American Enterprise Institute economist Peter Wallison blames Fannie Mae for the financial crisis. He claims that NINJA loans and the collapse of lending standards, were caused by the government’s desire to extend home ownership into poorer communities, aided and abetted by the two privately owned, publicly backed government sponsored enterprises (GSEs). According to Tea Party supporters “government entities like Fannie Mae and Freddie Mac occupied the epicenter of the housing bubble crisis.” The US Securities and Exchange Commission (SEC) seems to agree. Last Friday, the usually cautious organization brought fraud charges against six top executives at Fannie Mae and Freddie Mac, accusing them of understating their exposure to subprime mortgages to potential investors.
Fannie Mae was originally just a government agency whose task was to stimulate home ownership. Created during the Great Depression, it bought bundles of mortgages from local banks and sold them on, freeing bank capital so that it could be lent again. Fannie Mae single-handedly invented mortgage securitization decades ago by creating a secondary market in home mortgages. For most of its existence, it operated under very strict rules, only allowed to repurchase the highest quality mortgages. Indeed, one of the original definitions of sub prime was loans that Fannie Mae could not touch.