Fannie and Freddie: What Happenned to Cause the Mortgage Meltdown and Foreclosures Nightmare
Over the past few months our TV news programs have been filled with Members of Congress or an Administration official placing blame on the Mortgage Meltdown in the hands of a financial company official whose poor decisions and greed resulted in huge financial losses and great suffering. Ironically, it is many of these Washington Officials who advocated the mortgage lending policies that led to the economic turmoil.
In the early 1990s, Fannie and Freddie came under substantial political pressure to lower lending and underwriting standards in order to help more people achieve the dream of becoming homeowners. In particular these behemoth lenders were coerced into lowering the size of down payments and the credit quality of borrowers. Lower down payments led to housing prices that outpaced income growth.
Once Freddie Mac and Fannie Mae lowered their lending standards, the open market had to follow pace in order to compete. When this happened, home prices became increasingly untethered from any kind of demand limited by borrowers’ ability to pay. Instead, borrowers could just make smaller down payments and take on higher debt, allowing home prices to continue their unrestrained rise. Some statistics help illustrate how this occurred. Between 2001 and 2006, median home prices increased by an inflation-adjusted 50 percent, yet at the same time Americans’ income failed to keep up.
Fannie Mae and Freddie Mac were leaders in risky mortgage lending. Fannie and Freddie purchased $1.9 trillion of mortgages made to borrowers with credit scores below 660, one of the definitions of “subprime” used by federal banking regulators. This represents over 54% of all such mortgages purchased between 2002 and 2007.
