ON THE ROLE THAT FANNIE PLAYED

WHOOPS!

The New York Times has a piece worth reading on the history of how Fannie Mae reached the tipping point on making riskier loans to lower-income home buyers, prodded on by legislators, constituents and lobbying groups connected to the company and industry (image source).  Some excerpts:

"Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data..."

"...the company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010."

"...Whenever competitors asked Congress to rein in the company, lawmakers were besieged with letters and phone calls from angry constituents, some orchestrated by Fannie itself. One automated phone call warned voters: “Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.”

The ripple effect of Fannie’s plunge into riskier lending was profound. Fannie’s stamp of approval made shunned borrowers and complex loans more acceptable to other lenders, particularly small and less sophisticated banks.

Between 2001 and 2004, the overall subprime mortgage market — loans to the riskiest borrowers — grew from $160 billion to $540 billion, according to Inside Mortgage Finance, a trade publication. Communities were inundated with billboards and fliers from subprime companies offering to help almost anyone buy a home.

Within a few years of Mr. Mudd’s arrival, Fannie was the most powerful mortgage company on earth.

Then it began to crumble..."

"...Last month, the White House was forced to orchestrate a $200 billion rescue of Fannie and its corporate cousin, Freddie Mac."

As I mentioned in a post yesterday, no single entity or set of folks bear all the responsibility for the financial pickle we find ourselves in as a nation.  Rather, most of us directly and/or indirectly share a little bit of the blame.  Understanding the details of this history, may not help us avoid the next one, but hopefully it provides at least a bit of a pause before we rush pell-mell into repeating another bubble in yet another asset category.