A New York Federal Reserve report (Understanding the Securitization of Subprime Mortgage Credit) points out a little reported fact and one that John McCain seems more than happy to ignore as he rails against the two organizations.
Here’s how it worked: Fannie Mae and Freddie Mac buy the majority of their mortgages from other mortgage lenders who initially create the loan. These initial mortgage lenders (like Countrywide, Washington Mutual, etc.) were either too greedy and fraudulent in their lending practices or incompetent in their loan risk analysis. Fannie Mae and Freddie Mac are the secondary markets for these loans. It was also the fault of the “independent” credit rating agencies (AM Best, Standard and Poors, etc) who were responsible for properly rating these loan products.
Update:
Jared Bernstein has a great article on how this latest financial crisis has everything to do with the lack of risk management skills in the Executive Branch of government.
Tags: economy