Between 2005-2007, most of the mortgages they bought or guaranteed were either subprime, interest-only or negative amortization. But that's because those were the types of loans being made by banks and unregulated mortgage brokers. Government regulations precluded Fannie and Freddie from buying mortgages that didn't meet down payment and credit requirements. This meant they bought, resold or guaranteed 50% of the mortgages made, but it was actually the most credible half. By 2007, only 17% of their portfolio was subprime or Alt-A loans. However, when housing prices declined, and homeowners began defaulting, this relatively small percentage of subprime loans contributed 50% of the losses.
This was made worse by their use of derivatives to hedge the interest-rate risk of their portfolios. However, as a private sector company with shareholders to please, they were doing this to remain competitive with other banks, who were doing the same thing.
As government sponsored enterprises, Fannie and Freddie took on more risk than they should have, since taxpayers ultimately had to absorb their losses. But they didn't cause the housing downturn, the preponderance of exotic loans, and the use of derivatives instead of stock sales to cover potential risk. Instead, they were an example, not a cause, of the mortgage crisis. For more, read Did Fannie and Freddie Cause the Mortgage Crisis?
Comments
fanny mae & freddie mac were integral to the credit/banking crisis! the dems insisted on subprime loans through them.
Everybody was doing subprime loans, interest-only loans, negative amortization loans…Fannie and Freddie only touched half the loans out there, and the ones they didn’t touch were those that didn’t meet eligibility requirements.
There is plenty of blame to go around for everyone in this crisis.
Kimberly
Democrats blocked Republican attempts to cut down on subprime loans – Obama included in the don’t block vote, stating: Reducing risky loans will reduce affordability of home ownership.
Lobby pressure from organizations such as CRA and recatagorization of more banks to be included in regulatory status mandating percentages of loans to fall into “subprime”, also lead to the fallout.
Lenders were under pressure from these left wing political groups to make bad loans. It was not the “UNREGULATED brokers” that did this, it was relaxed underwritting guidelines driven by Affordable Housing Mandates that pushed these brokers, while doing their job to meet demands placed on the lenders in order to maintain favorable broker status and be able to compete with all loans they made.
Look at CRA as the real culprit here.