How HUD Mortgage Policy Fed The Crisis

But because Fannie and Freddie were buying mortgage-backed securities rather than the actual subprime loans, their involvement came too late to require stiffer standards from lenders.

Fannie and Freddie "made no progress in civilizing the market," said Sandra Fostek, a senior regulator at HUD.

William C. Apgar Jr., who was an assistant HUD secretary under Clinton, said he regrets allowing the companies to count subprime securities as affordable.

"It was a mistake," he said. "In hindsight, I would have done it differently."

Allen Fishbein, who was Apgar's adviser at HUD and is now at the Consumer Federation of America, said the agency failed to use its regulatory power by refusing to credit Fannie and Freddie for loans that were "contrary to good lending practices."

"They chose not to put the brakes on this dangerous lending when they could have," Fishbein said.

Fostek said the agency had no practical way to comb through the tens of millions of individual loans contained in the subprime securities.

She said that Fannie and Freddie did not overwhelmingly rely on securities to meet the goals but added that she would not disclose the amount counted because it is considered proprietary.

Fannie and Freddie spokespeople say their partners had agreed not to sell them loans with several prohibited characteristics, including credit insurance, excessively high costs and prepayment penalties that lasted longer than three years. But experts say the volume of subprime foreclosures proves they were toxic to borrowers.

Judith Kennedy, president of the National Association of Affordable Housing Lenders, said that while Fannie and Freddie nurtured unregulated subprime lenders, an estimated 30 percent of subprime borrowers could have qualified for safe, lower-cost prime loans.

"The damage to homeowners, to neighborhoods, to state and local governments as the tax base erodes, and now to all American taxpayers, is almost incalculable," she said.

Sen. Jack Reed (D-R.I.), a member of the Senate banking committee who brokered some of the regulatory reform in the pending bill, said HUD's homeownership push ignored reality.

"We need to focus on putting families in homes they can truly afford, not just on getting a sale, packaging the loan into a sophisticated financial security and walking away to the next closing," he said. "Today, people are wondering, 'Why weren't the regulators and the industry probing these [loans] more deeply?' "

Staff researcher Julie Tate contributed to this report.