I simply have to get this off of my chest. I am so sick of hearing various pundits on both sides of the aisle trying to explain the current credit crisis and its origins, as they consistently get it wrong (or most likely only tell the story from their political perspective). When all is said and done and the history books are written 20 years from now, this is how the story is going to go.
Our story begins in 1938 with the chartering of Fannie Mae (the Federal National Mortgage Association) with its goal being to provide liquidity to the housing market by essentially being the secondary mortgage market. This worked really well from its inception until our villain arrives in 1968. You see by 1968 Fannie Mae was (god-forbid) turning a profit and was thus "privatized" by Johnson to help pay for that little police action in SE Asia (talk about short term thinking).
In 1970 Freddie Mac was chartered essentially to expand the secondary mortgage market more and to provide competition for the now private (but government sponsored) Fannie Mae (Freddie was also private and government sponsored). For the next 20+ years everything worked as it should with these entities, as the housing market functioned well and these companies made their modest profits by enabling Americans to have 30-year fixed rate mortgages (did I mention that is one of the biggest contributions Fannie/Freddie provide, good luck getting that without them in the market).
Then, in 1992, HUD became the regulator for Fannie/Freddie and forced them to buy start buying "affordable" mortgages to "underserved" borrowers. This again was all relatively well and good (albeit it increased the risk in Fannie and Freddie's portfolios), as it provided opportunities for new people to gain access to home ownership (ie the beginning of subprime loans). The effects of HUD's decision to force Fannie and Freddie to back the subprime mortgage industry didn't get a chance to be studied, as in 1995 the rules were changed once again.
You see in 1995, HUD started allowing Fannie and Freddie to meet this relatively new mandate to provide "affordable housing" by purchasing securities that had subprime components to them. This is where the problem really begins, as HUD just created a market for subprime mortgage backed securities before it even new the impact of backing whole subprime mortgages (from 1992-1995 Fannie/Freddie bought whole subprime mortgages, so they could actually "see the homes and borrowers" after 1995 it was all just securitized crap).
Fast forward to the current crisis, by 2004 Fannie and Freddie bought $175 billion in subprime securities (44% of the total market). What HUD did was to create a secondary market for subprime securities, one which essentially didn't exist prior to 1995 and one that has now threatened the entire global economy.
So let's get back to Johnson's folly. By privatizing Fannie Mae he not only pushed the greed of a giant public company into the housing market, but also created a need for competition (hence Freddie Mac), costing the government untold billions in both lost revenues (remember, when Fannie was spun off it was turning a profit) and eventually forcing us to bail out (to the tune of over $1 trillion) a completely avoidable mess.
To right wingers - it wasn't CRA that caused this
To Kossacks - it wasn't a lack of regulation that caused this
This problem can be laid at the feet of the Vietnam War.