Peter Wallison at AEI has out an attempted take-down of economist Paul Krugman ( "Fannie, Freddie and You" , 7/14/2008), and pretty much anyone else who thinks Freddie and Fannie's role in this crisis during the 2005-2007 period was irrelevant compared to private actors. It's provocative stuff, and reasonably nuanced. At the same time, Wallison introduce sexpands a theory for why the two firms acted so destructively: While they were fighting for share, they were mostly trying to impress Democratic overseers post-account scandals. Call it the tail-wagging model of mortgage market implosion. Why did the GSEs follow this disastrous course? One explanation--advanced by Lockhart--is that Fannie and Freddie were competing for market share with the private label securitizers and had to purchase substantial amounts of subprime mortgages in order to retain their position in a growing market. Fannie and Freddie's explanation is that they were the victims of excessively stringent HUD affordable housing goals. Neither of these explanations is plausible. For many years before 2004, Fannie and Freddie had followed relatively prudent investment strategies, even with respect to affordable housing, but they suddenly changed their approach in 2005. Freddie Mac's report, for example, shows that the percentage of mortgages in its portfolio with subprime characteristics rose rapidly after 2004. In addition, Freddie Mac's disclosures indicate that of the lo ...
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Peter Wallison at AEI has out an attempted take-down of economist Paul Krugman ( "Fannie, Freddie and You" , 7/14/2008), and pretty much anyone else who thinks Freddie and Fannie's role in this crisis during the 2005-2007 period was irrelevant compared to private actors. It's provocative stuff, and reasonably nuanced. At the same time, Wallison introduce sexpands a theory for why the two firms acted so destructively: While they were fighting for share, they were mostly trying to impress Democratic overseers post-account scandals. Call it the tail-wagging model of mortgage market implosion. Why did the GSEs follow this disastrous course? One explanation--advanced by Lockhart--is that Fannie and Freddie were competing for market share with the private label securitizers and had to purchase substantial amounts of subprime mortgages in order to retain their position in a growing market. Fannie and Freddie's explanation is that they were the victims of excessively stringent HUD affordable housing goals. Neither of these explanations is plausible. For many years before 2004, Fannie and Freddie had followed relatively prudent investment strategies, even with respect to affordable housing, but they suddenly changed their approach in 2005. Freddie Mac's report, for example, shows that the percentage of mortgages in its portfolio with subprime characteristics rose rapidly after 2004. In addition, Freddie Mac's disclosures indicate that of the lo ...