Anatomy of a crisis

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The House Oversight and Government Reform Committee is holding a hearing on Fannie Mae and Freddie Mac — specifically, why they got so involved in the subprime mortgage market.

The hearing itself isn’t terribly interesting, but the committee released some fascinating documents. They include a June 2005 internal report (pdf) produced at Fannie Mae that chronicles Fannie’s first forays into subprime mortgages.

The report advises Fannie to “pursue ‘underground’ efforts to develop a subprime infrastructure”:

If we do not seriously invest in these “underground” type efforts and the market changes prove to be secular, we risk becoming a niche player; becoming less of a market leader.

It’s a long read (70 pages), but it provides a fascinating postmortem of the subprime crisis.

Fannie and Freddie realized they were losing business to private companies (like the now-defunct Countrywide) that were willing to purchase risky mortgages.

Our insular view prevents us from taking credit risks in areas unfamiliar to us.

The two organizations were also struggling with their minority lending goals: 52 percent of subprime mortgages were issued to minorities, so Fannie and Freddie decided a move into the subprime market would help them meet those goals.

We explained the failures at all of the financial regulators in this October article.

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