With the release of Peter Wallison’s new book, Hidden in Plain Sight, I suspect the debates over the role of Fannie Mae and Freddie Mac in the financial crisis may heat up again (I suspect Joe Nocera is working up a nasty review). Anyone interested in the financial crisis should read this book. It is extensively documented and well-written. While the narrative is similar to other of Wallison’s writings, he musters far more evidence for his case here. The amount of contemporaneous material from advocates, HUD and the GSEs (Fannie and Freddie) is impressive.

I’ve generally been on the fence about the housing goals, as I have felt that GSE leverage was a far greater issue. The book leaves me more sympathetic to Wallison’s argument. For the best counter-argument regarding the goals, see John Weicher’s paper on the issue (unlike Nocera, Weicher includes facts and analysis). 

I do think Wallison too easily dismisses other drivers of the crisis, such as easy monetary policy, but his general points are well proven. Those points are: 1) there were a lot more toxic loans in the system than generally believed; 2) government entities (FHA, GSEs) held far greater amounts of those toxic loans than generally believed; and 3) Fannie/​Freddie purchased much of those toxic loans due to their housing goals, not as a drive for greater market share.

Having been closely involved in or monitoring GSE oversight since about 2001, let me add some of my own recollections. As a staffer on the Senate Banking Committee when HUD proposed to increase the housing goals in 2004, I was extensively lobbied by Fannie and Freddie on the goals. Whether they can be believed or not, at the time, both claimed that the proposed goals would endanger their business and result in substantial losses. I would characterize the GSE attitude toward the goals in 2004 as one of near-panic (not that the GSEs were immune to exaggeration). I also recall a meeting with Freddie CEO Dick Syron (either in 2006 or 2007) in which he claimed the goals were killing the company and that he needed political cover to improve lending standards.

I also recall countless meetings with housing advocates beginning in at least 2001 in which the argument was presented that the GSEs should be pushed into subprime in order to “clean up” that market. I made a phone call to the GSEs’ then-regulator OFEHO in 2003 asking what all the “other” was in the reports of GSE purchase of mortgage-related securities. 

Imagine my surprise when told “other” was subprime private label securities. Perhaps more shocking was when this senior OFHEO executive told me what a great thing it was, as it was providing liquidity to the subprime market. Not only was the GSEs’ safety and soundness regulator aware the GSEs were driving subprime, this same regulator thought it was “great.”

There were a lot of contributors to the financial crisis. One of those was the role Fannie Mae and Freddie Mac. While the extent of that role can be debated, what I saw first hand before the crisis was 1) a broad Washington consensus that the GSEs should drive the subprime market and 2) the GSEs were not trying to drive that market but rather policymakers were nudging them in that direction. 

Perhaps that experience made me more open to Wallison’s arguments, you can and should judge for yourself (after actually reading the book).