To hear some conservative commentators, like George Will, our financial crisis was caused by Fannie Mae and Freddie Mac irresponsibly making shaky, high risk housing loans to low income people.
I spent some time with Google and I found that Fannie and Freddie did not sell sub-prime mortgages, and that, in fact, selling such high risk mortgages is contrary to their charter. What got Fannie and Freddie into trouble is the fact that, like other banks and financial institutions, Fannie and Freddie bought bundled sub-prime mortgages, “AAA rated,” as an investment and as a means to increase their profits for shareholders.
An article published in July by Arizona W. P. Carey professors Herbert Kaufman and Anthony Sanders says that “the rate of serious delinquencies on loans held by Freddie Mac was 0.81 percent. Fannie Mae’s rate of serious delinquencies was 1.15 percent. Those rates compare to market-wide rates of serious delinquency of 1.47 percent for prime mortgages, 8.35 percent for Alt-A mortgages, and 20.74 percent for subprime mortgages.”
Thomas Frank in a Wall Street Journal column entitled, “The GOP Blames The Victim” says, “I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn’t originate any of the bad loans — that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck. …
“A 2007 report by the Mortgage Bankers Association reports that the FBI estimates ’80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders.’ That means the lenders, not the borrowers. …
“Just imagine the flights of fancy that the theory of borrower malevolence and Wall Street victimization requires conservatives to take: All these no-account folks, you see, got together and forced investment banks to engineer subprime mortgages into highly leveraged securities. Then they tricked all manner of hedge funds and pension funds and financial institutions into buying these lousy products. Just for good measure, these struggling homeowners then persuaded bond-rating agencies to misrepresent the risk associated with these securities.”
An article in Salon, The truth about Fannie and Freddie, by Andrew Leonard, states, “Nearly everyone agrees that Hank Paulson and Ben Bernanke had no choice — the consequences of not acting were simply too great. That this is happening under George Bush’s watch is the most dramatic demonstration we have seen in modern times that ideology is no defense against economic reality. …
“A point that gets easy to miss in the current hullabaloo over the bailout is that Fannie and Freddie were not primarily responsible for either the housing boom or its bust. That responsibility is more fully borne by the non-government sponsored enterprises who play in the real estate market — the private mortgage lenders, commercial banks, investment banks and myriad institutional and hedge fund investors who engaged in an orgy of exotic mortgage loan and mortgage security innovation and speculation. Toward the very end of the boom, Fannie and Freddie did begin to get more involved in subprime loans and related derivative markets, but that was because they were losing market share to the fully private sector.
“We shouldn’t be shocked at all that Wall Street went completely overboard in its love affair with housing market manipulation. That’s what happens when a market is left to its own devices, and government eschews its oversight responsibility. That’s what always happens.”
An article in The Washington Independent, by Mary Kane, Low-Income Borrowers Blamed in Bailout Crisis Conservatives Cited Affordable Housing Goals as Trigger for Meltdown. House GOP Concurred, says, “In 2004, the agency that regulated their housing efforts, the U.S. Dept. of Housing and Urban Development, informed both entities (Fannie and Freddie) they needed to increase affordable housing efforts, with the mortgage market so strong.
“But HUD never told Fannie and Freddie to jump into the subprime market. Both chose to dive into subprime mortgage securities, and the purpose wasn’t to satisfy regulators — it was to increase market share, Cecala said. Afterward, they asked HUD if some of the securities they purchased could count toward their affordable housing goals. HUD agreed.
“Fannie and Freddie were huge players in the subprime market, buying 48 percent of all subprime-mortgage-backed securities offered in 2004 — way above anything they would ever need to meet affordable housing goals. They continued to buy loans made to multi-family dwellings, as in the past, to satisfy regulators.
“Despite claims to the contrary, the two did not rely, for the most part, on subprime securities to meet their regulator’s goals. In any case, the majority of subprime loans were refinancings, which wouldn’t have counted anyway. … It was a business decision by Fannie and Freddie, not government-mandated.
