Wow, that's really a compelling case, except that CRA isn't what you think it is, and there's that little problem of Fannie and Freddie dealing with conforming loans. But hey, your story sounds really good.<quoted text>
It's not like banks were forced to make loans to people that couldn't keep up the payments from pressure starting in the Carter administration and steamrolling under the Clinton Justice Dept. It isn't like Fannie Mae and Freddie Mac bought up many of those loans, bundled them and then sold them to investors. And it isn't as though since FM and FM were government secured, they could get lower interest rates and have lower capital requirements. And it isn't as though the Bush administration questioned the amount of the secondary mortgage market that FM and FM held and suggested stronger regulation, warning of "systematic risk for our financial system". And it isn't as though Barney Frank kept insisting FM and FM were "not facing any kind of financial crisis" and complained that the Bush administration was more concerned about financial safety than housing.
Freddie Mac: What it did, what went wrong
By Chris Isidore
January 24, 2012: 3:41 PM ET
...But what the firm did, and the role it and larger rival Fannie Mae played in the housing crisis of the last decade, remain a source of confusion for many Americans.
What do Freddie Mac and Fannie Mae do?
The two of them support the housing industry by providing billions in financing to the mortgage market.
They buy mortgage loans from lenders that conformed to their guidelines, typically safer loans with a large down payment, good credit scores for the borrowers and verification of their income.
Did the two firms create the housing bubble that caused the financial meltdown?
The two firms were major players in the mortgage market, and so the rising home values were at least partly funded by their flow of money.
But the bubble really inflated when Wall Street started buying riskier loans made to borrowers who didn't qualify for a Fannie or Freddie conforming loan. Those loans carried higher interest rates, with relatively little risk for investors while home prices were going up.
Experts say it was the growth of those riskier loans that caused home prices to rise and the bubble to inflate.
"When you bring in 5 million marginal buyers who under normal circumstances would not qualify for a mortgage, that's what ends up driving home prices," said Barry Ritholtz, CEO of Fusion IQ.
"If Freddie and Fannie never existed, we would have had the same problem," he said.
What caused problems for Fannie and Freddie? By the middle of the last decade, Freddie and Fannie had lost their dominant position in the home loan market, as the riskier loans became a larger share of the mortgage market.
So they adjusted their underwriting standards in order to participate in the riskier lending as well.
Even though the riskier loans were a minority of the loans each purchased, because each was so huge, they ended up with a large volume of those loans.
They also were relatively late to the game. That meant they got into riskier loans right before the decline in home prices -- which began in 2006 -- led to a spike in foreclosures. After that, home buyers started to default on loans that were safer, adding to Freddie and Fannie's losses.
"What killed Fannie and Freddie is the housing market went to hell and they were 100% exposed to housing," said Jaret Seiberg, analyst with Guggenheim Washington Research Group....