Suek, you really have missed a chance to understand the underlying causes of the housing crisis by instead insisting on finding irrelevant articles citing lobbying relationships between the GSEs and the Democrats. Truly sad.

BrianE, just to clarify that Post story. The GSEs do not issue non-conforming loans, including jumbo loans and subprime loans. What the article is referring to are insurance wrappers they issued starting a few years back on subprime loans. This liability was something less than $10B on balance sheet debt of $800B, so it was not large. Moreover, it was written off 9 months ago. The foreclosure rates on FNM and FRE loans is one-half that of the private sector banks on the non-conforming side. Again, the problem is much worse amongst private sector banks but you keep harping on the GSEs. Bear already received a tax-payer financed bailout more egregous than FNM and FRE. Lehman and Washington Mutual may be bankrupt this weekend, and likely will see a similar bailout–the Treasury has agreed to buy these banks’ debt using tax payer money. So why do you keep focusing on the GSEs only? It is ignorance or partisanship or both.

http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html

In January 2007, as years of loose mortgage lending were about to send the nation’s housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.

Discussing the company’s successes, Mudd said one of Fannie Mae’s achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step “toward optimizing our business.”

A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

Since then, Fannie Mae’s exposure to loosely underwritten mortgages has produced billions of dollars of losses and sent its stock price plummeting, prompting the federal government to prepare for a potential taxpayer bailout of the company. This month, Fannie Mae reported that loans from 2006 and 2007 accounted for almost 60 percent of its second-quarter credit losses.

Fannie Mae documents from the period, obtained by The Washington Post, paint a picture of a company with the dual incentives of fostering affordable housing and making money, and of one caught between the imperatives of increasing its market share while avoiding excessive risk. In a bid to juggle these demands, the company’s executives took on risks they either misunderstood or unduly minimized.

Fannie Mae aimed to benefit from subprime loans and expand the market for them — and hoped to pass much of the risk on to others, documents show. Along with subprime loans, which were typically issued to borrowers with blemished credit, the company targeted so-called Alt-A loans, which were often made with no verification of the borrower’s income.

“By entering new markets — especially Alt-A and subprime — and guaranteeing more of our customers’ products at market prices, we met our goal of increasing market share from 22 to 25 percent,” Mudd wrote in a 2006 year-end report to the Fannie Mae board dated Jan. 3, 2007.

In other internal documents, there was a common refrain: One of Fannie Mae’s objectives for 2006 was to “increase our penetration into subprime.”

In an interview, Fannie Mae Executive Vice President Thomas A. Lund said the company pursued the purchase of subprime loans in 2006 and 2007 at the request of lenders, who wanted Fannie Mae to take the loans off their books. He said Fannie Mae hoped to bring higher standards to the market, and he added that the loans helped the company in its struggle to meet goals the government had set for Fannie Mae’s advancement of affordable housing.

FM was in Alt-A loans and taking substanial risk. My problem is that people assumed the government would back the loans, so investors ignored the increased risk, thinking they could milk the extra return.

Testimony by Alan Greespan before the Senate Banking Committee 2004:
Given their history of innovation in mortgage-backed securities, why do Fannie and Freddie now generate such substantial concern? The unease relates mainly to the scale and growth of the mortgage-related asset portfolios held on their balance sheets. That growth has been facilitated, as least in part, by a perceived special advantage of these institutions that keeps normal market restraints from being fully effective.
The GSEs’ special advantage arises because, despite the explicit statement on the prospectus to GSE debentures that they are not backed by the full faith and credit of the U.S. government, most investors have apparently concluded that during a crisis the federal government will prevent the GSEs from defaulting on their debt. An implicit guarantee is thus created not by the Congress but by the willingness of investors to accept a lower rate of interest on GSE debt than they would otherwise require in the absence of federal sponsorship.

http://www.federalreserve.gov/boarddocs/testimony/2004/20040224/default.htm

http://wolfhowling.blogspot.com/2008/09/dining-at-trough-obama-palin-compared.html

Council nominations are up at the new Watcher of Weasels. Waiting for the takeover – The Glittering Eye questions the timing of the takeovers of Freddie Mac and Fannie Mae and observes that the citizenry is getting hit twice by the bailout. Beneath th…