The DOW has sunk 1500 points this month alone, and its not even 10 days into it. IBM stock is down by quite a bit, just barely at $90 share (p.s. if it gets under $70 share start buying). Since the economy is in the tanker it was fun for me to goto the Rochester Chamber of Commerce U.S. Congressional debate between Tim Walz (D) and Brian Davis (R). It came as no surprise to me that Brian Davis reiterated the false claim that Freddie and Fannie are responsible for most of the mess; it is just completely not true. This argument has been used before because the Republicans thought at one point Fannie and Freddie should be regulated differently and they of course blame the democrats for stopping them even though during that time they had no power in either the House, Senate or Presidency to stop any policies. But as the argument goes Clinton and all the other liberal forced Freddie and Fannie to make bad loans to people who couldn’t afford them, thus it is the liberals and there regulation that caused the mortgage crisis. This is of course silly, so here is the reality of Freddie and Fannie:
Fan and Fred were publicly traded corporation, like AT&T, IBM, Wells Fargo, Target, etc. They were owned by shareholders. They were once create and ran by the government but were, up until a month or so ago, own by stockholders. The Government provided some subsidies to them on occasions for stability.
So did Fannie and Freddie sell these subprime loans to people that couldn’t afford it? NO! [2] They work in the secondary mortgage market, meaning they buy mortgages from private lenders who maybe individuals, banks, realtors, or other types of businesses. Fannie and Freddie would then take these mortgages and securitize them, then turn around and resell them to investment institutions like Lehman Brothers, Goldman Sacs, Morgan Stanley, Merrill Lynch, etc. Fan and Fred acted as intermediaries packaging these mortgage backed securities (MBS). Some of the MBS would have adjustable rate mortgages (ARMs) that make them more susceptible to mortgage failure. These securities were highly leveraged using derivatives -- some of it created by Fred and Fan I give you -- but most of the derivatives were created by the investment institution that used the leverage to increase profitability (yet greatly increasing risk).
So the real culprit is the people who bought the mortgages (most of them middle class with fair credit [1]), predatory lending, greedy/risky investing and lack of Federal Government oversight. Fannie and Freddie are not the greatest concern and obviously not the biggest culprit, if they were not around or created by the government some other private business would have filled their shoes. Why? Because it was a very profitable business, both Fannie and Freddie were Fortune 500 companies.
There is also very little data that what the Republicans want to do with Fannie or Freddie would have done anything about the MBS market. So in the end blaming this all on liberals that got money from Freddie and Fannie is just nonsense and the belief that republicans were going to go and stop the crisis by regulating Fannie and Freddie is even more outlandish. Even if Republicans wanted to take over Fran and Fred earlier the companies only play in the secondary market, the subprime were issued by the lenders, the lenders then sell Fan or Fred the mortgage. If Fan and Fred didn’t exist the homeowners would still see defaults and foreclose because there were still involved in subprime lending. Fan and Fred really play a small role in this debacle; they were just too involved in the mortgage industry to not fail.
So even thought there is this tiring montra from the right that Frannie and Freddie, being GSE, were the cause of all of this, it’s just is not true.
[1] Rick Brooks & Ruth Simon, "Subprime Debacle Traps Even Very Credit-Worthy: As Housing Boomed, Industry Pushed Loans To a Broader Market", Wall Street Journal, December 3, 2007, at A1
[2] http://www.freddiemac.com/corporate/company_profile/our_role_secmkt/index.html
