Abstract
Some observers contend that the housing government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, were responsible for the financial crisis due to their financial support for the subprime mortgage market. This paper reviews the available evidence and concludes that while Fannie and Freddie played a role in the propagation of the financial crisis, they were hardly the main culprits. Between 2003 and 2007 the mortgage market shifted away from traditional mortgages purchased and securitized by the GSEs. The GSEs responded by purchasing the AAA pieces of subprime asset-backed securities (ABS) and later purchased large quantities of Alt-A loans. However, the GSEs’ mortgage loan portfolios performed much better than the national average and the losses that nearly brought down the financial system were on instruments wholly unrelated to the GSEs. Moreover, critics of the GSEs focused on interest rate risk while the problems that ultimately led to their insolvency related to market and credit risk.
Published Version
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