Fannie and Freddie function by buying, bundling and then stamping a government guarantee on mortgages. Then they sell them to investors. It keeps the banks happy because it keeps capital flowing, and it keeps consumers happy because it makes low, fixed-rate mortgages possible.
At least that how things were supposed to unfold. But the two mortgage finance giants “made astonishing mistakes,” Raj Date, executive director of a financial policy think-tank called the Cambridge Winter Center, told NPR’s Audie Cornish.
“As normal people everywhere in the country realized that housing prices seemed to be growing straight into the stratosphere, instead of becoming more conservative about lending against those ridiculously high values, Fannie and Freddie just continued to make the same kind of loans and indeed made more aggressive loans during that period of 2005, 2006, 2007,” Date said. “And it has all come back to haunt them.”
“As normal people everywhere in the country realized that housing prices seemed to be growing straight into the stratosphere, instead of becoming more conservative about lending against those ridiculously high values, Fannie and Freddie just continued to make the same kind of loans and indeed made more aggressive loans during that period of 2005, 2006, 2007,” Date said. “And it has all come back to haunt them.”
“So instead of rationally-priced credit, he said, the country wound up with a $6 or $7 trillion bubble in housing values. And all of Wall Street and most of the country’s banks made the same sort of mistakes, ….”
And a number of members of Congress, mostly Republican, made this clear to Congress. Check the Congressional Record. Its all there in considerable detail, including the ‘all is well statements’ of populist Democrats such as Franks and Dodd who pushed for more and more loans to people who simply didn’t ‘have what it takes’ to pay off a mortgage or, in many cases, to personally manage those mortgaged properties.
Some banks became very innovative in their mortgage-money management practices.
And again members of Congress pointed this out to the Congress, but the populists of Congress and the friends of irresponsible bankers who were sitting in Congress continued to to sing a ‘joint chorous’ of ‘all is well’ to the American people.’
“and it came back to haunt them”……really????? Was Mr. Raines and his $10million bonus haunted by this? Not much!
I don’t think there were as many irresponsible bankers involved as there were irresponsible congressmen, community organizers, housing non-profits, housing speculators, and the derivatives bunch who kept feasting on the bubble for their own gain.
And one thing we know about bubbles? They eventually pop.
And the republicans do not have clean hands in this. You hear a lot of gloating about how good the economy was under Bush. Yes, it was much more fundamentally healthy, but how many points of GDP growth should be deducted because of the housing bubble? How much longer would the economic recovery from 9/11 have taken if the engine of the housing bubble had not been reved up to the boiling point?