Today, four former CEO’s of Fannie Mae and Freddie Mac testified before the House Oversight Committee, in a hearing meant to “examine the extent to which the actions and policies of Fannie Mae and Freddie Mac may have contributed to the ongoing crisis.”
A favorite pastime of conservatives is to blame the housing crisis on Fannie and Freddie. However, as Rep. Henry Waxman (D-CA) announced at the beginning of the hearing, the 400,000 Fannie and Freddie documents amassed by the Oversight Committee show that “it is a myth to say [Fannie and Freddie] were the originators of the subprime crisis”:
At an earlier hearing, the minority released a report that called Fannie and Freddie “the central cancer of the mortgage market, which has now metastasized into the current financial crisis.” The next day, John McCain made a similar statement during a presidential debate in Nashville, stating that “Fannie and Freddie were the catalysts, the match that started this forest fire.” The documents do not support these assertions.
Fannie and Freddie were undeniably irresponsible in that they purchased risky loans and mortgage securities. As the Washington Post reported today, both Fannie and Freddie were “warned” that they were investing in risky mortgages “that could pose dangers to the firm.” Fannie and Freddie’s chief regulator — the Office of Federal Housing Enterprise Oversight (OFHEO) — failed to prevent them from investing in toxic mortgages, despite its clear mandate to ensure “the safety and soundness” of the two institutions.
However, to point to Fannie and Freddie as the catalyst of the crisis is absurd. As Nobel Prize-winning economist Paul Krugman noted, Fannie and Freddie “didn’t do any subprime lending, because they can’t“:
[T]he definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.
As the Center for American Progress Action Fund’s Tim Westrich laid out “the real culprits in the mortgage mess are non-bank mortgage companies…that originated the lion’s share of bad mortgages at the heart of the crisis”:
They made an estimated 50 percent of subprime loans in 2005. Another 30 percent of loans were made by non-bank subsidiaries of banks or thrifts.
Fannie and Freddie should not have bet the farm on risky loans in the midst of a growing housing bubble. However, that, by itself, is not an adequate explanation for the housing crisis.