2Center or American Progress | 7 Things You Need to Know About Fannie Mae and Freddie Mac
Under his sysem, morgage credi was coninuously available well ino he lae-1990sunder erms and a prices ha pu susainable homeownership wihin reach or mos American amilies. By he end o ha decade, however, Wall Sree had gured ou how o purchase and securiize morgages wihou needing Fannie and Freddie as inermedi-aries, leading o a undamenal shi in he U.S. morgage marke.
2. What role did Fannie and Freddie play in inflating the housing bubbleof the mid- to late-2000s?
Conrary o conservaive alking poins, he answer is very litle. During he bubble,loan originaors backed by Wall Sree capial began operaing beyond he Fannie andFreddie sysem ha had been working or decades by peddling large quaniies o high-risk subprime morgages wih erms and eaures ha drasically increased he chanceo deaul. Many o hose loans were predaory producs such as hybrid adjusable-raemorgages wih balloon paymens ha required serial renancing, or negaive amoriza-ion, morgages ha increased he unpaid balance over ime.
Wall Sree rms such as Lehman Brohers and Bear Searns packaged hese high-risk loans ino securiies, go he credi-raing agencies o bless hem, and hen passed hemalong o invesors, who were oen unaware or misinormed o he underlying risks.I was he poor perormance o he loans in hese “privae-label” securiies—hoseno owned or guaraneed by Fannie and Freddie—ha led o he nancial meldown,according o he biparisan Financial Crisis Inquiry Commission,
among oher inde-penden researchers.
In ac, Fannie and Freddie los marke share as he bubble grew: Te companies backedroughly hal o all home-loan originaions in 2002 bu jus 30 percen in 2005 and2006.
In an ill-aed eor o win back marke share, Fannie and Freddie made a ew ragic misakes. Saring in 2006 and 2007—jus as he housing bubble was reaching ispeak—Fannie and Freddie increased heir leverage and began invesing in cerain sub-prime securiies ha credi agencies incorrecly deemed low-risk. Fannie and Freddiealso lowered he underwriing sandards in heir securiizaion business, purchasing andsecuriizing so-called Al-A loans. While Al-A loans ypically wen o borrowers wihgood credi and relaively high income, hey required litle or no income documena-ion, opening he door o raud (which was oen perperaed by he morgage brokerraher han he homebuyer).
Tese decisions evenually conribued o he companies’ massive losses, bu all hishappened ar oo lae o be a primary cause o he housing crisis.