$6.6 Trillion in Mortgages Were Wrapped into Mortgage-Backed Securities at Heart of Financial Crisis
November 17, 2008 - 7:17 PMA total of $6.6 trillion in U.S. mortgages were wrapped into mortgage-backed securities, the financial instruments at the heart of the financial crisis--a sum that dwarfs the $700 billion approved by Congress for the financial industry bailout.
The outstanding balances on these securitized mortgages accounts for 59 percent of all money now owed by Americans on home mortgages, which is $11.2 trillion, according to the Fed.
In October, Congress granted Treasury $700 billion to purchase troubled assets from banks, with the idea that most of these assets would be mortage-backed securities that had lost their marketability.
Government sponsored enterprises, including Fannie Mae and Freddie Mac, processed $4.6 trillion of the $6.6 trillion in mortgages now tied up in mortage-backed securities.
The data comes from the Federal Reserve's "Flow of Funds Accounts for the United States" report which was published in September. The data in this report was current through the second quarter of 2008.
Treasury Secretary Henry Paulson announced Nov. 12 that his department had given up on the idea of buying mortgage-backed securities from private banks, saying that he felt it was no longer the best strategy to resolve the financial crisis.
In his testimony before the House Financial Services Committee today, Paulson reiterated this point, saying that after spending $250 billion buying ownership stakes in banks, spending the remaining money on "troubled assets" such as mortgage-backed securities was not "enough firepower."
“By the time legislation had passed on October 3, the global market crisis was so broad and so severe, we knew we needed to move quickly and take powerful steps to stabilize our financial system and to get credit flowing again," said Paulson. "Our initial intent had been to strengthen the banking system by purchasing illiquid mortgages and mortgage-related securities. But by this time, given the severity and magnitude of the situation, an asset purchase program would not be effective enough, quickly enough.
"Therefore we exercised the authority granted by Congress in this legislation to develop and quickly deploy a $250 billion capital injection program, fully anticipating we would follow that with a program for troubled asset purchases,” Paulson testified.
“We recognized that a troubled asset purchase program, to be effective, would require a massive commitment of TARP funds,” said Paulson. “It became clear that, while in mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. Half of that sum, in a worse economy, simply isn't enough firepower.”
Even if Paulson had spent all $700 billion authorized by Congress buying mortgage-backed assets, there still would have been $5.9 trillion worth of mortgage-backed securities on the market.
$5.9 trillion, by the way, is more than double the size of the entire federal budget for Fiscal Year 2008 – $2.9 trillion.