The Agenda

Fannie and Freddie and the Subprime Market

Ezra Klein has written a characteristically excellent and thorough post on how Fannie and Freddie fit into the mortgage crisis. Naturally, I have a few small disagreements.

Their failure was not, as some would have it, the cause of the mortgage crisis, or even close. For one thing, only about 2 percent of their portfolio was subprime. For another, they didn’t start backstopping the subprime market till long after it had taken off. And for a third, their greatest losses actually were in non-subprime loans.

While I don’t think that Fannie and Freddie were the sole cause of the mortgage crisis, I do think, following Raghuram Rajan, that a deeper cause was populist credit expansion, and Fannie and Freddie played a vitally important role. In Rajan’s forthcoming book Fault Lines, which, I should stress, is the best and most lucid book on the crisis I’ve read so far, he cites research by Edward Pinto that casts doubt on the notion that Fannie and Freddie were not heavily involved in the subprime market.

It is not easy to get a sense of the true magnitude of subprime lending by Fannie, Freddie, and the FHA, partly because, as Edward Pinto, a former chief credit officer of Fannie Mae, has argued, many loans on each of these entities’ books were subprime in nature but not classified as such. For instance, Fannie Mae classified a loan as subprime only if the originator itself specialized in the subprime business. Many risky loans to low-credit-quality borrowers thus escaped classification as subprime or Alt-A loans. When the loans are appropriately classified, Pinto finds that subprime lending alone (including financing through the purchase of mortgage-backed securities) by the mortgage giants and the FHA started at about $85 billion in 1997 and went up to $446 billion in 2003, after which it stabilized between $300 and $400 billion a year until 2007, the last year of his study. On average, these entities accounted for 54 percent of the market across the years, with a high of 70 percent in 2007. He estimates that in June 2008, the mortgage giants, the FHA, and various other government programs were exposed to about $2.7 trillion in subprime and Alt-A loans, approximately 59 percent of total loans in these categories. It is very difficult to reach any other conclusion than that this was a market driven largely by government, or government-influenced, money.

To be sure, Ezra is talking about Fannie and Freddie, and not Fannie, Freddie, and the FHA, but my sense is that (a) the FHA is a key part of the puzzle and that (b) Pinto’s analysis points to a far larger role for Fannie and Freddie in the crisis regardless.

That said, I think Ezra is very right to suggest that the real issue is the unsustainably massive government subsidy for home ownership, embedded in the tax code but also in the structure of the GSEs. No one really wants to touch it, including conservative Republicans who are essentially passing the buck to the Obama administration. And experience tells us that the Obama administration will not take the necessary political risks.

Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

Most Popular

Politics & Policy

The Great Misdirection

The House Democrats are frustrated, very frustrated. They’ve gotten themselves entangled in procedural disputes with the Trump administration that no one particularly cares about and that might be litigated for a very long time. A Washington Post report over the weekend spelled out how stymied Democrats ... Read More

Australia’s Voters Reject Leftist Ideas

Hell hath no fury greater than left-wingers who lose an election in a surprise upset. Think Brexit in 2016. Think Trump’s victory the same year. Now add Australia. Conservative prime minister Scott Morrison shocked pollsters and pundits alike with his victory on Saturday, and the reaction has been brutal ... Read More
NR Webathon

We’ve Had Bill Barr’s Back

One of the more dismaying features of the national political debate lately is how casually and cynically Attorney General Bill Barr has been smeared. He is routinely compared to Roy Cohn on a cable-TV program that prides itself on assembling the most thoughtful and plugged-in political analysts and ... Read More
Film & TV

Game of Thrones: A Father’s Legacy Endures

Warning! If you don't want to read any spoilers from last night's series finale of Game of Thrones, stop reading. Right now. There is a lot to unpack about the Thrones finale, and I fully understand many of the criticisms I read on Twitter and elsewhere. Yes, the show was compressed. Yes, there were moments ... Read More

Cold Brew’s Insidious Hegemony

Soon, many parts of the United States will be unbearably hot. Texans and Arizonans will be able to bake cookies on their car dashboards; the garbage on the streets of New York will be especially pungent; Washington will not only figuratively be a swamp. And all across America, coffee consumers will turn their ... Read More

The Merit of Merit-Based Immigration

Having chain-migrated his way into the White House and a little bit of political power, Donald Trump’s son-in-law is shopping around an immigration plan. And if you can get past the hilarious juxtaposition of the words “merit-based” and “Jared Kushner,” it’s a pretty good one. As things stand, the ... Read More