Fannie Mae and Freddie Mac Were Into Subprime Lending, and Lied About It
“One of the regular claims from Fannie Mae and Freddie Mac apologists . . . is that the two entities were blameless” for causing the mortgage meltdown and financial crisis, as these two “Government-sponsored enterprises” (GSEs) supposedly “weren’t involved in subprime” mortgages and were forbidden to buy them. This false and dishonest claim has now been refuted. In charging the former heads of Fannie and Freddie with fraud, “the Securities and Exchange Commission has decided that not only could the GSEs buy subprime, but they did in fact do so and, even worse, they lied about it.”
As Cato Institute economist Mark Calabria notes, “Back in 2008, Paul Krugman went so far as to say, ‘they didn’t do any subprime, because they can’t.’ Just taking 10 minutes to read the actual statute and regulations would have revealed to him that they actually could. Krugman went on to say, ‘Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.’ Of course, just reading Fannie’s 10-K would have revealed that claim to be false. But why let facts get in the way?”
In the Wall Street Journal, Peter Wallison, who prophetically warned against the risky practices of mortgage giant Fannie Mae, earlier described the key role that government-sponsored entity played in spawning the recent financial crisis, in an article entitled “Government-Sponsored Meltdown.” He cited the findings of a recent book about the causes of the crisis by New York Times business reporter Gretchen Morgenson and financial analyst Josh Rosner, a book called “Reckless Endangerment,” which 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.” Earlier, a top investment manager at JP Morgan Private Bank reached a similar conclusion, noting that “new research” showed that “US Agencies played a larger role in the housing crisis than we first reported,” and thus were a “primary catalyst for the US housing crisis.”
(Even now, the Obama Justice Department is pressuring banks to make risky loans to people with bad credit, relying on a strained interpretation of fair lending laws, and the threat of massive lawsuits.)
As Wallison noted, government-sponsored enterprises (GSE’s) like Fannie Mae played a central role in precipitating the financial crisis:
After James A. Johnson, a Democratic political operative and former aide to Walter Mondale, became chairman of Fannie Mae in 1991 . . . it became a political powerhouse, intimidating and suborning Congress and tying itself closely to the Clinton administration’s support for the low-income lending program called “affordable housing.” This program required subprime and other risky lending, but it solidified Fannie’s support among Democrats and some Republicans in Congress, and enabled the agency to resist privatization or significant regulation until 2008. “Under Johnson,” write Ms. Morgenson and Mr. Rosner, “Fannie Mae led the way in encouraging loose lending practices among banks whose loans the company bought. . . . Johnson led both the private and public sectors down a path that led directly to the financial crisis of 2008.”. . .Far from being a marginal player, Fannie Mae was the source of the decline in mortgage underwriting standards that eventually brought down the financial system. It led rather than followed Wall Street into risky lending. . .Edward Pinto (a former chief credit officer of Fannie Mae) . . . presented . . . evidence . . . showing that by 2008 half of all mortgages in the U.S. (27 million loans) were subprime or otherwise risky, and that 12 million of these loans were on the books of the GSEs.
In 2010, Congress passed a confusing, 2,315 page law to regulate the financial industry called the Dodd-Frank Act. But it did absolutely nothing about Fannie Mae, which it left completely unreformed despite the fact that taxpayers will end up paying well over $100 billion to bail out Fannie Mae. Instead, the Dodd-Frank Act delegates to largely-unaccountable agencies the power to write innumerable new regulations restricting the economy, violating the constitutional separation of powers, equal protection, and property rights.
As Wallison notes,
The principal sponsors of that Dodd-Frank Act, former Sen. Chris Dodd and former House Financial Services Committee Chair Barney Frank, were also the principal supporters and political protectors of Fannie Mae and Freddie Mac, and the government housing policies they implemented. It is little wonder then that legislation named after them would place the blame for the financial crisis solely on the private sector and do nothing to reform a government-backed housing finance system that will increasingly be seen as the primary cause of the devastating events of 2008.