The Rise and Fall of Fannie Mae and Freddie Mac; Update 1

This article updates my original September 15, 2008 article, "The Rise and Fall of Fannie Mae and Freddie Mac with new information.

September 27, 2008 update:

A reader sent me this September 30, 1999 NY Times story called "Fannie Mae Eases Credit To Aid Mortgage Lending." Here are some key excerpts:

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

Of course stockholders didn't want the company to take on excessive risk where failure to repay loans would mean loss of profits. Yet the democrats now blame Wall Street fat cats for the troubles.

"Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

So we have he CEO of Fannie Mae, during the Clinton years, saying that subprime borrowers don't meet their lending standards.

"In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."

So even the liberal NY Times knew in 1999 that the risk Fannie Mae was taking could require a bailout by taxpayers!

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

So a government sponsored entity (GSE) pushed by President Clinton threw caution to the wind to make bad loans. It is no wonder the insiders cashed out their stock options as they knew ahead of time this was going to end badly! It is funny to hear government now wants to punish them for doing what they were told.

"From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."

We were warned and yet BOTH the Clinton and the Bush administrations took pride in how many unqualified lenders were getting loans to buy homes they could not afford at market rates. Now the punishment to us taxpayers for electing such incompetent presidents and members of congress is we are in a bear market, headed for a recession with very tight credit even for borrowers with good business ideas or the ability to repay the loans.