Page 532 - untitled

Peter J. Wallison 503

Freddie were major buyers of NTMs well before Wall Street fi rms and the subprime
lenders who came to dominate the business entered the subprime PMBS market
in any signifi cant way. Moreover, the GSEs did not (indeed, could not) appreciably
increase their purchases of NTMs during the years 2005 and 2006, when they
had lost market share to the real PMBS issuers, Countrywide and other subprime
lenders.
Th e following discussion addresses each of the claims about the GSEs’
motives in turn, and in the end will show that the only plausible motive for their
actions was their eff ort to comply with HUD’s AH goals.

Did the GSEs acquire NTMs to “compete for market share” with
Wall Street or others?
Th e idea that Fannie and Freddie were newcomers to the purchase of NTMs
between 2004 and 2007, and reduced their underwriting standards so they could
compete for market share with Wall Street or others, is wrong. As shown in Table 7,
the GSEs’ acquisition of subprime loans and other NTMs began in the 1990s, when
they fi rst became subject to the AH goals. Research shows that, in contravention
of their earlier standards, the GSEs began to acquire high loan-to-value (LTV)
mortgages in 1994, shortly aft er the enactment of the GSE Act and the imposition
of the AH goals, and by 2001—before the PMBS market reached $100 billion in
annual issuances—the GSEs had already acquired at least $700 billion in NTMs,
104
including over $400 billion in subprime loans. Far from following Wall Street or
anyone else into subprime loans between 2004 and 2007, the GSEs had become the
largest buyers of subprime and other NTMs many years before the PMBS market
began to develop. Given these facts, it would be more accurate to say that Wall Street
and the subprime lenders who later came to dominate the PMBS market followed
the GSEs into subprime lending. Table 7 does not show any signifi cant increase in
the GSEs’ acquisition of NTMs from 2004 to 2007, and the amount of subprime
PMBS they acquired during this period actually decreased. Th is is consistent with
the fact—outlined below—that the GSEs did not make any special eff ort to compete
for market share during these years.

104 Pinto, “Government Housing Policies in the Lead-up to the Financial Crisis: A Forensic Study,” Chart
52, p.148, http://www.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-Pinto-102110.pdf.