I agree with you that from inception, Freddie and Fannie were setup to fail given the right circumstances. People have written about this off and on for years. While Freddie and Fannie did not precipitate this, you can’t exclude them as an element either. Some of the power in the release of this spring was stored in Freddie and Fannie.

To resell a loan, it has to be a ‘conforming loan’. An individual lender can write any silly loan they want, but if it isn’t classified against some conformance, it can’t participate in the same market as loans that are.

The tempo of this failure was probably finally set by the sub-prime mortgages and the five-years from 2002 to 2007 that it took for them to adjust up, but that doesn’t mean you can lay the blame entirely there either.

I.e., people were not loaning to people with bad credit risk because the CRA made them, they were loaning to them because they could resell the risk, in the form of mortgage-base securities, to other people.

Meanwhile, CRA-covered loans are slightly less likely to default than other loans at the same rate, and, more important, twice as likely to remain held by the original bank, instead of being bundled into securities and traded around, which actually caused this mess.

Meanwhile, the GSEs, Fannie and Freddie, also didn’t cause this mess. Their problems would happen anytime housing prices dropped by X% at once, leaving them with the possession of too much liability and not enough assets. It doesn’t have anything to do with the toxic ’securities’ market that’s bringing down other banks, or even foreclosures.

Covering the drop in housing prices, to keep banks from having to hold trillions in mortgages, was why they were created in the first place, although it was assumed that no idiots would ever let a bubble get quite this big, thus rendering them completely out of money.

http://blogs.wsj.com/washwire/2008/08/05/obama-camp-routed-out-illegal-donations-from-palestinians