Franklin Raines - Role in The Subprime Mortgage Crisis

Role in The Subprime Mortgage Crisis

Whether the GSEs (Government-Sponsored Enterprises) caused or greatly contributed to the financial crisis of 2008 is controversial. A few try to minimize their role. The Financial Crisis Inquiry Commission (FCIC) completed its analysis of the financial crisis and found that the GSE's "contributed to the crisis, but were not a primary cause." (That was only the majority report, and there was strong dissent.) The FCIC found that the GSE's were late to the subprime lending game, entering the market in a substantial way in 2005. The GSE's followed rather than led the race to purchase subprime loan securities. The GSE's increased their involvement in the subprime securitization market because they were significantly losing market share and were feeling less relevant in the mortgage lending marketplace. In accordance with the mission of Fannie Mae to enable home ownership by a greater proportion of the population, Franklin Raines, while Chairman and CEO, began a pilot program in 1999 to issue bank loans to individuals with low to moderate income, and to ease credit requirements on loans that Fannie Mae purchased from banks. Raines promoted the program saying that it would allow consumers who were "a notch below what our current underwriting has required" to get home loans. The move was intended in part to increase the number of minority and low income home owners.

The Investor's Business Daily editorial staff has noted that the expansion of easy credit to home buyers with a lesser ability to pay them back was one of the major contributing factors to the subprime mortgage crisis.

While the Fannie Mae pilot program described above sought to expand housing opportunities for under-served consumers, these loans did not result in major losses and performed significantly better than private label subprime loans. Phil Angelides, the Chair of the FCIC commented that ". . .the FCIC analyzed the performance of roughly 25 million mortgages outstanding at the end of each year from 2006 to 2009, and found that delinquency rates for the loans that Fannie Mae and Freddie Mac purchased or guaranteed were substantially lower than for mortgages securitized by other financial firms. This holds true even for loans to borrowers with similar credit scores or down payments. For example, data compiled by the FCIC for a subset of borrowers with scores below 660 shows that by the end of 2008, far fewer GSE mortgages were seriously delinquent than non-GSE securitized mortgages: 6.2 percent versus 28.3 percent." Although under Raines, Fannie Mae invested in some securities backed by subprime loans, it didn't start buying subprime and Alt-A loans directly (and bundling them into securities) until late 2004 after the accounting scandal. Purchasing of subprime and alt-A mortgages expanded under the guidance of Raines's successor Daniel H. Mudd. (See also Subprime lending.)

On December 9, 2008, Raines testified before the United States House Committee on Oversight and Government Reform on Capitol Hill regarding Fannie Mae, Freddie Mac, and financial market instability.