaeSpeculative
Fannie Mae might see the risk profile of its core housing debt portfolio change due to regulatory action.
- Freddie MacSpeculative
Freddie Mac might see the risk profile of its core housing debt portfolio change due to regulatory action.
- central bankSpeculative
A central bank may face questions regarding the validity of Basel benchmarks used for capital adequacy.
Possible ripples
Who this could reach next, traced step by step from the reporting. Possibilities worth considering, not forecasts.- Basel rules may force central banks to reassess capital adequacyCentral banks may need to reassess capital adequacy standards after Basel rules enabled extreme leverage.Possible
- How could the failure of Basel rules challenge the Bank for International Settlements' regulatory role?Basel rules' role in the 2008 crisis challenges global financial oversightPossible
- Extreme leverage in housing debt may increase risk for AGNCExtreme leverage in housing debt may increase risk for AGNC Investment Corp.Possible
- Extreme leverage in US housing debt may affect MBS structural backingExtreme leverage in US housing debt may affect MBS structural backing.Possible
- Basel rules' leverage may force FHFA to manage systemic housing riskFHFA's regulatory oversight is challenged by systemic risk from leveraged housing debtPossible
Keep exploring
The entities involved
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Fannie Mae
government-backed financial services company
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Freddie Mac
American government-sponsored enterprise
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