Maybe Fannie Mae Did Contribute To The Crisis

See The crazy housing market by Russ Roberts at Cafe Hayek.

Beginning around the year 2000, there was a dramatic increase in the dollar value of mortgage backed securities issued by Fannie Mae. The increase appears, as a chart shows, to have started before the private sector and was much bigger.

It even started sooner than the year 2000. "But between 1995 and 1998, Freddie and Fannie’s issuance of MBS more than doubled. There is also a big percentage increase in the private label MBS between 1995 and 1998, but it is dwarfed by Fannie and Freddie."

Here are some other key experts:

"...don’t get fooled when Krugman and DeLong tell you that Fannie and Freddie were “small players” after 2003 or that they withdrew from the market. As you can see, they were still massively large by any historical standard and still almost as large as the private label MBS. Between 2004 and 2006, they still issued over two TRILLION dollars worth of MBS."

"The underlying cause is whatever made it possible for Fannie and Freddie to issue increasing amounts of MBS post-1995."

"So what allowed Fannie and Freddie to expand? One answer, and it might be the only answer you need, is that starting in the mid-1990s, Fannie and Freddie were encouraged by the President and Congress to relax their previous standards for which mortgages they could buy. They were encouraged to buy loans from low-income individuals and the percentage of their business accounted for by such borrowers was required to grow steadily. See the two charts at the end of this HUD paper, written in 2001. Fannie and Freddie started buying loans with low down payments and loans with incomplete documentation."

"So if you want to know why housing prices accelerated in 1997 and then racheted upward once more in the early 2000s, I would focus on government’s bipartisan attempt to engineer an increase in home ownership that ratcheted upward in the 1990′s and extended through the 2000′s. Then add the implicit backstopping of the creditors from large financial institutions. Large financial institutions that lent money to others to buy AAA-rated MBS were very leveraged. This leveraging allowed enormous sums of money to flow into MBS."