But they didn't like losing their market share, and they pushed the envelope on credit quality as far as they could inside the constraints of their charter: they got into "near prime" programs (Fannie's "Expanded Approval," Freddie's "A Minus") that, at the bottom tier, were hard to distinguish from regular old "subprime" except--again--that they were overwhelmingly fixed-rate "non-toxic" loan structures. They got into "documentation relief" in a big way through their automated underwriting systems, offering "low doc" loans that had a few key differences from the really wretched "stated" and "NINA" crap of the last several years, but occasionally the line between the two was rather thin. Again, though, whatever they bought in the low-doc world was overwhelmingly fixed rate (or at least longer-term hybrid amortizing ARMs), lower-LTV, and, of course, back in the day, of "conforming" loan balance, which kept the worst of the outright fraudulent loans out of the pile. Lots of people lied about their income (with or without collusion by their lender) in order to borrow $500,000 to buy an overpriced house in a bubble market. They weren't borrowing $500,000 from the GSEs.
Furthermore, both GSEs were major culprits in the growth of the mega-lenders. Over the years they were struggling so hard to maintain market share, they were allowing themselves to experience huge concentration risks. As they catered more and more to their "major partners"--Countrywide, Wells Fargo, WaMu, the usual suspects--they helped sustain and worsen the "aggregator" model in which smaller lenders sold loans not to the GSEs but to CFC or WFC, who then sold the loans to the GSEs. In large measure this was a function of pricing: the aggregators got the best pricing from the GSEs--the lowest guarantee fees, the best execution options--making it more attractive for a number of reasons for small lenders to sell to the aggregators.
The mentality at the GSEs seemed to many of us to have become too focused on letting these "deep pocket" mega-players continue to push the GSEs toward low doc, "near subprime," interest-only ARMs, low-down loans with iffy subordinate financing, etc. If you were Podunk National, you weren't going to get a master commitment with the GSEs to sell "fast and easy" doc-lite ARMs with a razor-thin guarantee fee. But if you were HSBC, you got that, and so Podunk either lost market share or made those loans and sold them to HSBC, who sold them to the GSEs. From the GSE's side it looked like they had the balance sheet and servicer strength of HSBC--or CFC or WFC or BAC or whoever--on the other side of those loan sales. From Podunk's side it often looked like you could take advantage of the GSEs' power to keep the mortgage market liquid only by consolidating the gargantuan servicing portfolios of the 800 pound gorillas, whose seemingly endless appetite for higher and higher-risk products made it hard for you to compete with conservative vanilla offerings.
I think we can give Fannie and Freddie their due share of responsibility for the mess we're in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. They may finance most of the home loans in America, but most of the home loans in America aren't the problem; the problem is that very substantial slice of home loans that went outside the Fannie and Freddie box. But Krugman is right to focus on the fact that it was the regulatory and charter constraints of the GSEs that kept that box closed. In the schizoid reality of the GSEs, when they had their "shareholder-owned private company" hats on they did plenty of envelope-pushing. When they had their "affordable housing" hats on, they rationalized dubious theories of credit quality--like the fervent belief that low or no down payment can be fully offset by a pretty FICO score--to beef up their affordable housing goals, often at the expense not of the poor put-upon "private sector" but of FHA, whose traditional borrower pool they pretty thoroughly cherry-picked. Nonetheless, the immovable objects of the conforming loan limits and the charter limitation of taking only loans with a maximum LTV of 80% unless a well-capitalized mortgage insurer took the first loss position, plus all their other regulatory strictures, managed fairly well against the irresistible force of "innovation." If there has ever been an argument for serious regulation of the mortgage markets, the GSEs are it.
