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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

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to federal election campaigns. The “Fannie and Freddie political machine resisted
any meaningful regulation using highly improper tactics,” Falcon, who regulated
them from  to , testified. “OFHEO was constantly subjected to malicious
political attacks and efforts of intimidation.”  James Lockhart, the director of
OFHEO and its successor, the Federal Housing Finance Agency, from  through
, testified that he argued for reform from the moment he became director and
that the companies were “allowed to be . . . so politically strong that for many years

they resisted the very legislation that might have saved them.” Former HUD secre-
tary Mel Martinez described to the FCIC “the whole army of lobbyists that continu-
ally paraded in a bipartisan fashion through my offices. . . . It’s pretty amazing the
number of people that were in their employ.” 
In , that army helped secure new regulations allowing the GSEs to count to-
ward their affordable housing goals not just their whole loans but mortgage-related
securities issued by other companies, which the GSEs wanted to purchase as invest-
ments. Still, Congressional Budget Office Director June O’Neill declared in  that
“the goals are not difficult to achieve, and it is not clear how much they have affected
the enterprises’ actions. In fact . . . depository institutions as well as the Federal Hous-
ing Administration devote a larger proportion of their mortgage lending to targeted
borrowers and areas than do the enterprises.” 
Something else was clear: Fannie and Freddie, with their low borrowing costs and
lax capital requirements, were immensely profitable throughout the s. In ,
Fannie had a return on equity of ; Freddie, . That year, Fannie and Freddie
held or guaranteed more than  trillion of mortgages, backed by only . billion
of shareholder equity. 

STRUCTURED FINANCE:
“IT WASN’T REDUCING THE RISK”
While Fannie and Freddie enjoyed a near-monopoly on securitizing fixed-rate mort-
gages that were within their permitted loan limits, in the s the markets began to
securitize many other types of loans, including adjustable-rate mortgages (ARMs)
and other mortgages the GSEs were not eligible or willing to buy. The mechanism
worked the same: an investment bank, such as Lehman Brothers or Morgan Stanley
(or a securities affiliate of a bank), bundled loans from a bank or other lender into se-
curities and sold them to investors, who received investment returns funded by the
principal and interest payments from the loans. Investors held or traded these securi-
ties, which were often more complicated than the GSEs’ basic mortgage-backed secu-
rities; the assets were not just mortgages but equipment leases, credit card debt, auto
loans, and manufactured housing loans. Over time, banks and securities firms used
securitization to mimic banking activities outside the regulatory framework for
banks. For example, where banks traditionally took money from deposits to make
loans and held them until maturity, banks now used money from the capital mar-
kets—often from money market mutual funds—to make loans, packaging them into
securities to sell to investors.