What caused Fannie Mae and Freddie Mac's problems

In the finger pointing to assign blame for the housing and financial collapse of 2007 and 2008 Republicans - being in the difficult position of having been in control of government for the decade leading up to the collapse - have tried to deflect blame for the crisis onto Freddie Mac and Fannie Mae, the two gigantic Corporations that enjoy a bizarre quasi governmental status.  Republicans point specifically at changes made back in the Clinton administration to try to encourage more loans to low income folks.

As I have contemplated the Republican arguments about Fannie Mae and Freddie Mac's culpability, I realized I was pretty fuzzy about the exact nature of Fannie Mae and Freddie Mac, so I went out to gather some basic information.  On the assumption others may also be fuzzy about what sort of beast Fannie and Freddie are, here is a quick overview.

Fanny Mae was created in 1938 (Chapter 13, Feb 3, 1938) as an supplement to the FHA and FDIC which were created in 1934 (PL 84-345 - Chapter 847, 6/28/34).  The 1934 Federal Housing Act was in response to the fact thousands of banks had gone out of business early in the Depression resulting in lots of people losing lots of money they had in the banks.  So people were loath to put their money in banks, and the banks were loath to lend what money they had.  So Congress created FHA as Federal loan guarantee program and the FDIC to insure peoples bank accounts.  The goal was to give people confidence so they would put their money back in the banks (FDIC) and then give the banks confidence through FHA so they would loan money to people to buy houses.

The plan worked, but slowly, so Fannie Mae was created in 1938 to create a secondary mortgage market to buy mortgages from banks and thereby free up the funds so banks could use the proceeds to make more loans.  It was created as a government entity with no private investors involved.

In 1954 the law was amended to bring private investors into Fannie Mae.  (Aug 2, 1954, Chapter 649, Title II).

In 1968 Fannie Mae was converted to a publicly traded company by Lyndon Johnson to get the debt off the Government books - I presume to disguise the true cost of the Viet-nam war.  At this point the parts of Fannie Mae that handled VA loans and Farm Home Loans were spun off into Ginney Mae.  (PL 90-448, Section 801, Aug 1, 1968)

Since after 1968 Fannie Mae was now a huge publicly traded, profit oriented monopoly, in 1970 Freddie Mac was created to provide competition for Fannie Mae.   Freddie Mac went public in 1989.

With regard to the more recent history, there is an excellent and detailed article at Wikipedia (just do a web search for history of Fannie Mae).  Re the question of Fannie Mae and Freddie Mac's culpability in causing the housing and financial collapse, it seems pretty modest.   The problem was less the desire to expand the pool of borrowers and more that Fannie and Freddy had serious problems from CEO's infected with the make as much money as possible so ignoring financial realities (like many financial CEO's at the time).  (The economist in 2013 did a review of the many causes of the financial collapse - Fannie and Freddy don't make the cut in the laundry list of the primary causes.   http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article )

It was a growth of totally private businesses moving into the secondary mortgage market that touched of the really crazy loans and "bundles" of loans that caused the collapse.

To me the  big mistake was bringing in private investors in 1954.  Those of you who read my blog regularly know I view public/private partnerships as virtually always dead certain to end up costing taxpayers a lot of money - government and the profit motive do not fit well together.  Government is not inherently a problem and for many things absolutely necessary, but Government being controlled by folks with a profit motive is always a problem