Fannie, Freddie caused the financial crisis

By Peter J. Wallison.

Efforts to blame the banks for the financial crisis are failing because they are not supported by data. The key fact is that, by 2008, before the crisis, half of the 54 million mortgages in the U.S. financial system were subprime and other low-quality mortgages.

More than 70% of these 27 million weak mortgages were on the books of government agencies, primarily the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. When these mortgages defaulted in unprecedented numbers, they drove down housing prices, weakened most large financial institutions and caused the financial crisis.

Here's why it happened. In 1992, Congress adopted legislation that imposed "affordable housing" requirements on the GSEs. These required that 30% of all mortgages they bought from lenders had to be made to low- and moderate-income home buyers - borrowers who were at or below the median income in their communities.

Over the next 15 years, the federal Department of Housing and Urban Development - pushed by Congress - tightened and expanded this quota so that, by 2007, 55% of all mortgages the GSEs acquired had to be made to low- and moderate-income borrowers, including 27% to those below 80%.

The GSEs could find good mortgages at the 30% quota, but when it went higher they had to reduce their underwriting standards. By 2002, to meet the quotas, they had bought at least $1.2 trillion in subprime and other weak loans.

By 2008, just before they became insolvent, they and other government-controlled institutions held or had guaranteed 19.2 million loans, over 70% of the 27 million outstanding. In other words, the government's housing policies created the demand for these destructive loans.

What was banks' role? It wasn't until 2002 that Wall Street issued over $100 billion in securities backed by subprime or other weak loans. Recall that by this date, the GSEs had bought over a $1 trillion. The banks' number grew so that, by 2008, there were 7.8 million low quality mortgages backing bank-issued securities - less than 30% of the 27 million.

Given these numbers, it's obvious that blaming the banks for the financial crisis is simply a way to cover up a huge government error.

Peter J. Wallison is a senior fellow at the American Enterprise Institute.A Financial Crisis Inquiry Commission member, he dissented from the panel's report.