A newly released book, The Mortgage Wars, aims to rewrite history and absolve Fannie Mae and Freddie Mac of having any part in the financial crisis. Written by former Fannie Mae Vice Chairman and CFO Tim Howard, the book blames the crisis on Alan Greenspan and Larry Summers.
According to Howard, “The ‘GSE model’ for the secondary mortgage market was not flawed…. It was sabotaged by hostile and inept regulation.” (Incidentally, Fannie Mae had a hand in crafting some of those “inept” regulations.)
Whether or not Greenspan and Summers conspired with large lenders to undermine Fannie and Freddie, as Tim Howard claims, there is no doubt that the large lenders enjoyed the high fees from servicing loans, the ability to move risk (long-term loans) off their books, and the abundant source of inexpensive AAA-rated securities that bolstered their capital—all courtesy of the GSE model.
Furthermore, Howard’s account seems to be very much at odds with his former boss, Chairman and CEO Franklin Raines. In 2000, Raines told the National Association of Home Builders:
We begin the year 2000 with homeownership rates at a new high of 67 percent. With the favorable economic and demographic projections, we’re in a position to hit 70 percent by the end of this decade, with over ten million new homeowners. To get there, we have to keep bending financial markets to serve the families buying the homes you build.
Undoubtedly, the GSEs were not the only cause of the financial crisis, but to fully absolve them of responsibility is bizarre. At the very least, they promulgated a very dangerous notion—that securitizing mortgages diminishes risk rather than merely shifting it. This idea, paired with lower underwriting standards, encouraged lending and distorted housing markets. The GSEs—particularly Fannie Mae—were the chief cheerleaders of this approach.