“When you have government play its heavy hand, markets blow up and people get hurt. And the reason we have the housing crises we have is that the federal government played too heavy a role in our markets. The federal government came in with Fannie Mae and Freddie Mac, and Barney Frank and Chris Dodd told banks they had to give loans to people who couldn’t afford to pay them back.”
– Former Massachusetts Gov. Mitt Romney, in Wednesday night’s Republican presidential debate in Rochester, Michigan
– The federally backed mortgage-finance giants Fannie Mae and Freddie Mac, along with the 1970s-era Community Reinvestment Act, are often blamed by conservatives seeking to explain the collapse of the U.S. housing market.
– Fannie and Freddie were placed in government conservatorship in 2008 as the mortgage crisis spread, and the bailout is likely to cost taxpayers about $124 billion, the Federal Housing Finance Agency reported in October.
– The Financial Crisis Inquiry Commission’s 2010 report criticized the firms’ behavior during the last years of the housing boom, noting that their ratio of debt to assets was up to 75-to-1 before their collapse. In particular, Fannie Mae’s sought a bigger share of the mortgage market, leading it “to ramp up its exposure to risky loans and securities as the housing market was peaking.”
– The firms were also pressured by the Department of Housing and Urban Development to boost the percentage of affordable housing loans they financed, the commission found. But the commission found that while the companies contributed to the crisis, they were “not a primary cause” of the crash of 2008.
– The commission placed greater blame on relaxed mortgage-lending standards by private firms, the collection of those loans into securities, the role of credit rating agencies as “key enablers” in the sale of mortgage-backed securities; and the failure of federal regulators to halt the spread of subprime lending.
– Fannie and Freddie had delinquency rates lower than those of private firms, the commission concluded, and the companies “followed rather than led Wall Street and other lenders” in high-risk mortgages.
– Both the commission and the former head of the Federal Deposit Insurance Corp., Sheila Bair, also dismiss the role of the Community Reinvestment Act in the crisis. The 1977 law forbids banks from “redlining” minority neighborhoods, effectively cutting off credit.
“Nowhere does it tell them to make unaffordable, unsustainable loans that set people up for failure,” Bair told a nonprofit developer’s conference in 2010. “Most of the subprime and high risk nontraditional mortgages were made by non-CRA lenders, and these loans were made in large volumes because for a time they were highly profitable and because Wall Street would buy them and securitize them.”
– And the commission’s report added, “Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.”
– Dodd, the former chairman of the Senate Banking Committee, and Frank, now the ranking Democrat on the House Financial Services Committee, co-wrote the 2010 financial reform measure, overwhelmingly opposed by Republicans, that comes in for frequent criticism from the GOP. Dodd was criticized for getting favorable mortgage terms by now-defunct subprime lender Countrywide Financial, but the Senate Ethics Committee cleared him of any wrongdoing. Frank, meanwhile, opposed efforts to put Fannie and Freddie under Treasury supervision in the early 2000s, arguing that they faced no crisis at that time; in 2009, he blamed the Bush administration for pressuring the companies into buying subprime housing loans.
The verdict: False. The most extensive investigation of the 2008 crash to date puts most of the blame on private lenders and regulators, not the government-sponsored entities.