Wait a minute. Did someone force you to buy the Yugo in the first place before you resold it? I agree, fraudulently reselling it is wrong . . . but how about proximate cause?
The GSE’s purchases of all mortgages slowed in 2004, as they worked to overcome their accounting scandals, but in late 2004 they returned to the market with a vengeance. Late that year, their chairmen were telling meetings of mortgage originators that the GSEs were eager to purchase subprime and other nonprime loans.
This set off a frenzy of subprime and Alt-A mortgage origination, in which–as incredible as it seems–Fannie and Freddie were competing with Wall Street and one another for low-quality loans. Even when they were not the purchasers, the GSEs were Wall Street’s biggest customers, often buying the AAA tranches of subprime and Alt-A pools that Wall Street put together. By 2007 they held $227 billion (one in six loans) in these nonprime pools, and approximately $1.6 trillion in low-quality loans altogether.
From 2005 through 2007, the GSEs purchased over $1 trillion in subprime and Alt-A loans, driving up the housing bubble and driving down mortgage quality. During these years, HUD’s regulations required that 55% of all GSE purchases be affordable, including 25% made to low- and very low-income borrowers. Housing bubbles are nothing new. We and other countries have had them before. The reason that the most recent bubble created a worldwide financial crisis is that it was inflated with low-quality loans required by government mandate. The fact that the same government must now come to the rescue is no reason for gratitude.