Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The basic anchor of America’s mortgage system in the aftermath of the savings-and-loans debacle was the so-called government-sponsored enterprise (GSE).14 The mother ship of the GSEs was Fannie Mae, founded in 1938 to create a secondary market for lenders who were willing to issue the new type of government-insured Federal Housing Authority mortgages promoted by the New Deal. Fannie Mae did not issue mortgages. It bought them mainly from commercial banks across the United States that specialized in issuing FHA-insured mortgages. By acting as a backstop, Fannie Mae lowered the cost of lending and set a national standard for both lenders and “prime” borrowers. It helped to unify America through mortgage debt. Fannie Mae was able to fund its purchases of these standardized mortgages cheaply because its credit rating was that of a government agency that could not fail. So-called agency debt was equivalent to that of the Treasury. By the same token, the obligations of Fannie Mae featured on the federal government’s balance sheet. To get them off at a time of fiscal stress during the Vietnam War, in 1968 Fannie Mae was privatized. The branch still devoted to making loans to public employees and veterans was split off as Ginnie Mae. “New Fannie Mae” was licensed to buy any mortgages, government guaranteed or not, that conformed to certain quality standards—so-called conforming loans. And in 1970 Congress legislated into existence a third agency, the Federal Home Loan Mortgage Cor...