Fannie’s Mighty Fall From Grace

In 1938, during the waning years of the Great Depression, President  Franklin Delano Roosevelt created a small, obscure federal agency called Fannie Mae designed to make home loans more accessible to America homebuyers. However, the democratic leader never imagined that someday it would become one of the  world’s largest financial firms and eventually help trigger the Great Recession of 2008, costing American taxpayers hundreds of billions of dollars due to reckless  government intervention in the housing market.

Seventy years later Fannie Mae was bankrupt. Fannie, along  with Freddie Mac, was taken over by the federal government on Sept. 8, 2008, ending a failed and disastrous experiment in state-sponsored mortgage lending. The bailouts of the toxic twins have cost American taxpayers about $185 billion. And the beleaguered story of this housing folly is richly  documented in James R. Hagerty’s new book, “The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis” (History Press; 2012), which takes readers through a seven decade journey from the  depths of the Great Depression in the early 1930s to the colossal collapse of this financial titan in 2008 during the foreclosure crisis.

“Our grandchildren,” writes Hagerty, “will still be paying the cost of misguided mortgage business underwritten by Fannie and Freddie. They may wish to know how we got ourselves into this mess.”

This hard-nosed observation is one reason why Hagerty’s readable and informative new history book on Fannie Mae is so timely. In “Fannie Mae,” Hagerty carefully  chronicles the history of this New Deal era Keynesian housing experiment that  nearly imploded the global financial market in 2008 and helped launch an  avalanche of foreclosures, short sales and bank-owned REOs. The author acknowledges at the start that Fannie had humble beginnings, but  says that good intentions, inertia and greed combined to create a financial catastrophe like no other.

Hagerty, a seasoned Wall Street Journal reporter and  editor, introduces readers to a succession of Fannie leaders who sought to expand its power and influence both inside and outside the Beltway. From Sam Husbands, Fannie’s first president, to James Johnson, a wryly democratic insider who launched a massive crusade to expand home ownership for low-to-moderate income minorities in the 1990s, Hagerty explains how Fannie’s leaders turned  this quasi-government bureaucracy into a powerful political patronage machine protected by both Republicans and Democrats alike. He traces the rise and fall of this lofty institution with scholarly skill.

Next year, the 45th president will face a major  piece of unfinished business from the financial and foreclosure crisis that Fannie, and its small sibling Freddie, helped create, claims Hagerty.  And the fate of the government-sponsored enterprises (GSEs) will be hotly debated for years because several powerful interest groups — lenders, Realtors, homebuilders and mortgage insurers — depend on Fannie’s political (and  financial) patronage.

“Because millions of mortgages backed by Fannie and Freddie  have defaulted, the bailout has been immensely expensive,” writes Hagerty,  referring to the millions of GSE foreclosures. “In the five years that ended as of December 2011, Fannie alone reported total losses of $163.6 billion, more than double all the profits it made in the three decades through 2006. As of mid-2012, the U.S. Treasury had injected a total of about $146.5 billion of equity capital into Fannie and Freddie to keep them  operating as the nation’s main providers of money for home mortgages.”

Indeed, the creation of Fannie Mae was a costly mistake. It is becoming abundantly clear that the federal government — not the banks — caused  the financial and housing crisis. And “The Fateful History of Fannie Mae” places the GSE’s at the center of that storm.

Now that housing is showing a modest recovery, foreclosures are receding, and Fannie and Freddie are profitable again, Congress and the White House will be tempted to re-invent the GSEs.

But Hagerty has a warning:

“There is no need for Uncle Sam to favor homeownership over renting — a choice Americans can make for themselves,” he said.

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