A Good NYT Article (For Once)

Here's a good New York Times article on Fannie and Freddie. One reason I'm posting the link is so I'll have easy access to it. It's basically the same one that Looney Fundamentalist posted on his site, only it's a bit longer (or it seemed that way to me).

"Pressured to Take More Risk, Fannie Hit a Tipping Point By CHARLES DUHIGGA--decision, made under pressure from Congress and investors, to steer Fannie Mae into dangerous corners of the mortgage market proved to be disastrous."

It puts a lot of the blame on Democratic politicians, though it points out that the Bush Administration also played some role: "James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans."

Here are some quotes:

"When the mortgage giant Fannie Mae recruited Daniel H. Mudd, he told a friend he wanted to work for an altruistic business. Already a decorated marine and a successful executive, he wanted to be a role model to his four children — just as his father, the television journalist Roger Mudd, had been to him.

"Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way.
But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

"So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives."

"Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations."

Was taxpayer money used to guarantee those bad loans? I thought Sarah Palin was making a gaffe when she claimed Fannie and Freddie use taxpayer money! Such is the conventional wisdom, in any case.

But the article shows that a variety of factors led to the crisis. There was greed, since people at Fannie and Freddie made money off of selling mortgages. And there was touchy-feely liberalism, as Congress and regulators pressured the companies to steer loans to low-income people.