In any event, that was already clear, since commercial real estate has also suffered, without any equivalent, potentially-market-distorting federal mandates. Instead, the crucial feature leading to the crisis, in both private and commercial real estate, was the development of marketable mortgage securities:
The hearing brought forward a paradox: For years, Fannie fended off efforts to restrict its growth by arguing that it had the best risk-management tools and brightest minds. But on Friday, executives said that their business model doomed their ability to manage a national and sustained housing meltdown.
...So far, Fannie and Freddie have required more than $126 billion in taxpayer infusions, a number that is likely to grow as mortgage defaults rise further. One of the panel's commissioners, Douglas Holtz-Eakin, a former budget analyst, said on Friday that the collapse of Fannie and Freddie would leave taxpayers with the "single largest bill we will face in this episode."
...At the hearing, commissioners honed in on why Fannie executives made their ill-fated decisions to loosen underwriting standards and increase their exposure to riskier "Alt-A" loans for borrowers with good credit but little documentation of income or assets.
Fannie and Freddie's market share fell rapidly beginning in 2003 as private nonbank lenders were fueled by Wall Street's desire to bundle and sell mortgages as securities. One internal Fannie document made public on Friday showed how executives in 2005 considered a "stay the course" strategy to try to steer the market back to traditional products such as the 30-year fixed-rate mortgage.
But executives ultimately decided that new, riskier loans were "not a fad, but a growing and permanent change" in the mortgage market that the companies couldn't ignore, Mr. Mudd said. The company opted to strike a "middle course" by trying to offer less-risky versions of Alt-A loans.
"Could we really sit out?" said Robert Levin, a 27-year Fannie veteran who retired in 2008. "That's what we were grappling with."
...Commissioners also focused on the degree to which government mandates to support affordable housing were responsible for the companies' increased risk appetite. At the hearing Mr. Falcon dismissed such arguments, saying, "It was driven by a desire to once again regain their dominance in the market and to try to increase profitability towards what it had been in its hey-day." He added, "This is where they thought they had to go to achieve that.