Policy Brief | August 2010
Fannie, Freddie and the Foreclosure Crisis
The government-sponsored mortgage giants Fannie Mae and Freddie Mac are not blameless in the foreclosure crisis, but the case against them is also often misunderstood and exaggerated. This policy brief recounts the origins of the federal government’s role in the secondary mortgage market, the role GSEs played in the foreclosure crisis, and the implications for policy and practice.
There is clear evidence that Fannie and Freddie started purchasing lower quality loans at the peak of the housing market. However, it is also evident that they did so to regain market share from less-regulated private-label security issuers and finance companies. Housing goals do not appear to have played a significant role because Fannie and Freddie remained less concentrated in low-income market segments compared to the private market. Still, the high LTV, low FICO score, and alternative documentation loans that Fannie and Freddie purchased are performing significantly better than private subprime loans, suggesting the enterprises retained stronger risk management procedures than private financial companies.
Ultimately, profit not policy was what motivated Fannie and Freddie and loan products not borrowers were what caused their collapse. These facts have important implications for reform of the housing system, including countercyclical liquidity and how to approach low-income homeownership in the future.
This policy brief recounts the origins of the federal government’s role in the secondary mortgage market, the GSEs’ role in the foreclosure crisis, and the implications for future policy and practice.