I know I promised no politics. But I'm tired of hearing people in the media repeat the Republican party line that our current financial troubles are all the fault of Fannie and Freddie. I also don't think it's terribly political to point out when a bunch of politicians are stretching the truth to the point of pain, in order to satisfy the more radical members of their constituency. (if you're a Republican don't stop reading me; I call bullpucky on the Dems when they lie too)
The Two F's are wrapped up in our troubles, but Fannie and Freddie are not the root cause of the housing/mortgage crisis.
From the a series in the New York Times:
Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted.
Dozens of interviews, most from people who requested anonymity to avoid legal repercussions, offer an inside account of the.... pressure from Wall Street firms, Congress and company shareholders, [which caused Fannie's CEO Daniel Mudd to take] additional risks that pushed the company, and, in turn, a large part of the nation’s financial health, to the brink.
Shortly after he became chief executive [8 years ago], [Fannie CEO Daniel] Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation’s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else.
But at that meeting, Mr. Mozilo ... threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans. [Mozilo said] that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.
“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd.
Indeed, Fannie's share of the mortgage reselling marketplace had plunged by more than half in the year before the Mozilo-Mudd meeting. Adding to the pressure, Capitol Hill demanded Fannie buy more mortgages made to low-income and other risky borrowers. Fannie complied, purchasing more than 3 times as many risky loans between 2005 and 2007 as they previously had.
By the middle of 2007, it all added up to a toxic mess as homeowners started defaulting on their mortgages in droves. Fear of unknown toxicity sitting on banks' books trickled up through the credit markets, eventually freezing the short-term bank-to-bank and bank-to-business credit cycle.
The rest is (recent) history, as Treasury Secretary Paulson took over both Fannie and Freddie, then oversaw the FDIC bailout of IndyMac, orchestrated the Bank of America buyout of Merrill Lynch, watched as Lehman Brothers imploded, stepped in to bail out AIG and oversaw the WaMu seizure as well. Friday saw the passage of a landmark $700 billion "rescue plan".
In this campaign season, the Republican spin-meisters have a loose association with fact. It makes a good soundbite to lay the blame at Fannie and Freddie's feet, whereas it takes a little time, a little digging and a little nuance to explain what The Two F's actually did. Doggone it, we can't be bothered with nuance at a time of crisis like this. The American people just want government to get out of the way and cut their taxes. It's all about job creation, Katie. <wink> You betcha!
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