As one of Fannie Mae and Freddie Mac's biggest advocates, conservatives have blamed Frank for helping bring on the housing crisis. Is that fair?
Now that Rep. Barney Frank has announced his decision not to run for another term in Congress, the world is once again revisiting the notoriously combative politician's role in U.S. housing policy.
As the lead Democrat on the House Financial Services Committee, Frank was one of Capitol Hill's staunchest advocates for Fannie Mae and Freddie Mac, which many conservatives have blamed for fueling the housing bubble. Republicans say that Frank failed to police the GSE's (i.e.: government-sponsored enterprises) as their lending standards deteriorated and they bought up more and more sub-prime mortgage debt in years before the crash.
Is that a fair criticism? Leave aside the fact that Frank was in the House minority for most of the Bush Administration, when the mortgage bubble expanded. Presumably, he could have used his perch on the committee to be a stronger critic of Fannie and Freddie's practices. So what role did the two government housing giants play? Let's revisit a chart Dan Indiviglio posted in 2010.
Here's what the chart means. After 2000, Fannie and Freddie went on a mortgage spree until 2003, when new mortgages reached an all-time high. But in the years immediately preceding the bust, it was private banks's mortgages that surged. What happened? "Wall Street realized that the housing market could be a huge source of profits if they started competing with the GSEs," Dan wrote. They were exactly right. But before long, of course, their confidence proved horribly wrong.
So did Fannie and Freddie play a role in the beginning of the mortgage craze? The evidence is certainly there. Did they play a bigger role in the sub-prime binge than the private sector? That's a harder case to make. A study by the Federal Reserve found that in 2006, five out of six of sub-prime mortgages were issued by private lenders. If GSEs helped pave the road toward the cliff, it was private sector loans and securitization that nearly took drove us over the edge. Blame banks for taking us to the brink, blame Fannie and Freddie for blazing the trail, and blame Congress for failing to put the brakes on the whole enterprise. Barney Frank's record isn't perfect on housing finance, but it's a strange logical contortion to put the whole on crash on his shoulders.