Almost from day one, there have been rumors that the Financial Crisis Inquiry Commission, which the government established in the spring of 2009, was plagued by infighting between Democrats and Republicans. Lo and behold, on Dec. 15, defecting Republicans—former Calif. Rep. Bill Thomas; Keith Hennessey, who served on President Bush's National Economic Council; Douglas Holtz-Eakin, the former head of the Congressional Budget Office; and Peter Wallison, a fellow at the conservative American Enterprise Institute—broke ranks and released what they describe as their "preliminary findings and conclusions." This "primer" (in a blog, Wallison denied that it was either a "report" or a "response") put blame just where many Republicans would like to see it: on the government's push for homeownership.
"There were three important ways that the government pushed investors toward investing in mortgage debt," the authors write.
First, the regulatory capital requirements associated with mortgage debt were lower than for other investments. Second, the government encouraged the private market to extend credit to previously underserved borrowers through a combination of legislation, regulation and moral suasion. Third, and most important, during the bubble's expansion, the largest investors in the mortgage market … Fannie Mae and Freddie Mac, were instruments of U.S. government housing policy.
As a result of government-established affordable-housing goals starting in 1993, the authors argue, Fannie and Freddie had to "invest in mortgages of increasingly lower quality and higher risk to the taxpayer."
This narrative isn't completely wrong—but it is shockingly incomplete, which makes it, in the end, a ludicrous distortion of what happened. Yes, the government did lower the regulatory capital requirements for mortgages. But that didn't happen in a vacuum. Regulators did so in the face of fierce lobbying from the private sector. And while the government certainly did encourage the private market to extend credit, companies like Countrywide and Ameriquest didn't make mortgages—and Wall Street firms didn't package those mortgages and sell them off to investors—because the government was holding a gun to their heads. The mortgage companies and securities firms did what they did for one overwhelming reason: There was a huge amount of money to be made. As employees of Washington Mutual, which was one of the most prolific subprime lenders, rapped at a retreat in Hawaii in 2006: "I like big bucks and I cannot lie."
As for the implication that subprime lending began with Fannie and Freddie and resulted from the government's affordable housing goals, that's simply false. Subprime lending began in the 1990s with a group of other, nongovernment-affiliated companies more aggressive than Fannie and Freddie that sold the mortgages they made to Wall Street. These mortgages, for the most part, had nothing to do with putting people in homes. They were refinancings, not purchase loans, and they allowed people to use their homes as ATMs. Homeownership was just a convenient fig leaf—albeit one embraced by lenders and politicians alike.
For most of the 1990s, Fannie's and Freddie's affordable-housing goals required them to buy a certain percentage of mortgages made to families with a median income level. That was hardly onerous or risky, and anyway Fannie executives, who were far more preoccupied with return to shareholders, used to joke about the ways they neutered the affordable-housing rules. Indeed, there was an odd alliance between housing advocates and right-wing Republicans, both of whom complained—legitimately—that Fannie and Freddie weren't really doing anything to help homeownership. For Republicans to ignore now those earlier contentions in order to claim that it was the housing goals that gave birth to subprime lending is utterly dishonest.