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Another Conservative Myth Busted -- Did Fannie and Freddie Really Cause the Financial Sector Meltdown?

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Another Big Lie circulating among conservatives is the belief that the Wall Street meltdown was caused by Fannie Mae and Freddie Mac, the Community Reinvestment Act (CRA), Rep. Barney Frank or some combination thereof. David Brooks and George Will blame liberal compassion for the meltdown in the form of a desire to increase homeownership among the poor and minorities. One never knew compassion was so insidious and, outside of political circles, the quality was once considered a virtue. It seems only conservatives realize its true sinister nature. These myths have been debunked, but it bears repeating given the extent that conservatives cling to such false narratives.

Subprime lending surged from 2004 to 2006 during the height of the housing bubble. According to Kimberly Amadeo in an article titled "Did Freddie and Fannie Cause the Housing Crisis":

"Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. Even so, by 2007 only 17 percent of their total portfolio was either either subprime or Alt-A loans. Due to regulations, their percentage of these loans are actually better than many banks."

As David Goldstein and Kevin G. Hall write in the McClatchy Newspapers:

"During those same explosive three years, private investment banks -- not Fannie and Freddie -- dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data."

According to David M. Abromowitz and David Min writing for the Center of American Progress:

"If the conservative view was correct, one would expect to see mortgages originated for Fannie and Freddie securitization, as well as those originated for purposes of CRA, to default at higher rates, since these were the loans directly subject to affordable housing policies. In fact, we see quite the opposite, as these loans have performed exponentially better than those originated for private securitization, which the FCIC Republicans ignore."

The fact that the housing bubble occurred contemporaneously in other countries such as Iceland, Ireland, and the United Kingdom also dispels the conservative myth.

In another example of historical revisionism, conservatives blame Democratic Rep. Barney Frank for derailing Bush's attempts to reform Freddie and Fannie. After all, Rep. Frank told The New York Times in September of 2003 that Fannie Mae and Freddie Mac's problems were "exaggerated." However, Republicans controlled the House in that year with the infamous Tom "the Hammer" Delay the majority leader. Rep. Frank had one vote and lacked the power to block any such reform. Republicans could have passed any bill they liked with a simple majority. They held the committee chairs, as well:

"In 2003 neither Fannie or Freddie looked like they were in much trouble. AIG, Goldman-Sachs and Merrill-Lynch all looked like they were in good shape too."

Rep. Frank wrote:

"Under Republican President George W. Bush, many federal agencies turned a blind eye to activities which would later precipitate the global financial meltdown. The Securities and Exchange Commission decided to allow the nation's largest financial institutions to "self-regulate;" the Federal Reserve under Alan Greenspan declined to use its power to regulate subprime mortgages; the Comptroller of the Currency decided to preempt state consumer laws on subprime mortgages."

This last point referencing the obscure Office of the Comptroller of the Currency is important because President Bush actually made it illegal for state attorneys general to crackdown on predatory lending by mortgage lenders. According to former Gov. Elliot Spitzer in a editorial in the Washington Post: "The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules."

Regarding the CRA, the Financial Crisis Inquiry Commission established by Congress concluded that the 1977 law designed to prevent redlining was "not a significant factor in subprime lending or the crisis." Ben Bernanke opined a similar statement two years earlier. Also, defaults were concentrated in the suburbs and not in the inner cities which were the domain of the CRA. A McClatchy report "found that more than 84 percent of the subprime mortgages in 2006 were issued by private lenders" not subject to the law. And McClatchy found that out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations."

The myth that Fannie and Freddie are responsible for the Great Recession is useful to conservatives because it combines several of their shibboleths like the evils of Big Government and the idea that "compassion" causes more harm than good. Liberal compassion is inimical to their idea that only the pursuit of self-interest serves the greater good. Thus, Big Government targets are a giant pinata that conservatives can not resist flailing at. However, as usual the facts have a liberal bias. "As the FCIC staff reports demonstrate fairly conclusively, it was the shadow banking system's unregulated private securitization of mortgages that caused the financial crisis, not affordable housing policies."

Another conservative myth busted!