Desperate to defend the incoming corporate-socialist order, the Center for American Progress again defended Fannie Mae and Freddie Mac after Wednesday’s presidential debate. CAP’s Wonkroom notes that John McCain accused Fannie and Freddie of causing the current financial crisis and then offers the following refutation:
As McClatchy reported this week “federal housing data reveal that the charges [against Fannie and Freddie] aren’t true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.”
In 2006, during the height of the subprime boom, “more than 84 percent of the subprime mortgages…were issued by private lending institutions.” That same year, Fannie and Freddie’s regulator – the Office of Federal Housing Enterprise Oversight – “imposed new restrictions…that led to Fannie and Freddie losing even more market share in the booming subprime market.”
We already responded to McClatchy’s sorry attempt to pass opinion journalism off as straight reporting here, but to recap, what CAP and McClatchy continue to ignore is Fannie and Freddie’s major increase in the purchase of private label subprime securities. CAP and McClatchy are correct that Fannie and Freddie’s traditional market share in the issuing of mortgage securities declined, but what they fail to mention is that Fannie and Freddie more than made up for that decrease with a major increase in their purchasing of other entities’ subprime securities. Fannie and Freddie bought subprime securities since 1995, and by 2004 they were purchasing $175 billion worth of such securities a year, or 44% of the entire market. From 2003 through 2006 Fannie and Freddie bough more than a half trillion dollars in subprime securities. That is more than any other purchaser in the entire world. CAP and McClatchy pretend this little half a trillion dollars fact does not exist.
Remember, the entire purpose of Fannie and Freddie is to pump capital into the mortgage lending market. Every dollar of subprime securities that Fannie and Freddie buy means another dollar unscrupulous lenders like Countrywide Financial can lend out in bad mortgages. But Fannie and Freddie huge investment in the subprime security market also sent a signal industry wide that made the problem worse. American Enterprise Institute Financial Policy Studies fellow Peter Wallison and Columbia Business School professor Charles Calomiris explain:
Beginning in 2004, after the GSEs’ accounting scandals, the junk loan share of all mortgages in the United States began to rise, going from 8 percent in 2003 to about 18 percent in 2004 and peaking at about 22 percent in the third quarter of 2006. It is likely that this huge increase in commitments to junk lending was largely the result of signals from Fannie and Freddie that they were ready to buy these loans in bulk. For example, in speeches to the Mortgage Bankers Association in 2004, both Raines and Richard Syron–the chairmen, respectively, of Fannie and Freddie–“made no bones about their interest in buying loans made to borrowers formerly considered the province of nonprime and other niche lenders.” Raines is quoted as saying, “We have to push products and opportunities to people who have lesser credit quality.”
In other words, Fannie and Freddie created the explosion in subprime securities by publically guaranteeing they were would be government sponsored entity demand for them. The Center for American Progress has written about the subprime crisis numerous times, always with the same talking point: Fannie and Freddie are not to blame since they did not issue the majority of subprime securities. What CAP has never mentioned or addressed is that during that same time, Fannie and Freddie also became the world’s largest buyer of those subprime securities.