Fannie, Freddie Become Hot Topic in Campaign

By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, October 9, 2008

They long have been political hot potatoes inside the Beltway, but suddenly Fannie Mae and Freddie Mac have become pawns in the 2008 presidential campaign.

During Tuesday's debate, Republican presidential nominee Sen. John McCain (Ariz.) charged that the mortgage finance giants "lit this fire" under the economic crisis. He said Democratic presidential nominee Sen. Barack Obama (Ill.) and "his cronies" encouraged the companies to make risky loans. And he claimed that he took a stand two years ago to rein them in.

Obama gave a different view. He blamed McCain's pursuit of "deregulation of the financial system" for helping to allow the housing crisis to spin out of control. Obama said he "never promoted Fannie Mae." Rather, he said he warned policymakers two years ago of a brewing "subprime lending crisis" -- the very crisis that contributed to Fannie Mae's and Freddie Mac's downfall and their seizure by the government last month.

The candidates' records on Fannie Mae and Freddie Mac are not as clear as their statements during the debate.

A former top lobbyist for the mortgage giants said neither Obama nor McCain were regarded as central players in congressional discussions about their futures. "We generally viewed McCain as critical of the model and generally viewed Obama as supportive of the model," said the lobbyist, who spoke on the condition of anonymity because of the continuing political sensitivity surrounding the companies.

McCain has repeatedly suggested that the companies caused the crisis, but many housing specialists say their role is more ambiguous. The financial crisis had its origins in an era of cheap credit that helped inflate housing prices. Fannie and Freddie took advantage of low rates to grow quickly. But when the bubble burst, and housing prices fell, their massive portfolios of mortgages and mortgage guarantees took a hit and lost billions.

Further, lenders were far more aggressive about offering subprime and other risky loans than Fannie and Freddie. The companies eventually joined in, driven both by pressure to show they were supporting affordable housing and by a desire to maintain market share. Though the number of risky loans they took on was small compared to the overall size of their holdings, the actions may have ended up fueling or amplifying the mortgage downturn.

Christopher J. Mayer, a professor at Columbia Business School, said the companies took advantage of their special governmental status to maintain a thin financial cushion in buying loans, allowing them to buy more -- all under the oversight of the federal government. "Those lower capital requirements enabled them to take risks and grow their balance sheets," Mayer said.

Both campaigns cite actions they took to try and avoid a mortgage disaster.

In January 2005, several Republicans led by Sen. Chuck Hagel (Neb.) introduced legislation to create a new, independent regulatory agency to oversee the companies. They had trouble getting supporters. Sixteen months later, after a regulator questioned Fannie Mae accounting, McCain signed on to the legislation as a co-sponsor and made a 359-word speech in the Senate. The legislation failed to win approval.

Obama said little if anything publicly about Fannie Mae and Freddie Mac before the crisis started. Other Democratic lawmakers, however, long protected the interests of the companies and pushed them to expand their support for low-income housing.

Obama did warn about a looming subprime crisis in March 2007, though by that time many analysts were already warning of the danger. Obama also pursued legislation to crack down on lenders who pushed unsuspecting borrowers into taking on mortgages they could not afford.

Neither McCain and Obama is free of ties to Fannie Mae and Freddie Mac insiders. Obama initially asked former Fannie Mae chief executive James A. Johnson to vet his vice presidential choices, but Johnson resigned as a controversy flared over his role. McCain's circle of advisers includes former lobbyists and consultants for the companies.

Obama claims that "deregulation of the financial system," championed by McCain, led to the economic crisis. While McCain has generally subscribed to a free-market philosophy, he has favored regulation more often than many other Republicans.

"Only a restoration of the system of checks and balances that once protected the American investor, and that has seriously deteriorated over the past 10 years, can restore the confidence that makes financial markets work," McCain said in a 2002 speech.

© 2008 The Washington Post Company