Fannie and Freddie ‘Permitted What They Were Created to Prevent’

Government-sponsored entities Fannie Mae and Freddie Mac may have backed securities that were safer than those sold by Wall Street firms during the housing boom, but that did not stop them from indirectly encouraging bad lending, according to a new report from the Federal Housing Finance Agency.

In a study of $10.6 trillion worth of home loans, the FHFA looked at the level of “riskiness” associated with loans that Freddie and Fannie bought from 2001 to 2008 and compared that with the “riskiness” of loans without government backing that were sold on to investors on the secondary market.

What the study found is that the private-label loans were much more risky (30 percent overall delinquency rate) than the Freddie and Fannie-backed loans (only 10 percent are or ever have been in delinquency.)

The now government-run agencies used more caution in borrower credit scores, with only 16 percent of their financed loans coming from borrowers with credit scores below 660. More than half of the loans from private-label securities, by contrast, came from poor-credit borrowers.

Still the facts remain that Freddie and Fannie did lower their standards in order to keep up with the private companies during the boom, and that left the two companies without much of a backup plan when things collapsed. They also bought up a great deal of the the private-label securities, leaving themselves exposed to all that risk from sub-prime and adjustable rate mortgages. So even though they were not baking the worst of the loans, they were buying them as securities.

“They bought over $500 billion of the very loans that created the problem,” said Lewis Ranieri, the co-inventor of the mortgage-backed security, at a summit convened by the Obama administration last month, as quoted in the Wall Street Journal. “In the end, Fannie and Freddie permitted what they were created to prevent, and we are where we are.”

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