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Fannie and Freddie Helped Spawn the Mortgage Crisis, and So Did Affordable Housing Mandates

In a recent letter in The New York Times, I noted the role played by the government-sponsored enterprises, Fannie Mae and Freddie Mac, in spawning the financial crisis and burdening taxpayers to the tune of hundreds of billions of dollars. The two mortgage giants bought up risky sub-prime mortgages partly in order to satisfy government affordable-housing mandates, as even the liberal Village Voice found in its investigative reporting. Even Fannie Mae's 2006 10-K form with the SEC noted the role of HUD's affordable-housing mandates as a factor in its purchase of mortgages it would once have avoided as too risky:

[W]e have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet HUD’s increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions. We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUD’s goals and subgoals, which could increase our credit losses. [emphasis supplied]

Some commentators at liberal newspapers, like The New York Times' Joe Nocera, have argued that Fannie and Freddie bought up risky mortgages in order to maintain their market share, not to satisfy affordable-housing mandates, and that this somehow minimizes their role in the mortgage crisis, contrary to the arguments of Peter Wallison, who prophetically predicted that Fannie and Freddie would someday have to be bailed out by taxpayers, and argued in his opinion at the Financial Crisis Inquiry Commission that Fannie and Freddie were a major contributor to the financial crisis.

I find Nocera's argument baffling. If Fannie and Freddie bought up junky mortgages solely to maintain their market share (which I doubt), rather than to satisfy affordable-housing mandates, that strikes me as making them even more culpable, as I explained in a letter in the January 4 edition of The New York Times:

I found Joe Nocera’s attempt to minimize the role of Fannie Mae and Freddie Mac in the financial crisis unconvincing (“The Big Lie,” column, Dec. 24).

These two government-sponsored enterprises went broke and ended up being bailed out by taxpayers at cost of more than $170 billion — a cost that has never been repaid and continues to increase. By contrast, the private banks repaid their bailouts. Fannie and Freddie, not the banks, imposed the bigger burden on taxpayers.

That enormous burden is in no way alleviated if, as Mr. Nocera claims, Fannie and Freddie bought up risky subprime mortgages to maintain their market share, rather than to satisfy affordable-housing mandates. That simply underscores their shortsighted greed and complicity in the financial crisis.

Given their thin capitalization and what is effectively a taxpayer guarantee, Fannie and Freddie had no business dabbling in risky subprime loans in the first place.

Former Fannie Mae executive Ed Pinto, who worked at the mortgage giant before it began buying up risky mortgages, has also described Fannie Mae's key role in buying up and promoting risky sub-prime mortgages, which Fannie Mae did on a large scale, despite having a capital cushion that was tiny compared to private banks, resulting in its later insolvency and massive taxpayer bailout. A recent book about the causes of the crisis by New York Times business reporter Gretchen Morgenson and financial analyst Josh Rosner, “Reckless Endangerment,” chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.” Financial analysts have recently concluded that federal agencies and the GSEs played a larger role in causing the financial crisis than previously thought.