I'm still not sure how important Fannie and Freddie were to the housing calamity but I continue to do some research. Some say they were not involved in subprime at all, but we now know that was untrue, it's only a question of how much. The amounts were relatively small through 2002, but the real explosion in subprime securitization took place later. The following is from a 2004 HUD study. I have removed the footnotes for readability.
since the latter half of the 1990s. The GSEs entered this market by purchasing securities backed
by non-conforming loans. Freddie Mac, in particular, increased its subprime business through
structured transactions, with Freddie Mac guaranteeing the senior classes of senior/subordinated
securities. The two GSEs also purchase subprime loans on a flow basis. Fannie Mae began
purchasing subprime loans through its Timely Payment Reward Mortgage program in June 1999,
and Freddie Mac rolled out a similar product, Affordable Merit Rate, in May 2000 (described
below). In addition to purchasing subprime loans for borrowers with blemished credit, the GSEs
also purchase another non-conforming loan called an Alternative-A or “Alt-A” mortgage. These
mortgages are made to prime borrowers who do not want to provide full documentation for
loans. The GSEs’ interest in the subprime market has coincided with a maturation of their
traditional market (the conforming conventional mortgage market), and their development of
mortgage scoring systems, which they believe allows them to accurately model credit risk.
Although the GSEs account for only a modest share of the subprime market today, some market
analysts estimate that they could purchase as much as half of the overall subprime market in the
next few years.
Precise information on the GSEs’ purchases of subprime loans is not readily available.
Data can be pieced together from various sources, but this can be a confusing exercise because of
the different types of non-conforming loans (Alt-A and subprime) and the different channels
through which the GSEs purchase these loans (through securitizations and through their “flow-
based” product offerings). Freddie Mac, which has been the more aggressive GSE in the
subprime market, purchased approximately $12 billion in subprime loans during 1999—$7
billion of A-minus and alternative-A loans through its standard flow programs and $5 billion
through structured transactions.153 In 2000, Freddie Mac purchased $18.6 billion of subprime
loans on a flow basis in addition to another $7.7 billion of subprime loans through structured
transactions. Freddie Mac securitized $9 billion in subprime and Alt-A product in 2001 and
$11.1 billion in 2002.
Fannie Mae initiated its Timely Payments product in September 1999, under which
borrowers with slightly damaged credit can qualify for a mortgage with a higher interest rate
than prime borrowers. Under this product, a borrower’s interest rate will be reduced by 100
basis points if the borrower makes 24 consecutive monthly payments without a delinquency.
Fannie Mae has revamped its automated underwriting system (Desktop Underwriter) so loans
that were traditionally referred for manual underwriting are now given four risk classifications,
three of which identify potential subprime (A-minus) loans. Fannie purchased about $600
million of subprime loans on a flow basis in 2000. Fannie Mae securitized around $0.6 billion
in subprime mortgages in 2000, before increasing to $5.0 billion in 2001 and 7.3 billion in
2002. In terms of total subprime activity (both flow and securitization activities), Fannie Mae
purchased $9.2 billion in 2001 and over $15 billion in 2002, the latter figure representing about
10 percent of the market, according to Fannie Mae staff.