How The Government Destroyed Fannie Mae And Freddie Mac

Peter Wallison more or less demolishes the conventional wisdom

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Peter Wallison more or less demolishes the conventional wisdom—and now the official Federal Crisis Inquiry Commission view—when it comes to the collapse of Fannie Mae and Freddie Mac.

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The official view holds that Fannie and Freddie lowered their standards in pursuit of market share in the face of increasing competition from Wall Street. This is just another version of the standard view that the crisis was caused by greed and under-regulation—rather than being brought about by government policy.

In his dissent to the official FCIC report, Wallison effectively demonstrates that a key part of that is not just wrong—it’s 100 percent backwards. Fannie and Freddie were lowering their credit standards and participating in the non-traditional mortgage market—eventually buying up the credit risk of 12 million of the 27 million not-traditional mortgages—for one reason and one reason only: government regulation compelled them to do this.

Wallison shows that the GSEs were not recklessly pursuing market share that they had lost to subprime lenders like Countrywide.

• Fannie and Freddie were major buyers of non-traditional mortgages long before Wall Street firms or the likes of Countrywide entered the market.

• Fannie and Freddie began buying high loan-to-value mortgages in 1994, shortly after government began imposing strict affordable housing goals on them.

• The number of non-traditional mortgages bought by Fannie and Freddie from 2004 to 2007 did not increase. The amount of subprime private mortgage-backed securities actually decreased.

• The market share of Fannie and Freddie didn’t increase until 2007, when the market for private securitizations collapsed.

Profits also weren’t the driver behind Fannie and Freddie acquiring non-traditional mortgages. Beginning in 2000, Fannie began to realize that it’s profitability was hurt by acquiring so many mortgages. By 2007, it was asking for relief from HUD affordable housing goals because of the impact on the firm’s profitability.

So why did Fannie and Freddie lower their standards and chase the shoddy mortgages that lead to their destruction? Because they were attempting to meet the government’s increasingly stringent affordable housing requirements. The responsibility for the collapse of Fannie and Freddie rests with the policies of HUD.

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