CAP’s Faulty Fannie/Freddie Facts
Conn Carroll /
The left is desperate to pin this financial crisis on the free market. The left knows that if the American people knew the truth about how government intervention in the market caused this current credit crunch, their agenda would be dead for a generation. So what do they do? They make stuff up. Just look at the blatant falsehoods the Center for American Progress is peddling in this single item on Fannie and Freddie:
CAP FALSEHOOD: Fannie Mae and Freddie Mac are private institutions that were set up by Congress.
THE TRUTH: Fannie Mae was created as a government agency by FDR in 1938. LBJ partially privatized it in 1968. Freddie Mac was created as a government agency in 1970. It was partially privatized in 1989. At no time were either entities purely private institutions. Even after their quasi-privatization they continued to enjoy lower capital requirements than real private companies, guaranteed access to federal credit that real private companies did not have, and an industry-wide assumption that their debt was federally guaranteed. This allowed Fannie and Freddie to borrow at lower rates than real private companies.
With these government advantages Fannie and Freddie created a massive mortgage financing duopoly. By 2003, Fannie and Freddie held just over 50% of all U.S. mortgage debt. Read that again: two government entities controlled over half of the entire residential real estate market. Fannie and Freddie did not attain this market share through business acumen. They won it by fiercely maintaining their government granted advantages. Only the socialists at CAP could try and say Fannie Mae and Freddie Mac “are private institutions” with a straight face.
CAP FALSEHOOD: Their participation in the secondary market did not assist in the creation of the subprime market.
THE TRUTH: Fannie and Freddie do not actually make any home loans at all. Their purported reason for existence is to create liquidity so that lenders can make more home loans. Lenders can not make loans of any kind, unless the get the capital they need by selling off other loans they already made. Every time Fannie and Freddie buy any loan or subprime security, they make it easier for lenders to make new loans. Countrywide Financial was an industry leader in issuing bad subprime loans. Fannie Mae was Countrywide’s biggest customer for mortgage securities. Every dollar of loans that Fannie and Freddie bought from unscrupulous lenders like Countrywide, is another dollar Countrywide can then lend out in bad subprime mortgages. Fannie and Freddie were absolutely essential to the creation and growth of the subprime market.
CAP FALSEHOOD: Fannie and Freddie weren’t the biggest players in [the subprime market] and, most importantly, started this practice very late in the game. In fact, the subprime market had already started to go bad when they started their purchases.
THE TRUTH: CAP is either ignorant or flat out lying here. Fannie and Freddie began purchasing subprime securities in 1995. By 2003, the two were buying $81 billion in subprime securities a year. In 2004, they purchased $175 billion subprime securities — 44 % of the market. Read that again: At the height of the housing bubble Fannie and Freddie bought 44% of the entire subprime securities market. No entity bought more subprime securities than Fannie and Freddie. They were by far the biggest players in the subprime market, they started playing in the subprime market very early on in the housing bubble, and at the bubble’s peak they compromised almost half of the entire market.
CAP FALSEHOOD: Fannie and Freddie were supposed to be more closely supervised than other lenders—with their own regulator, which was supposed to keep a special eye on them because they are important institutions. Those regulators, who were part of the Bush administration, failed along with the rest of the Bush regulatory apparatus to stop the problem.
THE TRUTH: The Bush administration is plenty guilty in this mess. But the left and their allies in Congress are far more guilty. When real conservatives in Congress pushed for legislation to rein in Fannie and Freddie it was the left who carried Fannie and Freddie’s water. Witness:
- Sen. Chuck Schumer (D-NY), April 6, 2005: “I’ll lay my marker down right now, Mr. Chairman. I think Fannie and Freddie need some changes, but I don’t think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don’t undo Fannie and Freddie.“
- Rep. Barney Frank (D-MA), September 10, 2003: “I worry, frankly, that there’s a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially.“
- Sen. Chris Dodd (D-CT), July 11, 2008: “They’ll be fine. [Fannie and Freddie] are fundamentally sound and strong.“
There is a clear and causal nexus between Fannie and Freddie’s massive intervention into the residential real estate market and the current credit crunch that was caused by a housing bubble. The left will probably get away with denying this link for a couple of months, but the American people are smart and the truth will catch up to them.