Prior to 2003, as a fraction of their total mortgage-backed securities portfolio, each year the GSEs purchased approximately 10% in lower-quality loans. From 2004-2007, however, this fraction averaged 50%. While there is little doubt that, starting in the mid 1990s, government-mandated affordability housing goals played an important role in shifting Fannie and Freddie’s profile to riskier mortgage loans, it is an interesting question as to how much of the GSEs’ steeper dive into lower-quality mortgages was driven by those mandates and how much by their desire to maintain and expand their market shares.
I think the driver was the on line mortgage market, stealing the cream of the borrowers.
On line mortgages were the first killer app, helped drive the net. I would test the quality of those first loans made online, high quality borrowers, using technology cuts middleman costs.
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