According to conservatives, Freddie Mac and Fannie Mae’s audacity to loan to low-income Americans is to blame for the current financial crisis. During the final presidential debate, for example, Sen. John McCain (R-AZ) called the lending giants “the catalyst for this housing crisis.”
Today in a House Oversight Committee hearing with former Fed chairman Alan Greenspan, SEC chairman Christopher Cox, and former Treasury secretary John Snow, Rep. John Mica (R-FL) revived that argument. He also tried to tie the crisis to Sen. Barack Obama (D-IL), holding up a chart called “Follow the Money Trail.” He pointed that Obama has been the largest recipient of donations from Freddie and Fannie. (Actually, he’s the second highest.)
Committee chairman Henry Waxman (D-CA) chastised Mica for trying to turn the financial crisis into a political issue. He noted that Freddie and Fannie “certainly played a role” in the current situation, but then asked the witnesses, “Do any of you believe that they were the cause of this financial crisis?” All three men said no. Watch it:
Federal housing data back up this conclusion — that “the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.” As Center for American Progress Senior Fellows Michael S. Barr and Gene Sperling explain, Freddie and Fannie weren’t even securitizing subprime mortgages en-masse until 2005:
The subprime boom was led by investment banks and mortgage brokers, not by government-sponsored enterprises. Fannie and Freddie became unhinged in the middle of this decade when they tried to play catch-up. Their shareholders and managers pushed them to recover the securitization market share they had lost to unregulated investment banks getting absurd AAA ratings for packaging subprime dross. From 2005 to 2008, Fannie Mae purchased or guaranteed $270 billion in loans to risky borrowers — triple the amount in all its earlier years combined.
As Center for Economic and Policy Research co-director Dean Baker has written, “Fannie and Freddie got into subprime junk and helped fuel the housing bubble, but they were trailing the irrational exuberance of the private sector. They lost market share in the years 2002-2007, as the volume of private issue mortgage backed securities exploded.” More here on “how did this happen.”