Flailing, McCain is attempting to pin the housing crisis, and by extension the financial crisis, on the GSEs, to which many Democrats have ties. Is there any there there?

Econbrowser’s Menzie Chinn directs us to a new working paper from the Bank for International Settlements:

Two developments seem to have spurred the easing in US standards. First, a range of legislative and policy changes had been made to encourage the development of a non-conforming (Alt-A and subprime) lending sector, lying outside the model defined by the government-sponsored enterprises (GSEs, Fannie Mae and Freddie Mac). Part of the motivation for this was a desire to ensure that home ownership was accessible to households who had historically been underserved by mortgage lenders (Gramlich 2007). In addition, the administration had wanted to reduce the GSEs’ domination of the mortgage market. Following problems with accounting and governance at both institutions, the GSEs’ capacity to expand lending was capped by new regulatory limits on their activities (Kiff and Mills 2007, Blundell-Wignall and Atkinson 2008)…

The real distinction is between loans that were in the FHA pool or the conforming market — those insurable by the GSEs — and those that were not in either of those groups. Although there was some easing of standards in the conforming market, especially in the GSE’s extended programs and the FHA seller-financed downpayment program, it was minor compared with the one that occurred in the rest of the market. Arrears rates on the GSEs’ single-family home portfolio have risen a great deal recently, but this only started in the second half of 2007… Likewise, the increase in arrears rates on FHA mortgages has been fairly mild.

See also this, by Chinn, and this, by his blogmate James Hamilton. And Brad Setser adds:

I would argue that this data suggests a more complex story than is commonly told. The Agencies certainly played a role in turning US mortgages into an asset that credit risk adverse central bank were willing to hold: the availability of Agency bonds with an implicit government guarantee interacted with the acceleration of global reserve growth to help make too much credit available to American households.

At the same time, it wasn’t just a story of a market hopelessly distorted by the Agencies’ implicit guarantee. The Agencies implicit guarantee isn’t exactly a new development. Moreover, at the peak of the lending boom, regulatory restrictions kept the Agencies from growing their books rapidly. The big surge in risky, exotic mortgages was made possible by a surge in demand for so called “private” MBS — that is to say mortgage backed securities that did not have an Agency guarantee. From the end of 2003 to the end of 2006, the stock of outstanding Agencies increased by $550b, and the stock of outstanding “ABS” increased by $1850b. Not all those securities were mortgage backed securities, but a lot were. Central bank demand for Agencies freed up private funds to invest in riskier assets rather than directly financing the most risky mortgages.

So, it would be wrong to say that the GSEs played no role in the housing boom and bust. But the bottom line is this–during the critical period of growth in lending and housing prices, Fannie and Freddie were not able to involve themselves in the issuance and guarantee of subprime loans and the creation of subprime mortgage backed securities. Because of the restrictions on Fannie and Freddie, their role in the mortgage market declined sharply from 2003 on, as the party really got going. And defaults and foreclosures, the real events underlying the financial meltdown, have been overwhelmingly concentrated in mortgages that were not–could not have been–guaranteed by Fannie and Freddie. Indeed, many have suggested that had Fannie and Freddie been allowed to play a bigger role in mortgage markets during the boom, the crisis would have been less severe because of the rules and standards in operation at the GSEs.

None of this is to say that a serious rethink of the nation’s mortgage industry, including the GSEs, isn’t necessary. Securitization and sale of mortgages, and the implicit guarantee of conforming loans by the GSEs, much of this makes no sense. But the notion that Fannie and Freddie bear anything like primary responsibility for the crisis is just beyond stupid.