Is McCain right about Fannie and Freddie?

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John McCain, after feinting in the direction of SEC Chairman Chris Cox, has decided that Fannie Mae and Freddie Mac are to blame for all our nation’s ills. This would be convenient because Fannie in particular had a long and lucrative symbiotic relationship with the Democratic Party. But is it true?

Fannie and Freddie were freakish hybrids, private when it suited them (such as on payday) but quasi-public when that was more convenient. If Congress had been willing to give them a real regulator with real power, taxpayers might never have had to bail the companies out. And Fannie and Freddie played a central role in the misguided, decades-long effort by Washington to steer investment into housing (and thus, inevitably if inadvertently, away from more productive uses).

Buuuuuuut, when the mortgage markets began to go absolutely crazy in late 2003, Fannie and Freddie were barely in the picture. Here’s a chart I’ve already run a couple of times (GSEs, short for government-sponsored enterprises, means Fannie, Freddie and Ginnie Mae):

Graphic by Feilding Cage/

And here’s the view of an actual industry expert, Tanta of Calculated Risk:

I think we can give Fannie and Freddie their due share of responsibility for the mess we’re in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. They may finance most of the home loans in America, but most of the home loans in America aren’t the problem; the problem is that very substantial slice of home loans that went outside the Fannie and Freddie box. … [T]he immovable objects of the conforming loan limits and the charter limitation of taking only loans with a maximum LTV of 80% unless a well-capitalized mortgage insurer took the first loss position, plus all their other regulatory strictures, managed fairly well against the irresistible force of “innovation.” If there has ever been an argument for serious regulation of the mortgage markets, the GSEs are it.

And finally, here’s the verdict of a trio of real estate scholars who’ve been cited in this blog before:

[W]e find evidence that the changing credit regime that took place in late 2003, as the GSE’s pulled back from the market for political, regulatory, and market-based reasons, is suggested to be a primary factor reducing the dominance of market fundamentals in affecting house price returns and creating the price-momentum conditions characteristic of a “bubble”.

So the Congressional crackdown on Fannie Mae and Freddie Mac (which came in the wake of accounting scandals and seemed well-deserved at the time) may have been a proximate cause of the housing bubble. And John McCain says he supported the crackdown. This whole thing is his fault!

No, I don’t really believe that last part. But it does play up the absurdity of McCain’s charge that it’s all Fannie’s and Freddie’s fault.