Loosely regulated subprime lenders and investment firms that bundled loans into private-label mortgage-backed securities — not Fannie Mae, Freddie Mac or banks subject to the Community Reinvestment Act — were the main drivers of the housing boom and bust.
That’s the assertion of a McClatchy Newspapers story published Sunday that examines the emergence of "a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans."
In 2005 and 2006, private-label lenders securitized almost two-thirds of all U.S. mortgages, the story noted, surpassing Fannie and Freddie for the first time. In 2006, more than 84 percent of subprime mortgages were made by private-label lenders, the story said, citing Federal Reserve data.
During the boom, Fannie and Freddie employed tighter underwriting standards than many private-label lenders, many of whom have since gone out of business. According to a study by researchers at UC Irvine, accounting and management scandals forced the government-sponsored entities, or GSEs, to cut back on purchases and guarantees of mortgages beginning in 2003, clearing the way for dramatic growth in securitizations by "aggresive" private-label lenders.
Today, Fannie and Freddie are once again securitizing the vast majority of mortgages because investors shun those that lack the guarantees provided by the government-chartered companies.
The story also questioned claims that the Community Reinvestment Act — which requires federally regulated banks and financial institutions to demonstrate that they are lending money in underserved communities — contributed to the subprime meltdown or put pressure on Fannie and Freddie to purchase risky loans.
Most loans made by lenders governed by the Act have not been higher-priced loans, and the law has "increased the volume of responsible lending to low- and moderate-income households," Janet Yellen, president of the Federal Reserve Bank of San Francisco, said in a speech in March.
The National Community Reinvestment Coalition and more than two dozen civil rights and housing groups today issued a statement calling attacks on the Act "an attempt to deflect attention away from the real problem affecting our financial system" — failed regulatory policy and oversight.
Media Matters, a group that claims to monitor, analyze and correct "conservative misinformation in the U.S. media," has also challenged claims that the Community Reinvestment Act contributed to the subprime meltdown.
But if Fannie and Freddie maintained relatively conservative underwriting standards for mortgages they securitized, guaranteed and sold to investors, both companies also bought as investments billions in mortgage-backed securities issued by private-label lenders, in part to meet affordable housing goals set by Congress.
In August, Freddie held about $207 billion in private-label mortgage-backed securities in its $761 billion investment portfolio, while Fannie had $104 billion in such investments in its $760 billion portfolio. While those investments have contributed to mounting losses at both companies, they represented only a small fraction of securitizations by private-label lenders.
Now that they are under government control, Fannie and Freddie are expected to step up such investments as part of efforts to unfreeze credit markets.
Bloomberg News reported today that Fannie and Freddie — which were placed under government conservatorship Sept. 7 — have notified bond traders that each has been ordered to invest $20 billion a month in existing subprime, alt-A and nonperforming prime mortgage-backed securities.
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