More than two years since this country plunged into a financial crisis, countless Americans have lost their businesses, homes, savings and jobs. I am a native of Baltimore, but my current home is Nevada, which remains one of the hardest hit places in the country. So when I was asked to serve on the Financial Crisis Inquiry Commission — which was tasked to explain what triggered the crisis — I accepted. Having spent part of my career on Wall Street, I was eager to have a chance to research and analyze the fundamental causes of the crisis.
Last month, the commission released its report (available at http://fcic.gov/), which draws on the evidence collected through 19 days of public hearings, interviews with more than 700 witnesses and review of millions of pages of documents. As part of its mandate, the commission closely examined whether Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs), caused the crisis.
We found that the $5 trillion mortgage exposure and market position of the GSEs contributed to the financial meltdown. But, contrary to conventional wisdom in certain inside-the-Beltway circles, Fannie and Freddie were not a primary cause of the crisis.
Fannie and Freddie, created with a public mission, contributed to the catastrophe through a flawed business model as publicly traded corporations with the implicit backing of and subsidies from the federal government. In 2005 and 2006, they ramped up their purchase and guarantee of risky mortgages, just as the housing market was peaking, in order to meet stock market analysts' and investors' expectations for growth. They sought to regain market share and to ensure generous compensation for executives and employees.
Fannie and Freddie helped inflate the housing bubble, but they followed rather than led Wall Street and other lenders. Their market share shrank from 57 percent of all mortgages purchased in 2003 down to 37 percent by 2006. Non-GSE market share in "risky" mortgages spiked from 20 percent of the market in 2002 to nearly 55 percent by 2005.
The commission concluded that Fannie Mae sought to participate in this market to meet the growth goals expected on Wall Street, which in turn meant higher bonuses and equity rewards for Fannie Mae executives. In addition, Fannie and Freddie feared that their largest customers (Countrywide, for example) would stop doing business with them in safer, more traditional mortgages unless the GSEs would also accommodate them in the nonprime-mortgage sector, which included subprime and other risky loans.
Fannie Mae executives initially decided to "stay the course" on exposure to nonprime mortgages. Internal documents, however, show that Fannie instead increased its purchase and guarantee of risky loans in 2005. Then, in 2006, Fannie made a conscious decision to "meet the market where the market is," in large measure by increasing its purchase and guarantee of nonprime loans. The evidence shows that Fannie Mae made a business decision to participate in risky mortgages. It made that choice even though it could have opted out by law, by establishing with regulators that its mandated housing goals should be re-evaluated in order to avoid undue risks.
The commission found substantial losses after reviewing more than 25 million loans purchased or guaranteed by the GSEs or the private sector, but delinquency rates of Fannie's and Freddie's loans were substantially lower than those securitized by Wall Street firms and others. Fannie and Freddie mortgages, by the end of 2008, were far less likely to be seriously delinquent than were other mortgages. For example, for borrowers with credit scores below 660, the difference was significant: 6.2 percent versus 28.3 percent.
The commission also concluded that Fannie and Freddie mortgage securities essentially maintained their value throughout the crisis due to their implicit government guarantee. Thus, they did not contribute to the significant losses that were central to the crisis.
Nonetheless, these GSEs failed us in this respect: as a nation, we set aggressive homeownership goals with the desire to extend credit to families previously denied access to the financial markets. Yet the government clearly neglected to ensure that the philosophy of opportunity was grounded in practical reality.
So, while it is clear Fannie Mae and Freddie Mac contributed to the financial crisis, they did not cause it. They are in dire need of reform, and I hope the president and Congress use the commission's findings as a guidepost as they look to restructure these entities and refashion their role in the housing market.
Heather Murren, a Baltimore native, was a member of the Financial Crisis Inquiry Commission. A former equity analyst and managing director on Wall Street, she co-founded the Nevada Cancer Institute and served as its CEO and chairman.