A favorite conservative and GOP talking point about the mortgage meltdown blames Freddie Mac and Fannie Mae. The story runs something like this:

One deregulatory measure that is lacking from anybody’s plan is a sharp cutback or outright elimination of the Community Reinvestment Act (CRA), which essentially puts a gun to the head of all lenders unless they issue mortgages to various minority groups, low-income folks, and both legal and illegal immigrants. Lenders out of compliance would be penalized as regulators would disallow any new business plan for mergers, acquisitions, or new products. Community groups like Acorn could rat out lenders by showing data to the regulators who then would step into action.

Along with the Fed’s easy-money housing bubble, CRA is one of the prime movers in the sub-prime housing mess in which we find ourselves today.

and this:

Fannie Mae and Freddie Mac were government-birthed entities that decided to buy securities tied to subprime loans. And it was government officials on Capitol Hill, the recipients of millions in campaign donations from the F&F lobby, who decided not to rein in those entities. You had the government’s Community Reinvestment Act nudging banks to make unsound loans. Government banker Alan Greenspan pushed interest rates too low for too long earlier this decade, creating an extreme financial situation that made the crazy Wall Street strategies look temporarily reasonable. And for decades, government has pushed higher homeownership as a national goal, via F&F as well as through the tax code, siphoning off resources that might have been better devoted to other economic sectors.

Here’s the problem: It’s not that simple.

Yes, Freddie and Fannie did some unwise things. But they were not the root cause of the mortgage meltdown. From Barry Ritholtz:

The current housing and credit crises has many, many underlying sources. Its my opinion there were two primary causes leading to the boom and bust in Housing: A nonfeasant Fed, that ignored lending standards, and ultra-low rates. [SNIP]

We can blame the lenders, the securitizers, the borrowers, and Fannie/Freddie, but it doesn’t matter much. By the time Fannie and Freddie began changing their mortgage buying rules, the Housing boom was already in full gear, and the crash was all but inevitable.

The story, then, works like this:

1987 Federal Reserve cuts rates
1989 Housing Market peaks
1996 Prior purchases get to breakeven
1997 Housing Taxpayer Relief Act
1998 3 Rate Cuts
1995-2000 — Big stock market gains
2001 Rate cuts from 6% down to 1.75%
2002 More rate cuts to 1.25%
2003 one final cut to 1%

The upshot:

As I have said repeatedly, Fannie and Freddie were cogs in the great housing machinery, and they bear some responsibility for the current debacle. But to claim they were the most significant factors misses the true tale of our twin Housing and Credit debacles.

Fannie has been around since 1938, Freddie since 1968, the CRA has been around since 1977 — suddenly, all of housing goes to hell in 2005, and then credit collapses 2 years after — and the best explanation some people can come up with is Fannie, Freddie and CRA? Gee, isn’t that rather odd — especially after 70 years?

Despite its popularity as a conservative, government bashing talking point, ultimately, it’s not a tenable real world argument. Fannie and Freddie were part of the giant mortgage generating machine that was based on ultimately untenable business models - the system was going to melt down sooner or later. The Fed had cuts rates to ridiculously low levels. Both companies were coming under both political and business pressure to take greater and greater risks - risks that their financial models couldn’t assess. Many of the loans being written didn’t fit previous models - balloon payment, ARMs, and so on were, to put it mildly, creative (a favorite version involved a mortgage in which the homeowner paid only principle for a time, then the loan adjusted and payments went up and they were now paying back the interest not paid before plus the principle). It was fun while it lasted and a lot of people made a lot money along the way.

It’s difficult not to want to see the whole system as a morality play. The mortgage bubble was driven by cupidity, blind avarice, greed, arrogance, and healthy dose of denial. There’s an aspect of schadenfreude in hearing that the CEO’s who set the policies that encouraged making bad loans have lost their jobs. But there are too many people who are suffering the side effects for it to be an effective morality play. The bad people get punished, yes, but so do a lot of not so bad people and the really culpable are going to manage to get off without any real punishment (you lost your job? So sad, you’ll just have to live on the savings from the $90 million you were paid last year).

When it comes to dealing with Freddie and Fannie and the mortgage meltdown, these companies make easy villains - but in the real world where things are more complex, they’re not the villains and they’re not even the prime movers of the problem.