Cause of Fannie Mae's Conservatorship

Glenn M.

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Cause of Fannie Mae's Conservatorship

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Abstract

Everyone should have a home despite their economic struggles. Fannie Mae was founded on this premise during the Great Depression in 1938. The issue evolving from this seemingly beneficial and civil service sponsored by the government is the risk involved with lending to subprime borrowers. The following research will look at the failure of Fannie Mae, resulting in conservatorship, and determine if the cause of the failure was the Clinton administration pushing too hard to lower lending standards and implement the Community Reinvestment Act, the repeal of the Glass-Steagall Act, the Bush administration missing opportunities to curtail the subprime lending of Fannie Mae, or if Fannie Mae lent irresponsibly without keeping itself in check coupled with the inherent problems associated with being a Government Sponsored Enterprise (GSE). Each of these hypotheses will be compared by determining if regulation by the federal government could have prevented the conservatorship that was mandated in September 2008. The use of regulation as a variable to determine the hypothesis that could have been prevented to the greatest extent will be the focal point to answering why Fannie Mae fell into the conservatorship of the government. Finally, the research will look at the chosen hypothesis to construct a solution to the failure of Fannie Mae.

Introduction
Historical Background
Hypotheses Addressing Cause of Fannie Mae's Conservatorship
The Missed Opportunities to Curtail Fannie Mae's Spending by the Bush Administration
Fannie Mae was irresponsible and was predisposed to Fail as a GSE
Analysis of the Clinton Administration's Push for the CRA and Repeal of the Glass-Steagall Act
Analysis of the Fault of Fannie Mae and the Inherent Disadvantage of a GSE
Analysis of the Researcher's Hypothesis concerning the growing gap between Maximum Mortgage allowed and Median Household Income
Conclusions and proposed solutions

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[...] Part III: Research Analysis of Proposed Hypotheses This portion of the research will compare each proposed hypothesis; determine the validity of it being a cause to Fannie Mae's conservatorship, and single out which hypothesis was the greatest factor in the resulting conservatorship. The method used to compare each hypothesis will be to determine if regulation had been imposed, would it have prevented the events of the hypothesis from having a hand in the downfall of Fannie Mae. The hypothesis that would have benefitted from regulation the most will be considered to be the greatest cause of the collapse. [...]

[...] The observation of Fannie Mae by the Treasury Department could have stopped the problem before it got any worse. The denial of this legislation in 2003 was mirrored in 2005 when the Federal Housing Enterprise Regulatory Reform Act to reform the GSE regulatory structure died in the Senate. This bill could have also been the answer to stopping Fannie Mae from digging its own grave. Seeing as how this hypothesis is centered on the effect that regulation could have had on the demise of Fannie Mae, it is safely redundant to say that regulatory measures could have been made to see that governmental interference in Fannie Mae's transactions would have helped. [...]

[...] The following year, OFHEO released a report that reiterated that “although investors perceive an implicit Federal guarantee of GSE obligations, the government has provided no explicit legal backing for them.”[6] Later that year, Fannie Mae released information from an SEC investigation of its earnings that uncovered accounting fraud. The Secretary of the Treasury, John Snow, recommended to Congress to enact “legislation to create a new Federal agency to regulate and supervise the financial activities of our housing- related government sponsored enterprises and set prudent and appropriate minimum capital adequacy requirements.”[7] The accounting fraud was publicized as a widespread $ 1.2 billion accounting error. [...]

[...] The Fiscal Year 2002 budget declared that size of Fannie Mae and Freddie Mac is a potential problem because financial trouble of a large GSE could cause strong repercussions in financial markets, affecting federally insured entities and economic activity.”[1] In 2003, the Bush administration recommended a new agency to monitor and regulate the practices of Fannie Mae. The agency would be a part of the U.S. Treasury and it would specifically monitor the risk management of the company and set the minimal capital reserve requirements. [...]

[...] Part II: Hypotheses Addressing Cause of Fannie Mae's Conservatorship The Clinton Administration's Push for the CRA and Repeal of the Glass- Steagall Act This hypothesis operates under the assumption that the CRA forced Fannie Mae's hand in lending to low income families that would otherwise be denied due to risky credit. The borrowers given loans with the help of the CRA were presumably doomed and expected to default. Without government pressure from the Clinton administration to implement the CRA, Fannie Mae would not have lent to these questionable borrowers. [...]

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