12/31/2009 PERMALINK
New research into what actually caused the financial crisis New research by housing expert Edward Pinto, a former chief credit officer for Fannie Mae, found that the principal cause of the financial crisis is that Finnie and Freddie's misrepresentation of the nature of the loans they were buying. It seems that from the moment that Fannie and Freddie started buying risky loans in 1993, they routinely misrepresented the mortgages as prime, when they had characteristics that caused them to very clearly fall into the subprime or Alt-A category.

This deception by the two government-founded mortgage agencies created a tremendous amount of artificial demand for home ownership, inflating housing prices to outlandish levels. While keeping rating agencies and investors in the dark about the vast number of questionable mortgages infecting the financial system in the years just before the crash.

The magnitude of the Fannie/Freddie fraud on the world's investors is staggering. Pinto reports that of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks. Additionally, the Fannie/Freddie conspiracy to inflate mortgage ratings was the primary culprit for the 7.7 million subprime and Alt-A housing loans that wound up in mortgage pools issued by Wall Street banks. By both stealing the banks traditional mortgage market with lower-cost government-backed securities and vastly increased the number of risky loans, while obscuring this fact from bond rating companies and investors, the Fannie/Freddie conspiracy precipitated the real estate crash.

Why did they engage in such blatantly fraudulent activities?

The likely reason, Pinto concludes, is the intense pressure to fulfill the department of Housing and Urban Development's affordable housing regulations. These regs required Fannie and Freddie to issue trillions in loans to low income high default risk borrows. Something Fannie and Freddie would not have been able to get investors to do, without keeping them in the dark about the extremely risky nature of the loans they were buying.