Wednesday, September 29, 2010

Fannie and Freddie caused housing crash?

Did Fannie Mae and Freddie Mac cause the housing debacle? Before we get to the answer, let’s all get on the same page about what Fannie, Freddie and FHA actually are.
Neither Fannie Mae, Freddie Mac or FHA is a bank, they don't lend money.  FHA insures loans and Fannie Mae and Freddie Mac are investors, they purchase loans from the banks who originate them as soon as they are "funded".  (source: the

Look at the charts below and I think you’ll find that the people who scream that Fannie Mae and Freddie Mac caused the housing crisis are simply wrong. How can two companies that had the smallest share of the mortgage market have caused anything in that market? Other lenders - notably Bear Stearns, Lehman Brothers and the rest of that gang - were involved in the subprime mortgage world far deeper than Fannie and Freddie.

I’ll leave it to each of our lovely readers to decide whether the Fannie/Freddie bashers are stupid, lying or practicing world-class political spin.

mortgage originations by originator (I originally found these charts on Barry Ritholtz' The Big Picture blog)

See how the number of mortgages issued by Fannie and Freddie during the boom years of 2004-2007 dropped dramatically?

Meanwhile the number of mortgages issued by ‘private label’ lenders increased sharply. “Private label” in this context means companies like Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs and Morgan Stanley.

Here’s the same data divided by mortgage type:

Mortgage originations by product type, 2003-2010

See all those subprime mortgages being offered by companies that weren’t Fannie and Freddie?

See 2004-06? That was the height of the boom; the market cooled after that. Fannie and Freddie lost market share during those years and Lehman, Bear and their friends made more mortgages every year.

This isn’t to say that Fannie and Freddie don’t have their problems. They do. They just aren’t guilty of causing the housing crisis.