Editorial in the WSJ: Rewriting Fannie Mae History
If you want proof that the Washington establishment has learned nothing from the 2008 financial panic, look no further than the nearby letter from former Fannie Mae CEO Franklin Raines. Our old antagonist is signaling where the debate is heading as Congress finally begins to consider what to do about Fannie and its failed sibling, Freddie Mac.
Mr. Raines writes that "the facts about the financial collapse of Fannie and Freddie are pretty clear." So let's review those facts. In Mr. Raines's telling, Fannie Mae was undone by a decision—made after he left in 2004—to purchase loans "with lower credit standards" just before the bust. But even this managerial decision wasn't entirely the companies' fault. Rather, according to the man who presided over one of the largest accounting scandals in history while at the helm of Fannie Mae in 2003, Fan and Fred's big mistake was chasing Wall Street's credit standards downward at the end of the boom.
What he doesn't say is that Fan and Fred had a political and legal mandate to support low-income housing. At the end of 2004, the U.S. Department of Housing and Urban Development released its "housing goals" for Fannie Mae and Freddie Mac for 2005-2008.
The new rule required the two government-sponsored mortgage giants to increase each year the share of their business that went to low- and moderate-income borrowers, with subgoals for "underserved areas" and "special affordable" housing. The purpose, according to HUD, was to ensure that Fannie's and Freddie's mortgage purchases would "promote the national priority of increasing homeownership."
The mandate had two effects. First, it meant that in order to keep growing, Fan and Fred had to grow their affordable-housing business even faster to meet the targets. But not every borrower is a prime borrower, and that goes triple for low-income borrowers. Fannie and Freddie could only meet their politically mandated lending goals by looking for new ways to extend credit to subprime borrowers.
So when Mr. Raines says that "the cause of the financial problems for Fannie and Freddie was bad decisions, not their government sponsored status," well, let's just say he's not telling the whole story...
Read entire article at WSJ
Mr. Raines writes that "the facts about the financial collapse of Fannie and Freddie are pretty clear." So let's review those facts. In Mr. Raines's telling, Fannie Mae was undone by a decision—made after he left in 2004—to purchase loans "with lower credit standards" just before the bust. But even this managerial decision wasn't entirely the companies' fault. Rather, according to the man who presided over one of the largest accounting scandals in history while at the helm of Fannie Mae in 2003, Fan and Fred's big mistake was chasing Wall Street's credit standards downward at the end of the boom.
What he doesn't say is that Fan and Fred had a political and legal mandate to support low-income housing. At the end of 2004, the U.S. Department of Housing and Urban Development released its "housing goals" for Fannie Mae and Freddie Mac for 2005-2008.
The new rule required the two government-sponsored mortgage giants to increase each year the share of their business that went to low- and moderate-income borrowers, with subgoals for "underserved areas" and "special affordable" housing. The purpose, according to HUD, was to ensure that Fannie's and Freddie's mortgage purchases would "promote the national priority of increasing homeownership."
The mandate had two effects. First, it meant that in order to keep growing, Fan and Fred had to grow their affordable-housing business even faster to meet the targets. But not every borrower is a prime borrower, and that goes triple for low-income borrowers. Fannie and Freddie could only meet their politically mandated lending goals by looking for new ways to extend credit to subprime borrowers.
So when Mr. Raines says that "the cause of the financial problems for Fannie and Freddie was bad decisions, not their government sponsored status," well, let's just say he's not telling the whole story...