Government-Sponsored Meltdown

Great article by Peter Wallison from the 7-12-11 WSJ. It had the subtitle: "Fannie Mae did not contribute 'marginally' to the financial crisis. It was the source of the declining mortgage underwriting standards that brought down the system." Excerpts:

"With the publication of "Reckless Endangerment," a new book about the causes of the crisis, this story is beginning to unravel. The authors, Gretchen Morgenson, a business reporter and commentator for the New York Times, and Josh Rosner, a financial analyst, make clear that it was Fannie Mae and the government housing policies it supported, pursued and exploited that brought the financial system to a halt in 2008.

After James A. Johnson, a Democratic political operative and former aide to Walter Mondale, became chairman of Fannie Mae in 1991, they note, it became a political powerhouse, intimidating and suborning Congress and tying itself closely to the Clinton administration's support for the low-income lending program called "affordable housing."

This program required subprime and other risky lending, but it solidified Fannie's support among Democrats and some Republicans in Congress, and enabled the agency to resist privatization or significant regulation until 2008. "Under Johnson," write Ms. Morgenson and Mr. Rosner, "Fannie Mae led the way in encouraging loose lending practices among banks whose loans the company bought. . . . Johnson led both the private and public sectors down a path that led directly to the financial crisis of 2008.""

"...Fannie Mae was the source of the decline in mortgage underwriting standards..."

"by 2008 half of all mortgages in the U.S. (27 million loans) were subprime or otherwise risky, and that 12 million of these loans were on the books of the GSEs."

"...two-thirds of these subprime or risky loans were on the books of government agencies or firms subject to government control."