Mortgage giants Fannie Mae and Freddie Mac were not the lead culprits that brought the financial and housing sectors to their knees, as many politicians and critics claim.

 

The two government-chartered mortgage underwriters played second fiddle to Wall Street, which pushed lenders to make risky, subprime loans and other questionable mortgages, according to data from the Federal Housing Finance Agency, which oversees Fannie and Freddie.

 

Mortgages financed by private banks were 4.5 times more likely from 2001-2008 to be seriously delinquent than mortgages backed by Fannie and Freddie. This rate is based on the fact that 6% of Fannie and Freddie-sponsored loans made during that span were 90 days late at some point in their history, while about 27% of loans that Wall Street folded into mortgage-backed investments were at least 90 days late at some point.

 

Only 16% of Fannie and Freddie loans were made to borrowers with FICO credit scores of 660 or less, while 52% of bank loans were made to the same low credit score group. Only 18% of Fannie and Freddie loans were for more than 80% of the value of the home, whereas 31% of bank loans fell into this category. In addition, Fannie and Freddie loans were overwhelmingly at fixed rates, with only 12% using adjustable rates. Banks, on the other hand, used adjustable rates for 70% of their mortgage loans.

 

“The idea that they were leading this charge is just absurd,” Guy Cecala, publisher of the trade publication, Inside Mortgage Finance, told The Center for Public Integrity. “Fannie and Freddie have always had the tightest underwriting on earth. … They were opposite of subprime.”

 

Wall Street’s aggressiveness on the mortgage front, and subsequent fallout, has not cowed large financial institutions from pursuing new opportunities.

 

As the Obama administration deliberates over what to do with the crippled Fannie and Freddie, Wells Fargo and some other large banks are suggesting to Washington that they take over some of the duties belonging to the government-chartered enterprises—like bundling individual mortgages into securities—but only if the federal government guarantees Wall Street’s decisions, however risky they may be, again.

-Noel Brinkerhoff

 

FactWatch: Fannie and Freddie Were Followers, Not Leaders, In Mortgage Frenzy (by Michael Hudson, Center for Public Integrity)

Data on the Risk Characteristics and Performance of Single-Family Mortgages Originated from 2001 through 2008 and Financed in the Secondary Market (Federal Housing Finance Agency) (pdf)

Banks Want Pieces of Fannie-Freddie Pie (by Louise Story, New York Times)