Mortgage MeltdownInvestors Business DailyJust two months ago, with regards to the mortgage meltdown that government apologists have been eager to lay at the door of moustache-twirling Wall Street types, a research paper answered the question, "Did the Community Reinvestment Act (CRA) Lead to Risky Lending?" with a resounding, "yes, it did." Now, Investors Business Daily tells us that, as the federal government encouraged ever-riskier loans with fewer and fewer safeguards, the most enthusiastic issuers of the mortgage-backed securities that ultimately crashed in spectacular form were (can you guess?) Fannie Mae and Freddie Mac.

IBD's David Hogberg writes:

HUD not only encouraged no down payments but also adopted affordable housing mandates for the government-sponsored en terprises that issue mortgage securities, Fannie Mae and Freddie Mac. Beginning in 1996, the [government-sponsored enterprises] had to make 40% of new loans they financed to borrowers with incomes below the national median.

With lower underwriting standards and a mandate to fulfill, Fannie and Freddie's MBS issuance began to take off. It surged more than 116%, from $342 billion in 1997 to $741 billion in 1998.

Hogberg describes how MBS issues soared even as standards for loans were continuously eased, in compliance with the National Homeownership Strategy.

That strategy was a key piece of government policy through two administrations. Of its implementation, then-President Clinton said in 1995 "[t]he goal of this strategy, to boost home ownership to 67.5 percent by the year 2000, would take us to an all-time high."

The "how" of the boost is a big part of what got us into trouble. Businessweek reported in 2008 that the strategy "promoted paper-thin downpayments and pushed for ways to get lenders to give mortgage loans to first-time buyers with shaky financing and incomes."

While the strategy was no secret, and was continued by the Bush administration, it was sufficiently low-profile that the Department of Housing & Urban Development quietly tried to drop the embarrassing thing down the memory hole in 2007. That didn't work.

Hogberg continues:

By 2000, Fannie and Freddie were financing loans with zero down payments. The private market soon followed. By 2006, 30% of all homebuyers made no down payment. ...

After those changes, Fannie and Freddie's business skyrocketed. Their MBS issues jumped from about $469 billion in 2000 to $1.1 trillion in 2001. The increase continued, rising to $1.5 trillion in 2002 and $2.2 trillion in 2003.

As GSEs' issuance of mortgage securities began to fall in 2004, the private MBS market took up some of the slack. Private issuance rose from $684 billion in 2003 to $980 billion in 2004 to a high of $1.3 trillion in 2005.

Yet private mortgage securities never matched that of the GSEs. From 1995-2009, the private market issued about $6.8 trillion in MBSs vs. $14 trillion for Fannie and Freddie.

I distinctly remember "no-doc" loans being a big deal during those years, too. A friend of mine took out more than one mortgage during the National Homeownership Strategy years without offering a single page of evidence that the income he claimed bore any resemblance to reality. He "self-certified" in the language of the time, in return for a (very) slightly higher rate. He also admitted to me that his claimed income was complete bullshit. He wasn't the only one, as no-doc loans became known as "liar loans" and are now essentially unavailable.

This was a result of federal government policy to promote home ownership as a good in itself without regard to the financial ability to pay for a home. Fannie Mae and Freddie Mac took that policy and turned mortgage-backed securities into the equivalent of torpedoes fired at the U.S. economy.