Former Federal Reserve Chairman Alan Greenspan said (.pdf) today that the creation of subprime mortgages didn't cause the financial crisis -- the secondary market demand for these subprime mortgages drove the bubble that was to blame. He made these comments during a Financial Crisis Inquiry Commission (FCIC) hearing. Some blame Greenspan's easy monetary policy for beginning to inflate the housing bubble. His testimony makes clear that he sees the cause elsewhere.
There's a strong argument that the mere creation of subprime mortgage couldn't have inflated a housing bubble: such loan products had been around for many years. Why hadn't their origination been as great in the past as it was over the last decade? There was a demand shift. Secondary market purchases of subprime mortgages, including bonds resulting from securitization, became much more popular over that period. With ample funding for these risky mortgages, more were created and the subprime mortgage bubble began growing.
Greenspan sees Fannie and Freddie as a driving force. He says:
The firms purchased an estimated 40% of all private-label subprime mortgage securities (almost all adjustable rate), newly purchased, and retained on investors' balance sheets during 2003 and 2004. That was an estimated five times their share of newly purchased and retained in 2002, implying that a significant proportion of the increased demand for subprime mortgage backed securities during the years 2003-2004 was effectively politically mandated, and hence driven by highly inelastic demand.
Those are pretty compelling facts. The GSEs comfort with those loans likely also drove investors to purchase more of these securitized subprime mortgages on their own as well. Of course, rating agencies made matters worse by slapping AAA-ratings on many of the resulting bonds. Everyone began believing the same fallacy that home prices couldn't decline, so investor due diligence was inadequate to properly identify the risk inherent in these loans.